Financial truths . . .

An old Irish guy tells it like it is . . .

There's dead right and then there are the wingnuts

Over here Canadian Cynic is expending valuable energy addressing the entirely flawed hypothesis of a Blogging Tory in which the BT repeats the fallacious arguments of CNBC mouthpiece Rick Santelli and the emperor of the mouth-breathing US right-wing, Rush Limbaugh.

The argument? That people who are unable to make mortgage payments on the houses they purchased during the US housing bubble are the sole cause of the global economic meltdown. In short, (and directly quoting Santelli and Limbaugh), losers. (Why do I get this niggling feeling that they left something out of the extreme ignorance of their rants?)

All this brings to mind something that happened two and a half years ago.

On Sept. 7, 2006, Nouriel Roubini, an economics professor at New York University, stood before an audience of economists at the International Monetary Fund and announced that a crisis was brewing. In the coming months and years, he warned, the United States was likely to face a once-in-a-lifetime housing bust, an oil shock, sharply declining consumer confidence and, ultimately, a deep recession. He laid out a bleak sequence of events: homeowners defaulting on mortgages, trillions of dollars of mortgage-backed securities unraveling worldwide and the global financial system shuddering to a halt. These developments, he went on, could cripple or destroy hedge funds, investment banks and other major financial institutions like Fannie Mae and Freddie Mac. The audience seemed skeptical, even dismissive. As Roubini stepped down from the lectern after his talk, the moderator of the event quipped, “I think perhaps we will need a stiff drink after that.” People laughed — and not without reason. At the time, unemployment and inflation remained low, and the economy, while weak, was still growing, despite rising oil prices and a softening housing market. And then there was the espouser of doom himself: Roubini was known to be a perpetual pessimist, what economists call a “permabear.” When the economist Anirvan Banerji delivered his response to Roubini’s talk, he noted that Roubini’s predictions did not make use of mathematical models and dismissed his hunches as those of a career naysayer.

Except that Banerji was completely wrong and Nouriel Roubini was completely right. In fact, when a majority of economists were calling Roubini "Dr. Doom", Roubini was continuing to look outside the computer models for more information. What he found was terrifying. The picture he saw forming was that of a simultaneous pair of train wrecks: one brought on by sub-prime mortgage lending coupled with under-capitalized banks and the other being an enormous US federal current account deficit.

[W]henever optimists have declared the worst of the economic crisis behind us, Roubini has countered with steadfast pessimism. In February, when the conventional wisdom held that the venerable investment firms of Wall Street would weather the crisis, Roubini warned that one or more of them would go “belly up” — and six weeks later, Bear Stearns collapsed. Following the Fed’s further extraordinary actions in the spring — including making lines of credit available to selected investment banks and brokerage houses — many economists made note of the ensuing economic rally and proclaimed the credit crisis over and a recession averted. Roubini, who dismissed the rally as nothing more than a “delusional complacency” encouraged by a “bunch of self-serving spinmasters,” stuck to his script of “nightmare” events.

And Roubini was making it clear where the fault lay: With predatory mortgage lending, securitization of debt and rating agencies which were clearly in conflict-of-interest. In short, a lack of regulation, a "wild west" mentality and derivative financial instruments which were so complicated and being sold back and forth in so many different forms that almost no one could make any real sense of them. In fact they were so toxic that they were less than worthless.

Now, thanks to Ron Beasley, we find Roubini on the pages of Forbes magazine issuing an analysis of the problem and providing another dire warning. If the regulations aren't tightened up considerably, this whole thing will just keep getting worse. And, far from the "loser" hypothesis of Santelli and Limbaugh, Roubini makes it clear that the US government has to step in:

... two elements, both key to avoiding a near-depression, which are still missing: a cleanup of the banking system that may require a proper triage between solvent and insolvent banks and the nationalization of many banks, even some of the largest ones; and a more aggressive, across-the-board reduction of the unsustainable debt burden of millions of insolvent households (i.e., a principal reduction of the face value of the mortgages, not just mortgage payments relief).

Note, the lack of "loser" connotation when referring to insolvent households. That's because Roubini knows the fault doesn't lay with those households - it lays with the system which got them there: The Reagan/Thatcher Laissez-Faire capitalism.

