The Financial and Economic Crisis: An Assessment and Action Plan

The Financial and Economic Crisis: An Assessment and Action Plan

By Robert Roth
May 18, 2009

Introduction and Summary:

Many of our fellow citizens are still euphoric over Obama’s victory and hoping to get change we can believe in. The government and the media clearly want us to start thinking the worst is over and the economy is on its way to recovery. So are we out of the woods?

By flooding Wall Street and the credit markets with cash–and even letting a few drops come directly to the rest of us–it seems the government has at least for now pulled us back from the brink of another Great Depression. But the economy is on the ropes for the foreseeable future, if not down for the count. Meanwhile, instead of change we can believe in, we’re getting changes we can hardly believe are happening. The war isn’t over, it’s just moving on from Iraq to Afghanistan and Pakistan. Warfare is still winning out over healthcare, and single-payer healthcare is off the table. The usual gigantic business lobby has mobilized against legislation that could level the playing field for labor unions. There are mutterings that maybe we can’t even afford Medicare or, in the long run, Social Security anymore, while the government has dished out or guaranteed nearly $11 trillion to pay off or rehabilitate Wall Street, leaving the rest of us with the usual crumbs. And those are only some of the highlights.

Given the breadth of the onslaught, it may be a strategic error to approach these issues separately, one at a time, not only because acting on all these issues separately is inefficient, but also because our problems are related in both their causes and their effects and addressing them together can contribute to broader solutions. Specifically, each of the causes mentioned is related to any sustainable economic recovery. So we should be advocating for all of them at the same time, to the same people–our neighbors and friends as well as public officials.

This article shows some of the connections among the issues and provides a toolkit of facts and arguments that can be used in organizing and advocating for real change.

A couple of months ago, Federal Reserve Chairman Ben Bernanke spoke the words “green shoots” in a television interview. Since then, a rally in the stock market and some other financial indicators have some people debating whether the world economy is stabilizing and the worst will soon be over. It would certainly be nice to think so. But other measures continue to be troubling: unemployment continues to grow; the worldwide recession triggered by the financial crisis continues to deepen; and despite the hopeful talk it seems all but certain the US economy will get worse before it begins to recover. However, most of the mainstream discussion assumes we’re in the midst of a conventional recession, in which production and consumption have decreased for a time but can be relied upon to pick up at some point as part of the usual economic cycle. Unfortunately, there are deeper problems with the US economy, including increasing inequality and the decline of our manufacturing base and family-wage jobs, which have been building for decades. And on top of that, even as the damage to the Earth caused by industrialized economies is becoming undeniable, we appear to be hitting the limits of key resources such as oil, that have been both sources of environmental harm and the bases of our economies.

It’s hard not to be intimidated by the sheer magnitude and complexity of the cascading crises we face, and immobilized by the fear they have naturally engendered, but the situation is far from hopeless. The first step is understanding–recognizing and analyzing what we’re up against.

The latest analysis of prominent economist Nouriel Roubini is that the unprecedented government fiscal and monetary stimulus has reduced the risk of a global L-shaped near-depression, leaving us with a severe, deep and protracted U-shaped recession. Meanwhile, state and local government revenues are suffering massive declines, gutting essential services and the jobs through which they are provided. With the loss of experienced and knowledgeable staff in many fields, the damage here is not only the loss of jobs and other resources, but also the dismantling of services infrastructure that cannot easily be replaced if and when more resources are applied. Unless funding is provided to avoid them, state service cuts and likely tax increases will total about $350 billion over 2009 and 2010. This will create an enormous additional drag on the economy and effectively negate almost half of the federal stimulus.

In Oregon the recently proposed cuts in general-fund dollars would close courts, eliminate 5,500 jobs in the public school systems (resulting in increased class size and decreased school days in K-12), eliminate care for 14,000 senior citizens whose income is above official poverty levels, and cut $150 million from services to the most vulnerable populations such as people with developmental disabilities, despite the fact that this latter cut would trigger a loss of $200 million in federal matching funds for such services. And, of course, that’s just the tip of the iceberg. The situation is similar in many other States.

Much more funding is needed to restructure and revive the real economy. Government efforts to “jump start” the economy should be seen as easing the pain on a short-term basis, but the economy needs to be substantially restructured before it can become a vehicle for long-term prosperity. The economy we had before the crisis began was based on illusions of wealth created by excessive and continually increasing debt, giving it the nature of a Ponzi scheme, while the real economy had been gutted steadily for years by stagnant or declining wages caused by decimation of unions and the export of manufacturing and other jobs; thus we cannot have a return to sustainable economic growth without debt relief and the creation of millions more jobs at substantially higher wages to stabilize and increase aggregate demand. This requires reversal of policies that promote the off shoring and outsourcing of jobs, and a level playing field for labor organizing and unionization. The passage of EFCA would promote all these goals. Universal healthcare and a strengthened social safety net would further strengthen the U.S. economy by enhancing the competitiveness of U.S. businesses.

