The Obama administration is now completely wedded to the idea that there's nothing fundamentally wrong with the financial system - that what we're facing is the equivalent of a run on an essentially sound bank. As Tim Duy put it, there are no bad assets, only misunderstood assets. And if we get investors to understand that toxic waste is really, truly worth much more than anyone is willing to pay for it, all our problems will be solved.

JAY-ZUS!

What an awful mess.

Sioux Rose

Mr. Krugman: Thank you for telling the truth. The only thing missing is your explanation for WHY Obama is giving the bankster-criminals a free pass. Do you really think it's because he believes in a financial model that places the security of banks first? The very nature of security is undermined by in-house policies that treat others' funds like crap shots on a Vegas table. Gambling is the antithesis of sound policy for a nation to follow, support or rationalize.

Since Mr. Obama has a background in law, surely he understands the risks and potential losses attributable to a system that lacks any sane form of accountability. Surely he knows enough history to understand Glass-Steagall, and given the ravages underway that are impacting the poorest of the poor 'round the globe, only a soulless president, utterly under thrall to Mammon (and Mars) could go along with more of same, rewarding trespass of such profound dimensions, and PRETENDING these are the measures necessary to stem the great fall. To devoted followers like a priest passing out holy water, he gives power to the illusion that he is doing something to patch up the gaping wound that's bleeding money, when money remains the currency necessary for treating our collective challenges, ones like global warming.

The word insider rings like a bell. And the note it sounds is ominous to all sentient beings.

Our financial/banking system made simple - - -

Start with $1,000 earned from building widgets with value deposited in our local bank in a savings account. At the end of a year, the bank pays us interest – even at 5% (1.5% is closer), it is only $50. But the bank needs to make a profit, so our rules allow them to leverage our $1,000 by 25, 30, even 40 to 1; so using the 30 to 1 leverage; the bank makes a home loan of $30,000 and collects interest at 5%. The bank earns $1,500 on our $1,000 savings.

As a commercial bank, it has to borrow the $29,000 using the value of the property securing the mortgages as collateral, and would pay interest of say 1.5% or $435. So, the bank now has earned about $1,000 on our $1,000 in savings and can leverage that into $30,000 more mortgages and during the second year, our $1,000 has earned the bank another $2000.

This can and does go on and on with the bank doubling their earnings on our savings each year. After only five years, the bank is earning $32,000 a year on our $1,000 deposit. Everything is safe because home values keep rising.

Because they have leveraged our $1,000 and the net interest earned each year; the bank now has $1,890,000 worth of real estate backed mortgages.

Pretty sweet but not even close to the end. Our bank now sells these mortgages to an investment bank – or, since they are often the same bank, does an accounting entry. The investment bank now has $1,890,000 in value from our $1,000 savings. The rules allow them to securitize this asset into a bond which is rated; by their owned and controlled rating agency as AAA meaning it is as good as cash. The rules allow the investment bank to leverage as well, so our $1,000 now has become $56,700,000 which they loan to commercial banks for more mortgages. The cycle continues, remember we only have $1,000 in cash and as long as real state values continue to rise and the mortgage holders continue to make their payments, the system continues to grow, exponentially with bankers realizing a profit every step of the way. Even at 1.5%, the investment bank is earning $850,500 each year and yes, we are still getting our $50 dollars a year.

Now the really creative part, credit default swaps. The investment bankers (also allowed to be insurance companies), wanting to hedge against losses and find additional sources of income, buy and sell credit default swaps which are bets for and against the likelihood of the system to continue to grow. While the rules, or lack of rules, allow an unlimited number of these credit default swaps to be bought and sold and does not require the buyer or seller to have any ownership at all in the bond upon which the bet is placed. For simplicity, let’s assume only one credit default swap betting against the bond is sold (we do not know that to be true and no one telling us; it would be a safe assumption that the actual figure is much higher). But, since we assume only one is sold, we have only doubled the potential liability to $113,400,000 – all from our $1,000.

Because of our “too big to fail” financial system and the fact that our financial elites own our government, the taxpayers are on the hook for $113,400,000. So, when we quit paying our mortgages because we are deadbeat losers or whatever and the real estate values supporting this pyramid drop below the amounts owed; we the taxpayers are on the hook to make the bankers whole, pay all bets.

Multiply the $1,000 a few times and you get to the hundreds of trillions of dollars that is being legally stolen from taxpayers. The question is who gets the money? Who owns the banks?

They hate us because of our freedom! Right, and I have this bridge....