Make no mistake, Roubini believes in capitalism; just not the unregulated form that is responsible for the worst financial mess since the Great Depression. In other words, you can have a free-market but not a free ride. And if you are a bank, you're going to learn to play by the rules or be booted off the field.

[T]he self-regulation approach created rating agencies that had massive conflicts of interest and a supervisory system dependent on principles rather than rules. In effect, this light-touch regulation became regulation of the softest touch.

Thus, all the pillars of the 2004 Basel II banking accord have already failed even before being implemented. Since the pendulum had swung too much in the direction of self-regulation and the principles-based approach, we now need more binding rules on liquidity, capital, leverage, transparency, compensation and so on.

He's been right too many times to ignore.

The wingnuts, on the other hand, will continue to whine and cry like a bunch of gut-shot coyotes and try to blame anyone who isn't them. And they will continue to be wrong on orders of magnitude we can only imagine.

Year End Cleanup . . . .

Some end of the year cleanup is in order, and how fitting it is to feature the bush administration.

From Bob Herbert of the New York Times we get:

Add Up the Damage
By BOB HERBERT - December 30, 2008

Does anyone know where George W. Bush is?

You don’t hear much from him anymore. The last image most of us remember is of the president ducking a pair of size 10s that were hurled at him in Baghdad.

We’re still at war in Iraq and Afghanistan. Israel is thrashing the Palestinians in Gaza. And the U.S. economy is about as vibrant as the 0-16 Detroit Lions.

But hardly a peep have we heard from George, the 43rd.

When Mr. Bush officially takes his leave in three weeks (in reality, he checked out long ago), most Americans will be content to sigh good riddance. I disagree. I don’t think he should be allowed to slip quietly out of town. There should be a great hue and cry — a loud, collective angry howl, demonstrations with signs and bullhorns and fiery speeches — over the damage he’s done to this country.

This is the man who gave us the war in Iraq and Guantánamo and torture and rendition; who turned the Clinton economy and the budget surplus into fool’s gold; who dithered while New Orleans drowned; who trampled our civil liberties at home and ruined our reputation abroad; who let Dick Cheney run hog wild and thought Brownie was doing a heckuva job.

_______________


The catalog of his transgressions against the nation’s interests — sins of commission and omission — would keep Mr. Bush in a confessional for the rest of his life. Don’t hold your breath. He’s hardly the contrite sort.

He told ABC’s Charlie Gibson: “I don’t spend a lot of time really worrying about short-term history. I guess I don’t worry about long-term history, either, since I’m not going to be around to read it.”

The president chuckled, thinking — as he did when he made his jokes about the missing weapons of mass destruction — that there was something funny going on.

Paul Krugman, winner of the Nobel prize in economics, also of the New York Times now weighs in:

Looking for a word
December 31, 2008

Unusually, I’m having a vocabulary problem. There has to be some word for the kind of person who considers his mild discomfort the equivalent of torture, crippling injury, or death for other people. But I can’t think of it.

What brings this to mind is this from Alberto Gonzales:

"I consider myself a casualty, one of the many casualties of the war on terror."

This reminded me of Laura Bush’s remark on carnage in Iraq:

"And believe me, no one suffers more than their president and I do when we watch this."

Remember this. And remember, too, that for long years these people were considered heroic patriots, defenders of the nation.

And now it is time for them to go away . . . .

(Cross-posted from Moved to Vancouver)

Begone, Bungling Bankers . . . .

What is it with these international banking fund guys, anyway? It wasn't that long ago that we had the wolfowitz/World Bank incident and now this by way of Reuters:

Probe clears IMF chief of abuse of power
Sat Oct 25, 2008 8:11pm EDT - By Lesley Wroughton


WASHINGTON (Reuters) - The International Monetary Fund's board on Saturday cleared Managing Director Dominique Strauss-Kahn of harassment, favoritism and abuse of power following an inquiry into his affair with a subordinate.

While the board stopped short of any type of disciplinary action, its leader, Shakour Shaalan, acknowledged there was concern among female staff about Strauss-Kahn's behavior.

