Bulletin N° 376



23 November 2008
Grenoble, France

Dear Colleagues and Friends of CEIMSA,
In his ground-breaking essay, first published in 1959, on the social and political relationships of The Two Cultures --that of scientists and that of literary intellectuals from western nations-- British author C.P. Snow recounts how one of the more convivial Oxford University dons came over to Cambridge to dine. The date was sometime in the 1890s. The famous Oxford don was sitting at the high table on the right of the Cambridge President, and as he was inclined to do he attempted to talk to the men around him in some cheerful Oxford chit-chat. When he attempted to engage with  the man siting across the table from him, he got only a grunt in reply. He then tried the man to his own right and got another grunt. To his surprise, the first man  looked at the other sitting next to the Oxford don and said, "Do you know what he's talking about?" "I haven't the least idea!" replied the second. The Oxford don felt somewhat uncomfortable until the Cambridge President came to his rescue: "Oh, those are mathematicians! We never talk to them."(p.3)

Literary intellectuals in France come from a heritage of great political convulsions: the French Revolution, the Empire, the Restoration of the Bourbon dynasty, the Monarchy of Louis-Philippe, the Second Republic, the Second Empire, the Franco-Prussian War, the Paris Commune, the Third Republic, two world wars, the German occupation and the Pétin Regime, the War in Indochina, the Algerian War, etc., etc. . . .

It is from this context that Jean-Paul Sartre speaks of the 19th-century French literati, in his third volume of The Family Idiot. Sartre provides an unorthodox understanding of the "Great French Realist" author, Gustave Flaubert (1821-1880) and describes what he calls l'art névrose and the "objective mind," or "Culture as practico-inert," in the periods of Louis Philippe (1830-1848), the Second Republic (1848-1852),  and the Second Empire (1852-1870). The body of knowledge that preceded and surrounded the author of Madame Bovary (1857), wrote Sartre, can be understood in a chronology of three distinct periods in French history: the first included the writings of the Philosophes, whose 18th-century works addressed the French aristocracy on behalf of the bourgeoisie. The values and goals of such writers as Voltaire, Rousseau, and the other Encyclopedists reflected a concern for "Scientific Truths" and for the advancement of all humanity. These authors believed that they had  transcended social class interests, and while they were welcomed by the milieu of the aristocracy they promoted the belief that the interests of the bourgeoisie coincided with the universal interests of all mankind. Their project was synonymous with "freedom of speech" in the name of "progress" which they believed transcended social class interests. For this, their ideas were embraced by progressive 18th-century Americans, like Thomas Jefferson and Benjamin Franklin. [For a critical discussion of Sartre's study of Flaubert, please see Hazel Barnes, Sartre & Flaubert (1981).]

The second period according to Sartre began around 1815, after the defeat of Napoleon Bonaparte. It represented a literary revolt by the next generation of writers against analytic reason. French Romantics, in contrast to the generation of Philosophes, identified strongly with the class values of the aristocracy. They believed themselves to be "chosen by God," to be organic "aristocrats by blood" and, according to Sartre, they despised the bourgeoisie which had preempted their privileges. Men like George Gordon Lord Byron (1788-1824) and William Blake (1757-1827), in England, and François-René de Chateaubriand (1768-1848), Alphonse de Lamartine (1790-1869), and Victor Hugo (1802-1885) in France, identified analytic reason with the French Revolution and scorned both. These sworn enemies of the bourgeoisie failed to ally with the other enemy of the bourgeoisie, the early industrial proletariat, and Sartre writes that the readers of romantics were largely the misfits and refugees from the middle class, like women who never were successfully integrated into the bourgeois social order, and adolescents who had not yet settled down to a practical career, and the anxiety-ridden petty-bourgeois who were denied the prestige and privilege enjoyed by the wealthy owners of capital. In fact, the true "middle class," served as the ideologues of "false consciousness," which Sartre and his American translator, MS. Hazel Barnes, define as that

