WHAT CAUSED THE ECONOMIC CRISIS?

An asset destroying economy is inhumane, if not brutal. An asset accumulating economy is humane and truly capitalistic in the tradition of the moral philosopher Adam Smith, the founding father of capitalism.

For decades, the U.S. economy has been denying asset enhancement or has been asset destroying. In effect, it has subordinated the consumers to the manipulative, if not exploitative, interests of the producer and seller. In 1946, Congress passed the Full Employment and Balanced Economic Growth Act which institutionalized the theories and policies proposed by John Maynard Keynes. To prevent economic downturns from getting worse, it authorized the federal government to use appropriate fiscal and other policies to sustain aggregate demand. If the consumers refused to spend, then the government would do it for them. Keynes viewed savings as a form of avarice and greed, a notion that played squarely into the hands of the producer and seller.

Corporations seized the opportunity and eagerly embraced Keynesianism. They manipulated the government into outkeynesianizing Keynes since Keynes never advocated deficit spending during boom times. Yet, corporate interests, in alignment with the ulterior motives of the politicians, caused deficit spending to explode even during years of economic expansion. In so doing, it pushed demand for products to extremes. Essentially, the consumer was subordinated to the producer.

To maximize aggregate demand, the consumer was also manipulated, if not hoodwinked, into consumption through home equity loans, cashing out capital gains on homes, assuming reverse mortgages, just to spend and spend. Added to this was a massive increase in credit card debt to fuel even more demand for products. The media, meanwhile, vigorously praised consumer spending as maintaining the health of the economy.

As a result, government debt rose tremendously while consumer debt literally exploded. Savings rates constantly decreased and recently went into dissavings for several years in a row.

Other methods of fleecing the consumers abetted the mess.
Steve Wynn became a billionaire through expanding gambling in Las Vegas. Schwarzman, Soros, Buffett and Bloomberg, et al. became multibillionaires through expanding casino gambling on Wall Street. Diversify your investments in the stock markets, so the sales pitch told everyone. Forgotten was the fact that genuine and true diversification resides in local and regional investments. They maximize transparency, avoid geographical distances, minimize fees and spread wealth more evenly across the nation. But that didn't matter. Wall Street investments maximized geographical distances and concentrated wealth into the hands of the few. An asymmetric knowledge market expanded terrifically. In it, the insiders, the wealthy, the fee collectors, the experienced investors and the CEOs could suck in tons of money through surreal bonuses and backdating stock options or through massive thefts and through pumping up share values and bailing out before a crash.

In Wall Street, the U.S. had nationwide the most intense collectivizing investment patterns of all advanced economies. And it made Americans poorer. But it was sold with media support as being truly capitalistic and a model for the globe.

After the dot com collapse, Alan Greenspan's monetary policy took away benefits from the saver. He reduced interest rates to below the inflation rate, enabling his personal friend, subprime mortgage boss Roland Arnall of Ameriquest, as well as Angelo Mozilo of Countrywide, among many, to forge new ways to satiate greed. They created new markets in the form of the subprime mortgage ones (with former Ottumwan Tom Arnold cheerleading a “Best Damn Mortgage Company”). And they milked them to no end while Bush publicly sold it all as expanding the American dream of making home ownership more available. (Excuse me, making home ownership more available while, simultaneously, expanding massively cashing out home equities and reverse mortgages for consumption!) It was closer to an American nightmare of fleecing the masses, socializing the losses and transferring risks through monetary policy and bailouts while privatizing the profits. By the hundreds of
billions, the cost was shifted to those not in the market as well as to foreign investors.

The manipulative methods maximizing the profiteering reduced to this: create new corporate structures such as hedge funds, non-bank lenders, mortgage conduits, private equity firms, etc.. These were largely unregulated. Then, pick up the shambles and debris left over from the S and L debacle. Use new financial instruments such as structured investment vehicles and collateralized debt obligations, etc. to redirect the flow of money into the desired paths. Gain the support of the politicians and the SEC and network with them by granting them access to some profits and memberships on boards. Channel lots of campaign contributions to compliant politicians who, in turn, will pass deregulatory laws and others suited for parasitic actions. And, thus, with the support of fiscal and monetary policies, the largest economic fraud and the most intense corruption in all of modern economic history unfolded.

But it did not end with the fleecing of the private sector. Once bankruptcies exploded, the public sector was also fleeced through bailouts. These rewarded--irony of ironies--precisely those who acted unethically and caused the mess in the first place.

The question arises, what is the solution? In a nutshell it is this: immediate confiscation of the billions that were stolen to compensate those who lost their investments. Then, those who got rich through the financialization of the economy (which neglected the manufacturing sector and made the consumer poorer) should redirect their efforts to get rich by producing products that genuinely raise the living standard. Start with removing all slum houses and rundown trailer homes, refurbish the dilapidated infrastructure and engage in ventures that raise the living standard for the consumers. Once the U.S. becomes an asset accumulating and humane economy it can catch up with the living standard of many foreign economies such as Norway's, whose per capita GDP is a stunning 100 percent higher than America's. It can also catch up with Sweden, Switzerland, Denmark, Finland, the Netherlands, even Ireland, which are all more than 20 per cent higher. It would
reverse what Bush and his cronies have done when they were sugar-coating economic realities while presiding over and profiting from the causes of what is evolving into one of the worst economic crisis in modern history.