After Peak Finance: Larry Summers’ Bubble

There are three kinds of “bubbles” –  a term often used loosely when asset prices rise a great deal and then fall sharply, without an obvious corresponding shift in “fundamentals“.

  1. A short-run bubble.  Think about 17th century Dutch Tulip Mania: spectacular, probably disruptive, but not a major reason for the decline of the Netherlands as a global power. 
  2. A distorting bubble.  In this case, the increase in asset prices contributes to a reallocation of resources across sectors.  Think of the Dot-com Bubble: fortunes were made and lost, the collapse was scary to many, and – at the end of the day – you’ve built the Internet and some good companies.
  3. A political bubble.  Here rising asset prices generate resources that can be fed into the political process, through bribes, building politicians’ careers, and lobbying of all kinds.  Bubbles in Emerging Markets often generate resources that impact the political process, sometimes in good ways – but most often in bad ways, which eventually contribute to a collapse.

Larry Summers seems to think we are dealing with the consequences of bubble type #1.  In his speech last week, “the bubble” is a modern deus ex machina – it explains why we have a crisis, but there is no explanation of where this bubble came from, what exactly was bubbling, and what changes this bubble brought to the real economy or to our politics.

To the extent that Summers talks about the bubble at all, it seems to be in residential real estate.  It’s hard to argue that there was an unsustainable run-up in housing prices and that the fall has real consequences.  But what model – or even story – can explain the size of the global disruption we are facing without reference to what happened specifically in the financial sector?

The overall official consensus – which Summers continues to shape – seems to be that our problems are: housing bubble plus bad management in a few big financial firms and slightly too weak regulation.  So we’ll tweak regulation, ever so gently, and let the “good” big firms gobble up the people, market share, and perhaps even assets of those that fall by the wayside.

But what if we are looking at the effects of a distorting bubble?  In previous formulations – but not last week – Summers acknowledged that when financial sector profits hit 40 percent of total corporate profits, a few years ago, we should have seen that as a “warning sign”.  But was this a warning sign of something just about houses, or more broadly about the financial process in and around securitization that was both feeding the housing price increase and also reflecting a longer-run shift of resources into the financial sector?

Even James Surowiecki, a most articulate defender of our current financial sector, implicitly concedes that as a percent of GDP, finance is likely to fall from around 8 percent to GDP back towards 6 percent of GDP (its level of the mid-1990s; see slide 19 in my recent presentation; update, this link now fixed).  Of course, there is no way to know exactly where finance is heading – except that it is likely down as a share of the economy.

If the bubble (or metaboom with a series of bubbles) was in finance and pulled resources into that sector, we face an adjustment away from Peak Finance – and perhaps this will even more overshadow the next decade than Peak Oil.

The economic adjustment will not be easy for the U.S. but it will be much more painful for smaller countries that have specialized in finance.  The U.S., however, will likely struggle with the political adjustment – the financiers will not easily give up their licence to extract resources from citizens, either directly or through newly found rents channeled through the state (and coming ultimately out of your pocket, of course).

The political consequences of Peak Finance greatly complicate our economic recovery.

By Simon Johnson

48 thoughts on “After Peak Finance: Larry Summers’ Bubble

  1. I’d subscribe to the “metaboom” bubble-series view. It looks like since about the time of Greenspan’s irrational exuberance speech we have had a series of bubbles – emerging markets, dot-com, carry-trade, housing, commodities. If this is correct, what’s the common thread? Finance is like a plasma, an amorphous energized substance that is constantly reshaping itself in response to certain external forces, pressures or vacuums. Press on any spot on a bladder and it will distend at some other point. What point that is no one knows, so it was not inevitable for instance that immediately following or coincidental to the deflation of the stock market bubble in 2002, we would see the inflation of the housing bubble. Anyway this will continue unless you reduce the energy in the system overall. You’ve got to cool the plasma. Unfortunately this will have the unwanted side effect of cooling nonspeculative economic activty too.