Shaalan said he had warned Strauss-Kahn, a former French finance minister, against any further improper conduct.

"The executive board noted that the incident was regrettable and reflected a serious error of judgment on the part of the managing director," the IMF's board of member countries said in a statement.

_______________


The investigation by an outside lawyer into allegations of improper conduct by Strauss-Kahn found that his affair with Piroska Nagy, who worked in the IMF's Africa department as a senior economist until taking a buyout in August, had been consensual.

"I very much regret the incident and I accept responsibility for it," said Strauss-Kahn who is married to French television personality Anne Sinclair.

_______________


The board sought to deal with the investigation quickly so as not to distract the IMF from its role in dealing with the global financial crisis that has sent markets plunging on fears that the world economy is in for a long and deep recession.

Shaalan told a conference call with reporters that Strauss-Kahn still had the confidence of the board.

"Our conclusion was that this will in no way affect the effectiveness of the managing director in the very challenging and difficult period ahead," said Shaalan, who represents Egypt and other Arab countries on the board.

"This was an unfortunate incident where he expressed his regrets and the board has accepted his apologies," he said, adding, "I personally spoke to him after the meeting and informed him this should not happen again."

Well, isn't that just great? A little slap on the wrist, and all is well again.

Now, on to ruling over the nations of the world banking systems like nothing's happened. These are the guys we are supposed to entrust with major international financial decisions? Get real.

This crew is so damn out of touch with reality. Betcha they had their fingers in the sub-prime loan mess, derivatives and credit swaps if truth be told.

What a crock . . . .

(Cross-posted from Moved to Vancouver)

Paper Shredder, Nick ? ? ? ?

Man, this financial fiasco is really getting out of hand. Even world leaders are feeling the effects now.

Per Canoe Network:

Thieves hack Sarkozy's account
By THE ASSOCIATED PRESS - October 19, 2008

PARIS - The French Cabinet's spokesman says "swindlers" have broken into the personal bank account of President Nicolas Sarkozy.

Spokesman Luc Chatel told France's Radio-J an investigation is under way and insists the incident "proves that this system of checking (bank accounts) via the Internet isn't infallible." He did not elaborate.

Weekly Journal du Dimanche reported Sunday that thieves seized Sarkozy's bank account information and swiped small sums of money.

_______________


The press service for Sarkozy's office declined comment.

Maybe an infusion of government funds into the system will rectify the situation.

Sure hope 'Ole Nick isn't making any loan applications soon.

Expensive gifts to Carla Bruni might have to be reconsidered . . . .

(Cross-posted from Moved to Vancouver)

Spreading the "Joy" . . . .

It appears that bushco is attempting to SPP-ize the international financial markets.

Courtesy of Reuters:

Paulson to discuss G7 financial coordination
Wed Oct 8, 2008

by David Lawder and Andy Sullivan

WASHINGTON (Reuters) - The Bush administration said Treasury Secretary Henry Paulson at a news conference on Wednesday will discuss coordinated actions by wealthy industrialized countries to ease financial system stress.

White House spokeswoman Dana Perino said Paulson may discuss a plan floated by British Prime Minister Gordon Brown for concerted action to guarantee inter-bank lending.

_______________















She declined to provide any more details about the Brown plan, which was disclosed by a G7 source who said the British leader sent a letter to G7 counterparts urging them to issue a set of similar national guarantees aimed at restoring trust in the global market for bank funding.

_______________


Perino said Paulson also will focus on the Treasury's coordinated actions with other federal regulators to tackle "the four key challenges in our financial markets today: confidence, capital, systemic risk, and liquidity."

The Treasury will host the finance ministers and central bank governors of Canada, Britain, France, Germany, Italy and Japan on Friday ahead of semi-annual meetings of the International Monetary Fund and the World Bank.

Well, I feel better now . . . .


UPDATE: Now the party's getting even bigger! What shall we wear, what shall we wear ? ? ? ?

(Cross-posted from Moved to Vancouver)

Dead flag flying

Nobody likes the idea of a massive financial bailout of Wall Street. Nobody.

