This Economic Crisis Was Predicted

As was written in 1986: 'The problem is not just the personal, corporate and bank leverage nor just the unprecedented national debt, current account and trade deficits but with the addition of the huge unfunded liabilities it takes only a small trigger to get the whole economy to collapse.'

The leaders of both Parties in both Congress and the Administration and the Federal Reserve Bank failed to see this intellectually obvious, economic crisis coming. After the economic crisis hit them, they all recognized and now confirm that it was excessive leverage, i.e. the ratio of the debt relative to the equity, that was the problem.

Indeed it took only a less than 20% reduction in housing values in California and Florida to start the downward accelerating spiral that brought the economies of all Western Democracies to their knees. These 20% normally small losses, (particularly in a small sector of the economy,) that were reasonable to expect after a 40% speculative run on housing prices in those markets, spurred by the cultural attitude of "lets get rich fast despite being very ignorant and very stupid," when leveraged as high as they were leveraged by individuals and add the leverage on the same underlying asset by the banks and the almost infinite leverage on that same asset by the CDO's and CDS's that had no reserve requirements, we end up with hundreds of billions in losses becoming losses in the trillions; when so highly leveraged.

Defining which was "the trigger" for the economic crisis depends on the referenced time-frame so that one can just as validly argue that the oil prices primarily driven by the dictators of OPEC nations, of $140 during mid 2008, and the resulting fears of an inflationary spiral, were the trigger and also just as validly argue that the domestic job losses from the deflationary $600 billion annual trade deficit a year that we pay dictatorial China and then pay interest on the debt of it, was the critical 'trigger', from a long term perspective.

The wisdom necessary now is to minimize the damages while correctly maximizing the opportunities of the crisis. On the regulatory side the recommendation was given in 1986.

"The Federal Reserve should increase the reserve requirements of Banks thus reducing their leverage and thus the probability of an economic collapse."as it was explained in 1986.

Reserve requirements are the equivalent of equity as far as banks and financial institutions are concerned. They are the percentage of how much money they can borrow and lend relative to the deposits and cash they have. By increasing the reserve requirements of a Bank one automatically reduces the leverage they may have.

Now, over 4 years late and after millions of people lost their jobs, their homes and their savings, on March 20, 09, CNN reported that the X-Chairman of the Federal Reserve Bank, Alan Greenspan said that: 'The Banking system needs increased reserve requirements.' What a bozo! I have been calling for him to do or say this for 3 years as you see from above, but Greenspan is 4 years late!!!!

The solution to the longer term critical problems of OPEC oil and of China trade deficits starts with the following clear recognition of reality:

The war of fascism and of dictatorships against democracies has been relentless and ongoing for centuries and will manifest itself again in apocalyptic destruction unless China's trade deficits with the West are reduced to practically zero within 3-4 years.

That (probably appropriately not publicly admitted)but very real economic war between those that strive to be free from those tyrants that seek dominance over others spills over into the military. That is why we are in two very costly wars that we can't get out of as fast as we would like and are trying to minimize the chances of catastrophic wars in the dictatorships of N. Korea and Iran, that are covertly supported (in fact instigated)by other dictators, the most powerful of which are those of China.

(By the way, the fiscal deficit, which is the fourth component of the downward accelerating spiral, by 2012 should be below 3% i.e. at less than $350 billion and dropping, not the $500 billion and then increasing that is currently proposed, with no further tax increases,(see taxes) but with much larger government (non defense) spending cuts that should start in 2011.)

The above solutions only help to navigate through, minimize the negative effects and postpone the crises. This economic crisis has been effectively postponed by the late, inefficient but finally effective government actions. But these solutions do not solve the structural and strategic problems that are extremely severe so that the probability of a new worse collapse in 2012 or 2016 remain very high.

To deal with the structural problems there is a need for 40% or so in taxes on imported oil. It is the best way to preempt another steep oil price increase while achieving positive political, fiscal, trade and environmental results.

Also, after a few months of useless negotiations (that will yield only minimal and only face saving concessions) with the Chinese dictators, tariffs on Chinese imports or taxes on the $/Yuan exchanges by about 40%, must be instituted.