We face the onrushing dissolution of the Eurozone with all the fortitude of flying chickens in the barnyard.

It is, of course, all about the banks. In the months past we were told that the banks had hedged their exposures. Now we know that the hedges – so-called hedges – were like the credit default swaps that blew up in the U.S. These actually multiplied and spread the risk. They are bets. If the writer writes a lot, he makes money in the current quarter, and he can be the next AIG. Nobody knows the totals. Tens of trillions notionally. Nobody knows. They write them in the back rooms. Playing, of course, with house money.

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There is now a frantic wave of advocacy for a banking union, deposit insurance, making a bank in Athens or Madrid as safe as a bank in Munich. Maybe people won't pull their money out. It's like, "Let's weave a net and quickly throw it under the falling train. Here! You hold that corner. As if.

There is an idea we'll get to later in the podcast that is a solution, though it won't save the banks, it might save the euro.

It would be interesting to go back just a year to hear how trivial the risks were to Spain, Italy, the Eurozone as a whole. You couldn't find an economist saying the banks were the problem. I wish I had the time.

Today on the podcast, a rating agency with credibility, a flying chicken, a solution—yes, from Paul Davidson—and first Nouriel Roubini from 2006, excerpted from Demand Side the Book, out soon in its first edition, much better for its revisions. The rush version can still be had, with this Roubini in it, but we may have pushed it out too soon, a proud parent. needed some more practice and we really needed to tune the piano.

But here, from Chapter 13, Nouriel Roubini and Crisis Economics, quoting from a speech at Davos. One year before his three ugly bears speech on the impending housing finance meltdown. This is now five and ... six! Six and a half years ago.

“[The] lack of serious economic reforms in Italy implies that there is a growing risk that Italy may end up like Argentina. This is not a foregone conclusion, but if Italy does not reform, an exit from EMU within five years is not totally unlikely. … Italy faces a growing competitiveness loss given an increasingly overvalued currency and the risk of falling exports and growing current account deficit. The growth slowdown will make the public deficit and debt worse and potentially unsustainable over time. And if a devaluation cannot be used to reduce real wages, the real exchange rate overvaluation will be undone via a slow and painful process of wage and price deflation. But such deflation will keep real rates high and exacerbate the growth and fiscal crisis. Without necessary reforms, eventually this vicious circle of stag-deflation would force Italy to exit EMU, return to the lira and default on its euro debts [by way of unilaterally converting its debt from euro to lira].…


[A] sovereign nation is able to follow such policies — EMU exit, return to national currency and effective default on euro debt — regardless of any legal or formal constraints that the EMU treaty imposes in terms of no exit clauses. This is not science fiction, as Argentina was forced to do the same.


“What would be the systemic effect of such Italian exit from EMU? They would be extremely severe on EU capital markets as Italy would default on some of its external debt — the part of its euro debts held by non-residents. The contagion effects to other EU capital markets and banks would be severe. And the no bailout rule of the ECB would become effectively threatened as the ECB would be forced to monetize both liquidity and solvency induced runs to avoid a systemic effect on EU financial markets.


“In conclusion, my view is that EMU can work and has worked for the Eurozone countries that have reformed and are reforming. But, unless Italy and other Eurozone laggards change their policies to pursue serious economic reforms that restore competitiveness and growth, they will eventually be forced to exit EMU. This would be a disaster, but a disaster that may become unavoidable unless policies change. And I am currently pessimistic about the chances that such changes may occur given the policy makers and policies currently in place in countries like Italy.”

(Roubini N. , 2006)

Here from 2011,

Roubini writes: (also in the book)

“The bitter medicine that Germany and the ECB want to impose on the periphery ... is recessionary deflation: fiscal austerity, structural reforms to boost productivity and reduce unit labor costs, and real depreciation via price adjustment as opposed to nominal exchange-rate adjustment.


“The problems with this option are many. Fiscal austerity, while necessary, means a deeper recession in the short term. Even structural reform reduces output in the short run, because it requires firing workers, shutting down money-losing firms and gradually reallocating labor and capital to emerging new industries. So to prevent a spiral of ever-deepening recession, the periphery needs real depreciation to improve its external deficit. But even if prices and wages were to fall by 30% over the next few years (which would most likely be socially and politically unsustainable), the real value of debt would increase sharply, worsening the insolvency of governments and private debtors.


