Today on the podcast, Jeffrey Sachs of Columbia University and the Earth Institute. On Europe and on the Climate. From Bloomberg Surveillance with Tom Keene.

SACHS

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Saying we are economically lashed to carbon based energy is like saying we have to keep hammering nails into our skulls to have a functioning economy.. The cheaper the nails the better. Maybe we could come up with another way of keeping our hats on. Something more sustainable.

We can create technologically advanced rail with the same engineers who create technologically advanced carbon gas producers.

Energy saving retrofitting. Energy conscious construction.We can build transcontinental DC transmission lines that are not a threat to anybody’s water, conduits for Midwest wind energy to New York City lights with no transmission loss. We can begin to reorganize the sprawl into livable space. There are a million and one essential things that could be done beginning right now. We have the people, God knows, waiting to do something.

Why don’t we do it?

It costs too much.

How ridiculous is that? The cost of not doing this is potentially cataclysmic.

But the cost of doing it is too much. Reinhardt and Rogoff have given cover to this nonsense. First by saying government borrowing and debt is the cause, not the result of the economic collapse. Then by saying in essence to cut the government’s participation in the economy.

Look at the acres and plateaus of McMansions and the towers of luxury condos. These created the modest expansion of the George W. Bush years, along with the immense debt incurred to build them. We still have the homes. And we still have the debt. Less than ten years ago, this was the private market’s idea of what we should invest in.

The financial sector made lots of money, and lost lots of money, much of which is still yet to be accounted for in a methodical and legitimate manner.

Now every lever known to government has been pulled for the benefit of banks and private markets. the premise is that we will go back and build what we used to build in the bubble years or before -- sprawl and cars and vending stands for Chinese goods. We’re borrowing a trillion dollars a year to keep the cash flow going through the federal government. The Fed is sponsoring any project your corporation wants to build at two percent interest.

Is it working?

No. It’s not working. It won’t work. It cannot work.

Saving the banks. Floating them on easy money and direct and indirect bailouts won’t work because it doesn’t recognize the obvious fact of their decadence and corruption and it doesn’t lead to any productive investment to pay back even zero percent loans.

This is disgusting. As Sachs says. On one hand the climate crisis is breaking around us like one of its violent storms. On the other hand the only thing we can afford to do seems to be to bend over for a financial sector bent on doing nothing but helping itself to whatever it can reach.

Sorry. I get exercised. but the money to do this is at hand. Interest rates are very low because the private sector doesn’t want to invest. (See deflation indicators.) And if we don’t get the economy moving toward a useful future, who is going to want our money?

Pressing and obvious need: Addressing climate change, as you heard here, just getting to square one in the organization.
Capacity in plant, equipment and people lying idle
Investment capital decaying in bank vaults and 101(k)’s.


The only financially responsible thing to do is to cut employment in government?

Give me a break.

The only financially responsible thing to do is to let those who don’t want to participate sink in their own quicksand. That is the banks and the corporations who are hoarding cash.

The fiscal cliff is the triumph of jargon over substance. What is the fiscal cliff? Austerity on one hand, if we allow it to go into force. What kind of Austerity? The end of free cash flow to consumers and thence to consumer-oriented business through the government.That is the overwhelming effect of the current fiscal situation. Tax cuts sold as stimulants to the economy, temporary events, or surely not to be needed once the economy was going again. It is the same argument for tax cuts we’ve seen since George W. rode to office. We did it in 2001 and 2003. How well did it work?

The fiscal cliff is the policy Germany prescribes for the rest of Europe. Heck. Greece and Spain are Amish in their finances compared to the U.S. Many times the current account deficit of any other country. Deficits that continue.

The Ryan budget, end the deficits without ending the tax cuts means financial chaos. It is actually impossible on its face, with the multiplier effects of such draconian measures. Three years ago, the ECB said to Greece, cut your budget, confidence will return, you won’t lose access to bond funding. How well did that work out? Two years ago it was Italy. Last year Spain. Just sacrifice your populations to the bond vigilantes and they will release the confidence fairy.

Not working. Won’t work. Cannot work.

The idea may be to push Medicare and Social Security off the fiscal cliff. I don’t know.

What if we actually required consumers and businesses to pay for services currently being received. Armageddon.

These would not include current spending on Social Security and Medicare. Notice they are still in the black. Today, tomorrow, next year. The unfunded liabilities are in the future. The trillion dollar deficits are here and now, with the Republican controlled Congress. They are paying for military, debt service, government facilities, not Social Security and Medicare.