Not despair over financial policy, despair over our MONETARY SYSTEM.
Our monetary system is a privatized system of debt-based currency subject to interest. As with any monetary system subject to interest it inherently multiplies debt and will continue to do so until terminal debt is reached and monetary collapse occurs. That would be right about now. It is operated for the benefit of American and international banksters who don't give a rat's ass about U.S. citizens. We need to eliminate the unconstitutional Federal Reserve System and create constitutional money not subject to interest. Economic democracy then requires a constitutional guarantee that establishes and protects every prospective debtor's right to issue their promise to pay, free of extrinsic manipulation, adulteration, or exploitation of that promise, or the natural opportunity to make good on it. http://www.perfecteconomy.com/

As usual, Dr. Krugman is speaking the truth, but not all of the truth, not all at once.

What he's not telling you is that the Obama administration is on course to break the US middle class, plus most of its millionaires, to enrich and empower the trillionaire international banking imperium:

"...the powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. this system was to be controlled in a feudalist fashion by the central banks of the world acting in concert by secret agreements arrived at in frequent private meetings and conferences. The apex of the system was to be the Bank for International Settlements in Basle, Switzerland, a private bank owned and controlled by the world's central banks which were themselves private corporations...

"There really is a 'world system of financial control in private hands' that is 'able to dominate the political system of each country and the economy of the world.'"

Carroll Quigley, "Tragedy and Hope: A History of the World in Our Time" (1966)

Complete text:

http://www.alexanderhamiltoninstitute.org/lp/Hancock/CD-ROMS
/GlobalFederation%5CWorld%20Trade%20Federation%20-%2098%20
-%20Tragedy%20and%20Hope.html

The last fifty years of middle-class prosperity has been an aberration of history, because all other human history has been characterized by a relatively small, wealthy ruling class dominating the rest of the population, virtually powerless and mostly poor. Having lost much of their domination because of reforms under FDR, the global banking class has since then militated to reverse those reforms and reclaim their domination - and are well on-course to succeed.

Your descendents, if you have any, will be serfs and slaves, as your ancestors were.

Not that I really mind seeing the USA burn itself to the ground...good riddance really, the less fascist states in the world the better. .but the rest of us are choking to death on the smoke.

"The only means of strengthening one's intellect is to make up one's mind about nothing, to let the mind be a thoroughfare for all thoughts." - John Keats

Ditch the banks that get bailouts - close your account. Go open an account in your local small-town bank. Do business at farmer's markets, yard sales, Ebay perhaps, Craig's list. Barter to exchange value or services. Buy your food locally if possible. Don't go to WallMart - support your local business or it will vanish.

It is possible to some degree to opt out of the system - do it as much as possible. Personally, I'm trying to arrange a dwelling place, large garden, solar, wind, wood stove, about 1,000 second-hand books, eventually droping out of the rat race, taking perhaps a low-stress, low-paying job of some sort when cash is needed, thereby paying minimal or no taxes. Come to think of it I haven't filed for a few years. Probably should. But, if WE all don't file or pay, WE outnumber THEM so WE win. That is, if WE can get it together to act cooperatively :)

Have a good weekend - opt out - buy something used - barter - trade. :)

Goldman-Sachs continues to own the Treasury Department--check out Matt Taiibi's impressive Rolling Stone article--

http://www.rollingstone.com/politics/story/26793903/the_big_takeover/7

I fear that when the plan fails, as it almost surely will, the administration will have shot its bolt: it won't be able to come back to Congress for a plan that might actually work.
=====

And will we then all swirl into the black hole of economic ruin world-wide, penniless. without food and shelter? Troublesome times are on the way when people find themselves struggling to survive:

“The most dangerous creation of any society is the man who has nothing to lose.” -- James Baldwin

In the old days the spanish conquistadors went to the New World. They hacked through jungles and human bodies to collect their gold. And what do you know? The English pirates were waiting for them in some coves or bays. Of course, we all know the rest.

The present era's equivalent goes something like this. The industrial capitalists rob various natural resources, including labour, from all over the world. The governments AND middle classes of the home countries of these capitalists and those so called emerging economies are complicits in this globalised robberies.

Here come the modern day pirates, the financial capitalist who with the help of central banks all over the world start to create this massive fiat currencies. The result is we have a CONTINUOUS INFLATION lasting centuries. Ask yourself, how much is a loaf of bread in George Washington's time? How much is a bottle of milk in Queen Victoria's time?

There is off course a climax to this drama and it is here and now. When the ultimate inflation hit us all the fiat monies of the world will reveal their true nature, PAPER. It makes no difference whether it is the 5000 Yuans, Pesos of a worker or the 500 milllion Dollars, Euros or Yens of the industrial capitalists. The financial pirates now own most of the resources of the world.

