^{This is an update of a summary and economic prediction I originally published July 20, 2009}
During the Great Depression, following the stock market crash of 1929, the American public sought a scapegoat for their economic plight. Some held President Hoover responsible, others targeted the three B's -- brokers, bankers, and businessmen. In reality, it could not be attributed to one individual or even a group of people. The roots of the Great Depression were in the very structure of the American economy itself.

America's Economic Flaw: Unless the US economy expands and inflates no less than three percent per year on average, it will enter a "gravity well" that is very difficult to reverse. Factors like debt obligations and asset displacement or depletion (think real estate) intensify the risk. It's built into our brand of Capitalism.

The Wealth Gap: Unlike the Economic Flaw, which is built in to foundation of our economy, the Wealth Gap is determined by the political ideology of the Right or the Left, when it gains the power to enact economic laws. The Wealth Gap is a reliable predictor of massive economic cycles that trigger collapse.

Let's see how this works:

The Plutocrats vs. the Middle Class: When most of a nation's free wealth is in the hands of only a few individuals and private investment houses, the Wealth Gap is considered to be "widened" or "increased" and investment risk is very high. When nation's wealth is diversified among broader economic levels and smaller investment ventures, the Wealth Gap is "narrowed" and investment risk is very low.

The US economy becomes vulnerable to chaos and severe contraction whenever policies are enacted that cause an increase in the Wealth Gap across the population. For example, reducing taxes on the profits from the exploitation of massive wealth privately held by the Plutocrats (tax cuts for the wealthy) undermines the functional foundation of the nation. Everything -- from infrastructure growth to the training and well-being of the workers -- is quickly degraded. This, in turn, degrades America's ability to compete in global marketplace.

When the primary imperative of the US economic system is growth, progress, and international superiority, Plutocratic policies are not only counter-intuitive but irreversibly perilous. The damage caused by such policies cannot be "fixed" merely by raising taxes. There's a much steeper price to pay when a nation guts its own foundation.

The Wealth Gap in the US, as a result of destructive Republican policies, systematically enacted since 1980, is one of the largest in the industrialized world.

The Wealth Gap The Leading Indicator of Economic Collapse In a Free-Market Society

Despite rising wages overall, income distribution in the early 1900s was unfair and exploitive. Gaps in income started in the 1890s, and by 1928, the one percent of the population at the very top of the pyramid had incomes that were 650 percent greater than the ten percent of Americans at the bottom.

Twice in the past century wealth was taken from the middle class and concentrated at the top among the wealthiest Americans. This reversal of fortune occurred once in 1927 and again in 2007, and both times it caused the economy to collapse into Depression. These were times when government policy mandated tax cuts for the rich along with the repeal of protective regulations on banks and investment houses. Such policies lead to the neglect of the nation's infrastructure, the abuse of the environment, and the impoverishment of the working class, who actually are the backbone of the nation. When a downturn hits a nation gutted by greed, it does not have the resources or the necessary public policy to support and sustain itself. In America, depressions are born from stingy, greedy, small government ideologies, which work at cross-purposes to the reality of America's economy of scale.

When the wealth that a nation produces does not reach the families that do the work -- and the wealth is, instead, concentrated in the hands of a very few -- economic risk increases exponentially. Why? Because a single economic blow to the wealth-holding investment class can topple all parts of the economy. (We have recently seen this in our own rarefied markets.) When this happens, spending and credit become frozen, businesses close, jobs are lost, and the vast majority who reside in the middle are pushed further toward the bottom.

During the 1920s, a string of laissez-faire, small government, tax-cutting Presidents -- Harding, Coolidge, and Hoover -- set the nation up for the now-familiar pattern of economic peril. Because regulations were relaxed throughout the 1920s, corporations and investment houses were allowed to expand and consolidate into too-big-to-fail megaliths. They became monopolies, wiping out competitors and fixing the market to exploit consumers. Anti-trust laws were unenforced, as they were during the Clinton years, when Republicans took took control of both houses and began pandering to the Plutocrats in earnest.

By 1929, two hundred of the biggest corporations controlled fifty percent of the nation's corporate wealth. That meant that if just one or two of these companies went under (as Lehman Brothers did in 2008), the whole economy could spin apart.

