John Kay in the Financial Times makes an astute observation, and couples it with a stark prediction:

Fannie Mae and Freddie Mac were probably the world’s most heavily supervised financial institutions, subject to a specialist agency, the Office of Federal Housing Enterprise Oversight. The office employed 236 people at the time of its last annual report. OFHEO did not fail because it was understaffed or not well informed about Fannie Mae’s activities, but because it lacked authority. The entire staff earned less in aggregate than Franklin Raines, the aggressive chief executive who masterminded Fannie’s expansion.

Like Martin Wolf, I yearn for a world in which regulators would moderate the inherent instability of the financial system. But my yearning is tempered by modest expectations of what regulation can achieve. Martin’s realism, which I share, acknowledges that public expectations are much higher and politicians will claim to respond to these expectations. But the politicians will fail. The next financial crisis will be different in origin and the rules that will be introduced to close the doors of today’s empty stables will prove irrelevant.

This is why our present crisis is a constitutional crisis. It is not a crisis of finance as such, but a crisis of the governing mandate. Governments take over companies all of the time. Many governments have run important parts of the infrastructure. The US government runs a bank, The Federal Reserve. In fact, one of the first acts of the new government under the Constitution of 1787 was to charter The Bank of the United States.

The problem now is not that governments lack power, or that regulations have been lacking; it is that the mandate of the United States Government has been to keep the land casino open at all costs. The pieces that are falling are the direct result of this mandate of "socialism for suburbanism." What we are seeing now is a response very similar to Hoover's days in office, or Abraham Lincoln's disastrous first year in office, where there was a willingness to do anything except the things that would actually end the political and economic crisis.

The key requirement for a constitutional president is flexibility. McCain is flexible, but in all of the wrong ways. He will do anything except what is necessary. Obama is rigid and inflexible. McCain does not admit there is a problem; Obama admits there is a problem with everything, except with himself. McCain never admits he is wrong. Obama never admits he was wrong. As a result, at the very moment when political and economic forces have converged, Americans have selected two candidates for the nation's highest office who lack the only qualifications which are relevant.

There has been a great deal of commentary on how a theoretically free market ideology Executive is now busy nationalizing the financial sector. It has taken on trillions in assets to manage, and has essentially stepped in as that liberal animal: the state as buyer, seller, lender, borrower, and insurer of last resort. This means that the state needs to collect enough in taxes to fulfill these functions. Anyone talking "tax cuts" is simply being irresponsible. And yet, John McCain, with his economic advisor being a serial anti-preneur, is doing this. And Barack Obama is doing this. It is difficult to be enthusiastic about a candidate who is running behind his party identification, and who is bringing in a wave of blue dogs and conservative Democrats has his coat tails. Obama's mantra has been "less of the same" - Bush Lite.

Instead this is, as people now sense, a constitutional moment. Constitutional moments occur when the fundamental mechanism of commerce - currency - falls apart. It falls apart when those assets which back it are no longer accepted. There have been four times in American history that this has happened.

The first was during the colonial era, when the paper money that had been printed collapsed, requiring of going to the silver standard. This colonial crisis was met with a shift in power to Great Britain, which appointed governors and enforced regulations on trade and commerce. This met with a revolt from the colonies, which would become a Revolution a generation later.

The second occurrence was the collapse of the confederation with its separate State monetary systems. In effect the American Revolution attempted to restore the monetary order that existed before the imposition of mercantilism on the colonies. The result was the inflation which had made that order collapse. The problem was not a monarchy, but a monarchy unresponsive to its people. The solution was the Constitution of 1787, and the assumption of Revolutionary war debt, the creation of a proto-central bank, and the establishment of silver as the specie of the new government. This would last until the Jacksonian Revolt abolished the Bank of the United States, and usher in the era of "free banking."