Federal government efforts to address the crisis have massively favored the financial sector over the real economy, with less than $0.8 trillion allocated to stimulus of the real economy while the rest of the $12 trillion thus far spent or committed has gone to support financial firms and credit markets. It’s unlikely, however, that the financial sector and credit markets can be “fixed” by subsidization. The financial sector has also grown too large in proportion to the overall economy. Meanwhile, the trillions of dollars being thrown at the financial sector and underpinning the credit markets threaten to bankrupt the federal government, ruin the dollar and leave us without the resources needed for real economic renewal. And yet, despite the magnitude of the disaster and the fact that much of it was caused by intentional and deliberate human action and the systematic dismantling of protections enacted after the Great Depression of the 1930s, there has been no substantial effort to determine the causes of the crisis or prevent a recurrence going forward; and, for its part, much of the financial sector resists re-regulation. And, of course, continued uneconomic expenditures on the military further hemorrhage increasingly scarce resources without producing useful goods or services or building a sustainable economy with productive jobs.

Analysis and A Plan:

As George Santayana wrote, “Those who cannot remember the past are condemned to repeat it.” So it’s a good idea to start with a very brief statement of what triggered our current crisis. James K. Galbraith has provided a great short statement of what happened, starting with a quote from Richard Cohen, writing in The Washington Post about the case of Marvene Halterman of Avondale, Arizona:

At age 61, after 13 years of uninterrupted unemployment and at least as many living on welfare, she got a mortgage … even though at one time she had 23 people living in the [576-square-foot, one bath] house and some ramshackle outbuildings. She got it for $103,000, an amount that far exceeded the value of the house. The place has since been condemned… Nevertheless, a local financial institution with the cover-your-wallet name of Integrity Funding LLC gave her a mortgage, valuing the house at about twice what a nearby and comparable property sold for. … Integrity Funding then sold the loan to Wells Fargo & Co., which sold it to HSBC Holdings PLC, which then packaged it with thousands of other risky mortgages and offered the indigestible porridge to investors. Standard & Poor’s and Moody’s Investors Service [two securities rating agencies] took a look at it all, as they are supposed to do, and pronounced it “triple-A” [that is, among the safest of investments].

That process of packaging many loans together into one financial instrument, called a “security,” is what is meant by “securitization.” And investors the world over–pension funds, school districts, and local governments–bought such instruments as investments, based on their triple-A ratings. As Galbraith sums it up, “The consequence of tolerating this and like behavior is a collapse of trust, a collapse of asset values, and a collapse of the financial system. That is what has happened, and what we have to deal with now.”

The financial crisis is rapidly evolving now into an economic cataclysm that may be even worse than the Great Depression, and much harder to dig our way out of. It’s critical that the crisis be handled in such a way as to build rather than burn our bridges to the future. The economic restructuring our country needs will be inordinately expensive.  That’s why it’s so very disturbing that the Obama administration continues to throw trillions of dollars at the financial industry in a vain attempt to revive securitization by means of theft from the populace at large–socializing the losses of the financial sector, while continuing to privatize its gains. However, the various Fed and Treasury efforts appear to have no reasonable chance of reviving the financial sector and credit markets, though it appears they will be predictably successful at further increasing the wealth of already wealthy and politically powerful sectors while further impoverishing the citizenry at large.

After the initial mixed reception of the $700-billion TARP by the Congress, the Fed and Treasury have been circumventing Congress with a proliferation of additional, almost unimaginably costly schemes, described further below. The various Treasury and Fed schemes for “unfreezing” the credit markets are likely to fail for many reasons, but essentially because a crisis brought on by an excess of leverage cannot be resolved by more of the same. However, the schemes are in the process of achieving the biggest transfer of wealth in the history of the Republic, and perhaps the world, to the already richest 1% from the rest of us. If allowed to continue, they threaten to leave in their wake an economy devastated beyond repair and a bankrupt government with a ruined currency, posing the real prospect of widespread hunger and civil chaos as unemployment and poverty proliferate out of control. Bill Moyers and Michael Winship report that, “According to, at his March 27 White House meeting with the nation’s top bankers, President Obama [hearing arguments to the effect that the financial industry was being scapegoated] interrupted, saying, “Be careful how you make those statements, gentlemen… My administration is the only thing between you and the pitchforks.” Similarly, the Financial Times reported the remarks of Europe’s top employment official warning to the effect that social tensions and political extremism “could rise to dangerous levels unless Europe’s leader’s tackle rising joblessness (“Europe jobs crisis poses ‘threat’ to social order,” April 5, 2009).