Remember when Al Gore suggested we put Social Security in a lock box.

The military budget, the non-entitlement budget has been floating for years on borrowing from Social Security and Medicare Trust Funds. Now it turns out that it’s not the borrowing that is the problem, it’s the paying back. Your and my taxes have been lower for decades because we didn’t count borrowing from Social Security as borrowing.

Okay... I’ll stop.

I realize all this is well clear of anything currently on a public agenda. Probably sounds like every other crackpot on the radio.

Elsewhere government for sale, the corporate republic, is now in campaign mode, where dollars are translated into votes by a sophisticated slur machine. Fortunately for us in Seattle, we are not in a swing state. My sympathies to those of you who are.

Also. I don’t watch TV. And I can shrink the screen on my computer to lop off the ads. And the podcasts -- as you know -- are wonderfully light on advertisement.

None lighter than Demand Side Economics. Check out the book at DemandSideBooks dot com

The whole Demand Side empire. No ads. At least none generated by us. If you do see ads on your screen, let us know. Demandside at live dot com.

We’ll root them out of there.

Transcript: 514 Barofsky on TARP

brought to you by Demand Side the Book, Demand Side Minds, available on Amazon, in Kindle. Look for the links at DemandSideBooks.com.

As John Maynard Keynes revealed seventy-five years ago.

“When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done”

Neil Barofsky, former Special Inspector General for TARP ahs a new book out. title: Bailout. Subtitle: An inside account of how Washington abandoned Main Street while rescuing Wall Street.

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The casino markets are in full flower, and the biggest players own the House.

In Europe where the banks are increasingly exposed to sovereign debt that is wilting in the desert of austerity that they, through the ECB, demand, the call is ever louder for an American-style TARP. You heard it here last week from Carl Weinberg. The success of TARP -- the Troubled Asset Relief Program -- is confined to the prosperity of the big banks.

BAROFSKY QUOTE

We’ll get to the full audio in a moment. But the point is well taken. Congress intended TARP to lead to a recovery of the economy. Didn’t happen. Millions of homeowners, millions more unemployed workers, and tens of millions of taxpayers are on the hook for a program that is not working.

It is increasingly apparent that the Treasury under Tim Geithner, the White House and the Fed have one constituency -- the banks. Help for homeowners and a recovery of the real economy was only necessary smoke to funnel largesse of all kinds to the banks. “Foaming the runways for the banks,” is what we hear officials call it through Barofsky. That in reference to the half-hearted help for homeowners. Extend and pretend until the fortress balance sheets can be repaired.

BAROFSKY

The special inspector general’s website is useful. Get that link on the transcript.


http://www.sigtarp.gov/Pages/home.aspx

Like millions of Americans worried over their shrinking retirement funds, I relied on www.sigtarp.gov to find the truth about where our tax dollars were going and to whom.

Barofsky’s book gives us an inside and in depth look a the obstruction and aggressive trench warfare he found when he came to Washington to oversee the program. He paints the picture in detail, of a Treasury under Tim Geithner devoted to the banks and to blocking effective oversight of TARP.

The program ballooned from $700 billion into $23.7 trillion in commitments by various federal agencies, which with eerie precision avoided preventing a tsunami of evictions, foreclosures, fraud, blighted neighborhoods and homelessness. Barofsky correctly fingers Treasury Secretary Timothy Geithner, abetted by a timid White House and the regulatory capture we heard about here.


As he says at the end another financial blow-up is inevitable absent fundamental reform and restructuring of global finance. Which means it is inevitable.


It is amusing to hear economists yearn for stronger spending by the consumer. That prescription would be a lot easier for consumers to follow if they had some money. Indeed, where credit is extended -- as in autos -- there IS spending. But consumers don’t have money. The banks and the corporations have the money. They are holding onto it.

This month the numbers are slightly better. Last month they were slightly worse. The economy is on the mat, not on the mend.

The policy now in force is not a route out of the malaise. Nor are any of those in prospect. It is like looking to the west for the sunrise.

The political drama is a battle between do nothing and do damage, a fight between the Obama version of Reaganomics and the return of the Republican Old Guard intent on doing actual damage.

