What do we know about the financial crisis? What are the key questions?

Amidst all the blather about the financial crisis, I believe two things are clear.

1. We — everybody — have more questions than answers.
2. We, the American people, are fools.  These events should spark thought about our fitness for self-government.

This post discusses the questions, the details about the crisis.  As usual for this site, let us take this by the numbers.  First, what do we know?

1.  This down cycle has much more to go, still in its earliest stages.

2.  The de-leveraging of US households has just began.  Purging of excess mortgage debt is the first step; credit card and auto loans are next to go.

3.  The full force of the US recession has not yet hit, nor the effects of the global slowdown (perhaps to become a global recession).

4.  Most important, the global rebalancing process has barely started.  It will end when the US dollar has declined so that US goods and services are again competitive on world markets, our trade deficit is positive, and we can pay interest and even some principle on our foreign debt (there are other possible outcomes, but this is the good one).

The US government has changed course, from microeconomic tinkering (band-aids on individual firms) to broad macroeconomic intervention.  Nobody — including our leaders — knows what this will mean.  All we can do are list the questions.  Here are mine.

5.  How far will the government go in socializing the excess debt, moving it from private balance sheets onto the national credit card?

6.  Neither the US government nor the US economy has the funds to fuel this process.  Will our creditors lend us the money?  If so on what terms?

7.  Will our markets recover from the extensive manipulation by the US government?  Midnight rule changes, authorizing falsification of financial statements, it is a long list of efforts to prop up prices.  Participants have not realized this yet, lost amidst the chaos, but this corruption of our market machinery (analogous to a government debasing its coinage) eventually will be recognized and have long-term impacts.  See this for a brief look at these issues.

8.  How will the government use the financial sector, after its nationalization?

#8 is the key question for the long-term health of the US economy and survival of our political regime.  So far we are living in Oz, looking at the city through our emerald sunglasses.  How wonderful is this rescue, how few the long-term ill effects!

Taking off the green lens reveals a few questions.  The financial sector is one of the commanding heights of a modern economy, a key node in the flow of power.

9.  How much of the US financial sector — the banking and financial firms that comprise its machinery — will the US government control when this is over?

10.  How long will it retain ownership?  A short-term fix followed by a quick return to private ownership.  Or long-term ownership?

11.  Control is as important as ownership.  The industry will inevitably be far more regulated.  How much more?  At some point regulation becomes control.

12.  How much wealth will be transferred from the taxpayers to insiders by this process?  The Resolution Trust Company and the Iraq War proved that vast sums can be looted by insiders without public protest.  Those sums might be pocket lint compared to what happens in the next few years.

Please share your comments by posting below.  Please make them brief (250 words max), civil, and relevant to this post.  Or email me at fabmaximus at hotmail dot com (note the spam-protected spelling).

Key Treasury Department documents

We cannot plead the “we didn’t know the details in the fine print” excuse. The important details about this massive nationalization have been clearly spelled out for us.  See this page for a current list of Treasury Department documents.

Some FM posts about the current crisis

1. Treasury Secretary Paulson leads us across the Rubicon, 9 September 2008
2. High priority report: a geopolitical sitrep on the financial crisis, 15 September 2008
3. Say good-bye to the old America. Welcome to our new socialist paradise!, 17 September 2008
4. Another voice warning about the nationalization of AIG, 18 September 2008
5. A vital but widely misunderstood aspect of our financial crisis, 18 September 2008
6. A new sitrep, as we move into phase 3 of the financial crisis, 19 September 2008
7. Another step away from our Constitutional system, with applause, 19 September 2008
8. What do we know about the financial crisis? What are the key questions?, 20 September 2008
9. Slowly a few voices are raised about the pending theft of taxpayer money, 21 September 2008
America appoints a Magister Populi to deal with the financial crisis, 21 September 2008
Legal experts discuss if the Paulson Plan is legal, 21 September 2008

For a full listing see the FM reference page about the Financial crisis – what’s happening? how will this end?.

A few of the most important posts warning about this crisis

This crisis has long been forecast by many, including in articles on this site.  Even now that we are in the whirlwind, these provide valuable background material on its causes — and speculation about the results.  Here are some of those posts.

1. A brief note on the US Dollar. Is this like August 1914?, 8 November 2007 — How the current situation is as unstable financially as was Europe geopolitically in early 1914.
2. The post-WWII geopolitical regime is dying. Chapter One, 21 November 2007 — Why the current geopolitical order is unstable, describing the policy choices that brought us here.
3. We have been warned. Death of the post-WWII geopolitical regime, Chapter II, 28 November 2007 — A long list of the warnings we have ignored, from individual experts and major financial institutions (links included).
4. Death of the post-WWII geopolitical regime, III – death by debt, 8 January 2008 – Origins of the long economic expansion from 1982 to 2006; why the down cycle will be so severe.
5. Geopolitical implications of the current economic downturn, 24 January 2008, – How will this recession end?  With re-balancing of the global economy, so that the US goods and services are again competitive.  No more trade deficit, and we can pay out debts.
6. A happy ending to the current economic recession, 12 February 2008 – The political actions which might end this downturn, and their long-term implications.
7. What will America look like after this recession?, 18 March 208  — The recession might change so many things, from the distribution of wealth within the US to the ranking of global powers.
8. The most important story in this week’s newspapers , 22 May 2008 — How solvent is the US government? They report the facts to us every year.
9. Prof Nouriel Roubini describes “The Decline of the American Empire” ,18 August 2008
10. The World’s biggest mess, 22 August 2008 — A brillant ex pat looks at America from across the ocean.
11. “The changing balance of global financial power”, by Brad Setser, 22 August 2008
12. “The Coming US Consumption Bust”, by Nouriel Roubini, 6 September 2008

To see the all posts on this subject, go to the FM reference page about The End of the Post-WWII Geopolitical Regime.

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