Theories go out the window when everyone is in a panic. It seems that the "smart" money was more like the "herd" money in this cycle. It's always the same game: tulips, South Sea Islands, dot com stock, or debt repackaging. The values assigned to the "assets" cease to have any relation to the underlying items. Money is borrowed to buy more of the hot commodity and, eventually, the chips get called in.

What's different this time is that we had the experience of 1929 to base policy on. This helped avoid major meltdowns (although the 1970's were no picnic), but starting with Reagan the rules to prevent excessive speculation were removed one after another. Clinton (of all people) oversaw the repeal of the Glass-Steagall act and the SEC has made sure that what ever remained wasn't enforced anyway.

There is no way out of a Ponzi scheme without people losing money. This lesson is now being learned by the newly empowered investors in Asia as well.

If you don't mind a bit of self congratulation, I just looked over an essay I wrote three years ago:

The Coming Crash

I predicted a downturn, but based it upon fundamental dislocations, especially the over reliance on militarism and the trade imbalances. One cannot have a society living on borrowed money and failing to maintain its infrastructure and human capital forever. Viewed from this perspective the speculation in the financial sector can be seen as a natural outgrowth of our policies. When there is no place to invest, the money goes into speculation instead.

--- Policies not Politics
Daily Landscape

Remember that "mushroom cloud" Condi and the Bush gang referred to? Well, it happened....in the economy.

For some time now I have been expecting the "fix" for our economy will be a big inflation, or de-facto devaluation of the dollar. This will shrink everyone's debts, make the $500,000 mortgage payable with deflated dollars, give working people big raises to encourage more spending.

Unfortunately, those of us who are retired, living on fixed incomes, with a few dollars invested, will do the brunt of the suffering from that inflation. But, I suppose that is what older people are supposed to do - suffer.

Hoppy in Sacramento

"Final snarky comment: isn't it interesting to see how quickly these supply-siders become deeply committed Keynesians when they actually need to accomplish something useful?"

the only thing they'll accomplish is taking money from the future and putting it into their back pockets to cover their a$$.

To boldly go...

BevD asks: Is it still morning in America?

It sounds more like ‘mourning in America’ but I wonder, why now? Maybe it’s ‘moaning in America’ by those who have been reaping the rich rewards of our trickle-down economy but now see the flood waters reaching up to their houses on the hill.

Granted, mine is an economic illiterate’s take, but the way I see it, the working poor and lower middle class are not panicking because there’s nothing new here to them. And I understand that the overall economy must be stabilized and there are many people with retirement funds in the market that need protecting. But it seems to me that only when big corporations, especially financial institutions, start sinking that the government starts bailing water. It may only be hyperbole to say that the corporation has replaced the worker as to who is America, but what if it isn't?

After 9/11 we threw a few bills to the rabble down below but bailed out airlines and market firms and the real investor class in the interest of stabilization. I know that the CW is that we can’t let financial institutions crash because that will dent the system, but if it were up to me, B of A and company would be required to refund the $150 billion in rebates. From the bankruptcy bill to this, there is one message: the higher up the less responsible.

Bush has backed off making the upward redistribution of wealth (tax cuts) permanent (man, I bet he’s kicking himself for waiting a few months too long), but is he talking about anything that will change the fundamental slide of our economy? Even rebates to “consumers” will be put towards credit debt or spent in Wal-Mart, hardly better than being spent in China.

Bush’s answer to the ridiculous trade deficit and diminishing dollar is more exports- of jobs! And if you can’t export them fast enough, expedite importing workers. It is the philosophy of “greed is good’ And “I’ve got mine” that guides us. Our grandchildren won’t be asking who lost China or who lost the Middle East, but who lost America. In the end, we rise together or fall apart.

The people who need it most- the middle and working class people- will immediately put the money right back into the economy by spending it with retailers for essentials and with corporations for bill payments and debts. All sectors of the economy will benefit from this targeted stimulus.

The GAO report on prospective stimuli strongly states that the most effective targets are lower income families and the best immediate results will be achieved through increased unemployment and food stamp aid.

The argument that direct payments to working class and poor families will just be spent on Chinese imports and will only benefit the economy of China (see Sen. Judd Gregg, R-NH et al) is cruel, an utter fraud and completely ignores the best assessments of economists and social policy experts in and out of government. If Chinese goods are bought, they will be purchased from American retailers who have already paid for these goods, and will directly benefit American businesses who are also hurting fom the tightening of consumer spending.

The supply siders become Keynesians in the face of a recession because, as Keynes showed, monetary policy can kill a boom, but it can't stop a bust. One point, though. It was my understanding that even though the dollar is falling, prices of imports here are not rising much, because foreign manufacturers are holding US prices steady to hold on to the US market.

I wish I could particpate in this discussion with the kind of financial acumen you all apparently bring. I will instead add what only a nearly 60 liberal can throw in the pot: supply side economics doesn’t work. Deregulation of industries created a selfish culture that has destroyed the chances of countless Americans in the Middle Class. I say Middle Class with a certain blushing affection. I AM the middle class. I am college educated, my husband has degrees up the wootsie, my kids have PhDs, I’ve got a sticker for my gas-friendly car. My sister, a teacher, is 64, renting a small apartment, and she’s in $20,000 of debt to companies who are charging her 29% interest. I’ve been laid off from my last two jobs by school systems, and bring my grand intelligence to a part time secretarial job while I collect a partial unemployment claim. My husband is gray with the responsibilities of belief and hope, trying for many years to keep a small business afloat while he travels, trying to raise money from arrogant investors, until he topples into the house at night. We’d sell our house, but now we can’t, as it’s all we have – no savings, pensions or IRAs, and the house is borrowed against past its value for fix-ups, and the question is becoming, will we live long enough to sell it? My children and their babies all live far away, because they couldn’t afford to stay in California. One of them is a college professor living in student housing because it’s the only way he’ll ever be able to save for a house. My other kids bought a house in Michigan, then of course were unable to sell it because who could sell a house in Michigan? They’re now renting a house where their jobs took them. We carry a ridiculous insurance policy that won’t do a spit of good if we ever get sick, because someone who doesn’t care will deny us coverage. I haven’t been to a doctor in 15 years. I am well educated, well off, better off than millions of other people in this country, and awash with gratitude that I had a lovely family. I don’t expect there is any hope in my final years. All of our rule-following, all of our buying into the system, has led us to a reality we won’t be able to handle. And I have a sweet family to help me. What about people who don’t? What about people who are alone? I’m believing that we need to spend the next years leveling the playing field, and rejecting the self-serving economics that allowed the rich and the corporate to indulge their greed while the rest of us just paid our taxes with a smile and thought it would all come out. Gee, I’m depressed.