This weekend, the Republican federal government will nationalize the financial system by taking over Fannie Mae and Freddy Mac. Richard Nixon once famously said, "We are all Keynesians now." Scratch that: We are all fascists now.
Last fall, when I wrote about the developing financial crisis, all of my instincts told me we'd end up here. But it's not something I really wanted to believe. The implications were too worrisome. But here we are. Believe it: The U.S. has taken a gigantic leap toward fascism by putting a right-wing government in charge of the biggest component of our financial system.
Some people would argue that we've been fascist since 1913, when Woodrow Wilson created the Federal Reserve System, which essentially ceded control over the coinage of money to the banks. But for most of its history, the Fed has been a hands-off player, confining itself to accommodating economic growth and contraction by managing the money supply.
That began to change in 1987, when Alan Greenspan created a so-called "plunge protection team" to rescue the stock market from that year's crash. For the last 20 years, the "PPT" has operated in the background, keeping financial markets stable during crises, including the 1998 bailout of the wildly misnamed hedge fund known as Long Term Capital Management, the NASDAQ crash of 2000-2002, and the aftermath of the attacks of Sept. 11, 2001.
In those situations and others the "news" media hasn't told us about, the Fed stepped in not just with liquidity -- its historic role -- but to manipulate markets and arrange bailouts. Not of individuals, but of corporate entities.
That's the difference between socialism and fascism. Socialists act on behalf of individuals against the interests of corporations; fascists act on behalf of corporations threatened by the actions or interests of individuals. In the end, the two approaches wind up looking similar to each other, but it's always worth remembering their differing roots.
Bailout: The mask is removed
Now, the federal government will directly control the mortgage finance system. Fannie and Freddie are bankrupt, so Uncle Sucker will guarantee their debts and take over the management. Not that the 9-figure bonuses -- to the left of the decimal point -- paid to their CEOs when those entities were "private" will be recovered.
That would be socialist, and this isn't a socialist government. The bonuses will remain in the hands of those who took them. We have a fascist government, and that is what fascists do. If Barack Obama should happen to win the November election, the fascists will prevent his government from seizing the loot. Just wait. You'll see.
The news media, such as it is, reports that the bailout will cost tens of billions of dollars. They are off by a factor of roughly 100. The direct cost will be several trillion dollars. The indirect cost will be yet higher: In case anyone hasn't noticed, the collapse of the residential real estate bubble is rapidly spreading, as I predicted last fall when I wrote about a pessimistic disaster scenario.
Home values are down an average of about 20% from the peak, which means that people can no longer use their home equity to fund consumption. The Fed's attempt to paper all of this over (more on that in a bit), has killed the dollar, which in turn has ignited inflation, especially in energy and food.
Other consumption is falling, which is causing unemployment to lift off the launch pad. State and local governments, historically a counterweight to economic swings, are in trouble. California's government is in an outright crisis, and we all know where America's trends start.
My own cycles of optimism and pessimism
Before I go further, I'd like to tell everyone that, in the early 1990s, I was an optimist about the economy. At the time, I thought that inflation was tamer than generally realized, leaving plenty of room for interest rate reductions. The technology sector was in the early stages of a boom.
When Bill Clinton took office in 1993 and unveiled his economic plan that included a small tax increase on the wealthiest earners, I became extremely optimistic. Plenty of people thought I was a little crazy, but I predicted that federal surpluses would be so large that, at some point, the prospect of the complete retirement of the federal debt might become a challenge to the Federal Reserve's ability to perform its traditional functions.
I say all of that not so much to crow about having made a good call back then, but to point out that I've been an optimist. I'm not one of these people who's always been a pessimist about the economy. I was pessimistic in the 1970s, increasingly optimistic in the 1980s, and unboundedly optimistic by the mid-'90s. I started changing my tune in 1999, and by mid-2001 I was once again a pessimist.
As I've grown older, and more educated about the financial system and the economy, I've tended to be earlier on my calls. Hence, my 1999 pessimism was very much out of line with prevailing wisdom, and I missed the chance to cash in on the real estate mania of the first half of this decade. I was waiting for the bubble to burst.
Just how bad is this going to get?
May God help the next president. We're in for the worst times since the 1930s. Unemployment will be above 10%. Banks will fail -- big ones -- and at least one of the American automakers will go out of business. Retailing is going to shrink, and in some places it will collapse. You'll see people living in their cars. There will be another several million foreclosures. The resilient service sector will shrink.
Crime rates are going to rise in a major way. Not so much because of the direct impact of the economy, but because state governments won't be able to afford to keep criminals locked up. And get ready for an escalation of the drug problem; governments aren't going to have the resources to go after your friendly neighborhood meth dealer.
Obama, temper your promises on health care, because the next crisis to hit the federal government is going to be Medicare. Regardless of who's elected we'll be lucky to keep what we've got, let alone expand anything. Restoring Clinton's tax rates won't even begin to pay for what you want to do. McCain, if you really think you're going to restrain federal spending in the storm that's about to land, you're even more senile than I think. Palin, if McCain dies then you'd better set up the mother of all prayer chains.
For those who remain employed, be prepared for a lower standard of living. Your compensation is going to be inflated away, and unlike in the 1960s and 1970s, hardly anyone has a union contract and its cost-of-living adjustments to keep that wolf from the door. And hope that you don't have to sell your house. Bid a fond farewell to newspapers. They're on their last legs anyway, and the retail crash will kill them off. But movies and books will get better, because hard times always make for much more interesting literary output.
How long will it last?
We will start to recover in 2018, or thereabouts. Between now and then, it'll be like living in a washing machine. On average, these boom/bust cycles last for 17 years. There was a bust from 1929 through 1942. There was a boom from 1943 through 1969. There was a bust from 1970 through 1982. There was a boom from 1983 through 1999. There was a bust from 2000 through ... through ... 2017.
The federal government will work like hell to keep it from turning into the 1930s all over again, but don't kid yourself. There is only so much they can do. The Federal Reserve, for example, can create all kinds of banking reserves to be lent out, but it cannot create the ability to service the loans. In financial-speak, we have a solvency crisis, not a liquidity crisis. In people-speak, we're broke, busted, and soon to be disgusted.