And that's exactly what happened.

Great Depression 1.0 President Franklin Roosevelt's First One Hundred Days in Office

By 1929, the nation was in a fine mess. The Republican policies of neglect and selfishness were exacerbated by Hoover's tortured hand-wringing over the "moral hazard" of government intervention to stabilize the economy -- an economy that was spiraling toward collapse. Hoover's conflicted ideology (as a progressive conservative) allowed the banking system to slide into insolvency. His last minute attempts to revive the economy were too little too late; the American people were already jobless and many had lost their homes to foreclosure.

In 1932 New York Governor, Franklin Delano Roosevelt, won the presidency in a landslide election. He had campaigned on hope and reform, but he had a solid plan to turn the economy around and return the nation to health. Just six days after taking office, he shut down the US banking system:

After a month-long run on American banks, Franklin Delano Roosevelt proclaimed a "Bank Holiday," beginning March 6, 1933, that shut down the banking system. When the banks reopened on March 13, depositors stood in line to return their hoarded cash.

The success of the Bank Holiday, and the remarkable turnaround in the public’s confidence in the nation's banking system, is due to Roosevelt's Emergency Banking Act, which was passed by Congress on March 9, 1933. Under this Act, Roosevelt mandated the Federal Reserve to establish deposit insurance in all the banks that were reopened. This guarantee would later be known as the FDIC.

The public recognized the implicit guarantee and, as a result, believed that the reopened banks would be safe, as the President explained in his first Fireside Chat on March 12, 1933. Americans responded by returning more than half of their hoarded cash to the banks within two weeks and by bidding up stock prices by the largest ever one-day percentage price increase on March 15 — the first trading day after the Bank Holiday ended.

In just 15 days, by taking firm control of the banks and the Federal Reserve, Roosevelt reestablished the integrity of the US payments system and set the nation on the long path back to fiscal health. He also demonstrated the power of credible regime-shifting policies for all Presidents who would follow.

Now, technically, the banks weren't nationalized, but they were "under arrest." Over the next 99 days, FDR became a banker's worst nightmare -- or greatest hope -- depending which side of the great wealth divide the banker stood on. He called a special session of Congress on the ninth day of his Presidency and began submitting reform and recovery measures for congressional validation. On June 16, 1933 this special session of Congress came to be known as the "Hundred Days."

The laws and regulations that were passed were designed to protect citizens from the destructive greed of Plutocrats and exploitation by the investment class. Other emergency legislation was designed to bring immediate help to the American people and get them on their feet again. Roosevelt knew that the people were the true strength of the nation, and if were not protected and restored, there would be no US economy. The Acts that were passed during the first One Hundred days included the following:

Roosevelt's enactment of these early reforms and regulations -- and the restoration of high-income bracketing in the tax laws -- ultimately resulted in middle class prosperity and measured economic growth in the fifty years that followed. You can see this stable period in the narrow gap across the center of the Wealth Gap chart, above.

The distribution of wealth across a greater number of American families brought the nation together in cooperation toward common goals. During that time, you could raise a family on one salary, and public education was efficient and effective. It was in those years that we built our enviable infrastructure and the highway system that criss-crossed the continent.

Then -- in the 1980s -- the Wealth Gap began to widen again.

Great Depression 2.0 President Barack Obama's First 100 Days in Office

Like FDR, Obama inherited a national economy laid to waste by the destructive policies of the prior administration. The most damaging aspects of the laissez-faire ideology introduced by Reagan had been put into play. Many prominent economists had hopes that Obama would take control of the banking system, through temporary nationalization. That way, he could oversee the massive TARP bailouts enacted by the Bush administration, which had no provisions for oversight. It was in the American people's best interest to make certain the money was used productively and did not end up back in the pockets of the Plutocrats.

Temporary bank nationalization would immediately put the banks into non-profit status. This would have removed the greed incentive and created a neutral, internationally-trusted financial environment in which the US economy could stabilize itself. Most important, nationalization would allow the markets to put a floor under US assets through government-backed loan modification. At the same time, it would open access to credit for individuals and small businesses, which is where the majority of US economic activity occurs.

