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The scale of the economic crisis has begin to sink in to the point where leaders of the G-8/G-20 have begin to realize that everyone dwelling on the welfare of parochial, politically favored, financial interests ( Goldman Sachs in the case of the U.S.) is not going to get the world out of this crisis. Coordination of macroeconomic levers will be the key. Some good posts that I strongly encourage you to read,  before I comment:

Status report on the financial crisis: we’re at a critical point in time by Fabius Maximus

Encouraging signs – coordination appearing by Robert Paterson

Notes to Self: What Are We Doing? by Brad DeLong

The world is at severe risk of a global systemic financial meltdown and a severe global depression  by Nouriel Roubini

Equities, Pay Caps, Liquidity: Structuring a Bailout–Posner & Government Equity in Private Companies: A Bad Idea-Becker by Becker and Posner Blog

Geopolitical Consequences of the Credit Crunch by Niall Ferguson

How to view this system perturbation by Thomas P.M. Barnett

Wolfgang Munchau: Policy Errors Risk Turning Credit Crunch Into Depression  and Are Hedge Fund Margin Calls Leading to Stock Rout? by Naked Capitalism ( HT to John Robb)

National Orientation by Chet Richards

JOURNAL: Cascading Bubbles by John Robb

What is to be done ?

Aside from shortsightedness that comes from playing primarily to domestic political inside interests, there is another reason that G-7 leaders in particular are moving slowly in coming to terms with reality of this crisis: the interconnectedness wrought by globalization implies that the long term solution involves a considerable erosion of sovereignty to a global entity that can coordinate and shape macroeconomic policies of the central banks of the world’s largest economies. And to an extent, fiscal and regulatory policy as well. If the G-7 leaders are bold, they will approximate such meta-policy activity this weekend to get us over this crisis but we will be back to square one for the next crisis in two or five or ten years down the road.

I am uncomfortable, make that opposed, to any Brussels style global authority. Given the predisposition of much of the world politically, representatives of such an authority will prefer to misuse their authority to micromanage to achieve social and political engineering rather than stick to a narrow mission of tending to macroeconomic trends. Yet the fact that the sum of the global capitalist system now exceeds the ability of any part, even the U.S., to control it, requires a mechanism be put into place to transnationally leverage macroeconomic policies for maximum systemic benefit during hard times.

Better to set up a simple WTO like structure today for a “coordination council” that rules natonal monetary policies in or out of international consensus against a clear rule-set yardstick, than to wait until some emergency creates a crisis large enough where we wake up some day with vast portions of our sovereignty ceded to unaccountable international bureaucrats. Sort of a “Concert of Economies” that preserves the flexibility and freedom of of capitalism and national sovereignty instead of instituting a global GOSPLAN.

The crisis points to creating a level playing field in terms of financial rule-sets with agreed upon “circuit-breakers” are put into place now. This requires various states yield on all sorts of national comparative advantages for the benefit of the system as a whole. Something that goes against every career instinct of a politician.

A practice I’ve adopted since I’ve started blogging is to jot down ideas or questions that I get while surfing the blogosphere. Admittedly, the primary result from this habit is that my desk is usually littered with little pieces of crap on which I’ve scrawled some incoherent sentence fragments. OTOH, sometimes one of these tiny scraps of paper serves to jar my memory and I can return to a topic that interested me. Today is such a day.

A while back, I read an interesting post on “quantum libraries” – the books you read over and over again and learn something new each time. I’ve tried google and technorati to try and find the blogger who is the originator of this term but have failed ( if anyone knows, please shout out in the comments so I can properly link. It’s a great concept and one that applies to all serious readers.

Here is my “Quantum Library”

The Prince

The True Believer

The History of the Peloponnesian War

The Art of War

The Gulag Archipelago

1984

The Lord of The Rings

The Lord of the Flies

I suppose I could “tag”people but instead, I’ll just say that I’m curious about the quantum libraries of the following blogfriends: Dave Schuler, Dr. Chet Richards,  Soob, Lexington Green, Curzon, Smitten Eagle, Jeremy Young, Dr. Von,  Tim of Ubiwar, Cheryl Rofer, TDAXP, Shane and Sean Meade. Post if you have the time.

