06/14/2010 02:08 pm ET Updated May 25, 2011

Austerity, Austerity, Austerity!

You can loan money to the poor and middle class. But according to (It's a Wonderful Life) Mr. Potter:

"What does that get us? A discontented, lazy rabble instead of a thrifty, working class. And all because a few starry-eyed dreamers like Peter Bailey stir them up and fill their heads with a lot of impossible ideas."

We are now to believe that credit is bad. Funny, a recent two term President with a W in his name relied entirely on it to prop up an economy that could no longer produce the paychecks needed to support said economy. That same "W" President extolled you to go shopping to support his dalliances with war and tax cuts. He told you we should be an ownership society, so you should buy a house, even when you might have thought it better to wait until the real estate market cooled off. Buy, even though you could see that the money that chased the Dot Com bubble was now chasing the housing bubble. You were, if you followed the explicit leadership of your President, to create a second Great Depression for yourself and your children, with the able help of a Wall Street that grew increasingly indifferent to main street. The W president was our Peter Bailey, filling our heads with impossible dreams. Ok, maybe not.

There is no doubt that the Great Recession was triggered by reckless speculation and economic policy reliant on easy credit. Maybe Potter was right. Maybe we became a lazy rabble whose heads are filled with impossible dreams. Or maybe Potter was being as disingenuous as ever were the Potters of the world. It was, after all, the Potters and not the Peter Baileys that provided the easy money for the Great Bubbles of 1929 and 2006. It was the Potters who set the course for what we would become. All done without so much as the courtesy of explaining the terms.

What we became, among other things, is a country that has, for the first time since it was published by the BLS as a more truthful hedge on the official government line during the Reagan administration, officially acknowledged U6 as the "real" level of unemployment distress. Let me remind you that U1 was adhered to, desperately, by every administration since Reagan and with a complicit media, as the official and only figure indicative of unemployment. Only a few rabble rousing columnists and bloggers ever mentioned underemployment, which U6 includes, as a matter of concern to the health of the economy. It is perfectly transparent that the sudden promotion of U6 to prominence is for political purposes. Had we done so earlier, some of the structural problems developing with our economy might have been better examined.

The "natural" level of unemployment (Friedman) is nevertheless scrupulously engineered by the efforts of the Federal Reserve (Keynes), it being a prime variant in the condition of inflation/deflation. More often than not in our economic history, the Fed has been fighting inflation and keeping unemployment at a target of 4-6% (U1). For the last decade, the Fed has been fighting deflation. That's whatl the easy credit lowered regulation banking environment was all about. We have been stimulating the economy for a decade in order to disguise the depredation of the middle class.

The decade long Fed stimulus accomplished little in terms of real economic growth. It is now known as the "lost decade". Instead, it produced a debt bubble that, once popped, would reveal the actual state of the economy, some 6-10% smaller than was recognized by the happy face administration of W. That this facade was building was not lost on responsible economists, but it was not in the remotest back pages of the mainstream press, not even the financial press.

Real structural problems were allowed to fester for a decade. $500 billion in trade deficits grew, unaddressed. We have institutionalized wage deflation, aided by porous borders and import dumping. Wages did not grow while personal debt levels did, following the public's natural belief that things would somehow get better in the future, they always had. Our economy was allowed to shift from manufacturing to finance as it's key component, even though that finance growth was not directed toward real domestic economic growth in any way. Mergers and acquisitions smashed and grabbed from legions of prosperous companies because they were prosperous and had something to be stolen, white collar crime. We gambled that Friedman Supply Side economics would make the real economy grow and replace the tax revenue shortfall created by tax cuts for the rich. We were all gambling, either that the economy would get better or, in the case of Wall Street, that the economy wouldn't matter.

Now that we are in a hole created by ignoring the consequences of deregulation, fraud, creative usury and politically justified tax evasion, suddenly the world is now to take Mr. Potter's canard seriously. Seriously?

We are to adopt austerity, personally and in government, so that we can reduce the deficit and maybe work on retiring the debt. Fine. Inflation would do harm to the books of the banks, they being overleveraged as it is. They do so loathe to be responsible for the market excesses that they enable in chasing market bubbles no less than any greater fool.

But with austerity, what will then prevent the structural flaws that have created an economy that has required the life support of an effective 0% Fed funds rate for a decade, from finishing the job on the economy? What will make businesses grow and hire, not to mention provide wages that keep up with costs of living in health care, education and globally manipulated commodities? Where is the ledger on how much can be saved by balancing trade? How do we get some of the enormous wealth that has been sucked out of our economy (M2) and now chases a 2% return on currency futures or proprietary financial instruments, to be reinvested in the economy? How do you prevent deflation in an economy now designed to deflate jobs and wages? Economic voodoo ideology will not suffice my GOP friends. Freer, less regulated, markets and business created this economic mess.

No, my friends, merely cutting spending by government will not do. If you are going to do that, it must be matched with eliminating the structural drags on what remains an economy that is teetering on further retrenchment. Otherwise the spending cuts will just mean more debt through loss of more revenue and a spiral down the chute that will kill corporations as easily as it does children dropped from underfunded Medicaid programs.

In order to in fact be austere, you must give up corporate welfare, re-importation tax loopholes, naked short selling, union busting, unregulated commodities speculation, usurious loans, personhood of the corporation, no bid government contracts and start paying taxes again, to name a few. Otherwise we will not believe you take this austerity thing seriously. No call for austerity can be taken seriously without an opening offer of draconian sacrifice of profit by business. The public has no reserve from which to draw a contribution to austerity. The public is already broke, by your hand.

And don't even bother to claim capital formation will be harmed. The globe is awash in capital, more than all economies combined can make use of for the foreseeable future. Especially so since there is no incentive to invest in the consumer economy, all wealth in fact currently behaving as if there isn't. It is all off gambling on artificial hedge fund derivative concoctions.

The GOP would have us believe austerity is our patriotic duty now, just as it was our duty to spend before. Mr. Potter would be rubbing his hands together over the deliciousness of the deception. That you would fall for it is his rapture. And we race to the end of all profit for anyone, by defending the profits of the most wealthy, one by one as they each fall in time.

There will be a solution. It will not be called or be austerity and it will not be the product of the GOP.