Central banks around the world began intervening over the last 24 hours to protect a fragile global financial system. Chain reactions of debt-swaps meant that contagion was not localized, but spread through secondary and derivative debt markets, as instruments held through Lehman Brothers vanished in a puff of paperwork. Major Asian stock indexes tumbled, headlined by a 600 point drop in the Nikkei to 11609.72. Major European indexes have already tumbled as well, the DAX dropped to 5915, almost 150 points. However, the levels in Europe are still well above their 2002 lows, particularly when adjusted for currency.

Individuals great and small became caught up in the panic selling: Goldman Sachs shares plunged in pre-market trading as they announced a 70% drop. Ordinary share holders were wiped out, and scrambled to fill the voids in their finances.

But in all of the commentary about crash risk, about moral hazard, a fundamental point has been missed: this did not have to happen, but is, instead, the direct result of deliberate decisions made by known actors. This is the ultimate result of the crisis of legitimacy that began with Bush v Gore. What is the price of a stolen election? We now know that it runs into the trillions of dollars.

The crucial connection to understand is between interest rates, and energy driven meso-inflation. Meso-inflation is a change in relative prices between sectors. This is in contrast to micro-inflation, which is a response to shifts on the supply and demand curve for a particular good, and macro-inflation which is based on shifts in the curves of demand between commodities, interest, and currency generally. Meso-inflation is neither good nor bad. One man's inflation, is another man's pricing power.

The view of economics and the polity is that chronically high inflation in the developed world is the result of rising wages. Therefore, if wages are contained, both directly, and indirectly through government's being unable to prop up demand through spending aimed at consumers. The policy of central banks around the world became to be to act when wages began to rise significantly in real terms. This was felt to be sufficient to contain macro-inflation, because without wage demand, there would be no ability for an inflationary spiral to take hold, with workers demanding higher wages to cope with higher prices. This ideology, that workers would have to just cope with price increases.

Except there was a hole in the bottom of this ideology, and that was government spending didn't actually go down, we weren't taking about capitalists in a free market, and there was a way for people to adapt to meso-inflation, namely by reducing the savings rate in central economies and imposing savings rates on others. This was done by tax cuts, massive subsidies for suburban home building, and a generational drawing down of savings. People were told they could save less because their assets would appreciate more. This mythology was promulagated in a thousand ways. But the double bull market in housing and stocks was the best salesman. 20 years is long enough to convince most people that something is forever. However we've now had almost a decade of the opposite in stocks, and we are about to see a massive bleeding in residential property.

This was the ultimate hole: tax cuts are spending, though were not counted as such by either economists or politicians in any real sense. Yes there we nostrums about it, but the only time the "bi-partisan" groups were heard from is when there was a danger of a Democrat spending. Thus trillions for war, subsidies for suburban real estate and demand for speculation were not counted as "demand," even though they quite clearly are and were.

A large measure of this was the legacy of America as a Nixonian state, with Ronald Reagan as the political avatar who welded together a coalition of eubran resource extractors, who depend heavily on government subsidies, suburbanites, who depend heavily on subsidies, and financial industries, who are heavily dependent on government subsidies, and fobbed this off as the "free market." What it really was was the anti-wages coalition. Not suprisingly wages didn't go up. Instead progressively higher levels of leverage were used to create rising investment demand. This was pyramided on top of two, and only two, real sources of supply: computers and improved extraction methods for oil. Everything else was trendline, or worse, improvements in efficiency.

The anti-wage coalition created a very simple game: be part of the people in the favored monetary policy areas, and be able to borrow and speculate on the carry trade, or be the place where wages were being shipped to. This included much of computers, since computers were a way of reducing other kinds of labor. In effect, monetary policy functioned as fiscal policy.

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While this was stupid, and used some small amount of manipulation of representation, primarily by favoring home owners over renters in election systems, it was also basically democratic - in the imperfect way that all democracies are. That is to say there was systematic disenfranchisement, corruption, barriers to free political competition, and the ordinary varying quality of representation. However, all of these problems were fixable within the system itself. The problem is that the essential deal of the economy made this more and more difficult, because of the essential reason for that deal: the paper for oil economy. America sold paper to buy oil. To attract back the money that went out to buy oil, it then had to create a red queen's race of paper. The value of the paper had to grow faster than the value of the petro-dollars. One result of this was consolidation. It is harder to buy half of one large bank, than to buy a controlling interest in half of the small banks. The fewer banks, and the more money was accumulated together, the harder it would be for petro-dollar holders to get control of the financial system, even though they had a substantial say in how it functioned.

This meant that as wealth became concentrated, it was easier and easier for that wealth to buy the basic pillars of a Democracy: media, elections, social representation. This concept was not unknown to Plato, and was enunciated by Adam Smith as well. Over time it became more and more difficult for the body politic to connect the pain of an over concentrated, overleveraged, underinvested society, to the representatives that they had to choose from. Over time the media became, as has been predicted by observers for centuries in such circumstances, a mouth piece for political and economic power. Any time a society is not learning lessons that caused a monk to nail 95 theses to a door, it is somewhat behind the times in it's political theory.