“In short, the Eurozone’s periphery is now subject to the paradox of thrift: increasing savings too much, too fast, leads to renewed recession and makes debts even more unsustainable. And that paradox is now affecting even the core.


…


“Of course, such a disorderly Eurozone break-up would be as severe a shock as the collapse of Lehman Brothers in 2008, if not worse. Avoiding it would compel the Eurozone’s core economies to embrace the fourth and final option: bribing the periphery to remain in a low-growth uncompetitive state. This would require accepting massive losses on public and private debt, as well as enormous transfer payments that boost the periphery’s income while its output stagnates.


“Italy has done something similar for decades, with its northern regions subsidizing the poorer Mezzogiorno. But such permanent fiscal transfers are politically impossible in the Eurozone, where Germans are Germans and Greeks are Greeks... [The] monetary union’s slow-developing train wreck will accelerate as peripheral countries default and exit.


…


“With Italy too big to fail, too big to save, and now at the point of no return, the endgame for the Eurozone has begun. Sequential, coercive restructurings of debt will come first, and then exits from the monetary union that will eventually lead to the Eurozone’s disintegration.”

(Roubini N. , 2011)

Nouriel Roubini, years ahead of the flying chickens in the barnyard. Read it in print. Rush version still available at Demand Side Books dot com. First Edition... soon.


Now a little bit of audio and then to the solution from Paul Davidson that could save the euro, but not the banks. The banks are dead. The only question is whether they will drag the rest of us under.

First a digression into the economy. Here we have Sri Kumar speaking to Bloomberg on the Economy after one or another stock pullback.

AUDIO

That was Sri Kumar after a recent stock pullback.

This might be a good place to remind you of the forecast, now out these many months. Bouncing along the bottom, downside risks from Europe, still in recession. Isn't that funny I could say three years after the official end that we are not in recovery and still not get a laugh?

Now to a ratings agency with credibility, Yikes, do we have time? Not really.

Sean Egan of Egan Jones, beginning with the question, "Why are the bond yields ballooning in Spain?"

EGAN

So, that was a little choppy and we've run out of time for Paul Davidson. It's becoming the Demand Side Tease. We'll get to Davidson in the next few days. The solution is an International Monetary Clearing Union, which would get control of capital flows, even within the Eurozone, and would put the onus on the export surplus nations where it belongs, encouraging if not forcing these nations to balance trade and lose this grind to nowhere that comes when the Chinas and Germanies insist on siting employment within their borders and collecting debt instead of trading goods.

Transcript: 507 Climate Crisis meets Energy Boom

Today, Energy, Climate, Bill McKibbin, Phillip Verlegger

and the First Annual Adolph Award

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MCKIBBIN: [In June 2012] researchers in the Arctic reported that across a wide swath of the North they were measuring atmospheric concentrations of CO2 at about 400 parts per million. We've nosed above that number at least in part of the planet for the first time in 800,000 years. The whole planet will be above that within a year or two. The inexorable rise of CO2 emissions, as we burn coal and gas and oil, is the biggest thing, it turns out, that human beings have managed to do. We've raised the temperature about a degree.

That's already triggered chaos. But the real tough part is that we're still at the beginning of this story. The same climatologists that told us that we would raise the temperature a degree and predicted the kind of chaos it would cause are robust in their prediction that if we don't get off coal and oil and gas very quickly, that number will be four or five degrees before this century is out, much of it locked in very soon. Those kind of numbers represent a science fiction planet we cannot live on the way we're used to living.

ASHBROOK: You say we're already hitting chaos. What's the chaos you see that's related to that story that you describe?

MCKIBBIN: Well, let's talk about the last two days. We've got the biggest fire in New Mexico history the third biggest fire in Colorado history burning simultaneously, because – just think of the number of factors -- record drought in the Southwest... We've had warm winters year after year so the pine bark beetle has been able to survive. They've decimated pine trees... Dead stands of pine now going up like kindling...