A demand problem is what this recession is all about. Working people's incomes have gradually declined for the last thirty years. Corporations and Government have conspired with the acquiescence of economists to strip workers of a decent wage. Now people are in financial trouble and have no money to spend us out of this depression. Does it really make any sense to bail out the banks when there is not enough demand to purchase products and services? With ten trillion dollars in loans and guarantees to the banks, and only seven hundred billion for jobs, it seems unlikely that demand will be strong enough to bring us out of the depression. If this is the best that Harvard and Princeton graduates can do then plan on living a subsistence lifestyle. I already do.

Obama the new Hoover!

Headline in NYTimes: Wall Street saves Wall Street; Rich dancing the streets; poor eating cake

Mr. Krugman:

I appreciate your ideas here, but many of us are very tired of even the best economists giving in to the misleading terminology:

Bad Debt/Misunderstood Debt

In the public mind, too often, this is assumed to be merely mortgages that have gone into default.

But we know that the whole sub-prime market was around 1.5 trillion, but the Credit Default Swap market was anywhere from 45 trillion (early 2008 estimates) to 65 trillion (Dean Baker, recent quote).

Baker says that for every CDS that was covering a bond or mortgage-backed security that the purchasing party owned, there were 5-10 owned by people who were merely speculating, gambling.

It seems that much of the "bad debt" involves CDS's that financial institutions can't afford to pay.

But if the government is going to pay top dollar for bad mortgages that triggered the CDS's, then it would seem that there is no real loss to be covered-- so why should we be bailing out banks and AIG at hundreds of billions, if we're buying or reselling bad, or misunderstood, debt? Then the gambling/speculation losses to be covered by the CDS's would not need to be covered, or not at such high rates?

Or are we simply bankrolling finanical institutions to double-dip?

The public lacks a clear understanding of these parts of the crisis, and without it, many can only assume that the biggest, best predators of the capitalist system are doing what they do best, and finding some barely legal way to rob us all blind.

Please do better in your use of the "bad debt" terminology in the future. It feels as if the use of such lingo merely buys into a big lie that is being told, and it's wearing thin. We have to do better.

Trying to understand all this is impossible for most of us. I think we need to go back to basic principles of money and banking, and what as a society we expect from those who manage both to do and under what standards and rules of behavior. Banking is supposed to serve society, not exploit it. Fiduciary duties had meaning, and they should continue to do so. Part of the answer is smaller banks and separating investment banking from the banks that service our economy. Part is more regulation, more oversight, and greater insistence on the public service owed by banks to our citizens. The tail has been wagging the dog for too long.

Herman Schmidt

For those who believe that the "restoration" of the system, which has brought us this ruin, is the solution to our problems, please think again.
http://www.perfecteconomy.com/

The Federal Reserve, banking system and fractional reserve system are instruments of usury. They are designed and operated to allow a select few to amass huge, unearned fortunes at the expense of the nation.
Usury means charging interest. That is not to say “excessive” interest but any interest. If you will research the word back to its origin, you will find that usury and interest are interchangeable. The definitions, even passages in the bible, have been tweaked over time to accommodate the agenda of the elite.
Economics is numbers and numbers are math and nothing more. It’s called accounting.
An economy that is based on usury can never be balanced since it creates only ever-increasing debt that can never be serviced.

A charge of ten percent interest on $100.00, with no currency in circulation to service it, creates debt that can’t be paid. One hundred plus zero does not equal one hundred and ten. The usurer takes unearned wealth from circulation while providing nothing of use to society but rather heaps unending dept upon those who actually produce commerce and wealth.
Usury, charging interest, is destructive of commerce and society as a whole. This is can clearly be seen at this time by anyone who cares to have an unbiased look. The simple, common sense evaluation of observable phenomena provides undeniable proof. A cursory review of history simply confirms it.

If you actually choose to believe in the principles upon which this nation was founded and the alleged wisdom of those wealthy individuals who enacted those principles then simply refresh your history and see what many of the “founders” have to say about private banks and bankers. They warned that this time would come if private banks were given control of the nation’s money.

These are historically accurate. Don’t ask me to prove it for you. If you’re too lazy to do your own research then simply continue to choose blind faith in the capitalist ideology. Distilled to its essence, the capitalist mindset can be expressed in three words: Buy or Die.
I’m sure your children and grand children will be avid to hear an explanation as to why your narrow self-interest and addiction to instant gratification were more important than their survival.

“If the American people ever allow banks to issue their currency, first by inflation and then by deflation, the banks and corporations which will grow up around them will deprive the people of all property, until their children wake homeless on the continent their fathers conquered.” Thomas Jefferson

James Madison speaking on the first attempt to establish a central bank in America:
“History records that the money changers have used every form of abuse, intrigue, deceit and violent means possible, to maintain their control over governments, by controlling money and its issuance.”

