It’s true that if China dumped its U.S. assets the value of the dollar would fall against other major currencies, such as the euro. But that would be a good thing for the United States, since it would make our goods more competitive and reduce our trade deficit. On the other hand, it would be a bad thing for China, which would suffer large losses on its dollar holdings. In short, right now America has China over a barrel, not the other way around.

Couple this with the news that the International Monetary Fund is talking about increasing inflation targets from 2% to 4%, and you can see an elite consensus emerging around the idea of higher inflation.

None of this is to argue that inflation is a “good” thing. Runaway inflation can certainly be bad for an economy. Just ask Zimbabwe or 1930s Germany. On the other hand, moderate inflation is good for debtors, such as, say, the US Government or the 1 in 4 homeowners who are underwater on their mortgages.

In a nutshell, former governor John Engler is suggesting that Michigan offer the Upper Peninsula as a new home for a prison for the suspected terrorists who have been kept in the facility at Guantanamo that President Barack Obama intends to shut down.

Yup.  You gotta love an economy that leads people to beg the Feds for prisons.

During the campaign, Obama was never shy about his promise to undo the Bush tax policies. But it was easy to ignore his occasional lapses into populist rhetoric and focus on his intense intelligence and Ivy League education. Now, in the wake of the crisis, Wall Street’s politics are shifting rightward. “All the rich people I know took George Bush for granted,” says an analyst at a midtown hedge fund. “I’m a Democrat, but I agree with Rush Limbaugh on a lot of this stuff,” rails the wife of a former AIG executive.

The anger masks a deeper suspicion that Obama fundamentally doesn’t respect their place at the table. “I think he doesn’t have an appreciation for how hard it is to build these companies, the blood, sweat, and tears that goes into them,” says a senior executive from a failed Wall Street firm. “It’s just that he has no passion for it. He speaks dispassionately about the whole situation, except when he’s beating up on the Wall Street fat cats.”

. . .

There’s a vast woundedness now on Wall Street, which is hard to contemplate after the period of triumphalism so recently ended. In this conversation about money, there’s a lot to work through. Just months ago, the masses kept what anger they had to themselves, and the bankers were close-lipped about what they thought they were owed by society. There wasn’t much of a dialogue about the haves and have-nots and who was entitled to what. For the privileged, it was a lot more comfortable when things remained unspoken. Almost more than the loss of money, they are concerned with the loss of status and pride.

The only real motivation that anyone at A.I.G.-F.P. now has is fear. Mr. Cuomo has threatened to “name and shame,” and his counterpart in Connecticut, Richard Blumenthal, has made similar threats — even though attorneys general are supposed to stand for due process, to conduct trials in courts and not the press.

So what am I to do? There’s no easy answer. I know that because of hard work I have benefited more than most during the economic boom and have saved enough that my family is unlikely to suffer devastating losses during the current bust. Some might argue that members of my profession have been overpaid, and I wouldn’t disagree.

That is why I have decided to donate 100 percent of the effective after-tax proceeds of my retention payment directly to organizations that are helping people who are suffering from the global downturn. This is not a tax-deduction gimmick; I simply believe that I at least deserve to dictate how my earnings are spent, and do not want to see them disappear back into the obscurity of A.I.G.’s or the federal government’s budget. Our earnings have caused such a distraction for so many from the more pressing issues our country faces, and I would like to see my share of it benefit those truly in need.

On March 16 I received a payment from A.I.G. amounting to $742,006.40, after taxes. In light of the uncertainty over the ultimate taxation and legal status of this payment, the actual amount I donate may be less — in fact, it may end up being far less if the recent House bill raising the tax on the retention payments to 90 percent stands. Once all the money is donated, you will immediately receive a list of all recipients.

Going further than analysts anticipated, the [Fed] cut its target for the overnight federal funds rate to a range of 0 to 0.25 percent, a record low, virtually bringing the United States to the zero-rate policies that Japan used for six years in its own fight against deflation.

Elvis has officially left the building vis a vis the U.S. economy.  This is basically the last thing the Fed can do to try and improve the declining fortunes of U.S. business.

It also means that we’re officially in a “liquidity trap” — too many dollars chasing too few profitable investments.  The only way out of this — which is the same way Japan managed to keep its people going during their own crisis — is through fiscal policy.  Any members of Congress who disagree with Obama’s plans for a massive expansion in infrastructure spending should be reviled; their idealogical positions leading them to short-sightedness as criminal as Smoot and Hawley’s.

Going to be a long, strange trip.

So it’s with that in mind that a friend of mine has started a new Facebook group — Second Christmas (you’ll probably need a Facebook account to access).

2nd Christmas is January 20th, 2009, which is also Inauguration Day for President-elect Barack Obama.

2nd Christmas was created in the spirit of renewed hope and optimism for a country, and a world, devastated by the last eight years of negligent and inept leadership.