subterranean, pre-logical, unarticulated notion of humanity-in-the-world. This ideology is not free of bad faith. [It is described by Sartre as a] 'filter of thoughts common to all the individuals in a class, which springs from the impossibility of their achieving a true class consciousness.'The innate purpose of the 'false consciousness' is precisely to render a true consciousness impossible. Obviously no such ideology comes all of a piece, nor is there ever a deliberate, concerted effort to formulate it. Yet Sartre thinks we can both roughly date its beginning and pinpoint the subgroup responsible for its development. This sort of task has always been entrusted to the 'clerk.' In medieval feudalism it was given to the clerics, in the eighteenth century to the Philosophes. After the establishment of Louis Philippe in 1830 it was up to the members of the professional class. Sartre calls them 'les capacités' or 'les capables'. They were the doctors, lawyers, scientists, and technicians who made up the true 'middle class' within the bourgeoisie, below the wealthy industrialists, above the small shop owners and farmers. They formed, in fact, the greater part of Flaubert's readers.(p.279-280)

The "post-romantic" era was ushered in with the new aesthetics of Charles Baudelaire (1821-1867), followed by "the Great Realist", Gustave Flaubert (1821-1880), and Stéphane Mallarmé(1842-1898), before and after the French massacres of workers in 1848. This third period in French literary history appeared before the end of the reign of Louis Philippe (1830-1848). The post-romantics identified humanity with their own bourgeois class, as did the Philosophes, but they joined with the romantics in despising this class, and by logical extension despising humanity. They were doubly condemned, as members of the hated class and as an example of "the inferior species." These "Knights of Nothingness," as Sartre identified those infected with the post-romantic neuroses, tried to achieve a point of view which was nonhuman. In their imagination they tried to deny their solidarity with the human race. It was the duty of these authors not to engage in any cause. Beneath their superficial optimism lay a deep pessimism, a misanthropy, according to Sartre, that was capable of genocide.

If in the 18th century the Philosophe had put his pen to the service of humanity, his public included both the bourgeoisie for whom he spoke and the aristocrats to whom he addressed himself. The 19th-century Romantic offered his work as a gift. His was a mission to accomplish, but it was a hopeless cause. He chose failure, but it was a failure consented to, and partially compensated by the artistic creation itself. The Post-romantic refused to serve anyone or anything. He acknowledged no public and regarded his work as a necessary failure. Instead of deriving his satisfaction from the outside, as did the first group of writers, or from within. as did the romantics, the "Knights of Nothingness" (as Sartre calls them) were incapable of being satisfied. They adopted insatisfaction as a value.

The imaginary experience for them went beyond providing an escape from reality, its task was "to deny the real and to give being to the unreal," to reveal the superiority of Nothingness to Being, of the nonhuman to man, of what does not exist over the existent --the past over the present, death over life, abstract over the material; in short, "the imagined over the real." The failures of the "Knights of Nothingness" were due to their hypersensitivity. While recognizing their "feminine" side, they reproached women for not making the best use of their rich sensibility. Sartre writes ironically that the post-romantic writer was "too great to be a man. . . ." He then cites Baudelaire:

'Woman is in heat and wants to be screwed.' She seeks a practical outlet for her desires and is satisfied with normal affective attachments to people and to causes. By contrast, the artist rejects the passions and emotions that would attach him to the world and pours all his libidinal energy into his art.(p.272)

The romantic at least believed in the lost cause to which he committed his life; the post-romantic pursued failure for its own sake, in bad faith, as proof of the worlds unworthiness. The "Knights of Nothingness,"  by claiming for themselves the imaginary position of déclassés, sought to please no audience. Their pure aesthetics of "l'arte pour l'art" had no mission aside from pleasing themselves. It was the "impossibility of art," directed toward nobody and committed to nothing. For Sartre, they were the bearers of evil, and for three reasons, which are outlined in Hazel Barnes' book :

