The rescue operation brings to mind John Kenneth Galbraith's dictum that in the United States, the only respectable form of socialism is socialism for the rich.

Massive Bailout Planned for Banks

The same voices that supported tough macroeconomic policies to deal with the excesses of spending and borrowing in east Asia, Russia and Latin America are today pushing for a significant relaxation in the US to deal with the so-called subprime crisis...

Main Street consumers have overspent and over-borrowed and are unable to meet their obligations...

Consumption has been above sustainable levels and needs to adjust down, whatever view one has about the responsibility of adults over their financial decisions.

The adjustment of private consumption to sustainable levels is necessary, but is likely to have a negative influence in the short run on the growth of aggregate demand... put downward pressure on world growth.

Sustainable growth is not the consequence of an unsustain­able consumption boom but of the progress and diffusion of science, technology and innovation...

An efficient adjustment to the US over-consumption imbalance (and Chin­ese under-consumption) in a way that does not hurt longer-term growth should be based on compensating for the decline of US consumption with an increase in domestic investment and in consumption abroad. It should not be based on giving the US consumer more rope with which to hang himself... giving US households a $1,000 cheque by April, a trick that no macro­economic textbook would argue is particularly effective...

This essay is extremely clear and paints a stark picture.

Many of these points were made elsewhere earlier in the week:

The current slowdown is layered on top of deep-rooted economic problems that are not addressed by a stimulus package. If the nation’s leaders do not start showing the political will to do more than dole out popular tax breaks during an election year, short-term fixes could actually make the long-term problems worse.

For all its power, the Fed cannot change this troubling fact: trust in much of the financial system -- banks, brokerage houses, ratings agencies, bond insurers, regulators -- has been severely damaged by the subprime mortgage crisis. And that damage cannot be reversed with a quick cut in interest rates.

Stop behaving as whiner of first resort

Behind the recent bad news lurks a much deeper concern: The world economy is now being driven by a vast, secretive web of investments that might be out of anyone's control.

Lest anyone forget:

The reality is that, despite fears that our children are "pumped full of chemicals" everything is made of chemicals, down to the proteins, hormones and genetic materials in our cells.

1. This thesis seems to run counter to Ben Stein's complaint from yesterday, in which he argues that "market makers" are completely and nefariously in charge of the whole thing, swinging the pendulum at a whim for their own benefit. (To clarify: there is an important distinction between being able to make a particular stock or sector move in one direction or another, and having positive control of "the market.")

2. The author's characterization of the "prevailing assumption" runs counter to the evidence compiled by Eric Janszen, who argues that "The bubble cycle has replaced the business cycle." The author implies that before hedge funds, we understood the mechanisms of the market and were more or less in control of things. How, then, to explain the Asian financial crises of the 90's?

3. Frankly I'm surprised this article appeared in the Globe. Now, the Globe is not NYT or WSJ, or even WaPo or LAT, but this article would have been more at home in the Boston Herald, perhaps printed in Comic Sans. I'm inclined to believe the author is simply plugging his friend's new book. The chattily informal prose is off-putting: "swinging wildly", "slapping together", "booster shot", "building blocks", "sound the alarm", "huge wilderness", "chafe against the restraints", "prying eyes", and so on. I am led to believe those "small-circulation newsletters" he mentions are known elsewhere as "spam." But I have to admit I laughed at the characterization of innovative derivatives as "very sophisticated and chi-chi."

4. The author attempts to explain away Enron as a problem of "nontransparency". Hardly. I suggest he take "The Smartest Guys in the Room" and Gladwell's Open Secrets and revisit this in the morning.

5. He acts as though everything would have been alright if only everyone had been more upfront about all of the dodgy debt they were buying up. Never mind that the risks of issuing adjustable-rate interest-only jumbo loans to the marginally employed were always plainly obvious, even to the most casual observer. He pretends to ignore the fact that speculators built entirely too much new housing, flooding the market.

6. It's like, "Everything is so complicated. We ne... [ Read More (0.1k in body) ]

The black box economy

Quietly, insiders are perusing an obscure paper by Fed staffers David Small and Jim Clouse. It explores what can be done under the Federal Reserve Act when all else fails.

"The kind of upheaval observed in the international money markets over the past few months has never been witnessed in history," says Thomas Jordan, a Swiss central bank governor.

The ECB's little secret is that it must never allow a Northern Rock failure in the eurozone because this would expose the reality that there is no EU treasury and no EU lender of last resort behind the system.

Crisis may make 1929 look a 'walk in the park'