The U.S.

Financial Crisis: A Misunderstanding of the Top Causes

As I read the daily news, listen to politicians, and chat with my colleagues in the teachers lounge, it really seems that almost everyone believes that mortgage defaults and delinquencies are the reason we are in this financial mess characterized by frozen credit markets and downward spiraling stock markets. To my way of looking at the economic world, saying that rising mortgage payment defaults and delinquencies are the cause of the global financial crisis is tantamount to saying that poor building design was the true cause of the thousands of deaths on 9/11/2001. To use an often used cliche, rising mortgage payment defaults are simply the straw that broke the camels back. Moodys Economy.com (Mark Zandi) estimates that all U.S. mortgage losses on existing mortgages will ultimately reach $650B. This $650B of mortgage default is miniscule in relation to the size of our Governments vast financial resources and to the economy as a whole. It makes no economic sense that a $650B problem would generate an $8 Trillion decrease in financial asset wealth over the last year! Clearly, there must be a real problem somewhere! The real cause of the global financial crisis should not be blamed on the mortgage market or the housing crisis, but rather on inadequate regulatory law and the related governmental oversite of our financial institutions. There was no specific law prohibiting financial institutions to amass an alarmingly risky asset to debt ratio. All of the failures of financial institutions are resulting from the firms carrying too much debt (liabilities) relative to their assets (cash & other assets). Marketable securities will always go up and down in price so any firm, especially financial firms, must have a comfortable gap of higher asset values relative to their debt. The financial firms that have failed and are failing did not/do not have a comfortable ratio of asset to debt so when their mortgage related securities fell in value due to the mortgage payment uncertainty, debtors made a run on their collateral and demanded immediate payment from the financial institutions. So what are the real causes of the financial crisis? Here are my top 6 reasons listed in order of significance. You will notice that the most significant (1-3) are really not specifically related to the housing market or mortgage default increases. Since the mortgage defaults and delinquencies were the straw that broke the camels back, I have included them at a lower priority (4-6) of the causes.

TOP 6 CAUSES OF THE U.S. FINANCIAL CRISIS: 1. Imprecise regulatory law allowed the financial institutions to carry too high a ratio of mortgage-backed securities to collateralized debt. 2. Banking regulators should have screamed louder earlier regarding the ratio of assets to debt! Although there are many documented attempts from specific people that did warn of this problem it was more a whisper than a scream. 3. New accounting regulations under Sarbanes Oxley (regulation passed after Enron) are too conservative causing assets like mortgage-related securities to be valued less than their economic value (true worth), which caused the bank debtor run on the bank. 4. Private lenders (and their CEOs) got greedy either lowering or violating their own lending standards in hopes of making more interest income by loaning to people who were very risk bets. 5. Households borrowed more than they could afford. Citizens that borrowed need to share the blame with lenders, although I place lenders at a higher standard than borrowers. 6. New law had been passed several years ago, urging institutions like Fannie Mae to make more loans to lower income households that carried much more risk.

The Current Financial Crisis- Causes and Consequences

The house of cards built on easy credit has finally come tumbling down, triggered by the failure of one of the most flimsy of the cards, subprime mortgages. We'll look at the causesit's important to understand causes if one has any reasonable chance of analyzing the present and assessing the outlookand weigh the likely outcome of the government's actions. Not to keep you in suspense any longer, we believe the bailout and associated actions, adding yet more credit to an economy already over-ripe with easy credit, far from solving the problem (i.e., getting banks to lend again), will make matters ultimately worse, by postponing the necessary adjustments, building up inflation, and destroying the dollar and its purchasing power, devastating savers and undermining the foundations of the economy. This will be a protracted slowdown as corporations and households de-lever and attempt to restore some health to broken balance sheets. Neverthelessto jump ahead to the critical conclusion for investors we'll discuss next timewe are far beyond the time for wholesale liquidation, if it means selling quality companies well below their intrinsic values. It may be too early for aggressive across-the-board buying, but remember the words of the late, great John Templeton, who advised us to buy at the point of maximum pessimism. What Brought Us Here? It is critical to start by analyzing the causes of the problem, and assessing the likely outcome. Only by understanding that, can we hope to know what to do. So what brought us here, and what's next? The root cause of our current problems is clear: excess credit creation over these many years. Too much money and artificially low interest rates always and inevitably lead to speculation and mal-investment. Whatever excesses there have been on Wall Streetand there have been many, as well as the abject ignoring of any sense of fiduciary responsibility nonetheless, blaming Wall Street speculators for the mess is a little like blaming a drunk child when the parent left the open bottle in the playpen. Critical to understand is that this is not a normal cyclical downturn. Such is triggered by tightening money and higher rates in a deliberate attempt to cool an overheated economy and restrain inflation. The resulting recession can be sharp but is typically short. Similarly, it is relatively easy to get out of a cyclical recession: do the opposite of what triggered it, that is, ease money and lower rates. But this is not a cyclical downturn; it is, rather, a secular de-leveraging contraction. Tighter money and higher rates did not trigger it, and easing money and lowering rates will not get us out of it. Au contraire. We currently have easy money and low rates, rates that are actually

negative at the short end. And easier money and even lower rates, such as we've seen over the past year, have not helped. (Indeed, despite the Fed slashing the overnight loan rate from 5% to 2% in the seven months to April, rates in the real marketmortgage rates, credit card rates, etc.actually increased and, of course, available credit contracted.) This is important to recognize. Selling Begets Selling Thus, this de-leveraging process is likely to be a protracted process as banks, other firms, and households restore health to their balance sheets. But such a process feeds on itself, as we have all-too-painfully seen this year. Companies sell assets to raise capital, which pushes down prices, which forces others to raise capital, pushing prices down further, which causes banks to contract credit. And as banks contract, small businesses have difficulties, reducing purchases, and so on. So much of the selling in the market has been forced (by financial companies needing to raise capital to meet ratios; by investor receiving margin calls, and funds getting redemptions). The waves of forced selling then cause panic among investors, leading to the very worst kind of selling, blind liquidation of thinly traded securities into down markets. This can, and has, driven prices down sharply and suddenly. Will the Bailout Work? The banks have no capacity or appetite for lending, which is why lower rates haven't helped. And why, given that for investment banks to reduce their average leverage from 30 times to 20 times would require that $6 trillion of assets be sold, the government's $700 billion bailout won't change the picture either. (Another question: Do they buy bad assets at prevailing prices, in which case it won't improve banks' capital ratios at all, or do they defraud the taxpayer and buy back at abovemarket prices, as Paulson seemingly wanted to do?) It may plug a hole short term, but it doesn't mean the banks open up and start lending again. Washington is attempting to solve the problem by doing more of what caused the problem in the first place (andgreatest irony and travesty of allwith the very same people in charge who caused the problem in the first place, who encouraged the excesses, and who didn't see the problem until too late). By trying to keep asset prices up, Washington is repeating the error of the 1930s and ensuring that the downturn lasts longer. No parallel is precise, but we might look at what happened when Japan's stock market and real estate bubbles burst at the beginning of the 1990s. The Bank of Japan slashed rates, down to % on long-term government bonds, and bought up bad assets from the bankrupt banks. (They didn't open the monetary spigots, as has Washington.) Neither high interest rates of shaky banks

have been a problem in Japan for many years. But that didn't cause banks to resume lending. Japan also increased deposit insurance (covering accounts in full until 2006.) That simply slowed the needed restructuring, and caused the banks to withdraw, as The Wall Street Journa l put it, led to the establishment of zombie banks. There has been essentially zero net capital investment in Japan in the last 15 years. Despite nearinvisible interest rates and strong banks, Japan has been in either recession of deflation (or both) for most of the past 18 years. And Japan had one huge advantage over the U.S. today, namely that households had low debt and high savings. It's Not Pretty Ahead Not only will current policies not solve the problem, they protract the downturn and delay the needed resolution. But they make matters worse by ensuring more inflation, already at a 17-year high in the U.S., adding another disincentive to save. Taxes will go up, further suppressing economic growth or chances of a recovery. The likely result is a severe case of stagflation So the economy is likely to enter a recession soon, but it will be a long and painful experience coming out of it, a protracted period of sluggishness, with other economic problems. And the market, likewise, is likely to be sluggish for some time, though once we see some stability return, specific sectors and individual companies will recover sooner, while we will see short-term rallies. Next time, we'll look at the outlook for various markets, including, most importantly, the dollar, and then discuss how investors should act in the current crisis (clue: don't dump quality companies below their intrinsic value into a declining market).