First, they are radically pessimistic; they deny God and proclaim the total wretchedness of man without God. Second, this poisonous exposé of abandoned humanity is not offered out of concern for humankind but out of hatred; its intent is to injure. Finally, it fails to reach its own goal. The 'diabolical image of our world' that it presents to us is in truth not our world but 'the inconsistent outline of another universe which will never exist.'(p.274)


In fact, of course, these writers like their predecessors did necessarily represent a real social class interest. They imagined themselves free of bourgeois constraints, but the social position of the writer, his aesthetics, and his concept of his own role as artist is part of an inescapable ontological whole. Sartre's study of how the "objective mind" and the "objective neurosis" are formed  and modified is a pertinent contribution to our own on-going study at CEIMSA of ethics in American class society. [Readers are invited to attend the international colloquium we are organizing, with the help of the study group "Politique américaine" and CREA, on 6 May 2009 at l'Université de Paris 10 in Nanterre.]

Inside the plastic capitalist structures of American society, the dynamics of rising and declining ideologues reveal the constraints experienced by different social classes. At the time of the Cold War, for example, the hope was that science and technology would deliver us from the nightmare of thermo-nuclear war. In 1959, C.P. Snow writes that,

Major scientific breakthroughs, and in particular those as closely connected to human flesh and bone as this one in molecular biology, or even more, another which we may expect in the nature of the higher nervous system, are bound to touch both our hopes and our resignations. . . .
No one can predict what such an intellectual revolution will mean: but I believe that one of the consequences will be to make us feel not less but more responsible toward our brother men.

Today, the many vacillations within American political culture reflect a multiplicity of new constraints imposed on the ruling class in search of an ideology capable of providing a synthesis that successfully totalizes the past in such a way as to give new meaning to the future, while at the same time fulfilling its necessary task of achieving an acceptable class consciousness, which would legitimize the power of the dominant class and "hide the shameful secret that the well-being of the bourgeois demanded the pauperization of the workers."

Above all, it must offer a view of a manifest destiny in which all would participate. Only this might obscure the fact that 'the class interest of the bourgeois is the destiny of the proletariat.' 
     The elite performed its task admirably; the events of 1848 enabled it to complete the job. From the beginning the well-being of the professional classes was intimately allied with tat of bourgeois institutions. Scientists and practitioners depended on the wealthy industrialists for their livelihood.

The 5 items below will alert CEIMSA readers to the dialectical process we are now entering which is moving in a direction where our praxis in the pratico-inert toward human liberation will illuminate our lives at every level, instead of relying on light from the conservative "cybernetic lamp posts" produced and reproduced by relentless indoctrination and, if the insights of Sartre are of any value, continue radiating  from the "objective mind" and l'art névorse.

Item A. is an article by Naomi Klein on the transition toward democracy in U.S. political culture.

Item B. is an article by Nouriel Roubini sent to us by Information Clearing House, warning citizens to "beware of those who say we've hit the bottom."

Item C. is an audio interview on Electric Politics by George Kenney, speaking with Bill Fletcher, the executive editor of The Black Commentator.

Item D. is an article by Mike Whitney on the U.S. administration's need to implement "Plan B" before it is too late.

Item E. is an article by Jeremy Scahill on "the making of the Obama White House."

And finally, for an example of the dialectics of detotalization/retotalization we offer CEIMSA readers excerpts from the remarkable 1983 film, Danton, directed by Andrzej Wajda and staring Gérard Depardieu, whose masterful interpretation of the final days of Danton and Robespierre reveal some of the internal contradictions of the bourgeois revolution of 1789, before it imploded, reversing its ideology of human liberation and inventing new pyramids for establishing conservative national orders, lead by political elites whose mandate was (and still is) to protect the private ownership of capital and the private profit motive from democratic forces where ever they may appear.


Another, more succinct exercise from the dialectics of process is found written in black on the political lapel-button worn occasionally to class by my conservative Eastern European History professor at the University of Texas, Dr. Oliver Radke. It reads :

"God is dead!" --Nietzsche;
"Nietzsche is dead!" --God.