  2. Well said. The comparison to Peak Oil is interesting, but I don’t think we’ll see the end of money-ever.

    Bernanke, all along I believe, was bedeviled by his struggle with TBTF. In his testimony Tuesday he pretty much directly acknowledged the problem of TBTF. But still he pulls back from explicitly saying what his opposition to TBTF means: TBTF has to be broken up.

    Instead he falls back on the idea that maintaining the holding company means the Fed can regulate investment banks and commercial banks in one place. Sort of a one stop shop concept. Break them up and the Fed loses the legal ability to rein in investment banks, which will escape once again to make mischief.

    Would it not be better to wall off “narrow” commercial banking and then get explicit regulatory power over investment banks, insurance companies and non-financial players in shadow banking?

  3. “The overall official consensus – which Summers continues to shape – seems to be that our problems are: housing bubble plus bad management in a few big financial firms and slightly too weak regulation.”


    God help us if the people in power truly think this way….

  4. given the recent bounce back in financial-sector profits and pay, and the fact that bankers’ influence in washington seems as strong as ever, why would you expect finance’s share of corporate profits to decline?

    I can very well imagine US corporate profits in aggregate will decline as the parasitic effects of the health-care and financial sectors continue to take their toll on other industries. The pie may shrink but the relative slice taken by finance seems like it would stay the same.

  5. Peak Finance has already interacted with Peak Oil in an ominous way. Namely, thanks to the credit crunch, c. two dozen major oil projects slated to come online over the next several years, and necessary to offset the accelerating depletion of existing, aging fields, have been postponed or cancelled.

    This means that if all these bailouts and string-pushing machinations do manage to prop up a zombie “recovery” such that oil consumption rises again toward its former levels, then within five years demand will slam its head on the ceiling of insufficient supply, as current depletion is not offset by new production coming online (thanks to the slated projects mothballed on account of the credit crunch).

    That’s when we’ll experience the classical Peak Oil effect (as opposed to the nominal production peak, which probably occured in July 2008 at c. 75 million barrels per day): skyrocketing prices, increasing spot shortages, and the consequent permanent downsizing of the economy toward preindustrial levels.

    So Summers is quite silly to keep pushing his lies.

  6. Great post. The link to slide 19 clicks through to a James Surowiecki column. Where can I find a link to the presentation?

  7. I am surprised that Mr. Johnson is not willing to say more clearly that we are in bubble type number three, although that seems to be an implication of the “licence to extract resources from citizens” line.

    I don’t see any reson to believe that financial firm profits as a percentage of all firm profits have topped out. The financial firms receive unlimited government money without being required to perform any function at all relative to the rest of the economy. Other than not revealing uncomfortable facts such as the mark-to-market value of past loans.

  8. This is a good distinction as we’re not just in an ordinary bubble. The latter is your obvious choice.

    It may also be important to distinguish between credit crisis bubbles and ordinary bubbles.
    In the dot com bubble, sure some people got rich, but they were not betting the farm. So when it went bust, they were less well off, but the farm was still there.

    Here we’ve seen a massive increases in: the incomes of the top 1%, debt owed by the public, and bad debt held in banks.
    In this case the strain is all put to the government. Concentrated wealth knows how to avoid taxes, it’s mobile and can move anywhere. The rest of the population is now a drag, indebted and on the hook for bank losses. All of that has to add up to national decline and destabilization.

    This article from 1999 is as disturbing as it is prescient:

    To quote: “Consumer advocates also worry about the large numbers of homeowners taking out home-equity loans on the basis of what may be speculative increases in their homes’ value. In an economic downturn, with a rise in unemployment, home prices could drop precipitously, putting more middle-class households into bankruptcy and sparking a wave of home foreclosures.”

  9. “The political consequences of Peak Finance greatly complicate our economic recovery.”

    Great point – but one that can unfortunately be dismissed as trivial by those who refuse to acknowledge that the bubble may have been (or continues to be?) a distorting or political bubble.