Things are already even worse than many people realize. “Bubbles dot the economic landscape like it’s bath foam,” or, in Nouriel Roubini’s words, “a housing bubble, a mortgage bubble, a bond bubble, a credit bubble, a private equity bubble, and a hedge funds bubble–all are now bursting simultaneously.” As P. Sainath says, and as long as you try fixing the situation “within a dead framework, things will only get worse.” Whatever he does, President Obama asks us to see it as change we can believe in, and most Americans seem to be either cheering from the sidelines or simply standing around hoping for the best. But until more of us take action to define the future, we’ll continue to be, as Sainath puts it, “only gripped by change we can’t believe [we’re] seeing.”

The situation is worse than official data indicate. The way in which the unemployment rate has been figured in recent decades has been manipulated by the government. In an article in The Nation (4/20/09), Leo Hindery, Jr. and Donald W. Riegle, Jr. estimate the current rate at 16.7 percent:

There are 12.5 million officially unemployed workers, and America’s nominal unemployment rate is 8.1 percent. But … [w]hen we more accurately and honestly include the 10.7 million workers who are underemployed–either part-time of necessity (8.6 million) or otherwise marginally attached (2.1 million)–and the 3.7 million who … have abandoned their job search, then the unemployment rate rises to a staggering 16.7 percent.

The Obama administration’s first proposed budget could begin to redress some of the enormous inequities that have been accumulating for thirty years, and accelerating recently, and seems intended to address longer-term recovery issues such as universal healthcare, green economic development, and education.  But all that and more is threatened by the commitment of Obama’s team to “bailing out” the big banks at taxpayer expense.  Continuing that policy creates a gargantuan black hole of inequity capable of sinking the administration’s other programs and plans. And Obama’s program has not one but two Achilles’ heels; the other is his open-ended commitment to war in Afghanistan, “the graveyard of empires.”

We should stop throwing trillions we don’t have, but will borrow if we can, at Wall Street. Yet the Obama administration appears to be committed to giving the bankers everything they ask for, trillion upon trillion.

[Federal Reserve Chairman] Bernanke has provided generous “100 cents on the dollar” loans for Triple-A mortgage-backed collateral that is now worth 30 cents on the dollar. The Fed stands to lose trillions of dollars on these loans because the assets will never regain their original value. Eventually the taxpayer will have to pony up the difference in higher taxes, fewer public services and a weakened dollar.


…Treasury Secretary Timothy Geithner refuses to remove toxic assets from the banks’ balance sheets using the usual “tried and true” methods. A recent report from the Congressional Oversight Panel (COP) headed by Rep. Elizabeth Warren revealed that there are three ways to fix the banking system: liquidation, reorganization and subsidization. Geithner has rejected all three of these preferring to implement his own make-shift Public Private Investment Program (PPIP) which is thoroughly untested … and is clearly designed to shift the toxic debts of the banks onto the taxpayer through publicly-funded nonrecourse loans. (Geithner’s plan will allow the banks to establish off-balance sheet operations so they can buy their own bad assets from themselves using 94 per cent public money.) The whole thing is an obvious swindle papered-over with gibberish.

Patrick Madden describes how the Geithner plan is designed:

[T]he terms of the arrangements are suggestive of the enormity of the problem.  In order to entice private investors to buy these securities, the government is taking on almost all of the risk of the venture and loaning up to 97% of the purchase price of the securities to investors.  In order to provide such an incentive the US Treasury will put up nearly $100 billion of its own funds from the Troubled Asset Relief Program (TARP) and use its leverage from the Fed and the FDIC to borrow up to $900 billion that it will loan out to potential investors.  The New York Times described the arrangement:

[The] crucial incentive for investors–traditional fund managers, hedge funds, private equity funds, pension funds and possibly even banks–is that the government would lend as much as 85 percent of the purchase price for each portfolio of mortgages… On top of that, the Treasury would invest one dollar of taxpayer money for every dollar of private equity capital to cover the remaining 15 percent of the portfolio’s purchase price… The biggest inducement in all the programs is the government’s willingness to provide “nonrecourse” loans to institutions that buy up the unwanted assets. A nonrecourse loan is secured only by the underlying home or building… If the borrower defaults, the government would only be able to seize the real estate. If the mortgages or the securities generate bigger losses than expected, the government and not the private investors would have to absorb the brunt of those losses.

The money generated from the TARP-backed plan could result in up to $1 trillion being handed over to investors–yet this is not all.  The Troubled Asset-backed Loan Facility (TALF) will also create close to $1 trillion in loans for roughly the same purpose as the TARP fund.