Francis McCollum Feeley
Professor of American Studies
Director of Research
Université Stendhal Grenoble 3

from Naomi Klein :
Date: 15 November 2008
Subject: The Transition toward Democracy.

In Prase of a Rocky Transition
by Naomi Klein

The more details emerge, the clearer it becomes that Washington's handling of the Wall Street bailout is not merely incompetent. It is borderline criminal.

In a moment of high panic in late September, the US Treasury unilaterally pushed through a radical change in how bank mergers are taxed--a change long sought by the industry. Despite the fact that this move will deprive the government of as much as $140 billion in tax revenue, lawmakers found out only after the fact. According to the Washington Post, more than a dozen tax attorneys agree that "Treasury had no authority to issue the [tax change] notice."

Of equally dubious legality are the equity deals Treasury has negotiated with many of the country's banks. According to Congressman Barney Frank, one of the architects of the legislation that enables the deals, "Any use of these funds for any purpose other than lending--for bonuses, for severance pay, for dividends, for acquisitions of other institutions, etc.--is a violation of the act." Yet this is exactly how the funds are being used.

Then there is the nearly $2 trillion the Federal Reserve has handed out in emergency loans. Incredibly, the Fed will not reveal which corporations have received these loans or what it has accepted as collateral. Bloomberg News believes that this secrecy violates the law and has filed a federal suit demanding full disclosure.

Despite all of this potential lawlessness, the Democrats are either openly defending the administration or refusing to intervene. "There is only one president at a time," we hear from Barack Obama. That's true. But every sweetheart deal the lame-duck Bush administration makes threatens to hobble Obama's ability to make good on his promise of change. To cite just one example, that $140 billion in missing tax revenue is almost the same sum as Obama's renewable energy program. Obama owes it to the people who elected him to call this what it is: an attempt to undermine the electoral process by stealth.

Yes, there is only one president at a time, but that president needed the support of powerful Democrats, including Obama, to get the bailout passed. Now that it is clear that the Bush administration is violating the terms to which both parties agreed, the Democrats have not just the right but a grave responsibility to intervene forcefully.

I suspect that the real reason the Democrats are so far failing to act has less to do with presidential protocol than with fear: fear that the stock market, which has the temperament of an overindulged 2-year-old, will throw one of its world-shaking tantrums. Disclosing the truth about who is receiving federal loans, we are told, could cause the cranky market to bet against those banks. Question the legality of equity deals and the same thing will happen. Challenge the $140 billion tax giveaway and mergers could fall through. "None of us wants to be blamed for ruining these mergers and creating a new Great Depression," explained one unnamed Congressional aide.

More than that, the Democrats, including Obama, appear to believe that the need to soothe the market should govern all key economic decisions in the transition period. Which is why, just days after a euphoric victory for "change," the mantra abruptly shifted to "smooth transition" and "continuity."

Take Obama's pick for chief of staff. Despite the Republican braying about his partisanship, Rahm Emanuel, the House Democrat who received the most donations from the financial sector, sends an unmistakably reassuring message to Wall Street. When asked on This Week With George Stephanopoulos whether Obama would be moving quickly to increase taxes on the wealthy, as promised, Emanuel pointedly did not answer the question.

This same market-coddling logic should, we are told, guide Obama's selection of treasury secretary. Fox News's Stuart Varney explained that Larry Summers, who held the post under Clinton, and former Fed chair Paul Volcker would both "give great confidence to the market." We learned from MSNBC's Joe Scarborough that Summers is the man "the Street would like the most."

Let's be clear about why. "The Street" would cheer a Summers appointment for exactly the same reason the rest of us should fear it: because traders will assume that Summers, champion of financial deregulation under Clinton, will offer a transition from Henry Paulson so smooth we will barely know it happened. Someone like FDIC chair Sheila Bair, on the other hand, would spark fear on the Street--for all the right reasons.

