They still believed that the stock market was going to produce 15% per annum returns for the foreseeable future. September 2008 and he ended that mantra. On September 3, the Dow Jones Industrial Average was where it had been at its peak in 2000: 11,700. The Standard & Poor’s 500 index was lower: 1280 vs. 1529 (close). Subtract from that over 20% price inflation.

The experts on CNBC on September 1 still clung to the illusion that there was no recession, the boom was still in
force, and everything would work out just fine. By the end of September, all that lay in ruins. There is no optimism on CNBC today. There is a kind of stiff upper lip determination not to panic.

It should have been obvious in August 2007 that the end of post-2003 stock market recovery was over. Bernanke had tightened money from the day he took over as chairman of the Board of Governors of the Federal Reserve system in February 2006.

Real estate was the driving force of the expansion, and real estate was in decline. It was obvious to me in late 2005 that the bull market in real estate was over. I said so at the time. It was surreal estate. A handful of us saw this coming, but it seemed so far-fetched at the time that virtually nobody paid any attention. They now pay attention.

Real estate from 2001 to late 2005 was the largest bubble in American financial history. It dwarfed the bubble of the stock market in the 1920s, because that bubble had involved only a tiny fraction of American investors. The residential real estate bubble involved two-thirds of the population, all of whom owned homes. The other third were affected because of rising rents.

People thought that they were going to get rich with leveraged real estate. Instead, something in the range of 40% of all mortgage debtors in the United States will be under water in their mortgages by the end of 2009. People were told by the experts that “this time it’s different.” It wasn’t different. It was just more extreme. The consequences will be felt over the next decade.

In September, confidence was at long last shattered. At the beginning of the month, Secretary of the Treasury Henry Paulson was still assuring people that the banking system was perfectly sound. On Sunday, September 7, he unilaterally announced the Federal government was taking over Fannie Mae and Freddie Mac, along with their $5 trillion of mortgage debt. He did not ask Congress. Congress did not complain. That act ended anything
resembling a free market in housing. Falling equity takes away the credit that Americans need to borrow money to live the good life. They will soon feel betrayed. A widespread sense of betrayal is dangerous for politicians.

A LOSS OF FAITH

We are living in a time in which the fundamental religion of our era has been faith in the redemptive power of the State. Whenever there is a crisis, citizens call upon the State to bail them out. They are convinced that the State has a separate existence which enables it to intervene into the affairs of men, thereby improving the life of almost everyone under its jurisdiction.

This religion of State redemption has been fading in recent years. It gained almost universal acceptance during the Great Depression. The fundamental purpose of the State is no longer seen as justice, but rather to serve as the source of guidance for the free market, without which the economy supposedly cannot sustain long-term economic growth.

There is enormous faith by the public in the ability of bureaucrats to collect data, interpret data, make accurate
predictions, establish incentives that encourage growth, and enforce these incentives without bias. People generally do not believe that God intervenes into the economy with the same frequency and reliability that the State does.

The great redeemer since 1987 has been Alan Greenspan. He had the power of the printing press behind him, and he used it. People concluded that in an economic crisis, under Greenspan’s guidance, the Federal Reserve System would be able to overcome all economic setbacks. This faith escalated from 1987 until his retirement in January 2006.

We are now seeing the undermining of this confidence in the ability of the Federal Reserve System to compensate for the downturns in the markets. People are beginning to figure out that Bernanke is in over his head, and the Federal Reserve System seems impotent to overcome the worst economic crisis since the Great Depression.

It is significant that this assessment, namely, that this really is the worst financial crisis since the Great Depression, is now becoming widespread in the media. The assumption that theFederal Reserve, when assisted by the U.S. Treasury, and funded by an extra couple of trillion dollars of Federal debt, will be able to deal with any crisis is now becoming shaky. There are whispers of discontent. Some people are saying that this crisis is more fundamental than what Paulson admitted in the week of September 15.

The stock market boom ended in March 2000. But the Federal Reserve continued to inflate, beginning in June. The federal funds rate was at 6.25% in June 2000. The FED forced it down to 1% by June 2003.

With this next wave of monetary inflation by the FED, the really big money began to be made by the financial industry. Profits became astronomical. So did CEO compensation.

Cracks in the system began to be apparent in mid-2007. In August, the credit markets suddenly seized up internationally. There had been little warning. This was as a result of the reduction of monetary inflation by the Federal Reserve, which had begun in February 2006, when Ben Bernanke replaced Alan Greenspan as the chairman of the Board of Governors.

