Wednesday, September 24, 2008

The Shock Doctrine Playing Out In Front Of Us

"Only a crisis - actual or perceived - produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes politically inevitable."
- Milton Friedman : US Prof.Emeritus-Economics,Univ of Chicago, Nobel prize, Hoover Sr Res Fellow Stanford
Milton Friedman (1912 - 2006)

Let me start by stating that I believe this bailout is nothing more than the biggest scam and money grab in history. This is the shock doctrine playing out right in front of our eyes. This bailout is only a short term band aid that will postpone the inevitable collapse until the next sucker can take office.

In case you aren't really keeping up with it and don't really know the backstory of this bailout, I will explain what is going on right now.

In a classical supply and demand economy, demand is driven by wages and supply is driven by productivity. Demand is driven by the ability of people to purchase things. When people have enough money left over in their pocket after they pay for survival necessities like food and housing to be able to go to the store and buy things, that creates real demand. Businesses then open to fullfill that demand and that is how real jobs are created.

In the 1980s, under Ronald Reagan, the conservative Republicans proposed that we drive demand with debt by making credit more easily available and then business owners could stop raising wages and therefore make more money, especially when they were allowed to increase productivity at the same time by outsourcing their labor to peasants and slave labor in China and Mexico. That started causing a spike in unemployment that the government has been trying to cover up, but the fact is that we now have a real unemployment rate of around 12%.

At the same time they also lowered our tariffs to the point where we are economically defenseless, in order to encourage outsourcing. For instance if we want to sell a car in China we have to pay a 30% import tariff but if China wants to sell a car here they only have to pay a 2% import tariff.

That is why starting in the 1980s we saw the rise of not just easily available credit but downright open and flagrant predatory lending and usury. Credit cards became widely available and now today the average American household has over $8000 in credit card debt. Also since the 1980s we saw a rise in people using their houses like ATMs by taking out second mortgages or refinancing in order to try and take the equity out of their homes.

And it has all appeared to work for the last 30 plus years but the problem is that if you don't raise wages then eventually people aren't going to be able to pay back all their accumulated debt and the whole thing is going to fall down like a house of cards. All it takes to tip the scales is a significant rise in inflation that outpaces income.

And that is where we are today. The thing that tipped the scales was gas prices going up. That caused the prices of everything else to go up and now we have a real inflation rate of about 11%.

People suddenly found themselves unable to pay their mortgages so over the last two years we have seen record numbers of foreclosures. That caused the value of mortgage backed securities and hedge funds to drop which is the "crisis" we have today. The owners of these securities are saying that without money from the government they will have to stop making loans to people who can't afford them in the first place.

The real solution to this crisis is to get more money into the hands of the citizens at the bottom directly instead of sitting around hoping for some to "trickle down".
Raising wages means strengthening and supporting unions. It means protecting American industries with Tariffs like we did for the first 200 years of our nation's history.

At the same time what they should be doing with that $700 billion is making it available to American citizens who are facing foreclosure on their mortgages in the form of interest free loans. That will stop the foreclosures, boost the prices of the mortgage backed securities and solve this "crisis" for the long term instead of just bailing out those at the top for the short term.

Also, at the same time we need to save people from the skyrocketing costs of private health insurance by offering non-profit public health insurance. That alone could help save half the personal bankruptcies in America.

The whole thing has to be offered as a package like FDR did with the "New Deal" because individually no one thing is going to really save our economy and our country.