One thing we know for certain is that the market will react violently to any signal that there is a new sheriff in town who will impose serious regulation, invest in people and cut off the free money for corporations. In short, the markets can be relied on to vote in precisely the opposite way that Americans have just voted. (A recent USA Today/Gallup poll found that 60 percent of Americans strongly favor "stricter regulations on financial institutions," while just 21 percent support aid to financial companies.)

There is no way to reconcile the public's vote for change with the market's foot-stomping for more of the same. Any and all moves to change course will be met with short-term market shocks. The good news is that once it is clear that the new rules will be applied across the board and with fairness, the market will stabilize and adjust. Furthermore, the timing for this turbulence has never been better. Over the past three months, we've been shocked so frequently that market stability would come as more of a surprise. That gives Obama a window to disregard the calls for a seamless transition and do the hard stuff first. Few will be able to blame him for a crisis that clearly predates him, or fault him for honoring the clearly expressed wishes of the electorate. The longer he waits, however, the more memories fade.

When transferring power from a functional, trustworthy regime, everyone favors a smooth transition. When exiting an era marked by criminality and bankrupt ideology, a little rockiness at the start would be a very good sign.

Naomi Klein is an award-winning journalist and syndicated columnist and the author of the international and New York Times bestseller The Shock Doctrine: The Rise of Disaster Capitalism (September 2007); an earlier international best-seller, No Logo: Taking Aim at the Brand Bullies; and the collection Fences and Windows: Dispatches from the Front Lines of the Globalization Debate (2002).

from Information Clearing House :
Date: 15 November 2008.
Subject: The worst is still to come.

 The recession will continue until at least the end of 2009 for a cumulative gross domestic product drop of over 4%; the unemployment rate will likely reach 9%. The U.S. consumer is shopped-out, saving less and debt-burdened: This will be the worst consumer recession in decades.

The Worst Is Not Behind Us
(Beware of those who say we've hit the bottom)
by Nouriel Roubini


from George Kenney :
Date: 21 November 2008
Subject: Obama and moderation in a time of crisis.

Dear Francis,
For another cautiously optimistic look at Obama, I turned to Bill Fletcher, Jr., long-time labor and community activist, author, and currently executive editor of The Black Commentator. Bill has a nuanced, long-term view of what needs to be done and, like me, he doesn't go in for plaster saints.
As discouraging as Obama's retreat to the center may be, I think there's still some reason to be hopeful because centrist solutions to our massive problems just won't work. But we'll see...
If you like the show please feel free to redistribute the link.


from Mike Whitney :
Date: 20 November 2008
Subject: Moving on to Plan B.

This Is Not A Normal Recession
Moving on to Plan B
by Mike Whitney

"The Winter of 2008-2009 will prove to be the winter of global economic discontent that marks the rejection of the flawed ideology that unregulated global financial markets promote financial innovation, market efficiency, unhampered growth and endless prosperity while mitigating risk by spreading it system wide." Economists Paul Davidson and Henry C.K. Liu "Open Letter to World Leaders attending the November 15 White House Summit on Financial Markets and the World Economy"

The global economy is being sucked into a black hole and most Americans have no idea why. The whole problem can be narrowed down to two words; "structured finance".

Structured finance is a term that designates a sector of finance where risk is transferred via complex legal and corporate entities. It's not as confusing as it sounds. Take a mortgage-backed security (MBS), for example. The mortgage is issued by a bank (the loan originator) which then sells the mortgage to a brokerage where it is chopped up into tranches (pieces of the loan) and sold in a pool of mortgages to investors that are looking for a rate that is greater than Treasurys or similar investments. The process of transforming debt ("the mortgage") into a security is called securitization. At one time, the MBS was a reasonably safe investment because the housing market was stable and there were relatively few foreclosures. Thus, the chance of losing one's investment was quite small.