This era collapsed in the 1850's, and formally so when Buchanan ended the acceptance of silver as payment. This crisis was the most severe in the nation's history, because Buchanan did not abolish the store of wealth of one interest group, namely slaveowners. The civil war was fought over whether there would be unlimited expansion of slavery, which would have allowed the slavogarchy to store wealth as slaves. Slaves do not work as labor or capital, but they do work as a means of storing value. The one thing the North could not permit was slavery in the territories, and the one thing the South needed was new lands to impose the plantation system upon. Hence, war. The solution to this crisis was the National Banking system, and eventually a de facto gold standard, with a small amount of silver money used to prop up the economy.

This solution would hold until the creation of stock as a secondary currency, which was backed by coöperation between large banks. The gold-stock dual money system, like previous dual money systems, was vulnerable to the extent that in the end all speculative money must be paid back in hard money. As soon as hard money becomes too hard, the speculative money collapses. A democratic revolt has two prongs: one populist, for greater participation in a system which was created to limit freedom of a given electorate so that debts could be repaid (in effect, a constitutional agreement by one legislature to bind the hands of others); the other an elite prong that wants the unlimited creation of speculative money in order to bid on assets, each one of which could be worth all of future revenues. Speculative money, by definition, creates more to be bid on than can exist.

This separation of value led eventually a the stock market bubble, and then to the collapse of the banking system in 1929-1932. The solution was to end the gold standard, and instead make the value of dollars be based on the value of assets, particularly land.

This liberal constitutional order was, in its moment, a brilliant stroke of luck. No one designed it in the way that Hamilton designed the Federalist Republic's monetary order; it did not have time to evolve in the way that the Union's monetary order evolved over the course of almost a decade. Instead, it was born a bastard child in a few short weeks.

The key construction of a constitutional order is government assumption of all previous debts, the creation of a new basis for currency, and a means to push economic activity which will generate this new basis. In order: silver, gold, developed land. The economic game that is created is to make a political framework within which competing interests can vie for the control of this future store of wealth.

It is not ironic that the crisis of an order often centers around the control of future value in the old monetary order. Often reactionary forces control (or attempt to control) the means of creation of future value, and use this to prop up old value. This is because there is no wealth that exists by itself; wealth must be maintained, and the cost of maintaining it grows over time. It is at the point where all of the profits of the future are burned supporting wealth stored by the past, where the living work for the dead, that the constitutional order falls, because its money falls. It cannot keep all of its promises yet provide an incentive to work in the future. The rip becomes a pair of coalitions which are often very strange bedfellows. Those who have been most aggressive in pursuing the kinds of value that make up the future are often the most reactionary, because they hope to leverage that control into a permanent command of the economy. Those who hope to disrupt the present order often have a lagging control of the nascent assets, but have more of the potential growth if only previous claims in silver, gold, and revenue streams from mortgages are removed.

The complete lack of understanding of this historical process by current political parties, is the sign that while we could rearchitect the financial system, we cannot rearchitect the constitutional order. This means, with certainty, that there will be another crisis. The Federal Government has taken over the mortgage system, not to tell creditors that they will have to accept a different kind of money and then architecting a new economy which will generate that new kind of money, but in hopes of collecting the control of the old money. Since there is not enough future economic activity in the current form - that is, there is not enough money on the planet - to pay back all of the debts held (the speculative money having all been used to pyramid claims) this will fail, because it must fail.

The future is in the energy-information economy. The key is to create information that will allow more happiness in the scarce resource of easily extractable energy, with information ultimately being able to produce capital energy and allow a long boom. Getting there, surviving the early part of the cycle, is the difficulty, and it takes half a generation to do so. However, the half generation before the crisis is generally not a pinnacle for most people, but only for a few connected to the favored mechanisms of the old money system. There were three recessions in the 1920's. The 1850's featured a severe economic shock, and the period leading up to the Constitution of 1787 saw a brutal round of inflation globally that would not finally subside until the end of the Napoleonic Wars.

