In 1933 the lights started to go dark on capitalism in the United States. One by one, banks, like stars on the day of the apocalypse, began winking out. Facing a recession that it officially does not admit is going to happen, Benjamin Bernanke has take extraordinary measures which only have precedent in those dark and dismal days in March of the darkest year for America after the Civil War.

The Bear Stearns bail out, with its scale and urgency is almost unprecedented. While speculative funds have required rapid movement by the Federal Reserve and other banks, Bear Stearns is not Long Term Capital Management. The buy out, completed with the Federal Reserve, that is the American tax payer, assuming all risk, while JP Morgan stands to get all profit, is an example of the pure desperation that this financial bailout. Bear Stearns was bought for pennies on the dollar, virtually wiping out its share holders. Billions in debt is backed by Bernanke, who has also made an emergency cut of the discount rate.

The buyout of Bear Stearns means that in the space of two weeks, with the CEO telling everyone that there was no problem, the investors in Bear Stearns have seen 99% of their equity destroyed, and 90% over the space of the weekend. They went to sleep at 30 dollars a share, and woke up with 2 dollars a share. Every sorry reality of the financial mismanagement and fraud of the last decade were on display. We are assured that there are no other banks in as much trouble as Bear Stearns, and that everything is fine. We've been assured this repeatedly since August on the financial system. After all, we were assured while this was going on that nothing was wrong.

In effect in the last week Ben Bernanke has become the co-President of the United States, taking actions which under normal circumstances are reserved for the elected branches of government. In effect he and others defrauded investors, knowing that a bail out was being reached. While Bear Stearns was the most aggressive dealer in Mortgage Back Securities, every Wall Street Bank, to quote Roubini, as been in the job of repackaging mortgages for foreign sale.

It is time to look back over three recurring themes that the so called "Men in Black" have been writing about for some years - Roubini and Krugman, as well as bloggers such as myself, Hale Stewart, the deceased Oldman, Ian Welsh and others – namely that the present production and monetary policies of the United States are unsustainable and lead to a currency crisis.

What follows is my own view, I can only claim to speak for myself. However I have consistently stated that the crisis would take place at the point where the monetary system itself was in play, and this meant a real estate crisis, since this is the monetary basis of the United States.

This crisis unfolds through a Japanification of the American economy, and then a realignment of the global currency system.

Japanification: the lack of investment supply

The Japanification thesis is simplicity itself, namely, that in the wake of the stock bubble bursting, instead of dealing with structural problems, a housing and land bubble was created. This bubble has, as was inevitable, popped. With the popping of the bubble, the monetary base is endangered. This is because banks create money by proving that they have good loans on the books, and these loans are overwhelmingly land assets. If land begins to fall, then there is a crunch of monetary basis creation at the M1 and M2 level. This restrains inflation in goods, while the Fed's policies of loaning large amounts of money at the top create an explosive M3 growth, and asset inflation. However, when there is no more revenue stream to value, that is, when the squeeze of money at the bottom makes it impossible to create businesses that can pay the cost of money, however cheap, the M3 growth creates real inflation, as it consumes more and more of the profits of the real economy.

This is called "lack of investment supply", and it means that at a certain point, no matter how much funny money the Fed prints, it will not create new businesses. This is made worse by the collusive court culture nature of the present system. People who have money don't want to invest it, they want to park it, and people who have ideas can't get money, because there really isn't money to invest. If the money were invested, then it would become wages and demand, and that would generate inflation. We have been avoiding this to some extent by investing in dirty productive capacity overseas rather than in the US.

To explain that in greater detail. Investments trade money now for a share of future money. It is possible to create inflation in assets only for so long, and at a certain point, the share of profits that used to go to say, pay people's retirements and wages, must relentlessly shrink. Japanification is the process of restricting consumption of the broad majority of people in America, in order to create a fictional reserve of dollars that can be used to pay back investors.

The solution to the present economic mess, in this view, is to get the rich off the people's backs.

The Neo-Conservative Plutocracy

For years economists in the US thought that US policy makers had learned from Japan and we would not repeat the results of their "Bright Depression." However, this view was excessively optimistic, and rooted in a time when there was a bipartisan liberal consensus in Washington that the good of the public came first. When the right wing came to believe that it could have a military machine without mass mobilization, but instead with a high tech smaller force, it also did not see the need to keep most Americans happy. Instead, their new vision was of a small, permanent and highly mobilized base, which included a core of military-industrial contracting, supported by a security apparatus and getting votes from a combination of resource extraction, disorganized labor, the wealthy, franchise owners, and theocrats. Their idea was expressed in the Project for A New American Century, and in Karl Rove's political apparatus. People who were a danger to this thesis were removed by whatever means necessary. While being a heavily socialist enterprise, in the right wing sense of being a national socialism, it relied on a propaganda of libertarianism. This propaganda relied on creating the meme of the late 19th century as the legendary golden age, where laissez-faire economics combined with piety, plutocracy, and military empire, in that times case the conquest of the West to create a rising America. In truth America during the late 19th century was far from its peak, and much of the gleaming apparatus of capitalism came much later. People were made to, by means of framing, impose the gleaming rise of the City skyline, with a time when there was no building taller than 12 stories in the US other than a few church spires and the Brooklyn Bridge.