You know, that's one small day in the life in one corner of the world. Last year in this country we had more multi-billion weather disasters that any year in American history. In fact, we broke the record in August in Vermont. In Vermont we have enough money to at least to begin to deal with this kind of thing. In Thailand in December when they had the worst flooding they had recorded, they think it did damage equivalent to around 15 percent of the country's GDP.

You and I can both remember when the first pictures came back from the Apollo mission -- the Earth viewed from outer space. Those pictures are as out of date as my high school yearbook are. There's 40 percent less sea ice in the Arctic. You can't see it with the naked eye, but if you stick a PH strip in the ocean it comes out a different color. The ocean is 30 percent more acid as its chemistry changes as it absorbs carbon from the atmosphere.

Maybe the most striking thing for those of us who are terrestrial creatures, because warm air holds more water vapor than cold, the atmosphere is about five percent wetter than it was forty years ago. We have loaded the dice for drought and for flood, and we now see it on a kind of staggering and kind of Biblical basis, day after day, week after week, someplace around the world.

And as I say, this is just the start. This is the warning -- and really the last warning we get. Unless we act quickly in the face of that warning, this crisis escalates not linearly, but much more dramatically.

ASHBOOK: [Here is an article from the Economist magazine, under the title:] It says "America's falling carbon dioxide missions 'some fracking good news.' And the news is that because fracking is now where we go in and pull out all kinds of natural gas in really enormous quantities that was not accessible before, we are burning cleaner fuel than coal and CO2 emissions are actually down in this country. What do you make of that news?

MCKIBBIN: Well, you have to look at, as always, underlying physics and chemistry. Natural gas burns more cleanly in terms of carbon than coal does. The trouble is that natural gas released unburned into the atmosphere – CH4, methane -- is more a potent – about 23 times more potent – molecule per molecule – greenhouse gas than CO2.

ASHBROOK: Where is that happening?

MCKIBBIN: It happens anywhere you frack. So the question is, How much are you releasing as you do it. Anything more than about two percent of that gas escaping into the atmosphere actually makes fracked gas worse than coal in terms of its greenhouse gas impact. The only study we have so far was in Nature in January. It studied one big fracked gas field in Colorado and it found that about 4 percent of the methane was escaping unburned.... Meaning it was more damaging to the atmosphere than a coal field.

All of this is hard. The only real answer to it is to get off carbon fuel in general, to not be looking for some bridge into the future, but gird ourselves for the leap into the future. And the really good news, if you want a piece of data that really should make you happy. We can do it. A week ago Saturday, the country of Germany generated more than half of the electricity it used that day from solar panels. Now this is Germany. Munich is north of Montreal. It's far north. It's not that we don't know how to do what we need to do, it's that we manifestly and especially in this country lack the political will to get there.


Bill McKibbin
On Point
June 13, 2012


LETTER

To all of you, and particularly to any of our relatives who might be listening, the burning of fossil fuels is the cause of climate change. For those of you who doubt, I want you to write a letter to your grandchildren.

Begin with, "The conditions on this planet you and our descendents are facing are not the conditions in which I grew up. I am writing to explain the reasons I did not do enough to alter the course of this change."

Then you can go on from there. If you want at the end, say, "In the event there is no catastrophic change in the climate of Earth, and these apologies are not necessary, know that I took a lot of criticism from a lot of people, but I had my allies as well."

One of those allies is coming up in the first annual Adolph Award for communications, presented by Demand Side to a principle enabler of the dysfunctional future.

But the point of today is that in looking at the prospects for climate change, we are thinking like economists. There is risk and there is uncertainty. Uncertainty is where the past is no good measure of what's going to happen in the future. It is the stuff of Keynes and the explanation for investor behavior in crisis and much else. Risk is where the future probabilities can be judged and measured and weighed with some range of probable outcomes.

Footnote: And be sure Keynes knew probability. It was his preoccupation as a student and early in his academic life. He wrote a long treatise on probability. So when he says uncertainty is operative in economic situations because the future cannot be known within a range of probabilities, it is not because he doesn't – didn't – understand probability.

Climate crisis is a risk, not an uncertainty. Climate science is a science. The outcomes as forecast have a high probability of occurring. The planet is getting warmer, violent weather is increasing, oceans are becoming acidified, phytoplankton are being destroyed, glaciers are melting, drought and flood and the rest. This is not uncertainty. Prudent people react to risk – by taking measures.