    It’s important to keep pushing on what those political consequences are, because 1) to people outside the Beltway they are not obvious, and 2) the MSM in its devolved state is incapable of functioning as the fourth estate – that mantle has now passed to the bloggers.

    It’s also important to recognize that the political consequences may be counter-intuitive; i.e. not all Democrats have clean hands, and not all Republicans are evil capitalist monsters. This is not a partisan split. Like all truly political struggles, this will ultimately come down to the personalities of key individuals. A key question is who are they, and how does one best support those individuals worthy to lead? Very often the supporters of key individuals become a liability. This needs to be avoided.

    Finally, it’s important to recognize that seemingly obscure stories and situations may play a larger role than anticipated; subtle turning points are often missed when they occur, and their significance is uncovered only later by historians. MSM tries to catch these, but the result is generally to make things more confusing rather than less.

  10. Nice analogy Art.

    One distinction to the latest bubble has the breadth of its effect on “regular” people. The dot com bubble made instant millionaires (and just-as-instant ex-millionaires) out of secretaries and college kids, but relatively few of them. The rest of us just stood by and maybe saw in blip in our 401k’s.
    This bubble hit people, LOTS of people, in the house and the credit card, where it really hurts large numbers of people. As a result, there is a vast re-setting required across broad sectors of the economy. Auto sales, retail, commercial real estate, etc.
    I don’t think we are seeing a fundamental change to our economy (perhaps unfortunately) but rather a deflation back to a lower level of activity. I don’t see financial earnings down as a share of the economy – if anything they may increase share with the complete and utter control of Washington that Big Finance now wields. But I see the whole economy ratcheting down a notch.
    I admit I’m intrigued by the “spot the next bubble” game. It seems green-tech is a possibilty.

  11. Does anyone know the mark-to-market value of Larry Summers’ brain is??? I think there could be a large bubble there.

  12. I’d very much like to see something along the lines of the tech-bubble, but applied to green tech.

    In 5 years, maybe 20% of houses in the hot states could have solar panels feeding back into the grid.

    Think what the tech bubble left behind. A much better internet, and an ability to interact with many agencies, shops without expending fossil fuel to drive. Massive benefits.

    Think about the late sixties. The moonshot was a tech and engineering bubble financed by taxpayers that yielded many benefits.

  13. Even before the bubble collapsed, I always thought it was a kind of hysterical fear-response to the threat of environmental collapse.

    We despair of turning the lemming tide of global warming. We must fear the disruption of remaking our infrastructure because we do not believe in helping each other get through it. We are in denial of realities we cannot face. All of that fear energy is coursing around just beneath the daily humdrum and the slick media manipulation of our “confidence.” It surfaces in different ways.

    Is fear a fourth cause of bubbles? I wonder, in Dutch history could the tulip craze have had an underlying fear element? The sea is ever-threatening there. Had the dikes been breached or endangered? Perhaps an economic historian would know of other examples of fear-based bubbles.

  14. You know how I feel about guys like Mike Konczal, Simon Johnson, James Kwak, and the deceased politician Paul Tsongas??

    Mark 6:4
    But Jesus said to them, “A prophet is not without honor, except in his own country, among his own relatives, and in his own house.”

  15. Even if you believe #1, Summers’ policy reaction is curious.

    The buyers of the Inland Empire houses who defined the bubble were not the faceless names on the closing documents. They were Countrywide and Wells Fargo; these firms merely outsourced the “selection and pricing” component of real estate investing. They neglected, for a variety of mania-related reasons, to ask themselves whether they would make a principal investment at 80% (or much more) of the value that the kind stranger in their office was proposing.

    The proper reaction should therefore be to let the folks who got carried away go bankrupt, and the rest of the population goes on as before. Except Summers has done everything in his significant power to prevent even the admission (goodbye mark to market) of the problem.

    So even if it were originally #1, his very behavior has made it #3.

  16. The dotcom boom of the late 1990s, with all its excesses, served a positive purpose. It allocated enormous capital to the growth industries of technology and the internet. We are still receiving the benefits from this massive investment into productive assets.