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Now to turn from the general pattern, to the more specific problem at hand. The creation of unlimited paper money in the form of unregulated financial derivatives, Collateralized Debt obligations and so on was not, in itself, the problem. The problem was that the incentives were not to create new forms of economic activity that would relieve pressure on ultimately scarce goods, but, instead, to consume more. The rapid rise and fall of oil this year shows that the problem was not oil supply, but dollar over supply.

The contradiction was this: suburbanism. The store of wealth was moved from the cities as centers of economic activity, where it is energy efficient, to suburbs where it is energy inefficient, and from energy efficient manufacturing economies such as Japan, Europe, and comparatively speaking, the US, to places where it was inefficient. It was more important to hold wages down, so that those lending money would maintain the same control over the economy, than it was to expand economic activity. Hence moving production to China where labor and land are cheap, but where it is very expensive to produce a dollar of GDP. As land rent piled up in cost, it was cheaper to trade energy for land. This trade off of transportation for ground rents was well known to Adam Smith.

Thus it is logically impossible both to bet on energy inefficient production, which raises the price of energy, and on wealth creation which is increasingly energy inefficient. The particular mechanisms of finance which were used to do this, are irrelevant. If not these, then some others would be found. All that our current financial systems were, was ways that people could fool themselves into giving out bad incentives. The mathematics was good, the reality was not.

This means that drilling more is not a solution, because even if a great deal more oil existed than exists, it would simply be dropped into more SUVs and developments. The incentive to sprawl, itself, was the problem. The permission to sprawl, through social, political, and economic means - and it took all of these - was, itself, the problem. The particular excuses are unimportant, because nothing is more inevitable than a bad idea whose time has come. A bad idea is one which allows people to reward themselves with present luxury, at the cost of future ruin, and yet not realize they have lost their virtue. This too was well known in the late 18th century, to the framers of the constitution of 1787, it was well known to Niccolo Machiavelli in 1500.

In the present then, there is exactly one course of action, and that is to create a monetary system which creates the incentive to reduce the GDP cost in ultimate scarcity: easily extractable energy, absorbable carbon, potable water, and assorted subsidiary resources. Suburbanism is opposed to this project by definition. The suburbanite wants to trade energy for land rent, since land rent is inflated, and has been intentionally inflated, in order to pay for the energy which keeps the process going. The problem with a Red Queen's Race, is when you trip.

This means at this moment we are going to see a collapse in the large bets on energy, because there is a domino effect. The demand for energy was propped up by a dollar glut. The dollar glut was based on a housing bubble. The collapse of financial institutions wich allowed the contradiction, of a system which was generating a vicious circle: more houses meant more dollars to buy more energy, which was increasingly locked up into maintaining the fictional basis for printing the dollars in the first place. That fraud, deception, profligate borrowing, manipulation, and a great deal of ideological propaganda was involved in all of this, should not surprise anyone. Consider the racisms invented to maintain slavery as a more brutal example. The future will look on this age's energy profligacy in the same way that we look on slavery. Slavery as a peculiar institution was propped up, not by mere government action, but by social action as well.

So too our own justification as to why suburban lawns were the pinnacle of moral rectitude.

The core crash of the housing bubble is leading to a crash in the resource bubble. This will kill inflation, temporarily, but only temporarily. This is because the production capacity which has been invested in over the last 20 years is in productive capacity that consumes energy, and facilitates consumption of energy. It should be noted that the resource crash will lead, in a few months, to a crash in more financial instruments. As Russia collapses in its' mercantilist meltdown, so will those who bet heavily on its continued ballistic climb. The Russians will have to restrain production to push costs back up, as will other resource producers. This will probably ignite a recession which will be more severe than any since the great double recession of 1980-1981, but will not squeeze out the fundamental contradiction. Everyone is eager to get back to the game of knocking down trees to put up houses. Both parties have promised another round of subsides for this process. In fact, Obama's campaign is publishing articles and op-eds crowing about how their plan is more Reaganite than McCain's plans.