Economics is not a science. If it were, the probabilities and risk analysis that were brought to bear on conditions of uncertainty would never have occurred. The analysis blew up because it was not appropriate, securitization went under, the Great Financial Crisis. Economists are now split between, "More of the same trickle down low regulation plus new structural adjustments to degrade workers and public goods," and "Invest in public goods, write down debt, rationalize the banks, employ people." Although evidence and experience supports the latter, economic policy is firmly in the hands of the former group, but not because of any legitimacy of their economics as a science, rather for the power of their political positions.

If economics were a science, its axioms and hypotheses would be subject to scientific discipline. That done, the current schemata would have been thrown out and replaced with something corresponding more closely to reality.

But in the end, we survive the externalities of bad economics. We don't survive the climate crisis. There is no "un-do" button" on global warming. Worse than that, the bad stuff keeps happening for decades after we hit the "stop" button. Warming temperatures are locked in, and unless we do hit the stop button, those are temperatures that will end the prospects for our children and their children.

So in your letter, say yes, I lived it up, drove a big car to Wal-Mart, voted down the green taxes and the light rail, voted up Big Oil's boys in Congress. Then say whatever you can to make them feel better about you. I'm not sure what that would be. I've been trying to think of something for myself.

ADOLPH AWARD FOR COMMUNICATIONS

The First Annual Adolph Award, presented by Demand Side to the person most worthy of shaping the public consciousness of the alternative to reality that is the beacon leading onto the cliffs. Or perhaps over the cliff. "Look, the way is open, no resistance, Aaagh, we're falling."

There are a lot of worthy recipients, but none has better represented the interests of the corporate state, scapegoated rather than explained, and cast more error into the workings of the public's understanding than today's award-winner. You may be familiar with the no global warming theme, now retracted for a global warming is not the result of human activity theme. Another favorite is "half the people don't pay taxes," when nobody in the nation doesn't pay taxes, and when all taxes are considered, the incidence is flat, except at each end, when it is lower for the poor and lower for the rich. So, today, the winner is:

FoxNews.

The propaganda arm of the corporate right wing. The champion of ad hominem debate.

Here to accept the award is Roger Ailes... No? ... In Mr. Ailes stead, Rupert Murdoch... No?

Bill O'Reilly... Sean Hannity...

Wow. They don't get awards very often. I wonder why nobody showed up. Each of them deserved individual recognition. We'll just keep their names on file for our grandchildren.


Okay. That was fun.

But we said we were going to do energy today.

Phillip Verleger is a long-time energy industry analyst and political operative. He gives us the boom side of the energy picture. Verleger is not an idiot. If we could export the climate to Mars, we would be fine.

Listen.

VERLEGER

Our view is we ought to be taxing fossil fuels to finance the transition to a clean energy future. Tax the bads, subsidize the goods. That could be done tomorrow with the Cantwell-Collins cap and rebate scheme. Essentially set a limit on carbon production, auction the rights to that limit, and rebate 75% of the tax proceeds to each household with a check. The great majority of households come out ahead financially. The price of carbon becomes related to its costs. And there is 25% for financing alternatives, a survivable future.

Transcript: 506 Relay Stiglitz Book Tour

Wide ranging interview with Joseph Stiglitz from Steve Scher and Weekday

recorded June 13, 2012

Listen to this episode

News from Europe

Spanish banks get some sort of bridge loan to nowhere through their government.

Quote

from Prime Minister Mariano Rajoy, whose party won with 44.6 % of the vote in November. Polls now say he would capture 37%., with 63% unhappy with his performance. Quote

"Europe is offering Spanish banks a credit line that they will have to pay back.... There is no macroeconomic conditionality for the country, but for the banks that receive it."

Listen to this episode

Sounds kind of good. At least it sounds like Spain has declined the hemlock Ireland imposed on itself – the wholesale guarantee of bank assets by the taxpayer.

Not so fast.

The page one headline in the Wall Street Journal is followed by the lead, "Spain's acquiescence to a bailout of as much as 100 billion euros ($125) for its banks is a prelude to a much bigger question: Will Spain need a bailout for itself?"

