Ok, that's an incendiary title.

Intentionally.

But what is our financial system today?

Let's step back just a bit and contemplate what our financial system is, and what it has become.

Any financial system serves an essential function - providing liquidity to commerce.  Whether it be through the provision of a medium of exchange (that should be stable, since that medium usually must remain in use for more than a few minutes at a time!) or through the provision of lending so as to provide people the ability to place a wager on forward productivity (e.g. the farmer who borrows to buy seed which he then plants and six months later you eat) nobody can mount a sane argument that we should not have a financial system of some sort.

As such a financial system (ordinary consensual sexual intercourse) is necessary for the propagation and prosperity of an economy (the species.)

But some people get money-crazy (sex-crazy.)  Unable to satisfy their desire for more money (sex) through consensual and honest means, they turn to theft (rape.)

In a functioning society, when someone turns to theft (rape), the law intervenes and throws said person in prison so as to protect the rest of society from their kleptomania (ever-stiff penis.)

Thus it has been in our financial system.

But, instead of arguing for jail time and dishonor for those who have committed these acts in the financial system, our Treasury Secretary, Fed President and even President Bush have instead argued for both amnesty and the lining up of yourself, your children and grandmother so that the thieves (rapists) can have more free shots (rapes), not only intentionally disregarding the outrageous and even unlawful conduct of the past but offering free future offenses! 

And make no mistake, that is exactly what has happened.

The "why" is simple - bonuses and other compensation (including dividends) has been inextricably tied to "earnings." 

Banks traditionally earned their money by borrowing in the short term money markets and lending for longer periods of time.  The "spread", when multiplied by a safe and sane bank's leverage (8-12:1) provides a very nice profit - gross margins at a 3% spread come out around 35% or so, which isn't bad.

But greed (sexual desire), you see, got the better of these people, and there were only two ways to increase the amount of money (sex) that these bankers could obtain:

1. Increase "leverage", which is just a cute way of saying increasing the amount of debt one carries proportional to one's assets, even though just as with sex, the more of it you carry, the higher the risk you blow up (contract AIDS and die)
2. Increase fees (number of "plunges per act") as far as you possibly can, hoping that the customer ("bottom") doesn't complain that now you're hurting them instead of helping.

Now there is nothing particularly evil about talking someone into more debt (sex), provided you don't conceal from them the fact that you know they can't possibly pay the loan to term (you have HIV.) 

But in fact that is precisely what these bankers have done.  There was absolutely no reasonable expectation that the subprime buyer could pay off his mortgage on the original terms.  Likewise, there was absolutely no reasonable expectation that an "Option ARM" buyer could pay off that mortgage through the term of the loan. Similarly, when you have an automaker offering to "roll over" your previous car loan's balance into a new loan, its clear that the new loan has no reasonable expectation of being paid as agreed; you couldn't even satisfy the previous note!

All of these instances were and are clear cases of financial rape-by-deception ("I'll love you forever") in that the only possible way for the debtor to stay above water was to come back in another year or two and get a new loan, rolling over the old - which of course generated yet more fees.

There was no belief on the part of these lenders at any point in the process that the borrower would be able to perform as originally agreed.

This pernicious fraud (rape) led to asset (and service) price appreciation by making it appear the economy was growing when in fact it was not.  By how much?  Here it is again:

 From the last recession forward to today, approximately $12 trillion dollars has been "contributed" to GDP - that is, claimed economic output - that did not really exist.

Now let's look at aggregate GDP change from 2000-2007.  The aggregate increase over the 2000-2007 time frame was approximately $4 trillion dollars.

Without the additional $12 trillion in debt, aggregate GDP would have contracted by $8 trillion in over that period, which is twice the supposed growth in GDP over the previous eight years!

What's even worse is that this supposed debt was "supported" by falsely-inflated asset valuations - your 401k's value "inflated" by a false 50%, your home "inflated" in value by a false 100%, and none of this was supportable by safe and sound levels of indebtedness.  At the same time this insanity filtered through to anything that could be bought on "debt", including education - college tuition has risen at several times the rate of inflation but salaries have, obviously, not.

Now Henry Paulson wants to "stop home price declines" by, you guessed it, adding even more debt!

The problem with these plans is that just as with the other "alphabet soup" machinations they crowd out the ordinary process of business and assignment of risk, which destroys market liquidity and adds yet more false GDP that ultimately must be removed from the system.

Paulson's latest scheme would amount to "buying down" interest rates through intentionally overpaying for Fannie and Freddie paper.  Well, what happens to all the existing mortgage-backed paper out there with higher coupons?  What happens to those who have to make the higher cashflows?  "Crowded out"?  Ha!  How about "instantaneous destruction of yet another marketplace."

And while this sounds good in theory for "new home buyers" think about what happens to the existing homeowner who can't refinance into this debt!  Heh, if its only for purchase-money deals, how about if you and I swap homes?  I'll sell you yours, you sell me mine, we both cram down our rates!  Nice!  (Then we'll swap back sometime later - like, oh, tomorrow?)

The only solution to the home price problem is to force prices down so that affordability returns, which incidentially also forces defaults and thus cleans unsupportable debt from the system at the same time.

Chrysler's vice-chairman argued that if Congress doesn't allow them to suck off yet more debt their failure could "cause a depression." 

Hint to the peanut gallery:

A Depression has been assured; that $12 trillion in false GDP growth will and must come back out as the unservicable debt defaults; adding yet more unservicable debt to the pile will simply make The Depression deeper and longer.