    The worst types of bubbles are those in nonproductive assets – the two most common being real estate and finance.

    This past year, America has essentially lost trillions of dollars in a speculative craze in the real estate and financial market. The phenomenon is akin to pouring enormous amounts of money into a black hole that offers nothing (besides maybe some potentially beneficial financial innovation in the future) in return. An unprecedented destruction of wealth.

  17. SJ: “Even James Surowiecki, a most articulate defender of our current financial sector, implicitly concedes that as a percent of GDP, finance is likely to fall from around 8 percent to GDP back towards 6 percent of GDP (its level of the mid-1990s; see slide 19 in my recent presentation; update, this link now fixed).”

    A decrease from 8% to 6% seems rather modest. Is that supposed to have spectacular consequences for the US economy?

    Is there something like an optimal percentage for the financial sector? On what grounds can we say the 8% is too much?

  18. Simon–You said “It’s hard to argue that there was an unsustainable run-up in housing prices and that the fall has real consequences.” Did you mean to say either that “It’s not hard to argue, etc.” or “It’s hard to not argue that there was an unsustainable, etc.” or “It’s hard to argue that there was not an unsustainable, etc.”? I think that the current formulation is missing something since there was clearly an unsustainable run-up in housing prices and the fall has had real consequences.

  19. Time to put the politics back into political economics. Unfortunately, that idea does not mesh with the contemporary gesalt. But the slide presentation does a great job developing that theme.

    Trivia of the day–Did you know that Pitchfork Ben Tillman and Helicopter Ben Bernancke hail from the same state, a state also ‘blessed’ with an internet Lothario for a governor? Pitchfork Ben was far and away the nastiest of the three, and the internet Lothario is far and away the most amusing. I suppose that leaves Helicopter Ben a sincere centurion in the legion of technocrats.

  20. Simon-While your classification of bubbles makes sense another way of looking at bubbles would be to distinguish between those that are the result of real economic growth which people expect to go on forever and those which are the result of changed political or social circumstances which do not accompany real economic growth. Examples of the first sort would be the bubbles in the prices of the stocks of almost all new industries in the U.S. as they go through their period of rapid growth. There were bubbles in railroad stocks at various times in the nineteenth century. Later in the 1920’s and 1960’s there were bubbles in automobile stocks. Most major industries in the U.S from steel to fast food have gone through a period where people thought that the sky was the limit for profits and stock prices were driven to absurdly high levels. Still this process generated huge amounts of capital for economic development. The bubble was this sort of bubble: a bubble in productive assets.

    To me a good example of the second type of bubble is the Floridalandboom of the 1920’s prices go up but nothing real is accomplished. The tulip bubble is like this as are some bubbles in the arts: the price of paintings goes up then down, nothing gained.

    The finance boom is mixture of things but mostly it is the latter type of boom. Granted that greater access to credit may have helped economic growth in some way. perhaps by increasing home ownership rates, there doesn’t seem to be much evidence of any increase in production or productivity as the result of financial deregulation. Deregulation appears to have increased asset prices and bankers profits by a combination of price manipulation and outright fraud. It is the sort of boom where prices go up then back down. A few people are richer many are poorer. Because bankers profits were going up by taking wealth from others rather than creating wealth the finance bubble could only end in tears.

  21. Perhaps it’s also important to differentiate whether the asset price bubble is based on debt or not.

    When people bid up asset prices to unreasonable levels with their own money. Then some people loose their money to other people, when the bubble bursts. Some people become more poor. Some people become more rich. And that’s the end of it. It’s no big deal overall, although it is a big deal for individuals.

    But when people borrow a lot of money and bid up asset prices to unreasonable levels with borrowed money. Then both they and the lenders become poor, when the bubble bursts. And the bubble of debt remains long after the asset price bubble bursts.

    Perhaps it’s not the asset price bubbles regulators need to watch for. It’s the debt bubbles they need to worry about. Because a debt bubble doesn’t burst. It deflates slowly and painfully for a long, long time.