This is depressing, because Americans neither were willing, in 2004, when they had their last chance, to restrain dramatically their spending, nor are they willing now to accept that their chances in the old land casino have run out. It means that we are going to face another cycle of suburban socialism, where the future will be burned through to produce waste in the present. Any erg of energy created will be spent on this. Only a massive economic collapse which destroys people's faith in the land casino itself will change the direction of the American polity.

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So what would such a constitutional arrangement look like?

The first key is to realize that the process of debt assumption is already going on. However, the more important part of the process is the process of forcing the write off of old store of wealth that is incompatible with expansion, and opening a new area for expansion where people who have had the old doors closed, can go through new ones. What the Louisiana Purchase was to the Federalist Republic, and what the implosive development of the modern city to the Liberal Democracy, there must be an equivalent for the new republic.

It is also important to understand that each order has it's written, unwritten, and shadow components. An example of a written change is the Constitution of 1787, or the post-civil war amendments. But the power of the unwritten constitution is often greater. Consider, if you will, the example of the Child Labor Constitutional Amendment. Before the New Deal, barring child labor required a constitutional amendment, after, it could be regulated out of existence. The third component, however, is the shadow constitution. This is all of the implicit assumptions about what is so important that it cannot be allowed to fall, and also the compromises that must be taken to keep those marginally attached to the constitutional order in place. In any constitutional order there are those who believe, rightly, but more often wrongly, that they can leave the constitutional umbrella, or make themselves ungovernable.

This is why the conservative voters in the south have had a disproportional power over the late Liberal Democracy. Their cheap labor was needed, and they supplied a disproportionate share of the military officer class. They also felt that they were utterly exempt from the ordinary turns of economic cycles, since they supplied military hardware. Thus their venomous "revolution" when this was cut, becoming an almost uncontrolled cauldron of rage and illegality, from the impeachment over a blow job, to the theft of the election of 2000, to the Iraq War itself. They were operating within the shadow constitution, which is why there will be no political reckoning for any of these actions, until there is a true and complete disintegration of the political order. Even now the election is being fought over how to appease these "marginally attached to the constitution" voters. It is not a disqualification that Sarah Palin belonged to a separatist political party.

The other group which had a shadow constitutional place, is those who acted as intermediary between the flow of oil and the rest of the economy. The President was, in essence, Secretary of Oil, and anything that he needed to do to keep thr oil flowing, was deemed appropriate. This too covers the Iraq War, flatly illegal on its face, from any legal ramifications.

However the converse side must e looke at, in return for granting these shadows in the constitution, the suburbanites accepted that free trade, financialization, and computers, would offer a new undiscovered country. They in fact do, but as long as they were tied to the suburban sprawlconomy, they created perverse incentives. The dot com boom wanted to replace bricks and mortar stores... with overnight air freight. The expansion of free trade increased, rather than decreased, the cost of energy in GDP terms. Financialization, instead of creating a space for investments that would take years to pay off, pushed investments that would be a burden for decades. These tools can be redirected towards the future, but they were, as has happened in the past, used to prop up the past first.

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The pieces of a new constitutional order are in place: that the secret is for the developed world to bail out the developed world, rather than going to the holders of petrodollars. By swapping paper, this interconnectedness is being created out of necessity. However, it is equally essential that old claims be wiped out; the realization that the mortgage bets will never be repaid allows that economic energy to be redirected to creating new kinds of value. The focus on technical solutions, tactics of the process, is misguided. We do not know what steps will be most effective. No one in 1785 or 1858 or 1928 had any clue about the final synthesis, even though many had grasped essential parts. Constitutional orders harmonize the insights of many, and the efforts of multitudes, to reach a state that few of them will see in its final form.

The great write down will come, because very shortly someone must pay. The reactionary forces want the write down to come in the form of ending Social Security, and indeed all of the social safety net, and turn the US government in fact and name into an insurance company for their investments. What Suburban-Americans have yet to realize is that their home values and their retirements are at odds. The labor and resources required to keep their houses valued as they are, and the labor required to produce capital value that will pay for their retirement cannot both happen. As long as they cling to this contradiction, they will keep voting to kill their own future.

