The End of the American Empire

Facing threats of a "catastrophe," the government has moved to socialize the mortgage industry. Network talking heads are saying this could cost taxpayers "millions of dollars." This is like the initial cost estimates of Medicare or the War in Iraq. In fact, the cost could exceed a trillion. Count on hundreds of billions. Losses could be trillions. The New York Times asked a couple of weeks ago, "What Will Mac ’n’ Mae Cost You and Me?" Go ahead; read the article; you won't find the answer. The reason will be found at the end of this post.

Leading economist Nouriel Roubini had warned that This is the beginning of the decline of the American empire. On his blog he made the following predictions:

• At the end of the day this financial crisis will engender credit losses of at least $1 trillion and more likely $2 trillion. The financial and banking crisis will be severe and last several years, leading to a severe and persistent liquidity and credit crunch.

• This is not just a subprime mortgage crisis; this is the crisis of an entire subprime financial system. The losses are spreading from subprime to near-prime and prime mortgages, including hundreds of billions of dollars of home equity loans that are now worth little; to commercial real estate; to unsecured consumer credit (credit cards, student loans, auto loans); to leveraged loans that financed reckless debt-laden LBOs; to muni bonds that will go bust as hundred of municipalities go bust; to industrial and commercial loans; to corporate bonds whose default rate will jump from close to 0% to over 10%; to CDSs, where $62 trillion of nominal protection sits on top an outstanding stock of only $6 trillion of bonds and where counterparty risk – and the collapse of many counterparties – will lead to a systemic collapse of this market.

• Hundreds of small banks with massive exposure to real estate (the average small bank has 67 percent of its assets in real estate) will go bust.

• This will be the most severe U.S. recession in decades. This U.S. consumer is shopped out, saving less, debt burdened and being hammered by falling home prices, falling equity prices, falling jobs and incomes, rising inflation and rising oil and energy prices.

• This financial crisis signals the beginning of the decline of the American Empire; over time the relative economic, financial, military, geostrategic power of the US and reserve role of the US dollar will significantly decline.

• This crisis also represents a Crisis of the Suburbian (“McMansions and Gas-Guzzling SUVs”) American Way of Life. The sharp rise in gasoline and energy prices and transportation costs, together with the sharp fall in home prices, will radically change the pattern of living of the typical American household.

What Roubini doesn't point out is that the coming depression was government-induced, just as "the Great Depression" of the 1920-30's was government-induced. Fed Chairman Ben Bernanke admitted this in a Federal Reserve Board speech on Milton Friedman's ninetieth birthday. But no policy changes have been made. This is because political considerations take precedence over economic theory. By "political considerations" I mean, keeping up the myth that the government is our Messiah. This is why you will never find out what the exact cost to taxpayers of the Fannie/Freddie bailout will be, or what the losses will be to holders and insurers of mortgage debt. A concrete answer would be like admitting there is no Santa Claus. So we quickly change the subject.