It’s often said that the effort to shore up the financial sector–primarily its biggest firms–is needed to “get the banks lending again.” But the claim that the banks are not lending is false. What has broken down is not lending as such but securitization, the bundling of pools of loans into securities sold at market, described early on in this article. As further described by PIMCO’s Bill Gross:

Our modern shadow banking system craftily dodges the reserve requirements of traditional institutions and promotes a chain letter, pyramid scheme of leverage, based in many cases on no reserve cushion whatsoever. Financial derivatives of all descriptions are involved but credit default swaps (CDS) are perhaps the most egregious offenders. While margin does flow periodically to balance both party’s accounts, the conduits that hold CDS contracts are in effect non-regulated banks, much like their hedge fund brethren, with no requirements to hold reserves against a significant “black swan” run that might break them. Jimmy Stewart–they hardly knew ye! According to the Bank for International Settlements (BIS), CDS totaling $43 trillion were outstanding at year end 2007, more than half the size of the entire asset base of the global banking system. Total derivatives amount to over $500 trillion, many of them finding their way onto the balance sheets of SIVs, CDOs and other conduits of their ilk comprising the Frankensteinian levered body of shadow banks.

Pyramid schemes and chain letters collapse because there is no more credit to feed them. As the system of modern day levered shadow finance slows to a crawl, or even contracts at the edges, its ability to systemically fertilize economic growth must be called into question.

Efforts to revive securitization are not only almost certainly futile but unwise, in that a return to excessive leverage (debt piled on debt) is the last thing we need. People are broke, and they are beginning to save. The various Fed and Treasury programs also appear misguided in that their stated aim is to restore liquidity, while it seems clear the real problem is insolvency. But in any case, even the massive government efforts we’ve been seeing are dwarfed by the size of the crisis. As Merrill Lynch’s David Rosenberg observed in an interview:

Government cannot prevent nature from taking its course. While an additional $1.15 trillion expansion of the Fed’s balance sheet is large as a stand-alone event, it really is just a drop in the bucket when one considers that there is still almost $8 trillion of combined household and business sector credit that must be unwound in order to mean-revert the private sector-to-GDP ratio (which is still close to a record high). Once again, the government is cushioning the blow, but cannot prevent nature from taking its course. (1)

Similarly, as the markets have recognized, the Fed’s “quantitative easing” plan to buy $300 billion in Treasury debt is dwarfed by the multi-trillions in government borrowing that has already begun.

According to Edward Luce in his article “America’s liberals lay into Obama,” printed by the Financial Times (3/28-29/09), Paul Krugman describes the “toxic asset” purchase plan as “cash for trash.” Jeffrey Sachs calls it “a thinly veiled attempt to transfer hundreds of billions of US taxpayer funds to the commercial banks.” Robert Reich depicts Tim Geithner as a prisoner of Wall Street, and Joe Stiglitz says the plan “amounts to robbery of the American people.” No wonder, as a recent Financial Times/Harris poll on 4/14/09 shows, “public respect for business leaders is all but nonexistent.” The public is furious at the trillions being thrown at Wall Street. But the worst of it is that the bailouts are wasting funds we don’t have, but will borrow if we can, in an effort to do the impossible.

As William Black, deputy director of the former Federal Savings and Loan Insurance Corp. during the thrift crisis of the 1980s, recently remarked in an interview, “Unless the current administration changes course pretty drastically, the scandal will destroy Obama’s administration, both economically and in terms of integrity. We have failed bankers giving advice to failed regulators on how to deal with failed assets. How can it result in anything but failure?”

The $787 billion stimulus package, on the other hand, contains some good things and may have some good impact, economist James K. Galbraith has called the emphasis on short-term, “shovel-ready” projects “a mistake” because, “As in the New Deal, we need both the Works Progress Administration … to provide employment, and the Public Works Administration … to rebuild the country.” But so far, more than $4 trillion in direct spending, loans and guarantees has been provided in conjunction with the federal government’s financial stability efforts (including FDIC as well as Treasury and the Fed) (4). This amount represents $590.4 billion allocated by Congress to the TARP (Troubled Asset Relief Program) plus further expansion of the Treasury’s balance sheet that have been used to “leverage” TARP funds well beyond the amount appropriated by Congress. Using a broader assessment of all government guarantees backing various institutions and markets, Bloomberg News calculated the total as of February 24, 2009, at $11.6 trillion.(3)

As if that’s not enough, following release of the government’s so-called stress tests of the major banks, economist Paul Krugman points out that, “given the possibility of bigger losses in the future, the government’s evident unwillingness either to own banks or let them fail creates a heads-they-win-tails-we-lose situation. If all goes well, the bankers will win big. If the current strategy fails, taxpayers will be forced to pay for another bailout.”`

Meanwhile, only a fraction of the amount thrown at Wall Street has been allocated to the “real” economy where many of the workers who still have jobs are struggling just to keep food on the table. Substantially more is needed in the short-term. But looking ahead, we should also keep in mind that the economy that was operating prior to the onset of the financial crisis was unsustainable and cannot be revived, in part because it was based on over-consumption financed by excessive and continuingly increasing leverage (debt). An economy running on ever-increasing debt is one huge Ponzi scheme, and that’s what Treasury and the Fed are trying to revive.(4)

The bulk of the government’s effort ignores these problems. Instead, the Treasury gave AIG $183 billion to pay off financial speculators on the winning side of financial gambles. The flap about bonuses is a red herring to distract attention from the real scams.