Prime minister Rajoy's quote is on page A7.

On page A6, in the column just to the left of a quarter page ad for art deco diamond cufflinks, you get an analyst with this quote: "What you have to say now is that Spain is likely to lose access to the bond markets completely at some point. It has demonstrated to everybody that market access is limited by requesting aid."

And in truth, the banks and the political apparatus in Spain are interlinked, partly through the cajas, the regional savings banks, seven of which were merged to form Bankia, whose chairman Rodrigo de Rato resigned under pressure last month. The shares of Bankia did not find eager buyers on international markets, so they were peddled to the domestic population. Those shares have lost 75% since they were issued in July of last year.

Sudeep Reddy reports that the U.S. had quote pressed behind the scenes in recent monts for Eurozone rescue money to be injected directly into Spanish banks, instead of going through a loan to the government as now planned. That goal was pushed publicly by the IMF and many nations in Eurpoe – apart from the most powerful, Germany – to avoid adding to Madrid's already bloated government debt load and risking even higher Spanish borrowing costs in the coming months."

unquote

The banks are buying the government's bonds and the government is getting loans for the banks,  and there is no real separation. So the prime minister's position, though better as a negotiating strategy than Ireland's pointing the gun at itself, is likely no more credible than this quote from a Saturday news conference.

"It will allow the restarting of credit to families, entrepreneurs, small and medium-sized businesses so that they can all carry out their projects...  The European project, the future of the euro and our banking system all won new credibility yesterday."

 The aid comes from the European Union. We suggest the credibility of Saturday had vanished by the next Thursday.

Late news from Europe Online via Steve Keen

The jog on Greek banks is turning into a sprint, it seems, ahead of Sunday's elections.

Athens (dpa) - Greeks faced with uncertainty over their country‘s future have been withdrawing hundreds of millions of euros a day, officials said Tuesday, as the country heads to the polls for an election that could decide whether it stays in the single currency.

Greek account holders had withdrawn between 100 to 500 million euros a day, bank officials said, according to local media.

Reports said approximately 5 to 6 billion euros had vanished from accounts during the month of May and the situation had not improved since the start of June.

Bank officials said since the start of the economic crisis at the end of 2009 some 80 billion euros had left local bank accounts.

 One imagines the ECB now asked for continuing loans from Greek banks to deal with the bank run.  We've said it is the day that the ECB refuses to provide that backing that is the day the Greeks leave the euro.  It is not a matter of a choice by government.

We'll see.

I guess I would be moving money from Athens to Berlin right now.  If I had any money.

Meanwhile an old book with a new preface is out.  The book is Charles Kindleberger's The World in Depression, 1929-1939.

The preface is from Barry Eichengreen and Brad DeLong, which says in part:

The parallels between Europe in the 1930s and Europe today are stark, striking, and increasingly frightening. We see unemployment, youth unemployment especially, soaring to unprecedented heights. Financial instability and distress are widespread. There is growing political support for extremist parties of the far left and right.

 Mark Blyth and Matthias Matthijs at Foreign Affairs: The World Waits For Germany.:

So Germany has shifted, but not enough to make any real difference to the outcome. Germany is both devoutly anti-reflationary and leadership averse, which is the worst possible combination at the worst possible moment. It would be nice, to use an American expression, for Germany to step up to the plate and put its full economic weight behind a fiscal and a banking union, including euro-denominated sovereign debt. But for reasons of history and ideology, as well as political and economic context, Europe may well be about to re-run Kindleberger's 1930s ...

 Another call for a banking union from the ECB, read from the Wall Street Journal

The European Central Bank repeated its call for a common banking union to shore up the euro zone's financial system, even as Germany's central bank warned such proposals are "premature" and risky.

The ECB's No. 2 official, Vitor Constancio of Portugal, also said the central bank should have the power to supervise large European banks, saying it has the institutional resources and knowledge to perform such a task.
...
"There is a need to…conceive a banking union as an integral counterpart of monetary union," the ECB said in its semiannual financial stability review. Such a union would include euro-zone-wide bank supervision, deposit guarantees and a funding mechanism from banks."