ADDENDUM:

Joining in on the Quantum Library fun…..

The Innovationist

The Committee of Public Safety

ubiwar

The last global economic crisis of this magnitude helped spread Fascism, Communism and the economic primitivism of State Autarky. I expect that, if a relatively decent bounce-back cannot be engineered to loosen credit markets, we will see countries moving in authoritarian and autarkic directions in 2009, using managed trade barter deals to evade currency fluctuations or devaluations. Black Globalization will explode as ordinary citizens seek to escape new economic controls.

A convenience that, for middle income states, will soon harden into habit with the help of vested interests who benefit, relatively speaking, by reducing social mobility and economic fluidity in hard times.

John Robb is going to be the keynote speaker at the Boyd 2008 Conference on Prince Edward Island.

A great choice. Robb as most of you know, is the author of Brave New War: The Next Stage of Terrorism and the End of Globalization and is currently working on a book on “Resilient Communities”, one of the conference themes. Here is the conference agenda:

Situation* Energy – Peak Oil and its effect on our economy and our way of life is now a reality. The end of the big car, of suburbia, of cheap food, of maybe global trade, of how cities are designed are all on the table now. We can also see that paying for oil has also led to a shift of power from the US to other places. We are at full fiscal and financial stretch and it is going to get worse so long as we depend on oil and we do nothing to change how we live.

* Credit – We can now see that the Mortgage Crisis is not a “normal” correction but may include a complete shut down of the other mainstay of our way of life cheap and easy credit. Our financial system is on life support. Again, we are at full fiscal, financial and social stretch. The credit of our country is in question.

* Food – Food across the world seems finally to have hit some Malthusian limit perhaps affected by the end of Cheap Oil and by unstable weather – Not only is energy rising in costs but so is food. Both are also subject to shortages or even to being not available at all – much of the world is becoming a tinder box. Imbalances in water will increase the tension.

* Weather – It’s not just the hurricanes but too much rain or not enough is stretching communities to the limit.

* Conflict – With these forces building, so is the potential and the reality of conflict. This is the time for adventures such as Georgia or possibly Taiwan? This is the time for finding another to blame for domestic failure Pakistan/India? This is also a time when the US is at full system overstretch where its capacity to intervene or help is now in question.

* A transition in business models – The end of the “Ford Model” of get big and get central as the main value creator in business or in services – All who operate this model seem terminally ill. Millions are going to become unemployed as the shift to a more networked model takes place.

* Vulnerability in key infrastructure – Our oil/gas systems are a hurricane away from failure. The grid, a bad storm away. Our food delivery systems depend on a just in time system that also depends on nothing going wrong. The chances of being without food and power for a long period of time are now very high. There is no resiliency in these key areas.

* The end of the state – An aware person can see that the state can do little to help in any of these areas of tension. Not only is the larger state helpless or even worse, but so are the smaller states. Looking to the “father” used to work but post Katrina seems not to. So as we go to the polls this fall, many of us wonder if there are any ways at all that we can influence our destiny.

* The power of the legacy systems – The systems that are failing still have the power and the means to fight off a direct attack. They have the money and they have co-opted the political machinery. This includes the Pentagon, Big Oil, Big Auto, Big Food etc. Merely having the right ideas will not be enough.

Thought German might fit the Wagnerian mood of the markets today in a brief post discussing the economy. A few links on related tangents that I found intriguing, and then a brief comment:

John Robb –  A Real Nuclear Option in Finance

John relishes being not only out front but the edge thinker. He’s right that derivatives have to be addressed though I’m not qualified to comment as to “how”. I haven’t the faintest idea and the sums that derivative markets leverage vastly exceed our planetary GDP ( that’s right, not the economy of United States, the GDP  of planet Earth)  In particular, I wonder how you monkey with one class of derivatives without spooking the traders in other derivative instruments into stampeding us over a cliff in ten minutes. OTOH, Robert Paterson, who unlike me really does understand derivatives and the nuances of trading, agreed with Robb, who offered:

One solution: Nuke entire parts of the system. In short, destroy the system’s network connectivity. For example, credit default swaps ensure that failure will spread through internetworked contracts. Nuke CDS derivatives ($60 trillion or so) by making them illegal. Destroy parts of the network in order to save the remainder — firewalls and firebreaks.