But Barack Obama wasn't going there. The New York Times remarked:

It is a bit odd to watch Barack Obama, who aspires to finally end the era of Reaganomics, spend his early weeks in the White House swatting away calls for nationalization from decidedly non-leftist quarters. Lindsey Graham, a Republican senator from South Carolina, recently said that, given the depth of the credit crisis, he wouldn’t rule out nationalizing banks. Alan Greenspan went further a few days later. “I understand that once in a hundred years this is what you do,” Greenspan, an Ayn Rand disciple before he was a central banker, told The Financial Times.

It is a temporary takeover born out of crisis. Sweden pursued this kind of strategy in the early 1990s to clean up its banking system. Even the United States has nationalized banks on occasion, including IndyMac Bank last year.

"The weight of the historical evidence," as a Brookings Institution report dryly put it, "is on the side of the proponents of tough action."

When President Obama took office in late January 2009, the Troubled Asset Relief Program [TARP], enacted by the Bush administration three months earlier, was in full swing. The banks, while still shedding toxicity, had become more stable. Under the $700 billion program designed by Hank Paulson and Ben Bernanke, $296 billion was spent and $388 billion had been allotted. Timothy Geithner and Lawrence Summers, Obama's top economic advisers, evaluated the banks' progress under TARP. It was determined that the program was working as planned, and drastic government intervention in the form of bank nationalization was unnecessary and unwise. This allowed Obama to focus on his top priority, the so-called "Stimulus Bill."

The American Recovery and Reinvestment Act of 2009 was signed into law on February 17th. Obama was well aware that the nation was facing long-term economic peril, and the $787 billion in spending put protections in place for those who would be most impacted. In the end, 37 percent was devoted to tax relief, 18 percent was allocated to state and local fiscal relief (most going to Medicaid and education), and 45 percent was allocated to federal social programs and federal spending programs. While it looks ahead toward infrastructure improvements, it is not a jobs program. (It is called a "Stimulus Bill" by those who wish to infer that it does not work.)

Throughout this period, there were intense economic strategy meetings between Obama and his E-Team. Geithner and Summers, both skilled and knowledgeable insiders, helped Obama define the administration's larger economic policy, which would give the appearance of an orderly recovery while championing the virtues of the free market in the financial realm:

It was a compelling argument. Opening wide the valve of credit to individuals and small business was the fastest and most effective way to kickstart the economy. No secret there. The US economy is reinvested at the top, but is driven hard from the bottom, where demand is created. Seventy percent of the gross domestic product [GDP] is generated on Main Street. Consumer spending is the lifeblood of economic activity in the US. It's all we got.

Would the banks do right by the nation that bailed them out? When the Bush administration hurriedly proposed the TARP legislation, they had made it clear that bailing out the banks was the only way to help the economy. This was generally understood to be the arrangement.

Another important goal of TARP is to encourage banks to resume lending again at levels seen before the crisis, both to each other and to consumers and businesses. If TARP can stabilize bank capital ratios, it should theoretically allow them to increase lending instead of hoarding cash to cushion against future unforeseen losses from troubled assets. Increased lending equates to "loosening" of credit, which the government hopes will restore order to the financial markets and improve investor confidence in financial institutions and the markets.

"Let the Free Markets Work" And They Will That's How this Whole Mess Started

We now know that the hundreds of billions of dollars that were poured into banks, investment houses, and insurance companies, did not trickle down to Main Street, where the consumer-driven engine of the economy resides. As a result of the administration's unwelcome efforts at reform and regulation, the banks have taken a stand: They will not provide consumer credit in exchange for the bailouts. They never really said they would. They don't work for the government, after all. They work for their shareholders and see no inherent obligation to the government or the economy, since they are privately-held corporations.

Rather than unfreezing the credit market, banks are hoarding the money. They do not wish to lend what they now consider "shareholder money" to the risky folks on Main Street. They know the economy is collapsing at the small business and consumer level because they are the ones causing it -- not only by cutting off business-cycle credit to America's small businesses, but by putting the screws to consumers with painful new fees and impossible terms. This results in an increase in the banks' own credit card and credit line charge-offs -- but even accounting for that, the banks are currently profiting in the extreme.

