Capitol Hill Blue Forums Political Issues Finance, the economy & Economics How will the financial crisis develop?

In the fall of 2001 I attended a private investment conference in London to give a paper....The presentation documented my experience with a Washington-Wall Street partnership that had:

* Engineered a fraudulent housing and debt bubble;

* Illegally shifted vast amounts of capital out of the U.S.;

* Used “privitization” as form or piracy - a pretext to move government assets to private investors at below-market prices and then shift private liabilities back to government at no cost to the private liability holder....

Slowly, as the pieces fit together, we shared a horrifying epiphany: the banks, corporations and investors acting in each global region were the exact same players. They were a relatively small group that reappeared again and again in Russia, Eastern Europe, and Asia accompanied by the same well-known accounting firms and law firms.

Clearly, there was a global financial coup d’etat underway.

The magnitude of what was happening was overwhelming. In the 1990’s, millions of people in Russia had woken up to find their bank accounts and pension funds simply gone – eradicated by a falling currency or stolen by mobsters who laundered money back into big New York Fed member banks for reinvestment to fuel the debt bubble....

Several years earlier, I listened to three peasant women describe the War on Drugs in their respective countries: Colombia, Peru, and Bolivia. I asked them, “After they sweep you into camps, who gets your land and at what price?” My question opened a magic door. They poured out how the real economics worked on the War on Drugs, including the stealing of land and government contracts to build housing for the people who are displaced.

At one point, suspicious of my understanding of how this game worked, one of the women said, “You say you have never been to our countries, yet you understand exactly how the money works. How is this so?”

I replied that I had served as Assistant Secretary of Housing at the US Department of Housing and Urban Development (HUD) in the United States, where I oversaw billions of government investment in US communities. Apparently, it worked the same way in their countries as it worked in mine.

Change in Real GDP, 1929-1933
United States -29%
Germany -10%
France -9%
Italy -3%
United Kingdo -2%
Japan 11%

8:17 CT 2/17/09

I do not know what is going on here, and I don't think I want to.

Someone, apparently someone in Asia, wants dollars. A LOT of dollars. There is a forced-liquidation event underway that is massive, it is against all asset classes and it is spreading.

It originated at approximately 7:15 CT this evening and originated out of Asia somewhere. All of the primary currency crosses got hit at once - Euro, Pound, Yen - all weakened dramatically against the dollar and it is still going on. The Asian stock markets got walloped at the same time in coordinated waves of forced selling.

At the same time the US futures markets got nailed as well, down some six handles on the /ES in a near-vertical drop. While this sounds "not that big" to move these markets in a coordinated fashion like this is a trillion-dollar enterprise - this is not some small company that went bankrupt, or even a large company.

There is no news coverage at the present time identifying the source of this but it is not small and contrary to some reports it is not "automatic selling"; this is forced liquidation.

Just tossing in a little known bit of info about the Great Depression, that makes some of the "History Repeats Itself Buffs"
sound a little hollow.

Facts and figures

Effects of depression in the United States[54]:
13 million people became unemployed. In 1932, 34 million people belonged to families with no regular full-time wage earner.[55]
Industrial production fell by nearly 45% between the years 1929 and 1932.
Homebuilding dropped by 80% between the years 1929 and 1932.
In the 1920s, the banking system in the U.S. was about $50 billion, which was about 50% of GDP.[56]
From the years 1929 to 1932, about 5,000 banks went out of business.
By 1933, 11,000 of the US' 25,000 banks had failed.[57]
Between 1929 and 1933, U.S. GDP fell around 30%, the stock market lost almost 90% of its value.[58]
In 1929, the unemployment rate averaged 3%.[59]
In 1933, 25% of all workers and 37% of all nonfarm workers were unemployed.[60]
In Cleveland, Ohio, the unemployment rate was 60%; in Toledo, Ohio, 80%.[55]
One Soviet trading corporation in New York averaged 350 applications a day from Americans seeking jobs in the Soviet Union.[61]
Over one million families lost their farms between 1930 and 1934.[55]
Corporate profits had dropped from $10 billion three years ago to $1billion in 1932.[55]
Between 1929 and 1932 the income of the average American family was reduced by 40%.[62]
Nine million savings accounts had been wiped out between 1930 and 1933.[55]
273,000 families had been evicted from their homes in 1932.[55]
There were two million homeless people migrating around the country.[55]
One Arkansas man walked 900 miles looking for work.[55]
Over 60% of Americans were categorized as poor by the federal government in 1933.[55]
In the last prosperous year (1929), there were 279,678 immigrants recorded, but in 1933 only 23,068 came to the U.S.[63][64]
In the early 1930s, more people emigrated from the United States than immigrated to it.[65]
The U.S. government sponsored a Mexican Repatriation program which was intended to encourage people to voluntarily move to Mexico, but thousands were deported against their will. Altogether about 400,000 Mexicans were repatriated.[66]
New York social workers reported that 25% of all schoolchildren were malnourished. In the mining counties of West Virginia, Illinois, Kentucky, and Pennsylvania, the proportion of malnourished children was perhaps as high as 90%.[55]
Many people became ill with diseases such as tuberculosis (TB).[55]
The 1930 U.S. Census determined the U.S. population to be 122,775,046. About 40% of the population was under 20 years.[67]

The bursting of bubbles causes credit contraction, forced liquidation of assets, deflation, and wealth destruction that may reach catastrophic proportions. In a deflationary environment, the weight of accumulated debt can sink the banking system and push the economy into depression. That is what needs to be prevented at all costs.

It can be done by creating money to offset the contraction of credit, recapitalizing the banking system, and writing off or down the accumulated debt in an orderly manner. For best results, the three processes should be combined. This requires radical and unorthodox policy measures. If these measures were successful and credit started to expand, deflationary pressures would be replaced by the specter of inflation, and the authorities would have to drain the excess money supply from the economy almost as fast as they pumped it in. Of the two operations, the second is likely to prove both technically and politically even more difficult than the first, but the alternative--global depression and world disorder--is unacceptable. There is no way to escape from a far-from-equilibrium situation--global deflation and depression--except by first inducing its opposite and then reducing it.

The size of the problem is even larger than it was in the 1930s. This can be seen from a simple calculation. Total credit outstanding was 160 percent of GDP in 1929, and it rose to 260 percent in 1932 due to the accumulation of debt and the decline of GDP. We entered into the Crash of 2008 at 365 percent, which is bound to rise to 500 percent or more by the time the full effect is felt. And this calculation does not take into account the pervasive use of derivatives, which was absent in the 1930s but immensely complicates the current situation. The situation has been further aggravated by the haphazard and arbitrary way in which it was handled by the Bush administration. The public and the business community suffered a shock in the aftermath of the Lehman Brothers default, and the economy has fallen off a cliff. The next two quarters will show rapid deterioration.

To prevent the economy from sliding into a depression, President Obama must embark on a radical and comprehensive policy package that has five major components:

1. A fiscal stimulus package
2. A thorough overhaul of the mortgage system
3. Recapitalization of the banking system
4. An innovative energy policy
5. Reform of the international financial system