Root Cause to US Financial Crisis

Many follow the news in the US and dont understand what is occurring with the financial crisis. How did this happen? Why is it occurring? This article will touch on those subjects and hopefully provide insight and understanding without political rhetoric. History In 1977 there was a little known act signed by the Democratic president called the community reinvestment act (CRA). Its purpose was to spark financial support in what was considered to be high risk areas (bankruptcy, low income etc). The thought was that by offering higher interest the financial industry would offset the high risk losses which would occur. On the flip side it offered some folks a second chance toward home ownership. This did lead toward predatory lending, however, since the financial industry was highly regulated it only represented about 1%. The financial industry had wanted congress for many years to de-regulate the industry. This deregulation would allow Banks, Securities Firms, and Insurance Companies to merge into bigger institutions and to sell each others products (including home loans). This selling would show up as portfolios of various products being offered for sale on the market. It would allow even small investors a chance to play in the wall street game. In November of 1999 then democratic president Clinton signed into law a bill known as the Gramm, Leach, Bliley act. This bill was the sweeping financial reform needed to make America competitive. It repealed some of the financial regulations defined by the 1933 Glass Steagall, and the 1956 Bank Holding Act. The root cause of the Problem There was one section of the bill which almost saw its demise. That was section Vi the Community Reinvestment Act Provisions. This section required increased bank examinations to verify the quotas of high risk loans were being met by those participating in the de-regulation activities. The smaller financial intuitions were targeted with higher examinations to verify they did not rise to the next dollar level plateau without maintaining the proper quota for high risk loans. The quota of high risk loans required by the CRA is what fueled the sub-prime lending market. All types of incentives were used to get the market rolling so quotas could be met. Eventually as prospectus buyers started to evaporate, other incentives were needed to bring in more higher risk buyers. The process continued with ridiculous practices like interest only mortgages, adjustable

rate mortgages, balloon mortgages, non income qualifying mortgages (or liar mortgages), and just about any other non qualifying activity that can be considered. The though was that this would generate a market where the house price would increase dramatically over a few months and the home owner could refinance the mortgage with a better credit history, at lower interest, using the equity built up over the past few months. The housing Boom and Financial instability This CRA activity resulted in a housing boom in the US, where thousands of homes were constructed, which surpassed the market need. These high risk loans were being included and sold in financial portfolios throughout the financial industry. The buyers would purchase the portfolio and then merge parts of one portfolio with parts of another to create another marketable portfolio, and so on and so on... When the actual interest came to bear on the buyer who was of high financial risk anyway, they could not find credit available to refinance their home and the home failures started. Bankruptcy cases started to be rampant in the US, in 2005 just prior to the 2006 revisions, over 2 million bankruptcies were filled. With the new tougher laws in 2006 many informal (deadbeat) bankruptcies occurred (people just walked away). 2007 saw a greater increase as did 2008. The high risk CRA program instigated by the democrats was falling apart. This rampant housing market failure resulted in failure within the traded portfolios, which most American financial intuitions were holding. No longer income these failed loans produced negative ratios of cash to debt for most financial institutions. The Texas ratio (as its referred to) for financial intuitions rose above 50% for most with some being well into the hundreds (example Integrity Bank of Alpharetta Ga 372% Texas Ratio). With the failure of the housing market, these banks have no cash to loan, meaning all of their money is tied up in bad debt and partially completed construction. The bailout still prone to failure If the congressional package offered as a bail out does not repeal the CRA and end the quotas, then the bail out will be just money thrown at a problem which is not fixed, and we will revisit this very issue until the CRA goes away. You hear time and time again Senator Obama refer to banking de-regulation as the issue that cause this problem. In some twisted way that statement is true but only because the democrats tied the CRA to the de-regulation legislation in 1999. Then president Clinton threatened to veto the legislation unless the CRA was addressed to the satisfaction of the democrats.

Without the CRA being tied to the banking reform of 1999, there quite possibly would not have been a sub-prime mortgage market, capable of putting the US financial institution in is current chapter 11 state. Deregulation is needed to make our financial market competitive, however quotas for supporting high risk loans are not needed. It was the very regulation of the industry by the CRA act that caused the banking failure in the first place. Any bail out package that does not repeal the CRA is doomed to failure as the root cause has not been eliminated.

Other Root cause of the financial crisis

Several times recently, Treasury Secretary Paulson (and many others) have claimed that the "root cause" of the current financial crisis is "the housing correction." This is completely wrong--and unless policy makers realize that it's completely wrong, they're not likely to make the right policy decisions. Just today, in his testimony before the Senate Banking Committee, Paulson said: And that root cause is the housing correction which has resulted in illiquid mortgage-related assets that are choking off the flow of credit which is so vitally important to our economy. We must address this underlying problem, and restore confidence in our financial markets and financial institutions so they can perform their mission of supporting future prosperity and growth. Now, first of all, the proposal doesn't address the housing correction--it addresses the illiquid mortgagerelated assets (by buying them)--so it's still a step removed from what Paulson claims is the root cause. (Directly addressing the housing correction would involve buying houses, not buying loans.) But that's neither here nor there, because the root cause is not the housing correction. The root cause was the housing boom. Roughly speaking, an average household needs to earn enough money to be able to afford an average house. You can adjust that a bit--smaller, younger, poorer households can be left out of the calculation if you assume that they'll rent rather than own--but after leaving them out, it's just not sustainable for the average house to cost more than the average household can afford to pay--who else is going to buy it? Now, you can back things up yet another step in your search for root cause: How did house prices get too high? The answer to that question (which has mostly to do with bad interest rate decisions from the Fed interacting with bad public policy in financial market regulation) will help us prevent the next financial crisis. But for addressing this financial crisis, all we need to understand is that the correction is not the root cause. The root cause is that house prices got so high that the average household couldn't afford an average house. Once that happened, a correction was inevitable.

The way to address the root cause is to let house prices drop to where an average house is within the means of an average household. (Or, alternatively, boost the income of the average household to the point that they can afford an average house. But that's very hard. Letting houses prices go on falling, although painful for everyone who owns a house or who has lent money to someone who owns a house, is very easy.) Now, some sort of bailout plan may be necessary to keep the financial system from simply collapsing under the weight of all that bad debt. But if that plan is focused on keeping house prices from falling, it's a hopeless plan. If you successfully kept house prices up, we would remain mired in this problem until incomes rose enough to make house prices affordable.