The several bailouts thus far have led to increasing dominance of the government by agents of the rich and the financial industry itself, which are already resisting and will be major obstacles to the reforms that are needed, and thus to any sustainable recovery. This may go a long way toward explaining the lack of investigations and prosecutions thus far. But considering that what caused this crisis may have been the biggest financial scam in the history of the world, the absence of prosecutions is striking. Bill Moyers’ 4/3/09 interview with William Black makes this clear, and Black clearly knows what he’s talking about. The matter is often discussed as if it’s terribly mysterious and complex, and the financial instruments employed are certainly complicated. But the issue is ultimately simple, as stated in this particularly striking excerpt from the Moyers interview:

BILL MOYERS: I was taken with your candor at the conference here in New York to hear you say that this crisis we’re going through, this economic and financial meltdown is driven by fraud. What’s your definition of fraud?
WILLIAM K. BLACK: Fraud is deceit. And the essence of fraud is, “I create trust in you, and then I betray that trust, and get you to give me something of value.” And as a result, there’s no more effective acid against trust than fraud, especially fraud by top elites, and that’s what we have.
BILL MOYERS: In your book [The Best Way to Rob a Bank Is to Own One], you make it clear that calculated dishonesty by people in charge is at the heart of most large corporate failures and scandals, including, of course, the S&L, but is that true? Is that what you’re saying here, that it was in the boardrooms and the CEO offices where this fraud began?
WILLIAM K. BLACK: Absolutely.

As a matter of routine law enforcement and in the interests of fairness and justice, it is imperative that the appropriate authorities investigate and determine the causes of the crisis. To prevent a recurrence of the current catastrophe that may yet cause a systemic collapse, responsible parties should be prosecuted and punished for wrongdoing and unlawful conduct. To obtain some of the funds needed to repair the damage caused by fraud as well as excessive leveraging (debt) and financial “innovation” gone wild, responsible parties should be required to return their ill-gotten gains. Going forward, financial activity should be re-regulated and financial transactions taxed.

The financial industry should be much smaller than it has recently become. We need substantial re-regulation, including the re-enactment of Glass-Steagall-type firewalls (that is, rules enacted after the Great Depression that required separation of commercial from investment banking, to shield commercial banks from the effects of unprofitable investments). Entities that are too big to fail are too big to be privately owned. What is too big to fail is too big. Companies or firms whose activities or failures create systemic risk should be nationalized or broken up by the enforcement of the antitrust laws, amended as needed to achieve that end.(5) As President Obama has observed, credit is the lifeblood of the economy. The big banks should be examined by the FDIC and, as appropriate, not subsidized but nationalized, at least temporarily and perhaps permanently. And ultimately it might be wise to establish a system whereby credit is allocated in the public interest, on the regulated public utility model.

But there were even more fundamental problems with the pre-crisis economy than that it was based on excessive debt. For decades it deteriorated due to the offshoring/outsourcing of jobs, especially in manufacturing, in substantial part pursuant to the various “trade” deals favoring investors above all, the resulting declines or stagnation in real income, the increasingly regressive tax structure and the resulting inequity of income, wealth and power. The U.S. economy needs not a “jump start” but a substantial restructuring. A sustained economic recovery will require substantial debt relief and more and better jobs at higher incomes.(6) Some of these jobs will come from properly structured public works programs that have begun with the first stimulus package and should continue as part of the next.

On a longer-term basis, we should reexamine the various so-called “trade” agreements (which in fact have impacts far beyond the mere exchange of goods or services) to ensure that the effort to rebuild our economy is not undermined by the continued off shoring and outsourcing of jobs. These agreements include the North American Free Trade Agreement (NAFTA), the Central American Free Trade Agreement (CAFTA), and the World Trade Organization (WTO). The Trade Reform, Accountability, Development and Employment (TRADE) Act would address the provisions of these agreements that undermine our economy by rewriting the rules governing international trade to make it a positive force for working people in the U.S. and around the world. The TRADE Act will be introduced in this session of Congress, sponsored by Senator Sherrod Brown (D-OH) and Rep. Mike Michaud (D-ME); its details may yet be changed. But in broad terms, the TRADE Act would establish mandatory standards for future trade agreements regarding labor, the environment, consumer safety, trade in services, public procurement, agriculture, intellectual property, and other concerns; require the review and renegotiation of existing trade pacts, such as NAFTA, CAFTA and the WTO, so that they meet the new standards; and reassert congressional authority and public oversight in the trade policymaking process.(7)