 We are  reminded of the end game in chess.  The end game is the period after the outcome has been decided, but the checkmate has not yet occurred, or the draw has not been agreed to.  The tactics and grand strategies have been played.  The end game is NOT the climactic final mating maneuver.  It is an often tedious pushing of a pawn to the last rank or cornering the king or even just a perpetual play on when neither side has the material to force a win.  Good players will often resign rather than waste time where there is nothing to learn, resigning even if the outcome is sure to be a draw or even if they could force a win.

This is the situation in Europe.  Nouriel Roubini predicted these events in 2006 at Davos.  The strategies to avoid them were to deal directly with the trade deficits, the debt and what are termed competitiveness issues.  The political players in the game, however, were not willing to give up their queen or bishops, as the strategy required, preferring to save the banks and lenders and euro rather than win the game.  But sacrificing the king is a gambit that never wins.  The king is the broad real economy, which must be fully employed in productive enterprise.

A friend of mine returned yesterday from France.

"... intensely interesting", he wrote. "No question in my mind but that the European experiment is the most radical in recent history.  I got a whole new appreciation for the political power of the euro -- despite its economic  failings, it is a political statement of incredible importance. "

 I'll leave out his comments on the experience of coming back to the U.S.  But he did conclude, "Ugh, we ought to be ashamed."

So.  I accept that the euro is a matter of extreme political power and importance.  But it becomes like a chess player who doesn't realize the game is over and forces his opponent to play on and on, contemplating every possibility that his king might block the connected pawns, dragging the game on into the night.  The motivation not to lose is intense.  The game has ultimate importance.  In the end, the worry is that the ultimate realization of loss will spur anger and frustration and it will cease to be a game of chess.  The board will be upended and engagement on economics will become engagement in political fisticuffs.

The question, of course, becomes, "Is the game really over?" For those of us who see it as a game, a combination of finance and currencies and employment policies and bubbles, and ultimately of political players, yes, the game is over.  The next game should begin as soon as possible.  For those invested in the euro project, who see the money as a symbol of unity and social advance, there IS the possibility that an overarching and unprecedented control of the financial sector and the financing mechanism could be instituted.  Dani Rodrik's view.  In theory, the sovereignty of nations could be upheld, trade rebalanced, the exchange rate difficulties finessed, even now—or perhaps especially now in the appreciation of the desperate times.

But the game is in the hands of those who must save the queen, not the king.  The bankers led by the ECB are making the moves.  It doesn't matter that everyone else sees the futility.  Even IF everyone else saw the futility.  The common currency can survive, but not the banks, not the bond vigilantes, not the arcane economics that excuses such behavior.

Because in the last analysis there is NO economics that supports what the policy elite in Europe and the US are doing.

 

All that said, let's look at the end game.

Europe's bailout, the transition of bank debts to the public, the fact of Ponzi debt and consumer debt that must be paid out of income without having produced any income-generating value.  The situation remains and worsens that nations with excess total debt are finding higher interest rates in the context of negative net incomes.

Why not balance trade?

First – the book – not rumor, since you can see the Review and Comment edition at DemandSideBooks.com, but not real either – in the book we argue that the great virtue of Germany and China is their willingness to take money instead of goods when they trade.  it is not the trade of wool for wine through the medium of money.  It is the trade of wool for money.  When the money is turned into bonds, so as to collect a little interest, it becomes debt. Voila, the choice by me is turned into an obligation by you.

Of course, you COULD  adjust the exchange rate.  Country A's goods are more expensive now.  China and Germany don't export so much.  Trade is balanced, some inflation, some deterioration in Country B's standards of living.  No net negative income.

And we lose the absurdity of the policy prescription from the righteous market fundamentalist, "Everybody needs to follow Germany and Japan into net exporter status."

But what about the US?  You see a chart in the book, final out soon, which shows that the US has a net deficit five times that of the next country.  Yet the same folks as hold up Germany are most wont to congratulate the corporate oligarchy in the US for its weathering the economic storms.

Massive trade deficit

Massive government deficits

Dysfunctional political process, bought by that corporate oligarchy

But the so-called underlying economy is doing well, because I guess we bailed out the banks and allowed them to run the government.