Causes and effects of the U.S. financial crisis of 2008: From Wall Street to Main Street
The unfolding financial crisis signals a seismic shift in the foundation of the U.S. financial system. While some have dubbed recent developments Financial Armageddon, there is little question we are witnessing the greatest strain on our economy since the Wall Street Crash of 1929. What started as a shakeout in the subprime lending market has accelerated dramatically, a velocity of events leading to unprecedented federal intervention into private enterprise. Timeline tells the story As we went to press, the government was shaping a rescue plan, centered on a proposal to buy hundreds of billions in bad mortgages that have eroded investor confidence, curtailed access to liquidity and capital markets, negatively impacted stock prices and led to layoffs. As philosopher George Santayana wrote, Those who cannot remember the past are condemned to repeat it. Here are key events triggering todays problems: September 2001: After the attacks of 9/11, the Federal Reserve cuts rates to prevent a recession. It lowers the benchmark interest rate 11 more times to 1.75 percent at years end. May 2003: After the dot-com bubble burst, there are concerns about deflation. Federal Reserve Chairman Alan Greenspan tells Congress the risks are minor, though the Fed had already cut short-term interest rates 12 times from 6.5 percent to 1.25 percent and the economy remains sluggish. 2002-2004: Low-interest rates ignite demand for homes. Lenders offer mortgages that include less scrutiny of the borrowers credit. Many of these loans are adjustable-rate mortgages (ARMs). Seventeen interest rate hikes start to take their toll. The higher rates affect a variety of American borrowers, including those with adjustable rate mortgages or ARMs. June 2004: The Fed starts a cycle of 17 interest rate increases that up borrowing costs from 1 percent, their lowest level since the 1950s, to 5.25 percent by June 2006. 2005-2006: Rate hikes start to affect the housing market, and the property boom starts to unwind. Defaults on subprime mortgages increase.

February 2006: Ben Bernanke, the former chairman of Princeton Universitys Economics Department, becomes chairman of the Federal Reserve. July 2006: Former Goldman Sachs chief executive Henry Paulson Jr. is sworn in as Treasury Secretary. April 2007: New Century Financial, a major subprime lender, files for bankruptcy protection. The National Association of Realtors reports the sharpest month-to-month drop of existing homes in 18 years. June 2007: Global investment bank and brokerage firm Bear Stearns is forced to provide $3.2 billion in loans to bail out one of its hedge funds that made bets on the U.S. subprime market the largest by a bank in almost a decade. July 2007: Ratings agencies downgrade bonds backed by subprime mortgages. Bernanke warns the crisis in the subprime market could cost up to $100 billion and likely will get worse before it gets better. August 2007: American Home Mortgage, one of the largest independent home loan providers, files for bankruptcy. The rate of foreclosures rises to a record high in the second quarter of 2007 as homeowners cannot refinance their ARMs. March 2008: After receiving an emergency loan, Bear Sterns is sold to JPMorgan Chase & Co. in a deal orchestrated by the government. July 2008: Federal regulators seize the Independent National Mortgage Corp. (IndyMac), the seventh largest U.S. mortgage originator Sept. 7, 2008: The government seizes control of semi-public Fannie Mae and Freddie Mac, effectively nationalizing the two mortgage giants. Sept. 10, 2008: After reporting a $4 billion loss, Lehman Brothers says it will spin-off its commercial real estate assets. Regulators make it clear the government will not bail out Lehman. Sept. 14-15, 2008: Bank of America announces it will buy Merrill Lynch. The following day Lehman files for bankruptcy, the largest failure of an investment bank since Drexel Burnham Lambert collapsed in 1990. AIGs debt is downgraded.

Sept. 16, 2008: Knowing the failure of AIG would further disrupt the markets the government pledges to loan the company $85 billion in exchange for 80 percent of the company. Sept. 17, 2008: The Securities and Exchange Commission bans the routine practice of betting against the stocks, or short selling, of some 779 financial firms. A vicious cycle As important as those events is an understanding of how the borrowed money cycle works and how it falls apart. Like the classic play, Other Peoples Money, the system is based on using borrowed money (home mortgages) as collateral to borrow more money (mortgage-backed securities), to borrow yet more money (collateralized debt obligations) and hoping the flow of payments remains consistent. When defaults on home mortgages rise, the whole system can unravel. Traditionally, housing prices tracked inflation, but a decade ago, prices began rising at an unprecedented rate. This boom created wealth, both paper and real. When the upward movement of housing prices slowed and interest rates moved higher, monthly mortgage payments increased substantially, often beyond the borrowers ability to meet those payments. Subprime borrowers (and others) were vulnerable because they couldnt sell or refinance when they owed more than their house is worth. Normally, banks would foreclose but today most banks bundle their loans and sell them as mortgage-backed securities. The new holder of these mortgages can use them as collateral to issue bonds or finance deals with the interest payments from homeowners covering the interest payment on those bonds. When homeowners cant make mortgage payments and bond issuers cant pay off the bonds the cycle falls apart. As the bonds lose value companies that borrowed money to buy them must either put up more collateral or sell them, which can cause them to lose even more value. Banks then tighten credit requirements, raising the cost of financing deals and the cost of capital for other businesses. In todays global markets, stock prices drop and bond prices rise around the world. Amid this credit tightening fewer consumers qualify for mortgages further depressing the housing market and perpetuating this downward cycle.

Impact moving forward As the specifics of the bailout plan are shaped, expect a transformation of the U.S. financial economy, including a massive transfer of power to the Treasury Department which will be in charge of the clean-up. The U.S. free market system will not be as free. Goldman Sachs Group and Morgan Stanley formerly the two largest U.S. investment banks have restructured themselves into bank holding companies seeking a new level of safety over reward potential. The federal government now steadies and guides the market through its ownership in AIG and stewardship of Fannie Mae and Freddie Mac. Once the crisis has ended, the question remains whether those organizations will be nationalized, heavily regulated or sold. Government intervention on issues such as Fannies and Freddies future, caps on executive pay and protection for mortgage holders, including efforts to help homeowners facing foreclosure, are likely. Taxpayers may see a shift in financial priorities making it harder for allocations to areas such as health care, alternative energy and infrastructure improvement. During this presidential race, expect echoes of the 1992 presidential race in which the phrase, Its the economy, stupid, underscored a signature issue of Bill Clintons campaign. Above all, its important not to overreact to bad news. Investors should review portfolios and assess their current strategies taking a look at how performance may be affected by further developments. The freedom of the financial industry to make decisions is moving from Wall Street to Washington.

Causes and Solutions to the Global Financial Crisis

President of UN General Assembly invites Expert Panel
Concerned about the global repercussions of the financial crisis, on 30 October 2008, General Assembly President, Mr. Miguel dEscoto ( Nicaragua ), invited a panel of experts to hold an interactive discussion with Member States on causes and possible solutions. The panel was composed of Professor Joseph Stiglitz ( United States ), Professor Prabhat Patnaik ( India ), Professor Sakiko Fukuda-Parr ( Japan ), Dr. Pedro Pez ( Ecuador ), Professor Calestous Juma ( Kenya ), and Dr. Francois Houtart ( Belgium ). The panelists made presentations that were followed by an interactive dialogue and a question and answer session. The panel discussion was moderated by Mr. Paul Oquist, Senior Adviser to the General Assembly President. General Assembly President Miguel dEscoto opened the event by indicating that the crisis had spread like a plague to all countries of the world and emphasized the need for a more secure and sustainable economic order. He announced his decision to establish a Task Force of Experts, headed by Professor Stiglitz, to undertake a comprehensive review of the international financial system and to suggest steps to be taken by Member States to secure a more just and stable economic order. Mr. dEscoto indicated that the true dimension of the crisis was yet unknown, said that what was once described as rational exuberance is now seen as unbridled greed and added that States had lost sight of the responsibility to take care of their citizens. He stressed that the response must be multi-faceted, called for long-term measures that go beyond quick-fixes and said that it must take into account the poor. We are not looking for poorly conceived institutions, we are not looking for the next bubble to burst leaving people feeling deceived and neglecting the needs of the poor, he said and noted that the current financial architecture does not respond to this reality. He indicated that the G-8, G-15 and G-20 were not sufficient to solve this problem only the G-192, with full participation and within a truly representative framework will restore confidence. He stressed that all nations must be guided by financial discipline, including the rich and powerful, and called on the Member States to be guided by a passion for justice, fairness and inclusiveness to restore the sense of trust in each other, our governments and our institutions. Professor Joseph Stiglitz, a Noble Laureate and Professor at Columbia University , said that the current financial crisis, which began in the US and then spread to Europe , has now become global and requires a global response by an institution that is inclusive and that has political legitimacy. He indicated that any response should be based on social justice and solidarity that goes beyond national boundaries. He stressed the need to reflect on the role of financial markets in the economy, said they should be evaluated on how they serve citizens and added that they were not an end in themselves they were a means to economic growth and prosperity for all,