We, of course, also need repaired and improved infrastructure, with the emphasis on energy conservation, mass transit and renewable sources, education to prepare workers for the jobs of the future, and a universal healthcare system to enable U.S. firms to be viable and compete. Investing almost entirely in mass transit rather than automobile-related infrastructure could be a critical part of the solution. We should rebuild our rail system for the shipment of goods as well as alternative transportation. Restoration of train service in the vicinity of major cities would alone greatly decrease the need for air transit of a few hundred miles, which is comparatively inefficient and wasteful of scarce resources. But the federal effort continues to reflect a belief that resources are unlimited], ignoring the need for a new efficiency. As James Howard Kunstler observes:

One very plain and straightforward example at hand is the announcement … of a plan to build a high-speed rail network. To be blunt about it, this is perfectly … stupid. It will require a whole new track network, because high speed trains can’t run on the old rights of way with their less forgiving curve ratios and grades. We would be so much better off simply fixing up and reactivating the normal-speed track system that is sitting out there rusting in the rain—and save our more grandiose visions for a later time.

… With the airlines in a business death spiral, and mass motoring doomed, we need a national passenger rail system desperately. But we already have one that used to be the envy of the world before we abandoned it. And we don’t have either the time or the resources to build a new parallel network.

We also have the opportunity to re-tool old factories for the production of products used in the new green industries.  U.S. Senator Sherrod Brown has sponsored a bill that begins to address this need.  We should explore the regionalization of manufacturing to reduce shipping costs and provide jobs throughout the country, providing opportunities in states where manufacturing has not previously been a major economic activity.

Margaret Kimberley makes some additional useful suggestions, such as true healthcare reform (which would relieve considerable stress on existing businesses) and drastic cuts in wasteful as well as dangerous military spending (see further below). Apart from the horrendous impact on millions of people, the lack of universal healthcare places U.S.-based businesses at a competitive disadvantage to their counterparts in other industrialized countries, all of which have such programs. More generally, the social safety nets in other countries–unemployment benefits, welfare systems, and pension systems–are more generous, and these not only benefit their people as individuals and families but also strengthen their economies as a whole.

There is yet an additional dimension to the difficulty of economic reconstruction for long-term prosperity and sustainability. When we recovered from past recessions, we had abundant natural resources. With cheap oil now substantially gone and the Old Economy threatening the biosphere itself (breathable air, drinkable water, arable land), it’s both futile and unwise to attempt a “jump start.”  We need an economy restructured as if people and the Earth matter, not billions to build or rebuild highways and tax breaks to buy cars and trucks nobody wants anymore. James Howard Kunstler again:

The truth is that we’re comprehensively bankrupt, and no amount of shuffling certificates around will avail to alter that. The bad debt has to be ‘worked out’–i.e. written off, subjected to liquidation of remaining assets and collateral, reorganized under the bankruptcy statutes, and put behind us. We have to work very hard to reconfigure the physical arrangement of life in the USA, moving away from the losses of our suburbs, reactivating our towns, downscaling our biggest cities, re-scaling our farms and food production, switching out our Happy Motoring system for public transit and walkable neighborhoods, rebuilding local networks of commerce, and figuring out a way to make a few things of value again.
What’s happened instead is … that our politicians [are mounting] a massive campaign to sustain the unsustainable. That’s what all the TARP and TARF and PPIP and bailouts are about. It will all amount to an exercise in futility and could easily end up wrecking the USA in every sense of the term. If Mr. Obama doesn’t get with a better program, then we are going to face a Long Emergency as grueling as the French Revolution.

Or as Paul Krugman has more mildly expressed it, “[T]hat’s one reason I’m so concerned about the Obama administration’s bank plan. If, as some of us fear, taxpayer funds end up providing windfalls to financial operators instead of fixing what needs to be fixed, we might not have the money to go back and do it right.”

Moreover, when the U.S. and Western economies have recovered in the past from such crises as the present one(s), the means of production could call upon the resources of the natural world–including not only cheap oil but also such resources as air and water, treated as “free goods” in calculating the costs of production–to resume operations. Now, with natural resources, especially oil, substantially depleted and the continued operation of the economy in its former form threatening the means of life (e.g., the oceans before overfishing) and the biosphere itself (e.g., breathable air, drinkable water), it is not only unwise but also probably futile to look for a “jump start” to produce much activity. The creation of more jobs at higher wages will require a complex process of reconstructing an economy as if people and the Earth mattered. We need something–indeed many things–to be substantially different, including, for example, the means of producing food by sustainable agricultural practices.