The banks' self-fulfilling prophesy (and vindictive policy) of economic deterioration is fully underway.

Bankruptcies are on the rise, even among the currently employed and families with good credit. A glut of housing inventory from perverse foreclosures is pushing real estate values down further, putting other mortgages in jeopardy. (The banking lobbyists successfully blocked Obama's attempt to reverse that part of the destructive 2005 Bankruptcy Bill, which prohibited judges from modifying the terms of mortgages of primary residences. For owners of second homes in Aspen or Palm Springs, modification was perfectly fine.)

The small businesses that the banks froze out of the credit cycle are being forced to close. This perpetuates job losses, which beget foreclosures and loan defaults in commercial real estate. As a result, the nation's premier small business lender, CIT, is facing collapse, no doubt by design. One of the too-big-to-fail banks will scoop this specialized lender into its monopoly, pass Go, and collect the usual windfall reimbursements that the government hands out with takeovers.

Credit default losses aside, the banks have still been enormously profitable so far this year. The largest "banks," including JPMorgan Chase, Morgan Stanley, American Express, Goldman Sachs Group, and Capital One, have already repaid their TARP funds. It turns out that making money is easy when there are no toxic assets on the balance sheet. There was no need to make loans. All they had to do was raise fees and interest rates on outstanding consumer credit, and in some cases, sell valuable assets.

Paying back TARP funds is top priority for banks and investment corporations. In doing so, management can freely take the very large bonuses they promised themselves, delivering yet another smackdown to Obama for his attempted regulation of executive compensation.

Other banks, like Citi, had to scramble to secure their bonuses.

Banks are raising credit card fees to pay off bailouts. Indeed, Citi alone is taking in about $500 million a quarter in new revenue from increasing interest rates, according to Richard Bove, a banking analyst with Rochdale Securities.

"The company clearly needs revenues, there's no question about that," he said. "From the standpoint of the company, it's perhaps necessary. From the standpoint of the consumer it's not particularly desirable."

Bove said banks may also be expecting further restrictions on their practices from the proposed Consumer Financial Protection Agency, which some fear may bring back restrictions in interest rates, along with limiting other charges.

"I think the banks are trying to position themselves ahead of that bill," he said.

But, buy getting ahead, the banks may be putting more cardholders in jeopardy of defaulting on their debt.

Historically, what the major US banks are doing is not unusual after a crisis, when governments attempt to enact regulation in the financial sector to eliminate the practices that caused economic collapse. The banks (and insurers) swear to god that they will never do it again -- so there's no need for regulation. In 1933, Roosevelt just chuckled and continued to enact regulations; he understood the investment class and greed. Most recently, Sweden temporarily nationalized and re-regulated their banks until they functioned properly again. In this way, the economic recovery process is orderly, with full transparency, and protections in place for the people. Governments nationalize banks to prevent what's happening in America right now.

The effects of the TARP have been widely debated. A review of investor presentations and conference calls by executives of some two dozen US-based banks by the New York Times found that "few [banks] cited lending as a priority. An overwhelming majority saw the program as a no-strings-attached windfall that could be used to pay down debt, acquire other businesses or invest for the future." The article cited several bank chairmen as stating that they had no intention of changing their lending practices to "accommodate the needs of the public sector" and that they viewed the money as available for strategic acquisitions in the future.

President Bush, of course, could have nationalized the banks when they failed. He actually did nationalize IndyMac Bank when the collapse first began. But his advisors, Ben Bernanke and Hank Paulson, are ambassadors of the same investment-class Cartel as Geithner and Summers. They work for the Plutocrats, the most powerful "Wing" of the US Government. The interests of the Plutocracy are carefully furthered in the name of "free-markets," "innovative capitalism," and [with solemn reverence] "Democracy."

After the bailout recipients reported very high second quarter earnings this week, Paul Krugman noted:

You can argue that such rescues are necessary if we’re to avoid a replay of the Great Depression. In fact, I agree. But the result is that the financial system’s liabilities are now backed by an implicit government guarantee.