“It is proper to take alarm at the first experiment on our liberties. We hold this prudent jealousy to be the first duty of citizens and one of the noblest characteristics of the late revolution. The free men of America did not wait until usurped power has strengthened itself by exercise and entangled the question in precedents. They saw all the consequences in the principle, and they avoided the consequences by denying the principle.”

Andrew Jackson speaking on the second attempt to establish a central bank in America:
“If congress has the right under the Constitution to issue paper money, it was given them to use themselves, not to be delegated to individuals or corporations.”
“I am one of those who do not believe that a national debt is a national blessing, but rather a curse to a republic, inasmuch as it is calculated to raise around the administration a monied aristocracy dangerous to the liberties of the country.”
President Jackson told the bankers “You are a den of vipers and thieves. I intend to rout you out, and by the Eternal god, I will rout you out!”

It’s interesting to note how rampant the hypocrisy was even then.

http://www.perfecteconomy.com/

There is no way to Peace. Peace is the Way.

"Obama - and yes, the buck stops there - has decided to base his financial plan on the fantasy"

The key word is fantasy. Obama is just the latest con man in the White House fronting for the Wall Street interests. Same crap new wrapping. I tried to warn people during the primaries but nobody would listen. This just makes my blood boil. We're being robbed (these bailouts are robbery) and most people, particularly on the "left"(?), have been snowballed by this guy.

WHAT ACTION DO WE TAKE TO STOP THIS?

"Hell hath no fury like a spurned economist" (or a spurned progressive against Empire).

Paul is dead right.

As he has long warned this is not a liquidity problem, but a solvency problem, and Obama is showing a real lack of guts in facing the economic disaster caused by the 'Economics of Empire'.

I was fully committed, worked for, supported, and voted for Nader, because he was the only candidate willing to openly confront the ruling-elite 'corporate financial Empire' which controls our country by hiding behind the facade of its two-party, 'Vichy' sham of democracy.

However, once Obama was in office he almost "had me at hello". When he slapped out at the detached global thieves by shutting down their UBS 'wealth extraction express', I thought this was but the first move toward a more nuanced attack on Empire than Nader would have surely taken.

However, now Obama seems to have folded like a cheap-suited weak-Willie, as soon as the Rubin sandwich bit into him. Now it certainly appears that the money-power (and other powers) of Empire have taken the fight out of our would-be champion.

Which is why I summarized the all-too-real downside in "Empire, Elitism, Externalities, and Extinction". The cry of "Captain, my Captain" is wailing from the panicked passengers, but it doesn't look like our Captain ever understood the political helmsmanship or the economic engineering necessary to right our indivisible political economy of this ship of state against the titanic empire's maelstrom.

It's not often that you hear a Times' economic columnist (a Nobel no less), and the World Socialists' economic columnist sounding so disappointedly similar:

http://www.wsws.org/articles/2009/mar2009/bonu-m21.shtml

The seminal issue, much broader than AIG or the deceitful bonuses, is how to deal with an entire system which allows theft by dumping 'negative externality cost' POLLUTION (in this case 'debt bombs') on our society.

Luckily, this issue has already been legally resolved in dealing with dangerous industrial products --- "POLLUTER PAYS" is the legal answer and has been the law of the land since the cigarette settlement, the case of W.R. Grace in “Civil Action” and Erin Brockovich against PG&E poisoning ground water.

The same legal solution can and MUST pertain to financial pollution cased by a financial firm which manufactures corrupt/dirty products which are designed to produce phony profits only by polluting the financial atmosphere.

Manufacturing products which a prudent man knows or should know will produce pollution to the commonwealth, and doing so merely to create the appearance of phony profits (when there really is no profit) is illegal whether the product is cigarettes, dirty chemicals, asbestos, or CDSs.

"Polluter Pays" is the modern law of the land -- in the US and throughout the modern, sustainable, and social democratic world --- and thus financial products producers like AIG FP ('financial products') must pay to clean up the damage their products created.

Polluter Pays is the law and AIG (and most of all of the Wall Street corrupt investment banks, hedge funds, and integrated financial 'super-markets' like Citi) which have been selling rotten financial meat, and 'toxic waste' now have to pay for the pollution and financial sickness that their rotten products have caused!

Krugman knows more than Greenspan admitted in his phony mea culpa about a "shocking 'market flaw'" (that it's the externality economy, stupid), but Paul remains silent and Barack remains untutored and unprepared to confront the economic Empire.

Alan MacDonald
Sanford, Maine

To get an idea of just what a trillion is, when you hear these "experts" mouthing off about trillions of dollars, consider this...

A million seconds is 13 days.

A billion seconds is 31 years.

A trillion seconds is 31,600 years.