We probably need very substantial changes to the system of food production, with less chemically dependent agribusiness and much more locally based, smaller-scale and sustainable farming.  Given the myriad difficulties of the present moment, the new agriculture envisioned by Wes Jackson in Robert Jensen’s excellent interview in CounterPunch and the 50-year plan to create it are eminently realistic, and would be one good way to start. We need not only new and better ways of farming but more people on farms, and if there isn’t the money to pay them but there are people starving for lack of work, that’s a flaw in the economy that can be fixed by human action.

Most immediately, more funds should be allocated to facilitate economic recovery, but they should go to stimulus, not bailout. And the first priority should be further financial assistance to the States. As Robert Reich points out in his blog post on 4/09/09 entitled “Why It Makes No Sense for States to Cut Services and Raise Taxes Now”, all told, “state service cuts and likely tax increases will total about $350 billion over 2009 and 2010. This is nuts–exactly the opposite of what the government needs to be doing. That $350 billion is a huge fiscal drag on the economy. It essentially negates almost half of the federal stimulus.” Obama should return to Congress for a second stimulus, much of which should help the states maintain vital services and avoid tax increases, and Congress should heed the request. And the pitch should be made before the administration tries to get any more money “for bailouts of Wall Street, the automakers, life insurers, or any other industry whose bondholders should be taking the hit before taxpayers.”

Another step that could be implemented relatively quickly would be the cessation of our foreign military adventures deceptively marketed as the “war on terror,” or whatever our current wars come to be called, now shifting from Iraq to Afghanistan and Pakistan. The so-called “war on terror” has been an enormous waste of resources as well as human lives, in that a substantial consensus among knowledgeable analysts finds–as was predicted–that the result has been not a decline, but an increase in terrorism. At the same time–and apart from the appalling and immoral loss of human life–an increasingly glaring fact about these wars is that we just can’t afford them anymore. We’re waging them on credit, and increasingly on credit from foreigners. And the resources wasted on these destructive activities are wholly unproductive from an economic standpoint, as well as needed elsewhere.

Proposals for Actions:

The crises we face come from many directions, and it’s hard not to feel overwhelmed by their sheer size and complexity. But as I said at the outset of this discussion, there are many things we can do to avoid the worst outcomes and build toward a better future. What we need is a common understanding and the will to act constructively together. Although there are many ways to begin to address our unprecedented and multi-faceted crisis both immediately and for the long-term future, each of the following steps would be useful; and, taken together, they constitute a comprehensive approach. These suggestions begin with those requiring most immediate implementation. Some of them are longer-term and require or would be facilitated by further investigation, including Congressional hearings:

  • Redirect federal resources to reviving the real economy. Begin with an immediate allocation of additional stimulus funds to states on a basis allowing and enabling them to determine local allocations based on local need. Assess the need for additional unemployment benefits, food stamps and similar relief measures at the time of enactment and include them in the package. Take action, here.
  • Have no further bailouts and subsidies for the financial sector and instead nationalize and/or break up large banks and other firms whose failure could create systemic risk. Take action, here.
  • Provide meaningful rather than token debt relief for consumers, with a moratorium on mortgage foreclosures and amendments to the bankruptcy laws as needed to empower judges to reduce the principal owed to levels reflecting current values. A measure to do this was recently defeated in the Senate by a vote of 45-51, with lukewarm support from Obama. However, people are losing their homes in droves, and the negative impact on lenders is already occurring without providing relief for households, as banks foreclose on properties they then hold off the market out of fear of further price declines. The measure should be reintroduced and renewed pressure placed on the Senators who voted against it. The Senate’s recent rejection of the measure to allow federal bankruptcy judges to amend mortgages is outrageous and undermines the incipient recovery. Take Action here.
  • Near-term, end the current wars in Iraq, Afghanistan and Pakistan; in the medium term, close many or most U.S. military bases overseas; reexamine and substantially reduce military expenditures. [Take action, here and here.
  • Investigate and prosecute fraud and unlawful conduct that contributed to excessive debt and disgorge profits from wrongdoers. Make Wall Street speculators pay for bailout expenditures thus far through a securities transaction tax as well as recovery of ill-gotten gains, and raise additional funds through a corporate minimum income tax, the elimination of subsidies for excessive CEO pay, and the termination of overseas corporate tax havens. Partly as a natural outgrowth of renewed regulation and over the medium term, shrink the size of the financial sector. Take action, here.
  • Reinstitute worker rights protection at the federal level by re-staffing the National Labor Relations Board, revitalizing the Occupational Safety and Health Administration, and enacting the Employee Free Choice Act (EFCA). Take action here.
  • Enact the Trade Reform, Accountability, Development and Employment Act.  This legislation would re-write the rules governing international trade, to establish mandatory standards for future trade agreements regarding labor, the environment, consumer safety, trade in services, public procurement, agriculture, intellectual property, and other concerns; require the review and renegotiation of existing trade pacts, such as NAFTA, CAFTA and the WTO, so that they meet the new standards; and reassert Congressional authority and public oversight in the trade policymaking process. Take action here.
  • Enact universal healthcare on the single-payer model by extending Medicare to all Americans and strengthen the social safety net (bankruptcy laws, unemployment insurance, food stamps, pension protection, Social Security) to improve the quality of life of our people and the competitiveness of US businesses. Take action here.
  • Begin to restructure the real economy to create more and better jobs at higher wages and revisit unfair “free” trade policies and agreements that undermine these goals. Take action here.