But after a week of chewing and farting, having to put up with a mental midget like McCain injecting himself into the process, it looked like there was going to be something palatable enough that all sides could hold their noses and agree upon.

Apparently not.

The $700bn US bank bailout was today left in chaos after the House of Representatives voted down the plans.

After days of negotiations it had been thought that Democrats and Republicans had agreed a deal which could be passed by both the House and the Senate.

But in a shock vote the measures were rejected by 228 votes to 205.

In a scene of high drama the House briefly kept the vote open to give senior figures from both parties the chance to try and force those in opposition to change their minds. But within a few minutes it was announced the vote had been formally closed, leaving the plans in disarray.

Whether either side can find their way around this remains to be seen, but in the meantime the world's central banks aren't prepared to let everything sink into the abyss because of U.S. navel gazing.

Central banks around the world unveiled a plan to pump massive amounts of cash into the global banking system in a concerted effort to boost market confidence and inject liquidity into the global markets.

Which brings us to something Paul Krugman said about Milton Friedman, (that messiah of the unregulated free-market), in February 2007:

[H]e slipped all too easily into claiming both that markets always work and that only markets work. It's extremely hard to find cases in which Friedman acknowledged the possibility that markets could go wrong, or that government intervention could serve a useful purpose.

Krugman was being kind. German Finance Minister Peer Steinbruck minced no words during an interview with Der Spiegel:

In the end, unbridled capitalism with all of its greed, as we have seen happening here, consumes itself.

The Steinbruck interview is well worth the read, because if you think the 9/11 attacks on the US changed the world, according to him it was the pumping of tons of money into the US economy after those attacks which has led to the disaster that is the crashing free-market today. What has changed, in Steinbruck's view, is that New York and London are finished as world financial centres and an evolutionary shift will take place.

While US legislators start shucking and jiving trying to sort out how best to come to terms with the failure of a de-regulated and greed-driven market where the corporate head of a failed Washington Mutual stands to walk away with $19.1 million for 17 days work, some people have some other ideas as to how to start cleaning up Wall Street.

What you write on Friday may come back to haunt you on Monday

John McCain should know this. It is taught at the US Naval Academy to every midshipman. This often refers to late-night letters impetuously written about a specific policy which, once dawn breaks, is best burned rather than delivered.

We bloggers often get caught in this trap and I stand as living proof of one who sends a series of irate words down the "publish" t00bs only to regret them eight hours later. But then, I'm not running for President of the United States. In fact, I'm not running for anything.

John McCain, who I am sure understands the principle of re-reading those bits of conservative ideology sent out for publication, is running for POTUS and in that regard should be aware of events going on around him, particularly when the country he's asking people to let him lead has been in a year-long and increasingly dangerous financial melt-down.

So you have to ask, what the hell McCain was thinking when he wrote this in the latest edition of Contingencies, the journal of the American Academy of Actuaries. (Emphasis mine)

Opening up the health insurance market to more vigorous nationwide competition, as we have done over the last decade in banking, would provide more choices of innovative products less burdened by the worst excesses of state-based regulation.

The evidence of the runaway corruption and excesses of an unregulated banking system has been laying in a bloody mess on the public sidewalks for at least a year now. Anybody with a functioning synapse could see that it was only a matter of time before the corpses of the American banking system, let off the leash by Republican free-market ideology, would start to pile up on the Main Streets of America.

Yet, McCain's comparison was published in the September/October 2008 edition of Contingencies with no regard to the financial mess that was going on all around him while he wrote.

As of today the 12th American bank was closed by regulators this calendar year and more if you go back twelve months.

Would you want to put the health care system in the hands of this cognitively challenged fool?

More from Paul Krugman.
H/T Crooks and Liars

Your last nightmare was brought to you by....

The words you want to be repeating to yourself are... Washington Mutual. WaMu is the sixth largest bank and the largest savings and loan in the United States. Rumours abound that it is up for sale having lost 85% of its share value in one year. Shares closed today at $2.01 and its rating has been reduced to "junk" by Standards and Poors. In fact, shares dropped even further after the markets closed to somewhere around $1.80.