In the early years of the Bush administration, Wall Street took advantage of the gigantic flow of capital coming into the country ($700 billion per year via the current account deficit) by creating more and more MBSs and selling them to foreign banks, hedge funds and insurance companies. It was real gold rush. Because the banks were merely the mortgage originators, they didn't believe their own money was at risk, so they gradually lowered lending standards and issued millions of loans to unqualified applicants who had no job, no collateral and a bad credit history. Securitization was such a hit, that by 2005, nearly 80 percent of all mortgages were securitized and the traditional criteria for getting a mortgage was abandoned altogether. Subprimes, Alt-As and ARMs flourished, while the "30 year fixed" went the way of the Dodo. Lenders were no longer constrained by "creditworthiness"; anyone with a pulse and a pen could get approved. The mortgages were then shipped off to Wall Street where they were sold to credulous investors.

The disaggregation of risk--spreading the risk to many investors via securitization--was as much of a factor in the creation of "the largest equity bubble in history", as the banks lax lending standards or Greenspan's low interest rates. By spreading risk throughout the system, securitization keeps interest rates artificially low because the real risks are not properly priced. The low interest rates, in turn, stimulate speculation which results in equity bubbles. Eventually, credit expansion leads to crisis when borrowers can no longer make the interest payments on their loans and defaults spiral out of control. This forces massive deleveraging and the fire-sale of assets in illiquid markets. As assets lose value, prices fall and the economy enters a deflationary cycle.

There are many types of of structured instruments including asset-backed securities (ABS), mortgage-backed securities (MBS), collateralized debt obligations (CDOs) and collateralized loan obligations (CLOs) all of which provide a revenue stream from loans that were chopped into tranches and turned into securities. There are many problems with these complex securities, the biggest of which is that there is no way to unravel the individual pools of loans to isolate the bad paper. That's why subprime mortgages had such a destructive affect on the secondary market, because--even though subprimes only defaulted at a rate of roughly 5 percent--MBS sales slumped nearly 90 percent. Why? Former Secretary of the Treasury Paul O'Neill explained it like this: "It's like you have 8 bottles of water and just one of them has arsenic in it. It becomes impossible to sell any of the other bottles because no one knows which one contains the poison."

Exactly right. So why weren't these structured debt-instruments "stress tested" before the markets were reworked and the financial system became so dependent on them?

Greed. Because the real purpose of these exotic investments is not to provide true value to the buyer, but to maximize profits for the seller by increasing leverage. That is the real purpose of MBS, CDOs and all the other bizarre-sounding derivatives; higher profits with less capital. It's a scam. Here's how it works: A mortgage applicant buys a house for $400,000 and puts 10 percent down. His mortgage is sold to Wall Street, chopped into pieces, and stitched together in a pool of similar loans. Now the brokerage can use the debt as if it were an asset, borrowing at ratios of 20 or 30 to 1 to fatten the bottom line. When Fannie Mae and Freddie Mac were taken into conservatorship by the government, they were leveraged at an eye-popping 100 to 1. This shows that nearly an infinite amount of debt can be precariously balanced atop a paltry amount of capital. This explains why the $4 trillion aggregate value of the 5 big investment banks and the $1.7 trillion value of the hedge funds is now vanishing more quickly than it was created. Once the mighty gears of structured finance shift into reverse, deleveraging begins with a vengeance pulling trillions into a credit vacuum.

It all started when two Bear Stearns hedge funds defaulted in July 2006 and there were no offers for their MBS and other structured investments. Panic quickly spread to every corner of Wall Street as the alchemists of modern finance began to see that their worst nightmare might be realized, that trillions of dollars of Frankenstein investments could be worth nothing at all.