The option to avoid The Depression occurred back during the Tech Bust.  It is too late and Jim Press, along with the other "financially savvy" needs to STFU and start telling the truth.

Bernanke and Paulson, in particular, both know this is true as neither of them is mathematically challenged. 

The American People may be, but our "officials" most certainly are not.  They know this financial******has been going on (in fact, they're two of the practitioners of assault themselves!) but so far have managed to "snow" the public as we no longer teach kids about the fundamentals of compound interest and debt in school, and not one American in ten has looked at the above graph and contemplated what it means!

Geithner, Obama's Treasury Nominee, is apparently upset at Sheila Bair and wants to force her out of office.  While Ms. Bair and I have several serious areas of disagreement (not the least of which is that she didn't do her damn job closing the lenders operating with unsafe operating leverage ratios and making impossible-to-pay-to-maturity loans for the previous eight years!) the fact remains that Geithner's objection is that she's interested in protecting the solvency of her part of the government. 

Since when is this a bad thing?

We the people must recognize and admit that in fact the python that has infested our markets over the last eight years is in fact analogous to a sex-crazed monster who refuses to zip it and stop assaulting our grandmothers and children (not to mention that some of the officials claiming to be "handling" this crisis are the python!) and treat them accordingly.

Many have argued that we "must protect the financial system" or the economy will melt down and fail entirely.

I have good news and bad news.

The good news is that we must (and can) protect the financial system without protecting any of the existing players.  The means for doing so is in fact quite simple:

Government should set up ten (10) new federal banks.  Capitalize each with $20 billion dollars and immediately IPO off the bank to the public.  The capitalization would carry a preferred coupon of 9%, incenting the bank to immediately replace that government capital with private capital, with dividends, executive bonuses and pay beyond $200,000 per annum (total compensation) being prohibited until the government capital is repaid in full.

This would provide an immediate aggregate lending potential of two trillion dollars into the economy just off the Government Tier Capitalization alone.  Private capital would fly into these institutions since they would be established with no debt of any sort.

At the same time, withdraw all existing support programs by Congressional mandate.  This includes Fannie, Freddie, the existing alphabet soup mess and all other taxpayer-funded backstops.  The FDIC would be directed to provide deposit insurance only to the extent that it can document the safety and soundness, and expose same to public view, of the institutions it insures.

If The Fed (which is technically unable to be compelled to comply) refuses, revoke their right to regulate the money supply and replace them, leaving them as simply another private bank forced to compete for funds in the open market like everyone else.  They will go along rather than die.

The consequence of this set of actions would be to force an immediate default of the excess (unservicable) debt in the private sector.  Both banks and debtors would go bankrupt immediately, but the lending function would remain intact as the newly-chartered banks would exist to replace the "busted" institutions.

At the same time Glass-Steagall must be reinstanced, reserve requirements for banks reinstated and enforced without exception, and leverage in the financial system must be strictly controlled at no more than 12:1.

This set of actions would almost-immediately clear the system of excess debt load, defaulting over $10 trillion in bad loans within months and allowing the bankruptcy process to do its job.  There would be an enormous number of both firms and individuals who would go bankrupt, but in the place of bankrupt firms new competitors would immediately arise to serve the demand from consumers and businesses who were freed from paying 15, 20 or even 30% of their income towards debt service. 

Cleansed of excess debt service the economy could once again function and begin to grow at a sustainable rate.

We would experience severe economic pain but the pain is occurring anyway; it would cap that pain at the level of the stupidity that has already taken place instead of continuing to add to it as we are doing now.

It also would leave the economy in a position to be able to pay down the aggregate debt load further over time - something that is flatly impossible at present as the clear evidence shows we are now attempting to pay down debt by adding even more debt - a mathematical impossibility.

By taking these actions we would protect the essential functions of trade and transactional credit, along with lending based on sound and reasonable expectations of future earnings (e.g. to buy a house), while at the same time cutting off the access to our children and grandchildren from the financial rapists who have created The Depression we must now suffer through.

Make no mistake folks, there is no possible way to avoid reconciling the false $12 trillion in so-called "GDP" that was generated through additional debt load with the true GDP over the last seven years. 

That $12 trillion can either be removed via defaults (which will be very painful) or we can continue to grow that amount via compound interest (which will make it even more painful and cause even more constraint on productive output by diverting more and more of it towards interest, ultimately resulting in a catastrophic failure to service that debt.)

There is no option that prevents this adjustment; we are now arguing over "how bad", not "will it be bad", and as can be seen from the graph above the slope of the debt load has been increasing. 

The "new programs" taken on this year (which are not included in that graph) have made the growth rate in the debt line parabolic and we now are looking at an aggregate GDP adjustment, taken over the next three to four years, of some twenty percent, which is the definition of a Depression.

If we do not stop this insanity now we will face a catastrophic downward GDP adjustment in the next two to three years that could reach between 30-50% in what some economists call a "sudden stop."  The consequence of such an event, were it to occur, would be unemployment of 30% or more and Depression that would make the 1930s look like a cakewalk.  Worse, with our government having consumed all its borrowing capacity in a futile attempt to prevent this outcome we would not be able to provide necessary and basic human needs such as food, shelter and clothing to the displaced.

This is mathematics folks, not ideology.  We can either face the math now and lock up the financial rapists or we will all suffer from financial AIDS.

Time has run out.