The problem with Washington Mutual is that it is not only extremely exposed in the high-risk mortgage market, (yes, subprime and adjustable-rate mortgages), it has a huge customer base with (by their own recently released 3rd quarter outook) $143 billion on deposit.

Let's toss in another little number. Washington Mutual borrowed from the Federal Home Loan Bank of San Francisco to the tune of $58 billion to finance all those high profile mortgages. What the hell is the FHLB of SF? Glad you asked.

The Federal Home Loan Bank (anywhere it's based) is a US government corporation established by former US president Herbert Hoover in 1932, in the depths of the Great Depression, to provide low-cost credit to residential home lenders. This was a government owned corporation which was intended to provide regional banks, thrifts (savings and loans), etc. with low-cost money and enough capital to keep the home construction market alive and financing for middle income Americans with enough stable income to buy a modest house.

In the Bush 41 era, in the throes of deregulation, the FHLB ended up with an expanded role and less government control. Under Clinton, a Republican-controlled congress took the leash off FHLB and it behaved more like a private investment bank than a government operation. In short, in order to survive, it had to behave more like a private investment firm and, instead of reporting to the US Federal Housing Administration, reports to the Security and Exchanges Commission.

Means nothing? That's what I figured.

The FHLB was never supposed to be able to lose money. The money loaned to small banks and thrifts was supposed to be low risk. In short, the borrowers (credit unions and the like) had to have a strict lending criteria. That meant the retail borrower, (home buyers), had to provide some assurity that they could repay the mortgage and that they had a proven record of saving a little more than the amount of the monthly mortgage payment. Under the older regulations Washington Mutual would never have been able to borrow wholesale mortgage funds from the FHLB if they were signing subprime mortgages.

Now, the FHLB is losing money. After years of constant growth it is showing losses. And who underwrites those losses? The US government. The taxpayers.

This (20th Century) Depression Era, government established lending institution, with a mandate to lend only for residential housing became a player, however unwittingly, in a Ponzi scheme. Instead of dictating mortgage rules to lenders, they took a "hands off" approach because of several deregulation moves. But none was more important than the Financial Institutions Reform, Recovery and Enforcement Act of 1989 enacted by George Bush the Elder. It removed the FHLB from a supervisory and regulatory role on the lending practices of regional banks and thrifts. The smaller lending banks were closer to the consumer and they would assess risk - locally.

So, Washington Mutual actually has a liability of over $201 billion. If WaMu fails the taxpayer is on the hook for the $58 billion borrowed from FHLB San Fran. Money on deposit with WaMu is averaged at $5,200 per depositor. The Federal Deposit Insurance Corporation (FDIC) guarantees depositors insurance on their funds up to $100,000.

It gets ugly now. The FDIC has been depleted and has funds on hand of about $45 billion. It cannot cover WaMu depositors if WaMu fails. That said, FDIC has stated that the US Treasury, (yeah, the taxpayer again) will inject money into FDIC to cover its insurance liability.

Got that? Good. Sounds great... until you figure out that the US Treasury is in a huge deficit balance. It gets its money from taxes and by issuing bonds which are bought up by foreigners. That's where you need to listen to Paul Craig Roberts, former assistant Secretary of the Treasury under Reagan.

Most Americans, including the presidential candidates and the media, are unaware that the US Government today, now at this minute, is unable to finance its day-to-day operations and must rely on foreigners to purchase its bonds. The Government pays the interest to foreigners by selling more bonds, and when the bonds come due, the Government redeems the bonds by selling new bonds. The day the foreigners do not buy is the day the American people and their government are brought to reality. This is not the financial position of a superpower … Will what happened to Lehman Brothers today be America's fate tomorrow?

In short, the US government is borrowing money to finance the bailouts of of failing banks because they borrowed money to finance a risky scheme which failed.

Now WaMu has been making a lot of noise that they have the capital to cover their losses and manage their debt. Except for one small thing. Money on deposit to a bank is actually a liability - not an asset. A bank's assets are the shares they issue and the loans they've made (but now, we have to wonder how good they are), and in the case of WaMu, their shares have lost most of their value and a huge chunk of their loans are not recoverable. That means they have little or no collateral to put up to borrow their way out this mess.