We have the template: direct government employment or subcontracted employment to get people to work in the real economy, a renegotiation of mortgages to realistic prices to get the housing market going, straightforward regulation and restructuring of the financial sector. It was done in the New Deal and it worked. The recovery of the 1930s was actually better year over year than this one.

It is our great good fortune that not all of the New Deal institutions have been dismantled. Social Security and Unemployment Insurance survive, among others. Medicare from the 1960s provides essential security to a population retiring into uncertainty. Without these programs, we would be in worse shape. Should the U.S. follow Europe into the madness of austerity, there is no telling where we will end up.

Now we have the toxic cloud of climate change rolling over us and nobody is mentioning it. Addressing climate change full on could create the value needed to finance the effort, and the millions of jobs Read about it in Demand Side the book.. Instead we put it all on red thirty-two, even thoguh we know the guy with the Dimon earring has rigged the wheel.

And we’re surprised when we lose.

Transcript: 513 Weinberg on Europe

Today on the podcast, Carl Weinberg of High Frequency Economics on the potential crisis in Europe, but first Dean Baker on LIBOR, Nouriel Roubini on American Pie -- in the Sky, and Mitt Romney on vice presidents

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513 Weinberg on Europe

from Dean Baker

The case of the rigged Libor turns out to be the scandal that just keeps on giving. It reveals a great deal about the behavior of the Federal Reserve Board and central banks more generally.
Last month, Federal Reserve Board Chairman Ben Bernanke gave testimony before Congress in which he said that he had become aware of evidence that banks in England were rigging the Libor in the fall of 2008. According to Bernanke, he called this to the attention of Mervyn King, the head of the Bank of England. Apparently Mervyn King did nothing, since the rigging continued, but Bernanke told Congress there was nothing more that he could do.
The implications of Bernanke’s claim are incredible. There are trillions of dollars of car loans, mortgages, and other debts, in the United States, tied to the Libor. There are also huge derivative contracts whose value depends on the Libor at a moment in time. People were winning or losing on these deals not based on the market, but rather on the rigged Libor rate being set by the big banks.
Bernanke certainly had an obligation as Fed chair to expose and stop this rigging, which was interfering with the proper working of U.S. and world financial markets. But hey, Mervyn King didn’t want to take any action, what could Bernanke possibly do?

It is truly incredible that Bernanke would make such a statement to Congress and the public. There was nothing he could do about the rigging?



American Pie in the Sky
by Nouriel Roubini
From Project Syndicate:

While the risk of a disorderly crisis in the eurozone is well recognized, a more sanguine view of the United States has prevailed. For the last three years, the consensus has been that the US economy was on the verge of a robust and self-sustaining recovery that would restore above-potential growth. That turned out to be wrong, as a painful process of balance-sheet deleveraging – reflecting excessive private-sector debt, and then its carryover to the public sector – implies that the recovery will remain, at best, below-trend for many years to come.

Even this year, the consensus got it wrong, expecting a recovery to above-trend annual GDP growth – faster than 3%. But the first-half growth rate looks set to come in closer to 1.5% at best, even below 2011’s dismal 1.7%. And now, after getting the first half of 2012 wrong, many are repeating the fairy tale that a combination of lower oil prices, rising auto sales, recovering house prices, and a resurgence of US manufacturing will boost growth in the second half of the year and fuel above-potential growth by 2013.
The reality is the opposite: for several reasons, growth will slow further in the second half of 2012 and be even lower in 2013 – close to stall speed. First, growth in the second quarter has decelerated from a mediocre 1.8% in January-March, as job creation – averaging 70,000 a month – fell sharply.
Second, expectations of the “fiscal cliff” – automatic tax increases and spending cuts set for the end of this year – will keep spending and growth lower through the second half of 2012. So will uncertainty about who will be President in 2013; about tax rates and spending levels; about the threat of another government shutdown over the debt ceiling; and about the risk of another sovereign rating downgrade should political gridlock continue to block a plan for medium-term fiscal consolidation. In such conditions, most firms and consumers will be cautious about spending – an option value of waiting – thus further weakening the economy.


Last time we took a look at monetary policy with Tony Dwyer. We didn’t play idiot of the week theme music then because we respect Dwyer’s intellectual consistency and commitment to his thesis. Which broke down at the point where he contended that economic activity is fomented by Fed interest rates. We agree that this is how markets see it and react, but the evidence is lacking in the form of actual economic activity being produced. Money is produced in the lending process. Lending is generated not by having cash near at hand, but on the prospect of profit. Conversely money is destroyed in the debt deflation process, deleveraging, under the prospect of loss.