Fabius Maximus –  No coins, no COIN

FM sees the economic crisis forcing huge changes in American foreign policy, defense structure, military doctrine and acquisitions:

In most of these money is no object in the pursuit of security (or other goals, often quite chimerical).  That is an exceptional way of thinking.  More so when one considers how our current account deficit has steadily increased since 1971 (when we went off the gold standard) – and the even more rapid increase in the foreign debts that finances the annual deficit.

That era will close soon, and the United States will return to earth.  Like everyone else, we will have to consider what foreign adventures we can afford before starting them – weighing their costs and benefits – and stop wars whose costs spiral out of control.  This will force a military revolution more profound than any since WWII, when we entered the “money is no object” era for weapons and foreign wars.  

….Not that the annual budget wars were not fought fiercely, but they will be conducted differently once budgets start their rapid and long-term decline.  Like any organization thrust into radically changed environment, restructuring – drastic changes in structure and doctrine – will be needed.

Maritime, air, and land – our approach to all will change.  Maintaining full-scale forces against purely theoretical future threats will become impossible.  Seeking dominance in every theater will become unrealistic.  Prioritization will become imperative.

FM also offers up  A solution to our financial crisis . Right now, China, the leader in global dollar reserves is in a position where our crash is their crash and their crash may be the end of the PRC as we know it. Good time to strike a deal.

Tom at HG’s World cites Niall Ferguson in Ferguson’s greatest area of expertise, as an economic historian:

The End of Prosperity, or A Better Future?

Historian and author, Niall Ferguson penned this article in Time magazine, about the question that is on everyone’s mind if not their lips. “Are we headed into a second Great Depression?”He begins: “Congress’s initial rejection of the Bush Administration’s $700 billion bailout plan calls to mind an unhappy precedent. Back in 1930, the Senate passed the Smoot-Hawley Tariff Act, which raised duties on some 20,000 imported goods. Historians define this as one of the critical steps that led to the Great Depression – a tipping point when the world realized that partisan self-interest had trumped global leadership on Capitol Hill.”He explains what happened to tip the scales.“The U.S. – not to mention Western Europe – is in the grip of a downward spiral that financial experts call deleveraging. Having accumulated debts beyond what’s sustainable, households and financial institutions are being forced to reduce them. The pressure to do so results from a decline in the price of the assets they bought with the money they borrowed. It’s a vicious feedback loop. When families and banks tip into bankruptcy, more assets get dumped on the market, driving prices down further and necessitating more deleveraging. This process now has so much momentum that even $700 billion in taxpayers’ money may not suffice to stop it.”

Like Tom of HG’s World, I’ve been a big fan of Ferguson and have numerous books of his on my shelf . That said, it’s very odd to me that he not mention another parallel with the Great Depression of a Federal Reserve in the hands of a relatively new Chairman after the long tenure of an outsized and much respected predecessor. Or the inability of the Fed to effectively coordinate with European counterparts ( several days after loudly bloviating about American weakness/incompetence by the German Finance Minister it appears that he might have better spent his time addressing German and EU economic fundamentals. Good Lord, even by politician standards, what an asshole!) which back then scrambled to ditch the gold standard like a poor relation carrying hepatitis.

The solution, if you can call it that, from my crude perspective would be to gather the Fed with other central banks, treasury and it’s G-8 finance ministry counterparts plus China and the biggest sovereign funds and agree on a few, very simple, lowest common denominator “brakes” or safety nets to backstop the system, plus a 2 year “hot money” flight tax to give a window of time to let the markets settle and work out clear minded reforms rather tha jerry-rigged insider looting binges posing as band-aids. That and driving what money/credit remains toward entrepreneurship and innovation rather than another burst of McMansion consumption by a demographic of dudes without any verifiable means of support.

This scheme won’t create any rainbows. It would be a tourniquet but better a tourniquet than an amputation.  If we come out with a recession on the scale of 1981-1982 we should consider ourselves to be fortunate. The Great Depression has begun to pass out of living memory but reviewing the mistakes of those years might be instructive.