WaMu, despite its size, owes a lot, isn't worth much and is losing money - lots of money. If it was a horse you'd shoot it. Yes, there are all kinds of news stories hinting that there is a buyer for WaMu. Except that that doesn't solve much and WaMu would be an extreme risk for any buyer.

So, no bank is going to buy WaMu without a guarantee.... and guess who that's coming from. (File your tax return early and often.)

If no other bank buys WaMu then the US Government will be forced to place it in conservatorship.

By the weekend, the cost of the subprime mortgage scheme will be passed from the grandchildren of Americans to the great-grandchildren.

And if you're some poor shmuck in Iraq or Afghanistan, you're wondering what you're coming home to.

How did it happen?

Watching the meltdown of the financial sector of the global economy (yes, it's global) can be confusing to most of us. I know, (aside from the fact that I saw US sub-prime lending as dangerous and highly dubious from the start and felt that it was a hollow scheme which had no place to go but into a disaster), that what happened to have led to the collapse of long-established investment banks and large insurers was largely a mystery to me. Once the borrower had been given a mortgage they had little chance of repaying I had difficulty sorting out where things went from there.

Luckily, the Business Pundit has put together an easy to understand Subprime Primer in 45 pages of simple cartoons. When you've clicked through the whole thing, what's happening today will probably make a little more sense. And, while the cartoons are done humourously, you are probably going to come away very, very angry.

Have.... fun?

=====

The Business Pundit is clearly getting a lot of traffic these days and pages may be a little slow loading.

The Bank of Canada's strange behaviour

Jim Stanford, Chief Economist with the Canadian Auto Workers' Union, national columnist with the Globe and Mail and past chair of the Progressive Economics Forum has written an excellent post on the strange behaviour of the Bank of Canada in dealing with the current financial crisis brought on by the US sub-prime-mortgage-meltdown credit crunch.

Oh. You thought that was just a US problem? Not hardly. Stock exchanges and financial markets from Shanghai to Frankfurt and, Toronto in between, are being torn to shreds as speculators with collateralized securities watch the value of the paper they hold shrink like a wet angora sweater in a hot dryer.

Honestly, it's their fault and I have no sympathy for them. It's just that the damage they will wreak as a result of their attempt to sell the poor something they could not afford in the first place, and then sell the paper those mortgages were written on at inflated values will come back to bite all of us while leaving the working class in even worse condition.

The surprize was the sudden decision by the Bank of Canada to suddenly defend its interest rate by adding liquidity to the financial markets. What makes this even more surprizing is that the Bank of Canada has made the same statement over the years: Regardless of conditions, the central bank (meaning David Dodge) has made it very clear to all of us that the sole purpose, of that supposedly apolitical institution, is to defend the inflation rate.

The Bank of Canada has stood by while the exchange rate of the Canadian dollar has edged to near par with the US dollar and caused the Canadian manufacturing sector to dump 400,000 jobs. We are told by the central bank that we have to live with that. It's an adjustment and the Bank of Canada is not in the business of defending the exchange rate - it simply defends the inflation rate.

Except that isn't what the central bank is doing. Stanford does an excellent job of lighting up the scene on the Bank of Canada's behaviour and, while you might think he objects to bailing out a bunch of greedy chartered banks and speculators, he actually approves of the Bank of Canada's actions. He can explain it, but before you head over there, this is a sample of his latest column in the Globe an Mail:

What’s got me irked is the obvious contradiction between the Bank’s willingness to ride to the rescue of banks, hedge funds, and private equity dealers, versus its tough-love response to the dislocation of 400,000 factory workers.

[...]

If real businesses use cheap credit to invest in too much real production, create too many jobs, and strengthen incomes too rapidly for the Bank’s liking, then it cracks down hard. But if speculators use cheap credit to fuel a frenzied inflation in paper valuations, that’s no problem. An average worker can’t get ahead. But a speculator gets a free pass – even though the “wealth” they create is no more real than the turrets of Hogwarts Castle.

Go read. It's good and it's understandable.

Pay them Walmart wages - And watch your economy collapse.

