“wealth creating” components of the economy have been subordinated to a finance-driven model which suddenly derailed due to abusive expansion of debt

Welcome to Year 27 of the Reagan Revolution | by Mike Whitney / November 8th, 2007
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Why do the banks need such a huge infusion of credit if they are as “rock solid” as Bernanke says?

As most people now realize, the mortgage industry is on life-support. ...
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Additionally, the banks are holding an estimated $200 billion in mortgage-backed securities and derivatives for which there is currently no market. This is compounded by $350 billion in “off balance sheets” operations — which are collateralized with dodgy long-term mortgage-backed securities — that provide funding for “short-term” asset-backed commercial paper. ASCP has shriveled by $275 billion in the last 10 weeks leaving the banks with gargantuan liabilities. ...
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The news is bleak. The systemic rot is appearing everywhere presaging ongoing losses for the financial giants and a long-downward spiral for the markets. The banks are currently under-regulated, over-leveraged and under capitalized. ...
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Former Fed chief Paul Volcker summarized the overall economic situation last week at the second annual summit of the Stanford Institute for Economic Policy Research. In his speech he said:

Altogether, the circumstances seem as dangerous and intractable as I can remember. Boomers are spending like there is no tomorrow. Homeownership has become a vehicle for borrowing and leveraging as much as a source of financial security.. As a Nation we are consuming about 6 per cent more than we are producing. What holds it all together? - High consumption - high leverage - government deficits - What holds it all together is a really massive and growing flow of capital from abroad. A flow of capital that today runs to more than $2 billion per day.” The nation is facing “huge imbalances and risks.

Volcker is right. The country is in a bigger pickle than any time in its 230 year history. ...
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The biggest losers of all, however, are the financial giants that created most of the abstruse, debt-instruments that are now devouring the system from within. The productive and “wealth creating” components of the economy have been subordinated to a finance-driven model which suddenly derailed due to the abusive expansion of debt. Inevitably, some of the banks that took the greatest risks will be shuttered and trillions of dollars in market capitalization will disappear. ...
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... The pervasive “free market” ideology rejects the notion of supervision or oversight, and as a result, the markets have become increasingly opaque and unresponsive to rules that may assure their continued credibility or even their ability to function properly.

The “supply side” avatars of deregulation have transformed the world’s most vital and prosperous markets into a huckster’s shell-game. All regulatory accountability has vanished along with trillions of dollars in foreign investment. What’s left is a flea-market for dodgy loans, dubious over-leveraged equities and “securitized” Triple A-rated garbage.

Let’s hear it for the Reagan Revolution. ...