This neo-conservative plutocracy was intended to take the place of the Liberal Democracy. It had a war without end as its mandate, a Christianist ethnocentrism as its meaning to create context, and a monetary system which would, after the invasion of the Middle East, be based on a direct imperial control over oil. The oil would be sent back to the US, indirectly in the sense that it would be sold to other nations, thus freeing up supplies closer to the US for our consumption, along with the enormous free cash flow that the oil business creates. Iraq was to be annex of Texas.

The Adventures of Captain Carnage

In 2001, as soon as he was made the economic advisor to Bush, I stated repeatedly that Ben Bernanke would be made the Federal Reserve Chairman after Greenspan, and that he would be a disaster. This was based on a reading of his academic work, which was, essentially, a series of attempts to prove that such a neo-conservative system could avoid the collapse that lead to the Great Depression. No Great Depression, no FDR. No FDR, no situation where the rich would have to accept regulation and restriction in return for bailing out. In essence the first problem is the "Great Contraction." The United States and other nations, to attempt to re-impose the Gold Standard after allowing it to lapse for the First World War, had to at a certain point accept prices at the new levels, or had to dramatically reduce the money supply. They chose the later, creating a massive contraction of the money supply. This was done in the face of a downturn, because it was feared that a downturn would lead to easy money, and this to hyper-inflation of the kind witnessed in Germany, or very high inflation, as seen after the First World War. For them, coming after a two generation period where deflation was the norm during the classical gold standard and the consolidation of the first Conservative Era, globally, inflation was a horror.

Bernanke and others, argued that the Great Depression was not in any way a structural event, but strictly a macroeconomic monetary event. That strictly macroëconomic policy measures could have been used to effect the bailout. There were two major intellectual problems. One of them is the point where monetary policy is "pushing on a string." Or what Bernanke called "the zero point". The "bold" steps turn out to be the same sort of maneuvers used in the first decade of this century: finding deep pockets and hiding the losses.

Bernanke's failures begin as economic advisor to the President and continue in his time on the Federal Reserve. The culminate with his failure to either deal with the liquidity crisis, or to face inflation head on. By allowing the housing bubble, and the financial bubble built on it, to explode he set up the very circumstances. By dragging his feet on raising interest rates, and then by ignoring the expanding monetary crisis, Bernanke has set the stage where neither he, nor anyone else, is in a position to act. With a President who is content to give imaginary orders to imaginary armies, there is no center of power that can move. It also indicates that the opposition party has made a series of gross miscalculations about the situation, believing the rhetoric that things were going well, and that they were getting the best deal they could. They were facing people who were bluffing all the way, and are now realizing that there is no rush to give way on anything.

The "slow" rate raising campaign was a double disaster, it neither headed off inflation nor did it keep credit easy enough. This is because the problem was not the level of interest rates, per se, but what we were spending the money on. As many, many, many commentators, many, many times have pointed out, the US was consuming too much, and exporting too little. The Neo-Conservative happy monsters said that this could go on for ever, giving other people our paper for their oil and goods.

While it is possible that we will emerge from this functional, the likelihood is that we are going to see a continued fall for the next 9 months, as the crisis deepens, a die hard illegitimate executive burns his last brands on our skin, and a feckless opposition folds its cards over and over and over again, allowing ordinary people to bear the brunt of the continued contraction.

We are riding this bucket down a ways farther, because there is nothing to right the equilibrium, and without the stimulus from war spending, on which we are so dependent, there will be no pick up in business activity soon. There will be some increased exports, but not sufficient to take the place of the cratering of housing.

What needs to be done? Regregulation is obvious. Making the Fed serve elected policy makers is a no brainer. Restating numbers to prevent the white washing of bubbles is essential, a public sense of ownership of the financial system as part of the "high ground of the economy" seems essential. Firing Ben Bernanke is a pink do this to day post it note.

But most essentially there needs to be a change in the basis of money, simply because the obvious stability of real estate assets in the United States will no longer be enough.

Next: The Economic Consequences of Mr. Bush.