(1) Interview with Merrill Lynch’s David Rosenberg on Tech Ticker, quoted in Mike Whitney, “Bernanke’s Financial Rescue Plan,” April 6, 2009. Regarding the magnitude of the crisis, see a prediction and explanation from September 2007 by Satyajit Das, posted here.

(2) Congressional Oversight Panel, “Assessing Treasury’s Strategy: Six Months of TARP,” quoted in Mike Whitney, “Elizabeth Warren’s Devastating Report to Congress.”

(3) Mark Pittman and Bob Ivry, “U.S. Bailout, Stimulus Pledges Total $11.6 Trillion (Table),” Bloomberg News, 2/24/09.

(4) Mike Whitney, “The Decade of Darkness”, CounterPunch, 4/9/09; Henny Sender, “A reality check on loan book values is still well overdue,” Financial Times, 4/11-12/09; Tim Price, “Time to learn that rules of the game have utterly changed,” Financial Times, 4/8/09; Francesco Guerrera, “Don’t Eat Wall Street’s big fudge–it’s a dog’s breakfast,” Financial Times, 4/4-5/09 (“The overworked Obama administration found time to devise a plan that will make some investors rich and some banks richer”); Aline van Duyn, “Financial industry will have to feel some pain,” Financial Times, 3/21/22/09 (“Not since the Depression have there been so many contracts that may need to be changed, either voluntarily or by force”).

(5) Philip Augar, “It is time to put finance back in its box,” Financial Times, 4/14/09; Martin Wolf, “Cutting back financial capitalism is America’s big test,” Financial Times, 4/15/09; Michael Pomerleano, “Geithner and Summers need to address the banking problems square-on,” Financial Times, 4/13/09 (“The Obama administration is in denial regarding the problems of the financial system”); Maverecom (William Butler), “Too big to fail means too big,” Financial Times, 4/17/09, full text at; John A. Lybeck, “It is time to consider breaking up the banking behemoths,” Financial Times, Letters 3/19/09; Mike Whitney, “Bernanke’s Financial Rescue Plan,” April 6, 2009; Fred Mosely, “Time for Permanent Nationalization!”, Dollars & Sense, March-April 2009; Steve Perry, “UM economist V. V. Chari: Government bailout policy is ‘cross your fingers and hope,” published 4/19/09; Nouriel Roubini’s 5/7/09 Financial Times op ed (“Insolvent banks should feel market discipline”) asks why big banks shouldn’t be allowed to fail. Roubini has a complex proposal but it basically supports the idea that the public shouldn’t have to pay.

(6) See, for example, Samuel Palmisano, “Smart ways to prepare for a world beyond recession,” Financial Times, 2/20/09 (“Governments need to shape stimulus investments that envision and enable a smarter future”); Working Group on Extreme Inequality, “A Sensible Plan for Recovery,” 10/15/08, ; (by commentator Mike Whitney); and e.g., (by former assistant Treasury secretary Paul Craig Roberts).

(7) The WTO was apparently one of the bases for the repeal of Depression-era banking regulations and thus contributed to the current financial crisis as well as the longer-term deterioration of the U.S. economy with the outsourcing and off shoring of jobs. Take Action above to support the TRADE Act, and for more information, visit the Oregon Free Trade Campaign (ORFTC)’s “Trade Pacts and Financial Deregulation,” and see Public Citizen’s paper on the subject here. For further background and updates, a good resource is Public Citizen’s Global Trade Watch, at

Robert Roth, a retired public interest lawyer, received his J.D. from Yale Law School in 1971, and has worked in financial fraud and consumer protection for the Attorneys General of New York (1981-1991) and Oregon (1993-2007).

Originally posted at


One Response to “The Financial and Economic Crisis: An Assessment and Action Plan”

  1. euandus Says:

    Consider the presumptuousness in the banking lobby involving itself and insisting that its interests be served in Congress as it fashions financial regulatory reform. That they are in any position to be part of that process is beyond at least John Galbraith. If you are interested, here is my post:

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