The return for writing down the home values must be an end to the "middle class inflation" of access to education, jobs, and health insurance, as well as an end to the constant and blatant theft of their investments by fees, deception, and churn. There are ways to do this by creating a national pension system and a national health system, as well as changing the way college is paid for. Education can be reduced in cost by moving it from the local to the state and federal level. The practice of using local taxes to pump up local property values must end, because it is increasing costs across the society generally, and these costs can no longer be maintained. Monetizing inflation is the enemy, and yet at the end of a political cycle that is precisely what everyone is trying to do: monetize inflation.

Crucially there will be an end of the shadow constitution of a security-industrial complex, one that is used to track everything that people do in order to make sure that every bit of value can be extracted from them. Things such as the Patriot Act, which plays on the insecurities of the suburban classes are equivalent to the fugitive slave acts of the 1850's - the anxiety of a slave revolt is precisely the same cause as the anxiety of unnamed mysterious forces which threaten to invade suburbia, whether video games, Arab terrorists, or inner city African Americans.

But just as crucially, the means of campaigning and elections must change. One of the most pervasive forms of gerrymandering in America is the continuation of two practices. The first is the favoring of home owners over others by residency requirements and use of voter registration - witness the GOP using home foreclosure notices as a hit list to prevent people from voting. People presently see themselves as holders of home equity first, and holders of national equity last, except in so far as national equity sends them pork and oil. This is enforced by the second form of gerrymandering: elections being based on local, rather than national, qualification for voting. People can be denied their right to participate in national elections, based on local criteria for being on the voter rolls.

But these are pieces. The crucial synthesis is what is already happening: nationalization. The reality is that the United States is in a situation were it must, as a national unit, optimize its exports and imports. While the market mechanism will be part of this process, the incentives of the market mechanism will have to be determined by politics. The market has been proved over and over again to be unable to price its own meta. This is in fact part of the theory of market economics.

This leads to a change in political mandate which is more far-reaching than anyone has yet admitted. Since Nixon, and particularly Reagan, the mandate has been to keep the land casino open at all costs regardless of what was done, and most importantly without people seeing the sausage being made. Iraq has shown that Americans quail at the logical conclusions of being an imperial power that takes the raw materials that it needs, and that it is no good at being a colonial power. This means that a political class selected for its secrecy (its ability to cover over minor scandals scaled up to its ability to cover over the high crimes and misdemeanors required of the Nixonian state) would radically alter the political landscape because the very people who are disqualified for office now would be competitors for office under a new order. This is often the case. It is an interesting exercise to see how many key U.S. politicians of the 1850's became officials of the Confederacy. It includes Stephen Douglas' Vice-Presidential nominee.

The natural solution is not to stop with nationalizing AIG, but to continue to nationalize not merely the financial sector but the media sector as well. Since the financial crisis has not reached that point, it will not happen yet. But it will one day, and on that day the media sector will be ripe for nationalization as well. This is a dangerous process, but it is also a necessary one. It can be effected by regulation, and in many cases by simply applying regulations which have been long ignored.

There is already the constitutional architecture for this. If read broadly the 14th Amendment creates a national citizenship and grants broad authorities to Congress to enforce it. Indeed, we can take this almost as a marker of where America is to the extent that people are willing to revive the 14th Amendment in its original intent and wording, they are taking steps to a national Commonwealth.

The Liberal Democracy is dead; its fundamental agreements are broken. We are now facing a crisis in which institutions are corrupted and the implied bargain not go beyond certain bounds is being violated by the very people who opposed it, requiring a yet broader mandate of government. What can and must follow the Liberal Democracy is a National Commonwealth, which by removing old intermediaries directly bonds the citizenry with the government, because the citizenry are directly responsible for the debts that that government has taken on. If pride of ownership is to mean anything, then it is applicable here: Americans must see themselves, not as adversaries of their government, but as owners of it.

Or, they will find soon enough they are owned by their government.