Since the Bear Stearns funds fiasco, there have been huge explosions in the financial markets. Fannie Mae, Freddie Mac, Wachovia, Washington Mutual, Indybank, AIG, Lehman Bros and other industry giants have either gone under or been forced into shotgun weddings by the FDIC. The stock market has plunged over 40 percent and suffered wild gyrations not seen since the 1930s. The entire Wall Street landscape has changed completely. Investment banking is no longer a viable business model; the Big 5 have either vanished or transformed themselves into holding companies to escape short sellers. The hedge funds have been deleveraging with a ferocity that has sent sent stocks and commodities crashing. In one day last week, the stock market plunged 300 points in the morning only to bounce back 550 points a few hours later; a whopping 850 point-spread in one trading day! No one but a madman would dabble in this market. Cautious investors have pulled up stakes and moved to the safety of Treasurys. Meanwhile, the financial tsunami is roaring through the real economy where consumer confidence has plummeted, unemployment is soaring and retail sales have fallen to historic lows. The downdraft from the financial markets has flattened Main Street and set the stage for a humongous $500 billion stimulus package to be delivered in the first few months of the Obama administration. The meltdown appears to be playing out much like Henry Paulson anticipated. According to Bloomberg News : "Shortly after leaving Wall Street as Goldman Sachs' CEO, Henry Paulson was at Camp David warning the president and his staff of "over-the-counter derivatives as an example of financial innovation that could, under certain circumstances, blow up in Wall Street's face and affect the whole economy." (PAUL B. FARRELL, "30 reasons for Great Depression 2 by 2011", MarketWatch)

So far, the Federal Reserve has provided nearly $2 trillion through its lending facilities just to keep the financial system upright. The Treasury is currently distributing $700 billion to key banks and other financial institutions that are perceived to be "too big to fail". In truth, the "too big to fail" mantra is a just public relations hoax to conceal the web of counterparty deals that make it impossible for one institution to fail without dominoing through the rest of the system and wreaking havoc. That's why AIG is still on life-support with regular injections of taxpayer money; because it had roughly $4 trillion of credit default swaps (structured "hedges" that are not traded on a regulated exchange) for which AIG does not have sufficient capital reserves. In other words, the taxpayer is now paying the debts of an insurance company that didn't set aside the money to pay its claims. (As yet, No SEC indictments for securities fraud) In fact, the Fed and Treasury are now providing a backstop for the entire structured finance system which is frozen solid and shows no sign of thawing any time soon.

This is not a normal recession, which is a downturn in the business cycle and "a period of reduced economic activity" usually brought on by a mismatch between supply and demand. (that ends in two quarters of negative growth) The present situation is much more grave; it is the utter destruction of a system that was developed fairly recently and has proven to be thoroughly dysfunctional. It cannot withstand the effects of tighter credit or adverse market conditions. This is not a cyclical downturn; the structured finance system has collapsed leaving behind a multi-trillion dollar capital hole that is bringing the broader economy to its knees.

One by one, we have seen the structured instruments fail; mortgage-backed securities (MBS), collateralized debt obligations (CDOs), credit default swaps (CDS), commercial paper (CP), auction rate securities. Now we are seeing investors boycott anything related to structured investments. This is from Mish's Global Economic Trend Analysis:

"There were NO sales of bonds backed by credit-card payments in October, the first time since 1993, when the asset-backed securities market was in its infancy. Yields on top-rated credit card bonds relative to benchmark interest rates reached a record high of 525 basis points more than the London interbank offered rate, or Libor, last week, according to Bank of America Corp. data."

Wall Street has turned off the faucet for securitized investments. That market is toast. The only reason that Libor and the other gauges of interbank lending have normalized is because the Fed guaranteed money markets and commercial paper. It has nothing to do with trust between the banks themselves. There is no trust. Even so, the banks are not capable of making up for the vast amount of credit which was produced by the now-defunct investment banks and hedge funds which are constrained by losses of nearly $3.5 trillion; half of their total value. In the best case scenario, bank credit will only shrink 15 or 20 percent, which will put the US on track for a deep "18 month to 2 year" recession rather than another Great Depression.