In any event, we're glad we didn't do too much meltdown in Europe talk last week.  The situation is not much different today, except in the eyes of the beholders.  But those beholders often behold the second coming.  The solution that has yet to be approached – restructure the debt, remake the banking system, allow an exchange rate mechanism or capital controls is not beheld. 

It will be the madness of austerity until it becomes entirely too onerous.  The madness of austerity is rule by the banks, under the leadership of the ECB, more austerity for each new loan.  More debt, more austerity.  Great plan.

Today: Politics and economics,

Markets

Paul Krugman, a dangerous man part 2

More markets

Apology for no book.

Listen to this episode

We read candidate Obama's economic plan in 2008. You may remember, we did a series on it: single payer, end tax cuts for the wealthy, infrastructure spending, limits on speculation.

O is for oops. We read it, apparently the president did not. Early on he took Robert Rubin in front of the cameras, brought in Larry Summers, went Wall Street, stood on the steps of the White House and spoke about....

I can't find it here, but as I recall he said something very much like, "Many of you are asking, 'Where's my bailout? But we need to recapitalize the banks and get the process of credit creation going again." Something like that. In other words, first the banks, then the economy will follow.

We'll let you fill in the commentary today. We're going to take off in another political direction. A recent USA today poll looked at the support for the two presidential candidates and broke them out by opinion on the economy. It is at cross-currents with the political wisdom coming out of Washington, DC, which I will categorize as "If the economy tanks, Obama is in trouble, so job one for the Republicans should be to make sure the economy tanks."

The poll found that many of Obama's supporters come from the hard-pressed and the 99 percent, those who do not see things getting better any time soon. On the other hand, the great bulk of Romney's support comes from what USA today calls, the Thriving.

The Hard Pressed favored Obama 63% to Romney at 23%. Most doubt the economy will improve regardless of the election. Their top economic issue: Cost of health care. 60% of this group are aged 55 and up. 54% are independents. They gave Obama a job approval of 54%.

The Upbeats on the other side, also favored Obama, here 58% to Romneys 23%. These are split, some see better times if Obama wins. Their top issue: savings and retirement. 39% are moderates.

Those identified as the 99% ers, about twice the size of the first two groups, are in Obama's camp 77% to 17%. Their top economic issue: the concentration of wealth. 20% of this group are Hispanic, most of any group, and this is the most liberal and Democratic group. Obama's job approval 74%.

On the other side, Romney is tops with the Thriving, whose outlook is sunny, especially if Romney wins. Top economic issue: federal deficit/debt. These are the youngest group, average age 42 and have the highest income and educational level. Combined with these are the Downbeats, who all say the economy improves only if Romney wins, whose top economic issue is still the federal deficit and debt, and who attend church at least once a month. These are the most conservative and Republican group.

To reveal bias, I guess I would categorize myself as a 99%er who does not give Obama a good job approval mark.

But the poll reveals that the wisdom of Washington seems to be going after the base. The Republicans want the Downbeats, who they already have. The President wants the Upbeats, and risks blowing it with them if the economy does not do well over the next six months.

But the great majority of each side's support are in the opposite camp. The 99%ers and the Hard Pressed for Obama and the Thriving for Romney.

I see this in my listening to business radio. The conservative and establishment continually talk up the recovery and how we are turning the corner and trying to consolidate a recovery. The liberal and insurgent continually warn of the mess in the banking system, the weakness in jobs, the inordinate and continuing stimulus needed to keep the economy above water.

So make of that what you will. A friend of mine with similar sensibilities says, "Who do you want with the gun, Barney Fife defending you, or Davey Crockett shooting at you?"

I wouldn't say anything like that.

Paul Krugman is a dangerous man, part 2.

I apologize to those of my liberal friends who think Paul Krugman is a progressive answer. He has a liberal critique, that is in large part true, but an answer....? Not so much. While we agree that refunding states and localities is a good place to start, the rest of Krugman's shtick, further reducing the interest rate and risking inflation is a hypothetical situation that won't happen because the Neoclassical playbook from which he operates does not fit the real world. We went over that a couple of weeks ago.

Some of you may be aware of the set-to between Steve Keen and Krugman over the DSGE models, the Dynamic Stochastic General Equilibrium models, which Krugman defends and Keen attacks. Krugman's recent defense of these was to retire from the field when challenged.