It was clear to me by late 2006 that there was going to be an economic crisis. The expansion of money had lowered interest rates too far, and the semi-stabilization of the monetary base would inevitably produce a recession when rates rise, as they did. The recession took longer to arrive than what I had thought. I had expected it to arrive in 2007. It arrived in 2008. I had believed that real estate prices had peaked sometime in late 2005, and that prediction turned out to be true.

The wizards of finance got a wake-up call in August 2007. Nevertheless, they did not take it seriously. Within a month, stock prices resumed their upward move. They peaked at the end of October.

On November 5, I told my GaryNorth.com subscribers it was time to short the S&P 500. I told them that the end of the era had begun. When the S&P 500 fell from 1550 to 1500, I believed that this was the end of the line. Really, the end of the line had taken place in March 2000, when I issued by warning in “Remnant Review” that it was time to sell the NASDAQ. I was convinced then that stocks would not recover in this decade. If we discount the rate of price inflation since 2000, my expectation has proven to be correct. The S&P 500 index briefly exceeded the March 2000 figure — 1550 vs. 1529 — in late October, but price inflation of 20% had eroded the value of that later index.

But the wizards of finance did not believe this. They continued to receive their huge salaries and stock option bonuses. We have never seen a period in American history that matched the increase in executive pay that we saw from 2001 to 2007. It is mind boggling.

CEO COMPENSATION

In 1976, the total compensation for the average CEO in the United States was about 36 times the compensation of the average worker in their companies. This moved up steadily until 1993. In 1993, the average CEO was paid 131 times what the average worker was paid.

At that point, the Securities and Exchange Commission issued a new rule. The new rule specified that companies release figures on what their CEOs were paid. The belief of the SEC bureaucrats was this: as soon as the disparity was visible to shareholders, CEOs would not continue to receive these high salaries and bonus packages.

As with almost everything the government does, the result was exactly the opposite. Compensation for CEOs began to shoot upward. It became a matter of pride of a company that it paid its CEO more than some other company paid its CEO. By 2007, the average CEO made 369 times what the average worker made. This story appears in Prof. Dan Ariely’s book, “Predictably Irrational” (2008), pp. 16-18.

Nevertheless, most Americans paid no attention. The annual issue of “Forbes” in which executive pay is revealed to the public is probably the most popular issue of “Forbes.” Everybody wants to see who is being paid what. There were very few calls for reform of the system. The public perceived that it was not a matter of any concern to the Federal government. It was a matter of concern to the shareholders.

Today, however, there is outrage concerning the compensation packages that were given to the CEOs who led their companies into bankruptcy, merger, or government bailout. There are several of them who have received considerable attention. I intend to give them even more attention. But the reality is this: the reason why these men were given such outrageously high compensation is because the Federal Reserve System had pumped in so much money, and financial services had become wildly profitable because of this subsidy.

CEOs began to be paid enormous amounts of money to supervise ever more arcane and complicated systems of debt-based finance that were cooked up by their high-paid economists. The Federal Reserve System was subsidizing financial services by providing fiat money at interest rates that were lower than the free market would have established, had there been no fiat money. The CEOs in the financial services industry saw their opportunities, and they took them.

In retrospect, these people have turned out to be blithering idiots. They are singled out by the financial media and the general media as being overpaid, blind, greedy, and destroyers of capital. They were all of these things. But why did they get away with this now? Why did the markets seem to validate what they were doing?

Warren Buffett identified derivatives as weapons of mass destruction. He was right. But he was ignored on this point for years.

What I find interesting is that the media keep blaming the securities regulatory agencies for having failed to call this process what it was, and to take steps to stop it. What we do not see is a detailed discussion of Federal Reserve policy under Alan Greenspan. Greenspan was hailed as a genius, the Maestro, the greatest Federal Reserve chairman of all time. Yet it was Greenspan, as no other Federal Reserve chairman before him, who was the architect of this gigantic failure of the financial markets.

It was the Federal Reserve System, far more than the regulatory agencies that supervise stocks and bonds that caused the boom, which has now turned into a bust. But the Federal Reserve System remains sacrosanct in the media. To call it into question now is to call into question the financial markets since 1914. To call it into question, and to identify it for what it is — the enforcement arm of the commercial banking cartel — would be to identify the heart of modern state capitalism. State capitalists own the media, and we are not about to get this story regarding the Federal Reserve System. Instead, we get stories of CEOs who made fortunes, received large severance pay, and walked away multi-multimillionaires. This makes for great news bites, and it also makes for exceedingly bad policies passed by Congress and enforced by the regulatory agencies from this time on.

