CHICKEN LITTLE WAS RIGHT

by Stephen Pizzo


Funny how history has a way of turning back on itself.

Remember when the Berlin Wall fell in 1989 and Republicans claimed that Ronald Reagan's aggressive policies toward the Soviet Union had won the Cold War. In particularly they claim that Reagan's fabulously expensive "Star Wars" anti-missile system had forced the Soviets to spend so much on their own military projects that it bankrupted them.

Well, there's truth in that. Between trying to compete with Reagan's military spending and their own misadventure in Afghanistan the Soviet Union went bust. Decades of over-spending on its military, under-spending on critical domestic needs and saddled with a flawed and increasingly corrupt economic dogma all collided at once, ending in utter and complete collapse.

Nearly 20-years later America is building its own wall along our southern border, spending $12 billion a month fighting twin wars in Iraq and Afghanistan, while not investing in our aging, crumbling infrastructure and -- finally -- free-market radicals in this administration allowed the economy to be run into the ground by increasingly corrupt and self-indulgent players.

Add to that $3 trillion in tax cuts skewed towards America's richest citizens, and now another $1 trillion (likely more) to bailout companies run or owned by the very recipients of those tax cuts. Add it all together and what you get is what the Soviets got twenty years ago -- a reality-round right between the eyes.

In the days and weeks ahead you're going to hear a lot from Washington about how they've got a handle on all this. But they really don't, not even close. Because, you see, there's no money in the national bank account and our favorite lenders, the Chinese, Japanese and, increasingly, Middle East oil producing states, have been dragged into this economic morass themselves. The last thing of those lending nations need or want right now are a few hundred billion in USA IOUs.


But even if those lending nations were willing to continue to drop spare change into America's tin cup, there's not enough dimes on earth to fill the hole that's been created by Wall Street's Frankenstein creations called "derivatives."


I'm not going to waste your time trying to explain derivatives... because they can't be explained. Warren Buffett calls them ,''Weapons of financial mass destruction.''


According to the International Swaps and Derivatives Association, the notional value of CDS totaled $63 trillion at the end of last year. Estimates for this year are more like $67 trillion.


Alan Blinder, the former Fed vice chairman, who holds a doctorate in economics from M.I.T. admits that even he doesn't understand derivatives. “I know the basic understanding of how they work,” he said, “but if you presented me with one and asked me to put a market value on it, I’d be guessing.”


The point everyone misses," wrote economist Robert Chapman a decade ago, "is that buying derivatives is not investing. It is gambling, insurance and high stakes bookmaking. Derivatives create nothing."


Today, the outstanding "value" of derivative swaps stands at about $50 trillion. (By the way, that's up from $900 billion in 2001.) But the values investors and institutions placed on their books for these derivatives bears little connection to their actual value. And no one -- I mean NO ONE -- really knows what those things are really worth. First regulators and investors will have to determine a current real market value for each of them. To do that they have to untangle each of these Rubic Cubes; how they are amortized, who has claims on all or part of each, when they're due, etc. Only then will they learn what all these underlying assets are truly worth. They may be worth only pennies on the dollar. In many cases regulators -- and taxpayers now backing these instruments-- will learn they are not worth the cost of the electricity to put them through a document shredder.


All the activity you see at the White House in recent days has only one goal; to avoid a total collapse on Bush's watch. By the time the next President takes office the current administration will have eaten all the nation's remaining seed corn, leaving the next administration virtually nothing to re-grow the economy.


And then there's America's exhausted military. The surge succeeded, but not in the way the administration likes to claim. The surge succeeded putting off the inevitable collapse in Iraq until after Bush leaves office.


With the US consumer and financial system gutted and our military stretched far beyond its limits, the next Commander-in-Chief will be left with only one choice; to end military operations in Iraq and let the chips fall where they will between waring Sunnis and Shiites. And then to move some of those military resources to the real threats to the world, Afghanistan and nuclear-armed Pakistan.


Even then it will be difficult to maintain full-scale military operations there unless our NATO allies increase their commitments. Unfortunately Europe also finds itself being dragged down by the US financial market collapse.


Finally, don't even think about universal healthcare. As job looses hit and hit and hit again in the months ahead, the 50 million Americans currently without healthcare will mushroom. But there will be no money left to address this national shame.

So who do we need in the White House next January? Again look back to see ahead.

Bush has been compared with Herbert Hoover, and not without good reason. And even now, he follows in Hoover's failed footsteps.

In 1930s the nation found itself in the same fix. Wall Street had been allowed -- even encouraged -- to run wild by Republican President Herbert Hoover. And, surprise, surprise, when left to their own devices Wall Streeters fouled their own nest, and everyone else's.

Hoover's response was, first, to assure everyone that 'the fundamentals of the American economy are sound."

October 2, 1930: “During the past year you have carried the credit system of the nation safely through a most difficult crisis. In this success you have demonstrated not alone the soundness of the credit system, but also the capacity of the bankers in emergency.” — Herbert Hoover, Address before the annual convention of The American Bankers Association, Cleveland

Then, as the economy continued to implode, Hoover created something called the Reconstruction Finance Corporation, (RFC) a federally-owned bank to bail out commercial banks by extending loans to them, much as the privately-owned Federal Reserve is doing today.

That's pretty much what this administration has been up to this week.

But history teaches that Hoover's ploy failed. The last thing big banks needed was more debt... they had too much debt already. What they needed was for ordinary Americans to begin investing and spending again.

When Franklin Roosevelt took over he understood that. so one of the first things he did was change the RFC's mission. Under Roosevelt the RFC stopped propping up big banks and turned it's attentions to propping up ordinary Americans by making loans for housing, agriculture and small business creation.

As that help began to revitalize the American economy Roosevelt again tweaked the RFC by having it begin extending credit for infrastructure repair and development. Historians say it was that spending that prepared the US for the second world war.

In other words, trickled down has never worked. Strong economies and strong nations are built from the bottom up, not the top down. Any stonewall builder will tell you that, while the big stones are the ones that standout in stone wall, it's the little stones that hold the big stones in place.

John McCain is a big stone kinda fella, like Bush. The only time he even acknowledges the existence of us small stones is when he needs our vote. If you doubt that just listen to him. He wants the to make the Bush tax cuts for the big stones permanent, and more tax cuts for them as well.

Only Barack Obama is talking about recreating the bottom up kind of economy that Roosevelt created and which made America the wealthiest and strongest nation on earth.

But as of today America is the Soviet Union, circa 1989.