Here with Weinberg we see again intellectual consistency and coherence., plus a keen eye on what is actually happening, but it breaks down again at the point of credit creation. here Weinberg says Europe needs a TARP. He’s right that it is all about the banks, and we’ve said that here at Demand Side from the beginning. And he is right again about the foolishness of trying to reflate the bond bubble. (Though we not with respect to the U.S. that -- however foolish -- the Fed (not the Treasury) did try to reflate the MBS market. The evidence is still on its balance sheet.) But Weinberg is not right about the effectiveness of the TARP scheme. Pointing to some green shoots in the US in C&I -- commercial and Industrial -- lending, he neatly avoids the fact that it has been a long time coming. The exposure of the US to Europe is much more serious than this kind of bad smell he alludes to. The US recovery is as much or much more a result of the non-austerity program of trillion dollar deficits and the cheap funding from having a safe haven currency than it is the TARP. The rescue of the banks has been a failure to enforce market discipline, or any kind of discipline, on a sector which is demanding discipline and sacrifice from everybody else. It is the banks who are in charge. Hence the present stagnation and the perilous future.

Liquidity is often talked about, but rarely defined. When you hear “liquidity is sloshing around,” you -- or at least I -- have a vision of money, dollar bills, looking for this or that asset to buy.

And indeed cash is the most liquid asset. One can imagine, however, a situation where its price can -- say in terms of water in the desert -- change.

The point is the essential quality of liquidity is that the thing can be bought and sold easily without changing the value. Stocks and bonds with deep markets are liquid. Real estate in a depressed market is not liquid.

When the central bank provides liquidity, it is loaning money against collateral that in the present condition cannot be sold at normal prices. It is not buying the asset outright, unless you are the Fed, but loaning against collateral, so the asset does not have to be sold into a falling market, an illiquid market.

“Lend freely against good collateral” is the central bankers slogan in times of crisis and one that Ben Bernanke has quoted.

The question becomes, “What is good collateral?” How do you know if you have an illiquid market or a worthless asset?

With mark to market, which legitimate accountants insist upon, the asset wants to be valued against a current market price. With extend and pretend, banks and others seek to hold onto assets at higher valuations until some time in the vague future that the market comes back. Betwen them is the question, Are the markets illiquid or is the value of the asset just not what you want it to be?

Since decisions about the value of collateral have been made in the heat of crisis, there is no doubt that the drive to provide liquidity has led assets to be valued above their market price and loans extended on this value.

So we get to solvency. Is the value of assets higher than the value of liabilities? Now we do not pretend to understand the nuances of finance, but we do see short- medium- and long-term. The cash from the loan is an asset. The loan is a liability. If the collateral value goes down, you’d better have kept the difference in some form, otherwise -- say hi , American hhomeowner -- you are under water.

Then you have a market which becomes illiquid and there is no collateral to loan against. See the MBS, mortgage backed securities, market, where the collateral is a slice of a bundle and the underlying value is opaque. Ben Bernanke says you just buy the whole security. Not so different from a repo -- repurchase agreement -- except nobody is contractually obligated to repurchase. But the market will provide once we straighten out the quote complex chain of causality unquote that led to the housing bust.

Footnote: A repurchase agreement or repo is a contract where you sell your asset and agree to buy it back at some future date, with a price differential. It is effectively a loan agaist the collateral of the asset. That is, at the end of the day, you get cash for a specified period, and the lender gets rights to the asset, and you pay for the privilege in interest or in the difference in price.

The bad news is the Fed purchased more than a trillion in MBS’s and has become the only buyer ni the market. Now those securities are sitting there waiting for a revival. The sellers have their money. The Fed doesn’t talk about it.

At the tmie, baffled Ben’s analysis was that the housing bust was generated by quate a complex chain of causality” unquote in which one market didn’t support the next. He would step in and provide the support to the critical link in the chain and keep the whole thing from falling apart, and yes the market would reflate.

Ooops, it wasn’t a chain. It was a bubble. The bubble popped. You can’t reflate a popped bubble. That doesn’t seem to keep Ben off the pump, though, buying mortgages, reducing rates, etc., etc., in hopes one day those securities will be worth what he paid for them.