It is our sincere hope that a positive outlook and real, progressive change will spread starting with the inauguration of President-elect Barack Obama on January 20th, 2009.

To encourage the start of this renewed growth and return to a equitable and prosperous future, we suggest our own stimulus plan in the form of…2nd Christmas!

Citigroup is not the only bank grappling with tremendous losses. Many financial institutions are hiking customer fees at record levels.

It may be quick and easy, but that ATM convenience is going to cost you. Citibank, Chase, Bank of America and Wells Fargo are all starting to charge non-customers as much as $3 per transaction to use their machines.

“I think it’s kind of ridiculous because everybody is going through economic hardships,” New Yorker said Margo Waltz said.

. . .

Several banks are also boosting minimum account balance requirements and experts warn this is just the beginning as banks merge or go belly-up.

“The fewer banks you have the fewer choices consumers have the more a sort of gotcha the banks have,” Ludwig said.

One alternative experts are suggesting is checking out your local credit union.

“They’re not going to gouge their members because their members are the people who run the credit union,” Ludwig said.

States currently control interest rates, which are practically unlimited. Consumer advocates are calling on the Federal Reserve to step in as they did after the 1989 savings and loan bailout. They want interest rates and fees capped.

It’s estimated banks collected $17 billion in overdraft fees last year alone.

The Federal Reserve chairman and senior economic officials of the Bush administration solemnly filed into the large conference room of the Treasury Department. There was a sense of urgency, an understanding that drastic action — restructuring the financial landscape of corporate America — was desperately needed.

. . .

The crisis of that moment was the implosion of Enron, Global Crossing and other companies. Along with conflicts of interest and criminally creative bookkeeping, the culprit was often a combination of financial complexity and insanely expensive compensation packages.

Enron is long gone, but this episode — as much a warning for our financial security as the 1993 World Trade Center bombing was to the threat of wider terrorism — carries some telling lessons as our best minds struggle now to save the economy.

The meeting, recounted to me by Paul O’Neill, Mr. Bush’s first Treasury secretary, and several other participants, was something of a showdown. Everyone came armed for battle, none more than Mr. Greenspan and Mr. O’Neill, who railed that day like a pair of blue-suited Jeremiahs. Their colloquy on economic policy and corporate practice, which began when they were senior officials in the Ford administration, had evolved over three decades.

To the surprise of many younger men in the room, the duo opened by reminiscing about a bygone era when the value of a company’s stock was assessed by how strong a dividend was paid. It was a standard that demanded tough, tangible choices. Everything, of course, came out of the same pot of cash, from executive compensation and capital improvements to the dividend — which could be spent by a shareholder or reinvested in more company stock as a show of support.

In contrast to dividends, Mr. Greenspan intoned, “Earnings are a very dubious measure” of corporate health. “Asset values are, after all, just based on a forecast,” he said, and a chief executive can “craft” an earnings statement in misleading ways.

Speaking with a hard-edged frankness rarely heard in public — and seeing that those assembled were not sharing his outrage — Mr. Greenspan slapped the table. “There’s been too much gaming of the system,” he thundered. “Capitalism is not working! There’s been a corrupting of the system of capitalism.”

Mr. O’Neill, for his part, pushed to alter the threshold for action against chief executives from “recklessness” — where a difficult finding of willful malfeasance would be necessary for action against a corporate chief — to negligence. That is, if a company went south, the boss could face a hard-eyed appraisal from government auditors and be subject to heavy fines and other penalties. By matching upside rewards with downside consequences — a bracing idea for the corner office — Messrs. O’Neill and Greenspan hoped fear would compel the titans of business to enforce financial discipline, full public disclosure and probity down the corporate ranks.

But they were in the minority. . . .

Warren E. Buffett, the country’s most famous investor and one of the world’s richest men, announced on Tuesday that he would invest $5 billion in Goldman Sachs, the embattled Wall Street titan, in a move that could bolster confidence in the financial markets.

It’s strange to think that an investment bank ([ahem]) a “bank holding company” and one of the world’s richest men will come off being scions of virtue in this mess.  But that’s exactly what they are.

The rationale for the mooted bailout is that the American financial system needs to be recapitalized.

There’s a lot that’s fishy about this.  Among them is the fact that there are many, many ways for this to happen without government intervention.  Goldman Sachs and Warren Buffett have come to one of them: allow private investors to buy new shares in companies desperate for capital.

Here’s the thing: either the Fed is going to pay a market price (or, its best, honest guess at market price) for assets that are currently booked above their market value.  Or — as seems more likely — the Fed is going to overpay for these assets in order to subsidize the American financial industry.

The truth is that, eventually, the most distressed firms will find ways to assign a fair market value to their mortgage-backed assets.  In that case, some firm will buy those assets — on the open market.  American capitalism survives intact.  The banks get punished by having to take the loss on bad investments.  And the financial system gets recapitalized.