Paulson's attempt to divert $30 billion to non-bank financial institutions to revive loan securitization when there is no appetite among investors for such structured junk is pure folly. More troubling, is that neither Paulson nor Bernanke have a Plan B; an alternate scheme for rebuilding the financial markets on a solid, sustainable foundation rather than low interest rates and pools of debt. Everything they have done so far, suggests that they are focused on one thing alone; inflating another equity bubble. "Inflate or die", as the saying goes; and Bernanke intends to achieve this objective using the same tools that brought us to the brink of catastrophe. Here's a clip from a recent speech by Bernanke which shows his determination to prop up the broken system:

"The ability of financial intermediaries to sell the mortgages they originate into the broader capital market by means of the securitization process serves two important purposes: First, it provides originators much wider sources of funding than they could obtain through conventional sources, such as retail deposits; second, it substantially reduces the originator's exposure to interest rate, credit, prepayment, and other risks associated with holding mortgages to maturity, thereby reducing the overall costs of providing mortgage credit."

Sorry, Ben, the funding has dried up and the banks have shown no interest in going back to the days of conventional "30-year fixed" mortgages. It's a dead letter. The Fed and Treasury need to stop looking for ways to reflate the bubble and work to restore confidence in the markets by increasing regulation and reducing the amount of leverage that's allowable to 12 to 1. After all, it's no coincidence that AIG, Fannie and Freddie, Lehman Bros, General Motors, General Electric have all fallen off a cliff at the very same time. They are all victims of the same low interest, easy money finance swindle which allowed them to roll over huge amounts of short-term debt at artificially low cost. When Bear blew up; lending tightened, demand weakened, and credit was flushed from the system at an unprecedented pace. Borrowing short for long-term investments is not feasible when credit becomes scarce, but it's not because the banks aren't lending. That's just another myth that keeps the public from seeing what's really going on. As Jon Hilsenrath points out in his Wall Street Journal article, "Banks Keep Lending, but that isn't easing the crisis", that is not the case:

"Banks actually are lending at record levels. Their commercial and industrial loans, at $1.6 trillion in early November, were up 15% from a year earlier and grew at a 25% annual rate during the past three months, according to weekly Federal Reserve data. Home-equity loans, at $578 billion, were up 21% from a year ago and grew at a 48% annual rate in three months....The numbers point to one of the great challenges of the crisis. The credit crunch is surely real, but it is complex and not easily managed. Banks are lending, but they're also under serious strain as they act as backstops to a larger problem -- the breakdown of securities markets..The worst of the credit crisis is being felt not in banks but in financial markets..."

The banks are not to blame. There is a generalized contraction of credit in the non-bank financial system where structured finance has blown up and taken half of Wall Street with it. It's the end of an era. Here's how economist Henry C. K. Liu sums it up in his "Open Letter to World Leaders attending the November 15 White House Summit on Financial Markets and the World Economy":

"Neoliberal economists in the last three decades have denied the possibility of a replay of the worldwide destructiveness of the Great Depression that followed the collapse of the speculative bubble created by unfettered US financial markets of the 'Roaring Twenties'. They fooled themselves into thinking that false prosperity built on debt could be sustainable with monetary indulgence. Now history is repeating itself, this time with a new, more lethal virus that has infested deregulated global financial markets with 'innovative' debt securitization, structured finance and maverick banking operations flooded with excess liquidity released by accommodative central banks. A massive structure of phantom wealth was built on the quicksand of debt manipulation. This debt bubble finally imploded in July 2007 and is now threatening to bring down the entire global financial system to cause an economic meltdown unless enlightened political leadership adopts coordinated corrective measures on a global scale."

Rome is burning. It's time to stop tinkering with a failed system and move on to "Plan B" before it's too late.

from Jeremy Scahill :
Date: 21 November 2008
Subject: This is Change ?

Obama has a momentous opportunity to do what he repeatedly promised over the course of his campaign: bring actual change. But the more we learn about who Obama is considering for top positions in his administration, the more his inner circle resembles a staff reunion of President Bill Clinton's White House.

This Is Change?
(20 Hawks, Clintonites and Neocons to Watch for in Obama's White House)
by Jeremy Scahill