This created a disconnect: the public, even the activists classes, behaved as if they were in a situation where individual activism could be magnified to structural change. However, another force was working against them, namely the collapse of Marxism as a rival ideology. Marxism in its Leninist and Maoist forms was never a particularly good counter-ideology. It was incapable of fulfilling its own requirements. Marxism made a big deal about the objective requirements for a society, and produced a host of states who could not meet their objective requirements of command and control. However, even bad competition is competition.

This brief moment create an illusion, where one form of the dominant ideology of democratic liberal capitalism, presented itself as the only ideology. It is rather like each contending strain of Christianity claiming to be the only true church. This moment, when a radical reactionary ideology that, on one hand claimed to be free market and libertarian, but was, in fact, backed by both theocratic and heavily subsidized industries, made the rather absurd claim that the collapse of a competing totalitarian ideology also discredited it's mainstream competing ideology of democratic liberalism.

This ideology leveraged this illusion into the first step of a crisis of legitimacy, I speak of the impeachment over a blow job. This was a gross violation of the agreements of consensus of the age, and that it was so is shown by the failure to impeach Bush for real crimes. However it was soon clear that this was not enough, and the next crisis of legitimacy, namely the theft of the election of 2000. It is important to realize that a large part of this is, and was, the consent of the opposition. At each stage when political survival and the good of the country would have rested on ending the continued erosion of legitimacy, the opposition party accepted the erosion.

The theft of the election of 2000 is the direct cause of the current financial crisis, in that it put in place policies which have created it, namely the Iraq war, below sustainable interest rates used to finance the war and the tax based bail out of the market crash of 2000-2002, and the housing bubble/risk deregulation which is now exploding. How this works is simple, low levels of the cost of money and deregulation of the issuance of investment instruments created the web of derivatives, CDOs, entanglement of investment and retail banking and insurance. These are now collapsing, requiring a bail out. The crisis of legitimacy is the direct cause of the bubble, and the bubble is not a creation, then, of basic economic forces alone, but of basic economic forces acting on political forces which were outside of the economic range. Bush, his inner circle, and their backers, are utterly immune from any personal or financial consequence.

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In the present the continued acceptance of illegitimate government can be seen from both major candidates, who are vying for who can be the most realistic Reaganite. They are both vying for the support of the same people who backed Bush's bailout of their mistakes in the dot com boom, and are promising a bail out. Americans are not going to get a tax cut from either party, but instead will be laden with more public debt and reduced real investment in order to have the throughput, as Shaula Evans so nicely put it, to continue to pay loans made at unrealistic terms. This is, in effect, a repetition of the bail out terms of the early 20th century of the classical gold standard. These terms led directly to the First World War, in that, eventually, there was no way for all of the promises to be kept, and a war was held to see whose promises to pay back in gold would be honored. However, the cost of that war made it so that none of the promises could be honored, and the attempts in the aftermath to reimpose them would bring about the Great Depression.

We are presently on a course for a similar global war or other large scale militarization of the economic crisis, because the promises are not economic, but political.

In the short term we are going to see the continued entanglement, where ordinary citizens and consumers will have the failed risk offloaded on to them, because, in the end, all things must be paid either in the lose of autonomy of elites, or in the loss of standard of living of consumers. Since consumers have voted, repeatedly, to avoid any significant restraint on the autonomy of elites, it will, necessarily, have to come out of their own standard of living.

The first step will be for central banks to take advantage of the popping of an oil inflation wave by lowering interest rates again. This will allow oil to rise again, though not as high for the time being, and drive another wave of inflation and devaluation. However, with each cycle through monetary policy gets closer to the point where it is not merely "pushing on a string" but to the point where it will ignite a chronic cycle of inflationary expectations. When this occurs, the financial system being completely interlinked will set the stage for a collapse which will be of historic proportions. We are not there yet, however we have received a foreshock of what that will look like. Not one 5% down down, but one right after the other, over the course of weeks, combined with devaluation. It is worth remembering that the Dow is down over 40% from it's peak, when measured in GDP inflation adjusted hard currency. That is, if you had spent 10,000 Euro in 1999, and then cashed out today, you would have the buying power in the total economy of 6000 Euro. More importantly, this includes the fall in assets themselves. Ex-assets, the figure is even worse.

This kind of long term collapse in the value of investments cannot be sustained, because it is that value which is used to invest in technologies and expansion which make it possible to produce more happiness on less resources. The robbery of the future, which has been the theory of the Reaganite economy from the beginning, will continue to play itself out, making it more and more expensive to replace the aging petroleum infrastructure.