Now the last time there was a comparable expansion of the financial safety net, the creation of federal deposit insurance in the 1930s, it was accompanied by much tighter regulation, to ensure that banks didn’t abuse their privileges. This time, new regulations are still in the drawing-board stage — and the finance lobby is already fighting against even the most basic protections for consumers.

So far, the cost to the American people has been cruel, indeed. The Financial Sector shareholders got their dividends and the bankers will get their generous bonuses. But consumers will continue to lose their homes as their access to credit is cut off.

Small businesses, also cut off by the banks, will continue to whither and die along with jobs. The enormous debt, not only from the unsupervised TARP bailouts, but from the wars and irresponsible tax cuts, will cripple economic growth by siphoning depleted tax revenues to service it.

The Feds vast expansion of the money supply (Quantitative Easing) will trigger inflation the moment any modest recovery occurs, and the government will continue to borrow money from other nations and transfer that wealth to defense contractors (the largest wealth-feeder of the Plutocracy) in order to continue our pointless and unproductive never-ending wars. And the markets and commodities will continue to be manipulated by the Feds through futures purchasing at the close of each trading session -- until the world finally turns its back.

The Plutocrat's War in the White House The Behind-the-Scene Battles The Strategy and the End Game

In one corner is Barack Obama, wearing his progressive agenda (purportedly) to fight for the rights and wellbeing of the people.

In the other corner are the Plutocrats, wearing the Financial Sector agenda for the continued transfer of the nation's wealth to themselves.

Upon taking office, Obama immediately set out to pass the American Recovery and Reinvestment Act of 2009, the so-called Stimulus Act. Once this social safety net was in place, he began a policy fight for reform and regulations in both banking and health insurance practices.

In Obama's first regulatory battle in early May -- pushing for a change in the destructive Bankruptcy Bill that would have allowed judges to modify the terms of home loans -- he lost. Obama extended no political capital on this one, so it was a slam dunk for the Financial lobbyists. They even capped this unlikely victory by extracting a concession that saved banks at least $13 billion in fees to top up deposit insurance funds.

Obama's next regulatory battle was won -- at first. The Credit Card Accountability Responsibility and Disclosure Act of 2009 was signed into law on May 22nd. The bankers and their Republican fluffers, however, were more than satisfied with the final Bill. It gave Bankers another year to put the screws to the people. Then in July, the entire Bill was gutted when banks switched all their cards to variable interest rates, exempting them from the legislation. Obviously, the Act was derailed by young staffers who were buffaloed by the banking lobby. Administrative passiveness and Congressional neglect were the wind under the wings of the lobbyists.

Next up is a Bill calling for creation of the Consumer Financial Protection Agency (CFPA) to gather, in one place consumer protections that are scattered across government and frequently ignored. Unfortunately, the Bill is pretty much on the ropes already thanks to enormous lobbyist funding. Here's an overview by Reuters blogger, Christopher Swann:

The industry is digging in its heels over efforts to create a credible consumer protection agency and to sanitize credit default swaps. The industry seems determined to stick as close to the status quo as possible, restricting any move toward transparency. If they get their way, the system will still be vulnerable to crises.

After their crisis their weakness has become a trump card. Hurt the banks, they argue, and the economy would go down with them. Now the banks are taking credit for a revival in profits that is almost entirely due to the extraordinary contortions of public policy.

Banks have turned the tables on America’s politicians. Remarkably, policy makers now seem to be struggling to secure even a modicum of needed change in the regulatory system. The ability of the financial lobby to hold onto its political power has been one of the great mysteries of the crisis.

Given their recent success, the industry may get much of what it wants. This makes it especially important that the White House provide a stronger lead to Congress. Obama appears to have been reluctant to spend his political capital.

The crusading spirit that at one stage threatened to lead to the nationalization of U.S. banks and the downfall of their top executives now seems like ancient history.

Meanwhile, the outcome of the health care issue is closely connected to regulatory control that the Obama administration can get over the runaway Financial Sector. So far, attempts at regulatory control have failed, and in some cases, brought on retribution by the banks. If the Consumer Financial Protection Agency is axed, we can expect health care "reform" to be toothless, as well. A weak consumer class and a health-compromised working class is the description of a non-emergent third world nation.