including homeowners, ordinary people and the poor. He explained that the underlying doctrine of the current system is flawed and said that this was the root cause of the problem. What is good for Wall Street is not necessarily good for all, he said, and added that trickle-down economy had been consistently rejected as a means to provide prosperity for all. He also indicated that, in the past, the global financial system often worked to the disadvantage of developing countries. Banks in developed countries, for instance, were encouraged to lend short-term to developing countries - while this provided greater liquidity to the former, it led to greater instability in the latter. He noted that pro-cyclical monetary and fiscal policies were often foisted on developing countries, while developed countries followed countercyclical policies. That situation must change, he said. Creation of an external shock facility was a good idea, as was creating a multilateral reserve system with greater stability. There must also be more cooperation in setting macroeconomic policies, and the creation of a financial regulatory commission should be studied urgently. He stressed that the international community must commit itself to developing the institutions and instruments for increasing the stability and equity of the global financial system, and called for a reform in the governance of the international economic institutions and standard setting bodies. The reforms undertaken, for example, in IMF governance, so far have been inadequate. Unless far more fundamental reforms are taken, it will not be possible for these institutions to play the role they should decision making must reside with international institutions with broad political legitimacy, and with adequate representation of both middle income countries and the least developed countries. He concluded by saying that the only institution that currently has broad legitimacy is the UN. Professor Prabaht Patnaik, Professor at the Centre for Economic Studies and Planning at India said that the cause of the problem was located in the fundamental defect of the free market system regarding its capacity to distinguish between enterprise and speculation and hence, in its tendency to become dominated by speculators, interested not in the long-term yield assets but only in the short-term appreciation in asset values. He said John Maynard Keynes wanted this link to be severed through what he called a comprehensive socialization of investment, whereby the State, acting on behalf of society, always ensured a level of investment in the economy, and hence, a level of aggregate demand that was adequate for full employment. In the process of globalization, the role of nation-State has been undermined. As a result, fiscal intervention, as a means of sustaining growth, was replaced by globalized finance and de-regulation and an alternative paradigm was adopted whereby bubbles lead to booms instead of financial and economic stability ensured by sound long-term macroeconomic policies. He noted that the response measures had also been inadequate because injection of liquidity alone is not the answer; it has to be accompanied by injecting demand into the market through State investment in infrastructure and social services. The financial crisis will impact developing countries because of the ensuing recession which will contract demand for commodities, as well as sources of credit

and financial flows. Even during the economic boom, the conditions of the poor worsened. Part of the response lies in supporting the livelihoods of peasants and small producers in developing countries through greater fiscal pro-activeness and expenditure for the revival of agricultural production. Professor Sakiko Fukuda-Parr, Professor of International Affairs at The New School, said that in responding to the financial market crisis, much of the attention had been on the global financial markets and its major players, but as the crisis unfolds, we need to turn our attention to the implications for people, especially in poor countries. She noted that the impacts on developing countries are not so much from the financial crisis but more from the recession in the global economy and noted that the contagion, particularly to emerging economies such as India , China and Brazil , is already being felt. The effects include: fall in commodity market prices, contraction of markets for export products due to economic downturn and decline in ODA flows and in other capital flows, including remittances. She highlighted the human consequences of the economic crises, and said that women often bear the brunt because they are the first to be laid off and, as household incomes decline, women spend more time trying to produce and/or process food. Such unpaid work, is not included in national accounts, but is essential for human survival and if monetized would account for 2/3 of the value of global GDP. As a response, she said priority should be placed on protecting the vulnerable by not cutting on development aid budgets, promoting employment, controlling inflation and investing in social services such as health care. Professor Calestous Juma, Professor of the Practice of International Development at the Belfer Center for Science and International Affairs of the Harvard Kennedy School of Government, suggested that the impact of the crisis on developing countries could be mitigated by using technological innovation as a driver for economic growth. He explained that economic growth, in essence, is the transformation of scientific and technological knowledge into goods and services. By promoting more capabilities and harnessing opportunities in these areas, developing countries could strengthen their capabilities to buffer the negative consequences of global crises. He said the United Nations could play a key role in fostering the creation of a new regime of financial diplomacy that would bring together the global community to identify and share best practices in managing the relationships between finance, innovation and development. He stated that reforming the Bretton Woods Institutions could be a long and tedious process and said that innovative ideas could come from regional processes and bodies. He said regional initiatives could be interesting sources of solutions because some regions had already confronted similar financial crises in the past and had learned some lessons that could be shared with others. In this regard, he indicated that the UN offered good ground for collective learning to detect, prevent and mitigate financial crises.

H.E. Mr. Pedro Pez Prez, Minister for Economic Policy Coordination of Ecuador and President of the Ecuadorian Presidential Commission for the New Regional Financial Architecture-Banco del Sur, said that, given the speed and depth with which the crisis was unfolding, a regional Monterrey agreement among South American countries was urgently needed to act as a common framework in which the exchange rates of participating countries would be monitored, assessed and, if possible, agreed at the subregional level, according to the principle of mutual concern for exchange-rate credibility and stability. The coordination of relatively flexible regionalblock agreements was the most plausible way to achieve a rapid outcome, and their success could generate the political momentum for further institutional agreements that could open the horizon for a holistic and stable new global financial architecture. Professor Francois Houtart, Professor Emeritus at Belgium s Catholic University of Louvain and founder of the Tricontinental Centre, said the world needed alternative choices and not just regulation. It was not enough to rearrange the system; the system must be transformed. It was a moral duty, and in order to understand that one must adopt the viewpoint of victims. When 850 million people were living below the poverty threshold, and the climate was getting increasingly worse, it was not possible to talk only about the financial crisis. All the systemic breakdowns had led to a real crisis of society. There was need for a long-term vision based on renewable, rational use of natural resources, which pre-implied a different approach to nature. That meant respect for the source of life, rather than unlimited exploitation of raw materials. Speaking during the interactive dialogue were the representatives of Qatar, France (on behalf of the European Union), Antigua and Barbuda (on behalf of the G-77/China), Mexico (on behalf of the Rio Group), Spain, Philippines, United States, Venezuela, China, Chile, United Kingdom, India, Jamaica, Japan, Argentina, Egypt, Brazil, Nicaragua, Portugal, Morocco, Indonesia, Bolivia, Singapore, Honduras, Republic of Korea, Ecuador, Belarus, Canada, Kenya and Germany. Everyone welcomed the initiative by General Assembly President Miguel dEscoto to convene an expert panel to discuss the financial crisis and many agreed that it ought to be the first of many steps taken by the United Nations to address and tackle this issue. Member States also welcomed the establishment of a Task Force of Experts to undertake a comprehensive review of the international financial system and to suggest steps to secure a more just and stable economic order. There was consensus on the need to address the crises on a global level and as soon and as effectively as possible to mitigate its impact for all, especially for the most vulnerable. Concern was expressed at how the crisis, compounded by other factors such as food security and the cost of fuel, could impact on the achievement of the internationally agreed goals for development (IADGs), including the MDGs.