The issue was a comment by Keen that the common models used by Krugman and the rest of the Neoclassical school are really dressed up versions of completely unrealistic classical models that explicitly or implicitly assume one consumer, no money or debt dynamics, and time existing only in a stylized form. Krugman's version of DSGE employs tactics for sticky prices and other so-called imperfections, which Keen characterized as more or less fudge factors to make the data come out better.

It wasn't that Krugman disagreed, as he just overlooked or ignored Keen's points and when they were brought up to him by dozens of his blog followers, declined to engage them, saying, "I'm done with this conversation."

So again, Paul Krugman is a dangerous man, not because his heart isn't in the right place or much of his analysis is not good, but because it is. Having gotten credibility from that, however, he spends it in the mistaken prescription that a simple, temporary stimulus will jump start the economy. That is, further deficits and refunding states and localities.

No. Tremendous debt has to be dealt with, sooner or later. The mortgage mess has to be rationalized in the same way it was done in the 1930s, by writing down principle or keeping people in their homes as renters until the house is salable. The egregious disparities in incomes and political power have to be leveled. The government has to begin long-term, useful infrastructure and employment programs. We offer this not as a likely course of action, particularly in the near term. No politician is going to run on such a platform. We offer it because, from the demand side, it is the only course of action that will work. Sooner or later it will be tried. If it is not tried, we're in for hard times for a long time.

We keep hearing about avoiding deflation. We have not avoided deflation. Capital goods are deflating apace. Housing. Look at the 10-year bond as a surrogate. Investment is very low. Consumer goods may be inflating at very low levels, but primarily because the easy money from the Fed is inflating commodity prices.  Those liquidity injections are -- surprise -- inflating liquid assets, not the real assets we need for recovery.

Oh yeah, Do not lose track. We put up a Congressional hearing featuring Michael Greenberger not so long ago, noting a new intensity in investigating speculation and derivatives in oil markets. From that time, oil has trended lower. I know you don't hear anything but supply and demand anywhere else, but we're not buying it. When 70% of the market is speculation, speculation is controlling the price. Is there anything different about Iran and Israel? Can the markets not see three months ahead? Why would the price fall? But it is falling.  Or has been.

We'll let you decide.

A further comment on the market. We have two notes. Money fleeing the rest of the world looking for dollar-denominated assets will come into stocks as well as bonds, and the impact of the exchange rate should not be ignored. That is, because the dollar is going up, people want dollar-denominated assets. Not trust in the US economy, a play on financial markets.

And we can't let today go by without noting the weakness in stocks takes place after years of thin trading. The retail investor has been avoiding stocks. The professional trader has been in them. When you think professional trader, think leverage. As stocks trend down, think professional investor unwinding positions. I am not making predictions, but I am going to look to see if we don't have a strangely even glide path, as the sophisticated strategies that limit risk and maximize reward gradually unwind over time. Call it the algorithm glide.

Not to forget Europe. All about the banks. Nouriel Roubini in 2006 made speeches about the events we are seeing today, yet the desperate cries from here and there make you think it was a tsunami that started yesterday. The madness of austerity did not work. What's the answer? More austerity!!! Amazing.

All about the banks. A level of debt that cannot be repaid, so the official answer is to lend more money at higher interest rates. Individual nations have banks which are experiencing outflows and depend on ECB lending to them. If they do get the lending, they float on for awhile. If they don't, they go under and fail. How do you exit the euro? You get kicked out when sooner or later you don't get to float on ECB lending.

I guess we ought to note the JP Morgan Chase trading debacle has a few more items. The trade is still not boxed, meaning losses are open-ended. When you hear something like that admitted by Jamie Dimon, know it is worse behind the closed doors. The office in London where they make these hedges was taking gigantic positions even last year. The trade described initially as a hedge against losses was not in all likelihood anything of the sort, but strictly a play in the casino markets.

So that's it for today.

Our apologies for being such a slug. The review and comment edition is eliciting a lot more work than we had imagined, particularly late in the game. We'll stop predicting the date for the final. You can still get that edition at demandsidebooks.com. But don't, unless you're desperate. There's a lot that you can read for free there. It will be out when we get our act together. Nobody's fault but ours.