Just a couple of notes before we wrap up. Walter Bagehot (that’s B-A-G-E-H-O-T, prounounce Badget) originally said in the 1860s or 1870s, the central bank should lend freely against good collateral at punitive rates, so as not to be subsidizing the borrowers. The Fed has forgotten a couple of the adjectives, and the collateral is now dodgy and the rates are concessinoary, not punitive. This provision of liquidity has become another activity of the Fed in its role, as former SEC chairman Arrthur Levitt calls it, the Bankers Protective Association.

Transcript: A first look at the Market's serious but consistent misconceptions

513 Monetary Policy with Tony Dwyer

Today we try to explain the Market. Specifically why the market does well even as the economy skates along the edge and even bounces lower. We do it with the help of an intelligent market analyst: Tony Dwyer of Cannacord Genuity.

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This is important. It is the health of the financial markets that is the apparent bright spot in the current stagnation. That and the apparent health of corporate balance sheets. If the stock markets were down here with the rest of us, things would be being done.

We begin with the full Monty: Here is Dwyer, speaking to Bloomberg.

At this valuation the market is reflecting .. and you can even look at the level of long-term interest rates ... it's discounting something more severe than a recession. Historically when the long bond drops over a ten-week period, when it drops more than thirty, er, more than twenty percent. and it dropped thirty-four percent from the May peak down to where we are now. When that happens it is pricing in more severe than a recession. You've never had a recession in the U.S. with money widely available.


And going back to kind of Economics 101, you go into recession when corporations need money and have no access to it. How do you get money? You earn it. You get it from a bank through C&I lending, Commercial and Industrial lending, or you get it from investors via the corporate debt market.


All of those are wide open right now.


People like me come on TV and we pretend we know what's going to happen in the next fifteen minutes. And that's a joke. Today we walked in, and it looked like the Market was going to break down. Now the futures are up 15 points. It was the opposte yesterday. What I think you have to do is maintain conviction in your long-term thesis.


What is stimulative to corporate profits and to spending by individuals and companies? It is interest expense. It's energy expense, and industrial input costs. All of those are much lower than when we started the quarter.


5 step.


The market correlates to the direction of earnings. The direction of earnings is driven by economic activity. Economic activity is dri8ven by the availability of money and the steepness of the yield curve. That's driven by Fed policy. And that's driven by core inflation. Now those are the facts.

Sounds plausible. I told you he was intelligent.

Let's play it again.

At this valuation the market is reflecting .. and you can even look at the level of long-term interest rates ... it's discounting something more severe than a recession. Historically when the long bond drops over a ten-week period, when it drops more than thirty, er, more than twenty percent. and it dropped thirty-four percent from the May peak down to where we are now. When that happens it is pricing in more severe than a recession. You've never had a recession in the U.S. with money widely available.

Buzzer

"never had a recession with money widely available." Ooops. We just had the mother of all recessions, and money was almost free.

If the market really is pricing in something more severe than a recession, maybe it is more intelligent than we thought. ... Nah.

But the point is that the activity of the Fed is to keep money widely available. Bernanke's thesis was that the Great Depression would have been avoided if we had saved the banks. It was a hypothesis that he has spent the last four years and trillions of dollars testing. Hypothesis rejected.

And going back to kind of Economics 101, you go into recession when corporations need money and have no access to it. How do you get money? You earn it. You get it from a bank through C&I lending, Commercial and Industrial lending, or you get it from investors via the corporate debt market.


All of those are wide open right now.


What is stimulative to corporate profits and to spending by individuals and companies? It is interest expense. It's energy expense, and industrial input costs. All of those are much lower than when we started the quarter.

Buzzer

Stimulative is investment and hiring. Cost reduction is not stimulative. Lowering labor costs is the route corporations have taken to keep up profits. Profits are, or were, higher. Likewise interest expense. Big boost from cheap refinancing courtesy of the Fed. Likewise energy costs. Yes, there may be more spending power, but unless that power is spent on hiring, no stimulus. If it is used to pay down debt, save against uncertainty, return cash to shareholders, or buy stuff in China, IT IS NOT STIMULATIVE.

Evidence: Record Profits, record low interest expense, dropping energy prices. NO STIMULATION. You don't need a PhD to see that. A PhD in economics would probably get in the way.

Notice we did not buzz the source of money. Not the stock market. We'll get to that later. The stock market is there to value the share price for the casino.