The G-77/China indicated that the crisis is unprecedented because the epicenter is the richest and strongest country in financial terms and this evidences the weakness of the current international financial architecture to prevent crises of these sorts. The Group highlighted the loss of public confidence not only in governments but also in institutions and noted that the crisis cannot be dealt with effectively within the current institutional framework there is a gap that needs to be filled through comprehensive review and reform of a systemic nature. The EU agreed that the crisis illustrates deficiencies in economic and financial governance and called for a coordinated response that includes enhanced regulation through adequate standards, transparency, accountability and oversight. The EU emphasized the need to revert to the values of an inclusive market economy by making all financial players responsible. He noted the need for the transparency of financial instruments and institutions and stressed that managing them in a coordinated way at the national, regional and international level was crucial. The EU said that the major upheaval we are witnessing transcends the field of finance it will also change our vision of the world; it is a watershed moment that prompts the world to readjust and adapt itself. There was agreement on the need to reform the international financial architecture, but there were differing views about the degree and scope of the reform. While some indicated that reforms of the IMF and World Bank were needed to ensure more inclusiveness of developing countries in decision-making processes, others argued that this kind of tinkering was insufficient and called for a paradigm shift away from free-market and neo-liberalism doctrines towards more socially and environmentally responsible ones. Several countries, mainly from Latin America (the Rio Group), indicated that regional responses were the most appropriate way to prevent and control impacts of crises in the future because well coordinated macroeconomic policies and measures and sub-regional trade, investment and sources of finance, could act as effective buffers against this. In this regard, Ecuador proposed a Regional Monetary Agreement (RMA) among the countries of South America . He explained that the RMA would act as a common framework in which the exchange rates of participating countries would be monitored, assessed and, if possible, agreed upon at the sub regional level. He also referred to the need to go forward with the three pillars of the New Regional Financial Architecture agreed upon by the seven ministers of finance ( Argentina , Brazil , Ecuador , Paraguay , Uruguay and Venezuela ). Bolivia suggested that Member States request the Secretary-General to produce a report on how the US $1.5 trillion spent to bail out the banks, could have been spent to achieve the MDGs. Brazil indicated that a strong, coordinated and profound reform of governance structures and the institution of counter-cyclical policies, along with the role of the UN, should be considered as part of the solution. Developing countries such as India and China called for a successful conclusion of the Doha Round on trade and said that

eliminating market distortions such as agricultural subsidies and correcting trade imbalances created by the intellectual property rights (IPR) regime, were effective means of ensuring market access and economic growth for developing countries. These countries also called for reform towards a new economic order. Qatar, Morocco , Egypt , India , China, and other developing nations called for a strengthened partnership for development in reference to the upcoming Doha conference to review progress made in the Monterrey Consensus. Egypt proposed a separate conference to review and reform the international financial architecture. Kenya reflected on the need to assess the role of the State vis--vis the role of the market. He said the underlying problem was distortion of the market by speculators and lax regulation, and concluded that this is the result of an unfettered free market. He called for a Secretary-Generals report on measures that the international community could take. The Philippines noted the need for setting limits on risk exposure and called for a standardized financial framework across the board for risk and liquidity management; rules for cross-border lending should also be established. The UK said that a global response was the only way to address the crisis and called for urgent reform and renewal of the financial system. The representative indicated that the new global governance should have: an early warning system; stronger cross-boarder supervision; mechanisms for collaboration and supervision and regulation across all countries. He stated the need to create a new IMF facility for emerging economies in the current crisis and stressed that this time of financial turbulence would be the worst time to turn back on the MDGs. The financial crisis only increases the urgency to act and we must harness the Doha Review Conference to respond to new challenges, including food security and climate change. Germany questioned the underpinnings of the bubble and asked how much of it was based on real economic growth and how much on mere speculation. The representative stressed the need to go back to basics and called for reflection about how unsustainable consumption and production patterns had contributed to a virtual economy that eventually bursts, and reaffirmed Germany s ODA commitments. Spain called for strong multilateral cooperation to confront the crisis and called for enhanced oversight and surveillance authority by the IMF to anticipate and prevent crises of the like from happening. The US thanked participants for the frank discussion, noted that financial markets continue to be strained and called for a joint response to address the crisis. The representative acknowledged that the US domestic financial system needs to be reformed towards increased transparency, supervision and regulation, but noted that balance had to be struck between regulation and open markets. He reported that the US had taken aggressive action to protect the domestic and economic system by injecting massive amounts of capital to avoid the crisis, and stated that

global financial institutions should be able to recover with these measures. He noted the need to strengthen financial institutions and spoke about working together in a coordinated manner. In this respect, he referred to the High Level Meeting for the G-20 to be convened by the White House on 16 November 2008 and said that the IMF, World Bank, the UN Secretary-General and the Chair of the Global Stability Forum had been invited to consider principles, policies and measures to address the crisis and its impact on emerging economies. He indicated that this meeting is envisioned as the first of a series, and added that the US stands ready to assist countries that find themselves under pressure. He called for a rejection of protectionism as a response and referred to the benefits of open trade as a source of global economic growth. Japan said that the current crisis and the contraction of global credit would have an impact on developing countries, indicated that the IMF should provide any needed assistance and said that his country stands ready to provide additional assistance. Canada stated that market-based regimes have to be supported by adequate regulatory frameworks. He said misalignments of incentives and the failure of effective regulatory systems had combined to produce the crisis. He called for strengthened regulatory regimes and indicated that the role of international institutions was critical; all alternatives should complement each other, including the role of the UN and the Bretton Woods Institutions. The discussion concluded with general agreement on the pressing need for global solutions and concerted action based on inclusive and legitimate decision-making processes and on the role of the United Nations in this respect. The PGA emphasized, in his closing remarks, that the UN was accustomed to dealing with problems without borders, and that its system of regional commissions, specialized agencies, funds and programmes drew on a deep pool of expertise and wisdom that would be very helpful in providing support for long-term solutions to the crisis.

Meltdowns and Myths: Did Deregulation Cause the Financial Crisis?

"The trouble with the world is not that people know too little, but that they know so many things that aren't true."--attributed to Mark Twain Easy answers are seldom correct ones. That principle seems to be at work as the nation struggles to discover the causes of the financial crisis now rocking the economy. Looking for a simple and politically convenient villain, many politicians have blamed deregulation by the Bush Administration. House Speaker Nancy Pelosi, for instance, stated last month that "the Bush Administration's eight long years of failed deregulation policies have resulted in our nation's largest bailout ever, leaving the American taxpayers on the hook potentially for billions of dollars."[1] Similarly, presidential candidate Barack Obama asserted in the second presidential debate that "the biggest problem in this whole process was the deregulation of the financial system."[2] But there is one problem with this answer: Financial services were not deregulated during the Bush Administration. If there ever was an "era of deregulation" in the financial world, it ended long ago. And the changes made then are for the most part non-controversial today. Basic Regulatory Structures Never in Doubt In a literal sense, financial services were never "deregulated," nor was there ever a serious attempt to do so. Few analysts have ever proposed the elimination of the regulatory structures in place to ensure the soundness and transparency of banks. Simply put, the job of bank examiner was never threatened. More typically, of course, the word deregulation has been used as shorthand to describe the repeal or easing of particular rules. To the extent there was a heyday of such deregulation, it was in the 1970s and 1980s. It was at this time that economists--and consumer activists--began to question many longstanding restrictions on financial services. The most important such restrictions were rules banning banks from operating in more than one state. Such rules were largely eliminated by 1994 through state and federal action. Few observers lament their passing today, and because regional and nationwide banks are far better able to balance risk, this "deregulation" has helped mitigate, rather than contribute to, the instability of the system.