  22. Good point. Not only easy money on home loans, but easy money for levering up in the market hurt as well.

  23. Whatever happened to Glass-Steagal? It seems to have been factored entirely out of the equation. And it’s demise seems to have marked the beginning of the inflation of that bubble. Let’s face it, if you put too many things under one roof, it enables just what happened: manipulation. Who are we kidding, when we think that any regulator can regulate that much stuff happening under one roof? Yes, they can still exercise a degree of arbitrage between markets even with Glass-Steagal, but not the kind of fully opaque arbitrage. Even those who created the CDS environment couldn’t see the crash coming. I don’t believe that they were that suicidal. And oh so smart, but then….

  24. I still think there’s a bubble that is still inflating, and inflating rapidly at that. At first I thought that it might be #3, the political bubble, but what I have in mind is somewhat different.

    I see a government bubble, and not just in the U.S. Although it is certainly visible through increased government debt, I think it is more than that, it includes increased government powers, increased bureaucracy, increased meddling, increased arrogance, increases and more increases. National government has taken on more and more of a life of its own, the reality of the politicians is less and less based on the reality of the citizens.

    In the 1921 depression, the US government cut taxes, reduced spending, and urged savings. The Federal Reserve did nothing. A year or two later it was all over. If we compare that to what the governments of the world are doing, and insisting must be done, it amazes me how much complexity and need to “do things” has been taken on by those governments.

    So maybe I’m saying that there should be a fourth kind of bubble in your list, something like a societal bubble, or a civilization bubble, or a paradigm bubble. Something that when it bursts changes the course of whole civilizations. That’s where I could put my bubble of governments.

  25. Simon, you and Paul Krugman and others have written about Geithner, Bernanke and Summers’ failure to, in Krugman’s words “make banking boring again” by pressing for similar banking regulations to those enacted under FDR. Is a possible that a reason for their seeming lack of interest is because they think the passage of such regulations in the thirties acted as a damper on the recovery from the Great Depression?

  26. Back in the dark ages of my post-graduate pre-law school years, I took a graduate level class at UW-Madison on governance of the economy. I wrote my paper on the collapse of the Franklin National Bank and its connection to the Latin American loan crisis of the early 1980’s. This was a whole different crisis from the later Savings and Loan crisis.

    It was clear at that time — 1984 — that a great fad had run through the banking sector, lending (what at that time seemed) huge sums to Mexico, Argentina, Brazil, etc. My paper concerned the possible role that the IMF could play as an international version of the FDIC — coordinating creditors so as to be able to keep the international debtors sufficiently alive so that the maximum amount feasible could be paid back.

    But these fads — Latin American lending, Savings and Loan go-go days, junk bond takeovers, brokering Japanese investment in U.S. assets, dot-com/tele-com, housing, securitization — are all serial bubbles. And they all seem to me to stem from a common complaint amongst our rentier class — that the normal safe return on capital is simply not acceptable. That the money to be made by investing in a company that makes things people want is so pre-1973.

    It seems like there are too many assets chasing too little market share and that our financial system has been chasing its tail — and swallowing it regularly — since, oh, about 1973.

  27. kaleidescope: I’d like to add another factor to your “that the normal safe return on capital is simply not acceptable”, and that is that the amount of money handled and managed by the banks has grown so large that not only are there “too many assets chasing too little market share” but there was simply no place for the money to go without the invention of whole new classes of storage space (investments) for that money. Derivatives, CDSs, CDOs, all kinds of financial innovations, are not just attempts to get a higher return, but necessities for the banks as repositories for their money. There simply aren’t enough opportunities to invest in companies “that makes things people want” for the amount of money available. There weren’t enough homes being bought the old fashioned way to absorb the bankers’ money. Add to that the fact that the new financial innovations were much easier money (think scam and fraud here), and it is no wonder that these fads exist and will continue.