Paulson’s approach essentially means that American tax payers are going to send a donation to banks, and then bear the costs when those assets are inevitably written down.  Meanwhile, the expanded debt means that there won’t be any money for the types of public investments that are going to get the American economy moving again.  Things like roads, bridges, and rail that not only create solid investment opportunities for the newly recapitalized banks, but also provide jobs for lower-middle income workers.

If the bailout goes through according to Paulson’s plan, we’ll likely end up in a liquidity trap anyway.  Sure, the banks will be recapitalized, but there will be precious little worthwhile investment to make as U.S. consumers tighten their belts and the U.S. government focuses all revenues on debt servicing.

Goldman’s and Buffett have it right — let the markets work for the purpose they were intended.  There’s going to be pain one way or another.  Let’s not pile on the hurt, and embeggar our country for generations to come.  Let’s hope the rest of the financial industry follows the lead of Goldman Sachs and Warren Buffett.

P.S. I also want to add that I think Goldman’s is betting that the federal government is going to be both inept and an unwelcome guest.  By using the markets to solve their problems Goldman Sachs ensures a much greater degree of regulatory independence in the future, which should enable them to be more competitive than other institutions that take the Fed’s handout.  Think welfare moms vs “up by the bootstraps” entrepreneurs.  It’s also interesting to note that Paulson is a former leader of Goldman Sachs, which makes you wonder “what do they know that everybody else doesn’t?”

The Fed effectively killed Glass-Steagull today by allowing the last two remaining investment banks — Goldman Sachs and Morgan Stanley — to convert themselves into Bank Holding Companies.  Instead of being subject to SEC regulation, the banks will now be subject to Fed oversight.

It’s interesting to note that Glass-Steagull was originally enacted to prevent the worst excesses of the Robber Baron era from recurring.  In particular, the practice of the commercial banking arms of a financial institutions lending its own investment bank money and then using assets it issued itself to underwrite consumer lending.

Crazy days, folks.  Crazy days.

Everyone seems to agree on the need for a big and comprehensive plan, and that the markets have to have some confidence that help is on the way. Funds need to be supplied, trading markets need to be stabilized, solvent institutions needs to be protected, and insolvent institutions need to be put on the path to a deliberate liquidation or reorganization.

But is the administration’s proposal the right way to do this? It would enable the Treasury, without Congressionally approved guidelines as to pricing or procedure, to purchase hundreds of billions of dollars of financial assets, and hire private firms to manage and sell them, presumably at their discretion There are no provisions for — or even promises of — disclosure, accountability or transparency. Surely Congress can at least ask some hard questions about such an open-ended commitment.

And I’ve been shocked by the number of (mostly conservative) experts I’ve spoken with who aren’t at all confident that the Bush administration has even the basics right — or who think that the plan, though it looks simple on paper, will prove to be a nightmare in practice.

Thank the maker (thank the Maker’s?) that Pelosi & Friends finally remembered where they kept the long pants after 7+ years of playing subservient children to the Bush administration.

There’s no way in hell the American people — or our representatives in Washington — should let the banking industry off the hook for this one.

And in case it isn’t obvious, those begging as they cling by their fingertips on the precipice are not in a position to be making any demands or calling any proposals “deal killer.”

Late Update: My instincts tell me that the effort to pretty this up by adding a ‘stimulus package’ is equally bogus. That’s not to say it’s not important in itself. But if we blow 700 million or a trillion dollars cleaning up Wall Street’s mess, having also budgeted 25 or 50 billion on helping ordinary people won’t make that trillion dollars any less blown. The focus here needs to be on making sure this bailout makes sense, isn’t going to be farmed out to Neil Bush and provides something for taxpayers in return. Let’s keep the focus on that.

Seriously. How obnoxious do you have to be, after losing trillions of dollars making bad bets and begging for a handout, to have the unmitigated gall to decide what is or isn’t a “deal killer?” Talk about beggars and choosers. It’s like offering a homeless guy a sandwich only to have it thrown back in your face as he says, “hey man, mustard is a deal killer.”

And I absolutely agree on the stimulus package part. Let’s chuck the whole thing and get a deal that’s more equitable and copacetic to our interests.

Now I know how this anonymous Congressman is feeling.

What’s more, they’ve effectively just used the savings of the American middle class to bailout the shareholders of the financial industry — mainly rich white guys, with a few Arab and Chinese sovereign funds thrown in to boot.

We’ve effectively turned into Argentina, only without the great soccer team.

You, and I, and everyone in this country not about to retire will be paying this off for a generation.

Just when I thought Bush couldn’t possibly add to his legacy of corruption, reactionary-ism, and general stupidity, now he’s got a new one — socialism.