Gramm-Leach-Bliley and Beyond The next major "deregulation" of financial services was the repeal of the Depression-era prohibition on banks engaging in the securities business. The ban was formally ended by the 1999 Gramm-Leach-Bliley Act, which followed a series of decisions by regulators easing its impact. While not without controversy, the net effect of Gramm-Leach-Bliley has likely been to alleviate rather than further the current financial crisis. In fact, President Bill Clinton--who signed the reform bill into law--defended the legislation in a recent interview, saying, "I don't see that signing that bill had anything to do with the current crisis. Indeed, one of the things that has helped stabilize the current situation as much as it has is the purchase of Merrill Lynch by Bank of America, which was much smoother than it would have been if I hadn't signed that bill."[3] In 2000, Congress also passed legislation that, among other things, clarified that certain kinds of financial instruments were not regulated by the Commodity Futures Trading Commission (CFTC). Among these were "credit default swaps," which have played a role in this year's meltdown. Whether this law constituted "deregulation" is not clear, since the pre-legislation status of these instruments was uncertain. Nor is it a given that CFTC regulation of their trading would have avoided the financial crisis. In fact, many policymakers, including Clinton Treasury Secretary Robert Rubin, argued that their regulation would do more harm than good. In the nine years since that legislation--including the eight years of the Bush presidency-Congress has enacted no further legislation easing burdens financial services industry. Regulatory Agency Trends But what of the regulatory agencies? Did they pursue a deregulatory agenda during the Bush Administration? Again, the answer seems to be no. In terms of rulemaking--the promulgation of specific rules by regulatory agencies--the Securities and Exchange Commission (SEC) is by far the most active among agencies in the financial realm. Based on data from the Government Accountability Office, the SEC completed 23 proceedings since the beginning of the Bush Administration that resulted in a substantive and major change (defined as an economic effect of $100 million or more) in regulatory burdens. Of those, only eight--about a third--lessened burdens.[4] Perhaps surprisingly, the Bush record in

this regard is actually less deregulatory than that of the Clinton Administration, which during its second term lessened burdens in nine out of 20 such rulemaking proceedings. Other financial agencies have been far less active in making formal rule changes. The Federal Reserve reports five major rulemakings in the database since 1996--four of which were deregulatory. The only rule change reported by the Federal Deposit Insurance Corporation and the Controller of the Currency is the 1997 adoption of new capital reserve standards, an action with mixed consequences. Of course, much of the work of regulators takes place in day-to-day activities rather than in formal rulemaking activities. For that reason, it is also helpful to look at the budgets of regulators. These also show little sign of reduced regulatory activity during the Bush years. The total budget of federal finance and banking regulators (excluding the SEC) increased from approximately $2 billion in FY 2000 to almost $2.3 billion in FY 2008 in constant 2000 dollars. The SEC's budget during the same time period jumped from $357 million in 2000 to a whopping $629 million in 2008. During the same time period, total staffing at these agencies remained steady, at close to 16,000.[5] A False Narrative In the wake of the financial crisis gripping the nation, it is tempting to blame "deregulation" for triggering the problem. After all, if the meltdown were caused by the ill-advised elimination of necessary rules, the answer would be easy: Restore those rules. But that storyline is simply not true. Not only was there was little deregulation of financial services during the Bush years, but most of the regulatory reforms achieved in earlier years mitigated, rather than contributed to, the crisis. This, of course, does not mean that no regulatory changes should be considered. In the wake of the current crisis, debate over the scope and method of regulation in financial markets is inevitable and, in fact, necessary. But this cannot be a debate over returning to a regulatory Nirvana that never existed. Any new regulatory system would be just that--complete with all the uncertainty and prospects for unintended consequences that define such a system. Policymakers must not pretend otherwise.

The American Global Crisis "Buried deep in the financial pages, telltale signs are appearing that suggest America may well be headed for a financial meltdown. In January 2004 the staff of the International Monetary Fund, who normally worry about profligate nations like Argentina, took direct aim at the United States, warning that we are careening toward insolvency... As a nation we are running on empty." ~ Peter G. Peterson, Running on Empty, Preface
America and the world today are firmly mired in a General Crisis which is made up of many Great Crises, themselves made up of many little crises, which are highly interdependent and in many ways synergistic [reinforcing and multiplying each other]. This General Crisis is so vastly complex and so institutionalized that it is impossible to give more than an overview of it. The many little and Great Crises that make up the General Crisis are financial, political, and cultural. They are not scientific, technological, or primarily economic, all of which are the positive factors that are being slowly overwhelmed by the financial, political, and cultural Crises. I and a great many other people from all the intellectual disciplines have been analyzing these Crises for decades. Peter Peterson's splendid books, most notably his recent book Running on Empty, are representative of the best of these I have drawn on in my own work. I strongly recommend that people read that book and related ones for details on what I shall be dealing with here and in my other articles related to this [Part I of the series]. I know all intelligent and knowledgeable people know a great deal about many of the details of these Crises at all levels. But all of us have immense difficulty in trying to "wrap our minds around" these immensely complex Crises that is, get a Big Picture of them. We need a Big Picture as a General Framework for seeing and grasping them: otherwise, we feel completely lost in the vast details. Even one book like book Running on Empty can leave one feeling drowned in details. So my purpose in these few brief outline essays is to highlight the Crises which seem to me to be the most important the biggest, most pressing, and most irresolvable by standard measures. (A crisis is defined as a problem that is not clearly solved by standard measures, but they come in all degrees of severity, lack of clarity, and insolvability by standard measures.) My analyses are certainly problematic and meant to encourage creative thinking about them, not to impose some abstract framework of ideas on the vast and inherently problematic realities of our world. I begin here with the financial Crises because they are more pressing and may lead any day to a crash or implosion of the sort we are all too familiar with from the Soviet example, the Japanese Crash, the Crash of the Mexican and Asian economies, the U.S. Stock Market Crash of 1987 and the first years of this new century (especially the Nasdaq Crash) and lesser Crashes in recent years, such as that of bonds in the Russian default and the Crash of LTCM in its wake. (Robert Shiller's