Maybe it was so simple nobody could see it. Although, I don't know how that could be. I'm no economist and even I could figure out that if you paid people so little, in a retail operation that sold cheap products at the lowest prices, and the employees couldn't afford to buy them, that eventually the model would fail.

Somewhere in the Hamptons a high-roller is cursing his cleaning lady and shaking his fists at the lawn guys. The American poor, who are usually tactful enough to remain invisible to the multi-millionaire class, suddenly leaped onto the scene and started smashing the global financial system. Incredibly enough, this may be the first case in history in which the downtrodden manage to bring down an unfair economic system without going to the trouble of a revolution.

First they stopped paying their mortgages, a move in which they were joined by many financially stretched middle class folks, though the poor definitely led the way. All right, these were trick mortgages, many of them designed to be unaffordable within two years of signing the contract. There were "NINJA" loans, for example, awarded to people with "no income, no job or assets." Conservative columnist Niall Fergusen laments the low levels of "economic literacy" that allowed people to be exploited by sub-prime loans. Why didn't these low-income folks get lawyers to go over the fine print? And don't they have personal financial advisors anyway?

Then, in a diabolically clever move, the poor - a category which now roughly coincides with the working class -- stopped shopping. Both Wal-Mart and Home Depot announced disappointing second quarter performances, plunging the market into another Arctic-style meltdown. H. Lee Scott, CEO of the low-wage Wal-Mart empire, admitted with admirable sensitivity, that "it's no secret that many customers are running out of money at the end of the month."

I wish I could report that the current attack on capitalism represents a deliberate strategy on the part of the poor, that there have been secret meetings in break rooms and parking lots around the country, where cell leaders issued instructions like, "You, Vinny -- don't make any mortgage payment this month. And Caroline, forget that back-to-school shopping, OK?" But all the evidence suggests that the current crisis is something the high-rollers brought down on themselves.

When, for example, the largest private employer in America, which is Wal-Mart, starts experiencing a shortage of customers, it needs to take a long, hard look in the mirror. About a century ago, Henry Ford realized that his company would only prosper if his own workers earned enough to buy Fords. Wal-Mart, on the other hand, never seemed to figure out that its cruelly low wages would eventually curtail its own growth, even at the company's famously discounted prices.

The sad truth is that people earning Wal-Mart-level wages tend to favor the fashions available at the Salvation Army. Nor do they have much use for Wal-Mart's other departments, such as Electronics, Lawn and Garden, and Pharmacy.

It gets worse though. While with one hand the high-rollers, H. Lee Scott among them, squeezed the American worker's wages, the other hand was reaching out with the tempting offer of credit. In fact, easy credit became the American substitute for decent wages. Once you worked for your money, but now you were supposed to pay for it. Once you could count on earning enough to save for a home. Now you'll never earn that much, but, as the lenders were saying -- heh, heh -- do we have a mortgage for you!

Pay day loans, rent-to-buy furniture and exorbitant credit card interest rates for the poor were just the beginning. In its May 21st cover story on "The Poverty Business," BusinessWeek documented the stampede, in the just the last few years, to lend money to the people who could least afford to pay the interest: Buy your dream home! Refinance your house! Take on a car loan even if your credit rating sucks! Financiamos a Todos! Somehow, no one bothered to figure out where the poor were going to get the money to pay for all the money they were being offered.

Personally, I prefer my revolutions to be a little more pro-active. There should be marches and rallies, banners and sit-ins, possibly a nice color theme like red or orange. Certainly, there should be a vision of what you intend to replace the bad old system with -- European-style social democracy, Latin American-style socialism, or how about just American capitalism with some regulation thrown in?

Global capitalism will survive the current credit crisis; already, the government has rushed in to soothe the feverish markets. But in the long term, a system that depends on extracting every last cent from the poor cannot hope for a healthy prognosis. Who would have thought that foreclosures in Stockton and Cleveland would roil the markets of London and Shanghai? The poor have risen up and spoken; only it sounds less like a shout of protest than a low, strangled, cry of pain.

When a credit card you can't afford replaces a paycheck something's got to give. You'd think the financial wizards and a tube sock full of MBAs could figure that out for themselves.

H/T While the Earth Burns