People like me come on TV and we pretend we know what's going to happen in the next fifteen minutes. And that's a joke. Today we walked in, and it looked like the Market was going to break down. Now the futures are up 15 points. It was the opposte yesterday. What I think you have to do is maintain conviction in your long-term thesis.


5 step.


The market correlates to the direction of earnings. The direction of earnings is driven by economic activity. Economic activity is driven by the availability of money and the steepness of the yield curve. That's driven by Fed policy. And that's driven by core inflation. Now those are the facts.

Buzzer

Here is what George Soros – see the Soros chapter in Demand Side the Book out on Amazon, by way of DemandSideBooks.com – what Soros calls a misconception.

Where are we? Page 81... the trend and the misconception in the boom-bust process.

Dwyer's five-step process is indeed what happens in the market, and has happened in the market. It explains why bad news makes positive markets and good news makes negative markets.

The misconception, or one of them, is that good news on hiring, for example, will create inflation, which means the Fed will raise interest rates, and tracking back down Dwyer's linkage to the next misconception, Fed policy affects the availability of money. This is a big misconception. See the Steve Keen and Hyman Minsky chapters, they're relatively short. The Fed does not create money. It validates the money created by lending in the fractional banking system. No lending, no money. Evidence: Massive Fed balance sheet growth, tepid money growth. Chart on page 93. Booms finance themselves. Busts ignore the Fed.

And back down further. Money growth creates economic activity.

Buzzer.

Exactly reverse. Economic activity creates money growth. The direction of earnings may correlate to economic activity, or it may not. Depends on which earnings you are talking about. We saw bottom line profit growth go through the roof in the past four years, as companies stopped capital spending and cut workforces. Helped out their stock prices. But when profits are driven not by hiring, expansion, investment, but by sacrificing the workforce, top line revenues do not do so well. But the market correlated to the bottom line, helped also by cheap money for refinancing and not incidentally the same cheap money available to market players to speculate with.

So the Market correlates to Fed money growth because Fed money is used to play in the casino market.

Real economic activity, money growth in the real economy. Inflation in the real economy. All these are outside on the street, totally unaffected by Fed policy except in a negative way, as incomes are hit by low returns on savings, for example, or as commodity prices go up thanks to increasing speculation.

The correlation between Fed policy and stock and bond market prices is as Dwyer describes. Used to be they operated in opposite directions. But now with all this liquidity, it looks for a home wherever it can be found.

But it is interesting that there is a closed loop here. Since the common error in normal times by monetarists is the Phillips curve connection, which is that employment and inflation rise and fall together, the common error in normal times is increased economic activity means potential inflation. Good news is greeted with higher rates by the Fed, which sends markets down. Bad news is greeted with lower rates, which sends markets up.

The bad news in this good news – bad news loop is that higher rates kill economic activity a lot more effectively than low rates revive it. Look at the data. Pushing on the string.

So the misconception is validated by the market. It becomes a trend-like thing. The financial markets operating for their own benefits and responding positively to Fed money. The Fed feeling validated by the financial markets responses. The real economy looking in the window.

Perhaps you think we fail to appreciate the virtues of capital formation generated by the Market. Here is somebody who likewise fails to find the game is worth the candle. John Bogle,the founder and retired CEO of The Vanguard Group. He’s the author of a new book “The Clash of the Cultures: Investment vs. Speculation.”

BOGLE

Let me start off by saying, give you a quote from Lloyd Blankfein of Goldman Sachs. He claims to be doing God's work, arguing that the financial industry, and I'm quoting him here, "Helps companies to raise capital, generate wealth and create jobs." Now we like all those, and it's true as far as it goes. But let's look at the facts. In a typical year, recent year, that total stock issuance including IPOs, comes to about $250 billion a years. But the rest of Wall Street is doing trading of $33 trillion a year.


So the amount of speculation, if you will, is 130 times the volume of equity capital provided to business. Or put another way, tradiing – casino activity – represents 99.2 percent of what our financial system does, and capital formation represents the remaining 0.8.

Of course, ultimately there IS a connection between the casino and the real economy. Bonds and debts come due that have to be ratified by earnings in the real economy. This is when the bankers look over their stacks of chips that have become worthless and say to the treasury, we need a bailout. Or to the Fed, won't you buy my worthless stuff? Actually, they have the power. They say, "You will buy my worthless stuff."

But cost-cutting that may help the bottom line and profits and CEO pay cannot continue forever with a shrinking top line. Ultimately we will need real demand.