splendid book on irrational exuberance, second edition, is vital on these.) I shall then proceed to the more problematic political Crises and finally the Big Picture of The General Crisis made up of all these. The crucial, general point about the Big Picture of the financial Crises is that the overall, total, accrued financial Crises are so immense and generally soaring so rapidly. Some of these taken alone, such as the medical and Medicare cost crisis, could "bankrupt" or otherwise cripple the U.S. over the long run, if the recent trends continue for very long. But the crucial point is that there are so many of them soaring. Any one Crisis might be resolved by radical reforms and probably would be, if it were the only Great Crisis we faced. Most Great Crises do not "cripple" a nation because at some point before it is too late the nation makes massive reforms to prevent catastrophe. But any move to resolve one or two of these Great Financial Crises we face will seriously detract from our resources to resolve the others, so, even if we do radically reform to resolve one or two, there will still be the others and they will likely be worse because we have redirected our resources to deal with the one or two. Moreover, each of these Crises is now so great that any possible radical reforms to resolve any of them leads to explosive political fights that involve the great political crises we face (to be addressed in Part II of this Series) Because we have delayed dealing effectively with these Crises so long, we are now in the situation of someone who has diabetes, obesity, immobility, severe heart and circulatory problems, and the many lesser problems each of those causes. Dealing with any one of these problems would be difficult, but The Total Risk Factors are extremely high and interdependent. It is, for example, very hard to reduce obesity without more mobility, so it is very hard to control the blood sugar problems that come with obesity, and so on and on. I will return to this crucial point later. My arrangement of each of these Great Financial Crises is just a rough, inherently problematic ranking. Number 10 may look less "Great" to me now, but look like the worst of all to you, and may in fact wind up being the one that proves fatal in the end. There is nothing simple or obvious about ranking one over the others, nor is there any completely clear definition of each Crisis or clear measurement of each. Phony official statistics are one of the worst aspects of the pseudoscience attitude of our government "experts" today and their mis-measurements are a vital factor in deceiving the public and allowing the Crises to continue growing, to come home to roost in some future political administration. The crucial thing is the obvious order of magnitude and general dimensions of the Crises, not pseudo-scientific precision. I see each of them as so big and cutting across so much of our society that I am merely pointing out a great mountain range THERE it is looming on the horizon, you can't miss it, if you just look. It does not really matter if it

is a $10Trillion Crisis or a $30Trillion one: it's huge and can trigger a fatal cascade of problems that grows into a catastrophe of some sort, such as a CRASH or even a system implosion. Number 1. Soaring hundreds of trillions in derivatives contracts that have never been tested in a major financial crisis. The most recent guesstimate I've seen by a good financial source of the derivatives contracts outstanding is supposedly rapidly approaching $500,000,000,000,000. I say supposedly because the number is so immense and mind-boggling I do not really believe the estimate is right. My rational mind keeps saying "just say no!" As the analyst said, it seems beyond reason that people in finance would want to "hedge" ten times the total global annual domestic products. But the number has certainly been soaring. Just a few years ago estimates were about $150,000,000,000,000. (Yes, Alice, that's trillions, what we call real money down here in our humble rabbit hole.) I see this half quadzillion (or whatever!) dollars worth of contracts cutting across all major legal systems in the world as a Mushroom Cloud hanging over us that could snuff us out because it is so immense as to be unbelievable, the contracts are often so complex no one can understand them, they have never been tested in a great financial crisis and all past experience shows that this is the golden hallmark of looming disaster in finance, and no one can even be sure how much there is, how immense the turnover of contracts is, or exactly what is being done with them. There is no system of effective, spontaneous morality governing them around the world and no central regulation, a deadly combination in many markets in recent days, such as the cataclysmic corruption of the partially deregulated electricity market in California. Those are no doubt thoughts Warren Buffet had in mind some years ago when he called the then small number of outstanding derivatives weapons of financial mass destruction. The mere thought of this immensity of unknowns fills me with fear and trembling, like discovering a parallel universe of negative matter would. My mind quails before the thought: It's impossible, therefore I do not believe it is happening, but they keep soaring. It reminds me over and over again of what David Stockman said back in the halcyon days of mere federal budgets, No one knows what these numbers really mean. We know derivatives have locked up in many lesser financial crises; we know hidden derivatives losses brought down the venerable Barings and recently Deutsche Bank discovered about $53 million in such hidden losses; we know the collapse of LTCM was seen as a danger to the whole global financial System by the Fed and the Big U.S. Corporations which saved it because they held a tiny position of about $1trillion in derivatives with little capital to back them up when the world bond market was hit by a very small default compared to the immense dangers today; we know there is some pretty wild speculating going on in Korea and other places in new equity derivative instruments; we know they are used for far more than hedging risks...and everything we know seems scary to me. What can we do to contain this unknown, awe-inspiring RISK? God knows, I hope, but I haven't the foggiest what he knows.

Number 2. Soaring tens of trillions in medical and Medicare costs as far as anyone can pretend to see. Medical costs have been soaring for decades, with ups and downs, and are soaring at about 8% officially each year recently, about three times the official inflation (CPI) figures. Our society is being ravaged by soaring epidemics of many kinds of degenerative diseases diabetes, obesity, autoimmune problems, dementias (especially Alzheimer's); we are facing soaring costs for old epidemics of cancer, heart disease and others; and avian flu in the near future may annihilate us. The diabetes epidemic alone is getting awful in all ways, especially financially. Some will be curtailed, but probably at soaring costs, as is true of heart problems. We are living longer, getting sick more, dying more slowly, running up soaring costs. The immensely bureaucratic System of medicine is highly corrupt, increasingly inefficient and dangerous, and totally misconceived to deal with our soaring problems because it is aimed at dealing with the catastrophic problems when they happen rather than at preventing them, a much cheaper way to go. This year the Big Pharma Corporations spent over forty billion dollars on R&D but got only about 20 really new drugs to market. Some new drugs cost far more than an arm and a leg combined, as much as $100,000 for an anti-cancer drug to extend the survival of colon cancer patients several months. Meanwhile, the Baby Boom tsunami has hit 60 and starts retiring at soaring rates in several years. Medicare individual payment costs are being cut at the federal level, leading doctors to cut patient care. Medicare alone could bankrupt the U.S. if these trends continue. They won't continue, but they can wreak havoc on everything. And the political paralysis of Big Brigades fighting each other prevents any move to effective resolution of this soaring, immense Crisis. Number 3. Soaring social security and pension system costs and bankruptcies. This Great Crisis overlaps greatly with Number 2 and is due in part to the same longevity and aging disabilities problems. The projected cost increases run into the tens of trillions, will lead soon to having one retiree for two workers (two and a half the current load), corporations are already rapidly eliminating defined benefit programs, going bankrupt and turning costs over to the federal government, whose pension insurance program is de facto bankrupt. The Bush administration proposes "growing our way out of the Crisis" by letting people take part of their money out of SS and invest it in very volatile, risky baskets of assets they know nothing about. This reminds me of Reagan's "growing our way" out of the soaring bankruptcies of the S&L System, which led us into a Financial Black Hole and tsunamis of corruption. Optimists sing the praises of the "Chilean Solution," not noting that a country one hundredth the size of the U.S. is not a good comparison and the fact that Chileans are screaming bloody murder over the costs and failures of their System after just a brief time. Many millions of Americans are losing their