    The mathematics imply that the long-term result of our financial system is for the financial sector to eventually own all the money, and all the goods and assets (through foreclosure and repossession). In the meantime, the financial sector becomes more and more desperate to find piggy banks in which to put their money. They think they are simply looking for returns, but on a more basic level it is a search for storage space. Such a system, over a very long time horizon, must be unstable. I hope so, because otherwise it means permanent enslavement for any who thought they might have had “certain unalienable Rights”…

  28. This column was bizarre. What we are facing is nothing more than a good old fashioned credit bubble. There is nothing new about this, except for the size of the thing. Connect the dots:

    1. The consumer spent instead of saved.
    2. The consumer pulled equity from the one asset he had…a personal residence….and spent.
    3. Financial and industrial firms failed to properly forecast the % of total spending that was pulled forward through debt.
    4. These same firms overexpanded on the basis of unrealistic and unsustainable growth forecasts.

    Once the consumer stopped spending, it all fell apart rather quickly AS IT ALWAYS DOES. You might want to check your history on the Dutch Tulip Bulb Crisis as well. Start with Kindleberger. Tulip bulbs seem bizarre to us but when you think about what people were paying for a share of, oh say for example, it doesn’t look so bizarre any more.

  29. What are you talking about? People don’t bid up prices to unsustainable levels when their own money is involved. Need proof? Every single financial bubble in history was based on leverage or OPM. The higher the degree of OPM involved, the bigger the bubble. That’s all you need to know.

    If you want to argue the point, let me give you an example. I am a prudent person. I wouldn’t think of buying real estate without 20% down. Why? Because I want to protect my downside. I don’t want to walk away. That’s why I live on the Great Plains and not in California. I knew prices were ridiculous there. As a prudent person using my own money, I had no desire to overpay. I cared about price. Now imagine if I had to pay 100% cash? Would I be more or less prudent? That’s why it is only debt which makes such behavior possible.

    Your comment about regulators indicates a complete lack of understanding. Regulators want bubbles because everything they do encourages the sort of reckless behavior that leads to them. If I say I care about my health but I sit around and eat bacon all day, I don’t care about my health. What I say isn’t important. What I do says it all. Lending is profitable. Bankers run the government. Regulators work for the government and the government works for the bankers.


    Too funny for words!

  30. You wrote, “The overall official consensus … seems to be that our problems are: housing bubble plus bad management in a few big financial firms and slightly too weak regulation.

    People want to learn only a tiny lesson from a big problem. This is not good. (I was going to say “micro” and “mega” instead of “tiny” and “big”, but I figured “micro” means something else in this blog.)

    The problem for regulators is with innovation. They don’t know how to regulate new things; the new things haven’t failed before—they’re too new—so they get a pass. When they fail, the regulators say “we should watch out in the future.” That just drives innovation to unregulated areas.

    I conjecture that non-self-aware financial models/algorithms will always fail because they cannot anticipate their own impact upon the market. In this case the models did not anticipate that their own use would drive the system outside of the limited historical data used to assess risk. (I.e. I’m saying that the use of mortgage securitization led to subprime lending to keep the pipeline flowing, i.e. it created its own ruin.)

    If regulators and investors are ever going to anticipate the next problem, they need to predict the effects of innovation upon the market before it fails. That’s a very tall order. Especially considering that predictions usually say more about the seer than the future.

  31. During the Tulip Mania in the Netherlands people used mostly their own money to bid up prices of tulips. There wasn’t a lot of debt involved. And that’s why the consequences of that bubble bursting weren’t disastrous for their economy.

    And the stock market tech mania where Nasdaq went up all the way to 5000 was mostly bid up with people’s own money. Because there was a limit how much margin people were allowed use to buy shares. The US government legislated this margin limit after the 1929 stock market crash.

    Perhaps some similar borrowing limit needs to be put on all types of loans. When people loose mostly their own money. Then it’s mostly their own problem and not a problem for the whole economy.

  32. I’d rather call it ‘peak credit’ rather than ‘peak finance’. The latter is merely a socio-economic consequence of the former.

    For over 25 years now, Central Bankers across the world have adhered to the view that as long as inflation is not showing up, there’s no problem. And as asset values are not included in any money velocity measures, we have bubbles but no inflation.