pensions and medical benefits and going back to work or not retiring at all. This synergistic twin of Medicare and Medical costs is a very Great Crisis that will not be resolved soon, if ever. Number 4. The Chinese-American bubble is the greatest financial bubble in history and is the result of the unsustainable imbalances of currencies, currency manipulations, debts, investments, and much else. If recent trends continued for long China would soon own the U.S. Treasury market, the U.S. would have no jobs left for anyone but speculators, and the Chinese Communist Party could defeat the U.S. by pulling the financial plug on us without going down the tubes with us. It won't happen because no nation is that insane. (God forbids, I hope.) The Bubble will come to an end. If it leaks faster and faster over many years, we will likely have soaring interest rates to buoy the dollar and, thus, a rapidly sinking economy which threatens to trigger a cascade of falling dominoes. If the Bubble crashes rapidly, keep an eye on the Black Hole below us, especially that of derivatives. Optimists promise us that God looks after drunks and American speculators. I hope so, since I can see no way any form of "unwinding" of this immense Bubble which has pioneered new forms of imbalances can end in any way other than disaster. The Chinese soaring purchases of commodities has produced a Bubble in major Commodities of most forms and led to bubble-like conditions in Japan, Korea and other nations. We have little bubbles on Great Bubbles and that is always a scary situation. Number 5. Soaring energy costs threaten us with soaring inflation, decreasing competitiveness, loss of all energy-intensive production here, declining investment returns and more. The Great Chinese-American Bubble may have led to a short run soaring in these costs which will decline when the Bubble dissipates, but it seems clear we are at or near the historic peak in oil reserves that will lead to soaring prices over the long run until new technologies come on line to cut those costs. Any serious cut in exports from the Persian Gulf or other dangerous areas due to attacks, soaring insurance costs, etc., could lead to sudden jumps in oil prices and catastrophic results. There is a long run resolution to the Crisis, but the U.S. has adamantly refused to embrace it (alternative energy sources, soaring efficiencies mandated by carbon taxes or other means, etc.). Those who refuse to adjust, will not, and they will not reap what they have not sown. We have sown waste and refusal to adapt, so we shall reap the Energy Crisis. Count on it, though we may have a breather if China crashes or an overnight catastrophe if Israel or the U.S. attacks Iran and they shut down the Straights of Hormuz or sink a few ships and send insurance costs sky-rocketing.

Number 6. The great real estate bubble will sink one way or another and take much of our consumption with it. The vast tsunami of free paper money the Fed and other central banks poured out into the financial web to avoid a Crash when the U.S. stock assets crashed (wiping out maybe eight trillion dollars on paper) and the Chinese-American Bubble have led to Real Estate Bubbles around the world, including a huge run-up on the U.S. coasts and some other urban markets. These are now cooling, most clearly in hyper-inflating California. They will leak year after year or crash, bringing prices and consumption down. Wild financing and spending built-up equity to fuel the U.S. inflation out of the beginning crash in the early 2000's have left many millions of Americans very vulnerable financially. It is likely we will see a reverse multiplier effect lead to cascading downward in consumption. However it ends, it will not end well. Number 7. Debts of all forms have soared in the U.S. and much of the world and savings have hit sub-zero in real terms in the U.S. The U.S. has roughly the total indebtedness now that it had at the end of WWII. Then we totally dominated the world, had an unchallenged control of the global currency, were the great creditor nation, owed debt only to Americans, and faced no major, immediate threats. Today everything is topsy-turvy. We are now the Great Debtor Nation and owe soaring percentages of our economy to foreign lenders roughly 8% more a year, almost as bad as a nation living on credit cards. The dollar seems wildly overpriced in this situation, because the Chinese, Koreans, Japanese, et al., buy it to keep our currency high relative to theirs so they can hollow out our productive investments needed to pay the foreign creditors and take away the jobs needed to pay for everything. It was hard to get out of that debt after WWII. Today it will take the help of God, which I certainly hope will be forthcoming on time. Our nearly $800,000,000,000 a year in current account deficits [Yes, Alice, billions] is an incredible imbalance with incalculable risks. Optimists assure us that God is a great juggler who can balance the wildest imbalances and soaring disequilibria. I hope so. Number 8. We have a great stock market bubble and all the obvious signs of speculative excesses in financial markets. The price-to-dividend ratio is so high that no one mentions it. The only ratio the used-car stock dealers mention is price to pie-in-the-sky future earnings that they make up ("projected earnings," as they say), just like last time around. The same analysts are screaming the sky is no limit and making bushels of dollars for their wild touting. There are now scores of times more stock and hedge funds than a short time ago, apparently about 8,000 so-called hedge funds selling every

inconceivable paper asset bundle with wild leverage. These wild hedge funds make up between half and three quarters of trading volume each day in most major markets, obviously so in the U.S., and seem clearly to be swaying the markets to fleece the sheep. There may soon be as many Funds milking the ignorant stock buyers as there are Lobbyists in D.C. milking the nation dry (though right now the Lobbyists have a big advantage in numbers). They assure us prices can only go up, just like in all the previous boom-to-bust cycles. Unless God becomes a buyer of last resort for distressed stocks, which I am praying for diligently, expect a serious change of course, all over again, and far more serious fall out. Can the Fed push real rates below zero again for years and the government go many more trillions into debt to "prime the pump" after having barely managed it in the beginning of this century? I doubt it. How many rabbits can you pull out of the same hat? Number 9. We face soaring long-run costs from pollution control to prevent global warming and other catastrophes. The climatologists are getting very scared. The evidence and analyses are looking more and more bleak. The U.S. is by far the biggest polluter and has unilaterally refused to do anything to cut the gases that threaten us with many catastrophes, from inversions of the Gulf Stream and annual hurricane bashings with huge costs (a mere $80,000,000,000 this year?) to an ice age. Unless God provides us with a global air conditioner, we will most likely have to pay vast amounts for this one or suffer a cataclysm some day, such as an inversion of the Gulf Stream or a New Ice Age. Number 10. The U.S. faces soaring military and security costs of all forms in its permanent world war against roughly sixty Muslim nations with one and a third billion (and soaring) enemies. The U.S. is spending about $300,000,000,000 (Yes, Alice, billions) more a year in these costs in just the past five years. The War has just begun, since the Muslim World thinks in terms of centuries and has been fighting Israel for almost a century already and Israel is totally bankrupt, depending on the U.S. for its financial existence. One nuke in New York or Washington would be Dooms Day for a long time to come. One nuclear generator or massive dirty bombs or biochemical disaster could send insurance rates sky high and then. You get the idea. Closing the Straights of Hormuz in the Persian Gulf would be catastrophic enough. Blowing up major oil terminals in Saudi Arabia...The possibilities are as limitless as the human mind and stretch around the world. This is a Fool's War financially, even if we wind up creating shining nations of pure democracy in the deserts may Allah allow it!

Number 11. We face soaring education costs with no clear idea of how to resolve the education crisis. Way back in the 1980's the Reaganites declared the U.S. was a nation at risk because of our low and sinking relative education achievement. Trillions more have been poured into the Goliath Bureaucracy with little to show for it. We're still at risk, especially as we sink into a Black Hole of Debts and Risks that demand a technological revolution to get us out. Don't count on it. In America experience is the great teacher and one thing we have learned from our experience is that new trillions in the education bureaucracy pay few dividends. What are the soaring assets to pay for all of this? Greenspan assured us in messianic terms back in the 1990's that the endless prosperity of soaring efficiencies of production and rational exuberance would resolve all our Crises. The Bubble he did not notice crashed and he spent four years pumping wildly to prevent a Financial Armageddon, that Black Hole which threatened to swallow us. So much for endless prosperity. Cycles are still the eternal rule. What happens this time, with all those Great Crises above, when the great wheel of financial karma turns? More wild pumping? We've been getting financial Crises around the world about once every three or four years since the Japanese Miracle turned into a Nightmare in the late 1980's. We're overdue. And now we have Bubbles on Bubbles around the world and in all directions. Greenspan did not reverse the iron-rule of business cycles, but the trillions in new government debt and the Bubbles they generated did convince Americans that "deficits don't matter," so they have spent and speculated more wildly than ever before and created a vast Mushroom Cloud Bubble with Bubbles on top of it. They have continued to soar and build up immense imbalances with their immense risks. This is not because all financial thinkers have gone insane. They have not. All serious, very knowledgeable financial thinkers have been screaming for years that the Crises are soaring and have been begging the government to stop producing these and probably praying to God to help us stop them. But the feds assert that "Deficits do not matter," as if we had suddenly been transported into a parallel negative universe where everything is turned upside down and account books have only an asset column and no debit column-and what used to be called debits are now only assets.