    And whenever inflation actually starts showing up.. they ‘adjust’ statiscical methods.. and it disappears again!)

    How can you ‘stimulate’ economy out of a recession which is so severe EXACTLY because economy has been OVERSTIMULATED with cheap credit for 25 years?

  33. Actually, not only can we expect financial firms to have a smaller share of corporate profits in the future, but also that aggregate corporate profits themselves, as a share of GDP, will decrease from their current levels. As nicely explained by Jeremy Grantham (see his articles at, personal income in the US (as a percentage of GDP) has been declining for several decades now, while corporations have been earning an ever larger share of GDP. This process seems to have started a reversal recently (according to a graph in the “National Economic Trends” booklet published by the Saint-Louis Fed) and may potentially exacerbate the earnings decline of financial corporations.

  34. Kaleidescope, good post. I remember when the media was full of reports that the large banks might collapse because third world countries were defaulting on all those mega-loans. Then very shortly afterward the banks invented RRSPs, and the middle class bought in and began contibuting big chunks of their monthly paychecks into the banks — and there was no more talk of bank collapse. Connected? I’m certainly no expert but hmmm. And I always figured there was no way people would all be able to benefit from those RRSPs — there were just too many of them..

    It seems to me that the whole investment-&-dividend game can only work for a wealthy minority drawing on the life-energies of the many. If you get too many on board and not enough floating the boat, it won’t work. It may appear to work for a while but it won’t be grounded, it will be some kind of bubble. Soon after the RRSP thing began, the middle classes started playing around in the the stock market, and Wall Street affairs became a common subject of conversation. I think the large number of people trying to play the dividend game made its collapse inevitable.

    BTW what an excellent string of commentary! Wow.

  35. The rentier class wallowing in money creates a market awash with cash. Thus, they can only earn unsatisfactory rates of return, while at the same time, the US middle and working classes are being hollowed out. This all came about because the usury laws in borrowers’ states were judged by the Supreme Court to be superseded under the National Bank Act (1864?) by the usury laws in the lender’s state. So all the credit card companies are based in no-usury-law states, and borrowers have no protection from lenders’ rapacity. Lenders able to charge any interest rate combined with the financial pressure deteriorating incomes put on working Americans and the relentless pressure to consume, consume, consume, plus various generous tax cuts for the very richest, etc., etc., insured that money flowed rapidly to the rentiers. Consumer debt put off the day of reckoning, but now it’s here.

  36. Game Over ?

    They have until October.

    Politics always trumps Free Markets and it’s all calculated!

    If this fiasco hasn’t turned-around by then, the O-Team will send in “The Cleaner” and the Election Cycle will rein.

    – misallocated Capital encouraged overcapacity and the Social Contract with Labor is null & void
    – End of ’09, Bargaining & Hope is lost and Anger causes heads to roll (i.e., B.B., L.S. and T.G. are out as the nation moves closer to socialism)
    – 2010 will bring Depression and will end with Acceptance
    – 2011 re-election campaign kicks in with promises to Labor of a “Road to Recovery”
    – 2012 Capital gets the backseat, Labor is in the driver’s seat. O-Team is re-elected with a majority in the House

    The fate of capitalism as we know it, will forever have changed!

    Election Cycles:
    …note election year Novembers, the February following election year Novembers has been an excellent indicator as to whether the election year November would mark[s] an important top. In every case since at least 1968, when February following election year November moves to a higher high than the January following election year November, the market has proceeded to do very well.

    Conversely, when the post-election year February is unable to move higher than the post-election year January, a significant market decline has always followed. This may be coincidence but it has proved prescient for at least the past 40 years.

  37. ” We must fear the disruption of remaking our infrastructure ”

    We all love our computers, and the internet. However, how we’ve used them both, how we’ve allowed younger people who are not seasoned decision-makers to use these tools, and how we’ve allowed seasoned decision-makers to have retired at very young ages … I think we’ve made huge mistakes.

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