The winners in this process I call the bluffers. To them I attach the phrase blind man’s bluff. They bluffed. They won personally, but their companies are destroyed or tottering. The shareholders lost. But that was the fault of the shareholders. To blame the government at this late date is silly. The shareholders did not complain for as long as they appeared to be getting rich from the rise in the value of their shares. It was only when share prices collapsed that shareholders became incensed.

The bailouts began in September 2008. The general public chimed in. How could these men have made so much money? The answer is simple: Federal Reserve inflation caused an economic boom in financial services.

These men were blind because they had been blinded. As early as 1912, Ludwig von Mises identified this process. He said that it is central bank policy to distort interest rates by creating new fiat money. This distortion leads entrepreneurs into making uneconomic allocations of capital. The blindness that afflicts entrepreneurs is caused by central bank policy. They are blind as a group, they prosper as a group, and they fail as a group, because they have been blinded as a group. In September 2008, the blindness was exposed for what it was. What was not exposed was the cause of their blindness.

If you want to see what CEOs have made, you can read the 2008 report in “Forbes.” The alphabetical lost is here:

http://www.garynorth.com/snip/672.htm

THREE BLIND MICE

In early March, a week before the Bear Stearns bust and forced sale, three former CEOs appeared before a Congressional committee. They had been subpoenaed. They were Angelo Mozilo, former CEO of Countrywide Financial, Charles Prince of Citibank, and Stanley O’Neal of Merrill Lynch.

The day before, the committee had released a report that their combined compensation, 2002-2006, was $460 million. This did not count 2007, which was an even bigger bonanza for them. This was reported in a March 7 story on CNN/Money.

Their compensation was tied directly to the performance of the company, via stock and options that the executives have held over time. Prince, O’Neal and Mozilo argued that their pay was buoyed by impressive profits the companies delivered in the years leading up to the mortgage crisis. They also said that they have lost millions since as their companies have seen the price of their stock plummet in recent months.

The Congressmen were not sympathetic.

But also in focus were the cozy relationships between the directors responsible for determining pay and compensation consultants who get hired by directors to advise on executive pay, which was the centerpiece of an earlier hearing sponsored by the committee in December. Lawmakers have argued that these consultants are merely getting paid to tell the board and CEO what it wants to hear.

The pay consultants have been described by Buffett as the firm of “Ratchet, Ratchet, and Bingo.” Yet the fact remains that the CEOs’ companies went along with this. Shareholders could have sold at any time.

I recommended that they sell on November 5, 2007.

The article continued.

In December, Goldman Sachs (GS, Fortune 500) Chairman and CEO Lloyd Blankfein took home nearly $68 million in restricted stock, options and cash, making it the largest bonus ever given to a Wall Street CEO.

Chrysler Chairman and CEO Robert Nardelli made headlines when he was forced out of Home Depot (HD, Fortune 500) in January of last year and left with $210 million in cash, stock options and retirement benefits.

http://www.garynorth.com/snip/669.htm

FANNIE AND FREDDIE

The story of Franklin Delano Raines was the first one to penetrate public consciousness when he left Fannie in 2004 under a cloud because of accounting irregularities. He later paid the government $24 million, $15 million of which was worthless stock options.

The most recent occupant at Fannie was Dan Mudd, son of Roger Mudd, and great-great something or other of Samuel Mudd, who treated John Wilkes Booth when he escaped from Washington. Dr. Mudd went to prison for this. Ever since, the phrase “his name is Mudd” has been handed down from generation to generation.

Dan’s name is still Mudd, but he will not go to prison. He walked away with $9.9 million for his leadership. Richard Syron of Freddie did much better: $14.1 million.

http://www.garynorth.com/snip/662.htm

These men were in charge of the biggest joint failure in American history, a loss so huge that no one can calculate it yet. If 20% of the $5 trillion portfolio is bad, this will equire a trillion dollar bailout by the government.

INVESTMENT BANKERS

Richard Fuld ran Lehman Brothers Holdings (LEHMQ) . . . into a brick wall. He refused to sell in the crisis. He refused to admit defeat. On September 15, Lehman declared bankruptcy when a $70 billion bailout attempt failed when Barclays said no. Recently Barclays bought remnants of Lehman for pennies on the dollar. Fuld took home almost $170 million in 2005 to 2007.

Lehman’s filing wiped out as much as $13.7 billion in company stock held by employees, who owned 30 percent of the shares when the stock peaked at $85.80 last year. Lehman encouraged stock ownership and has said about 20,000 of its 26,000 workers got at least some equity in 2007.

But the market got its revenge. Fuld at one point was worth $1.2 billion in stock. He recently sold 2.8 million shares for $500,000.

Then there was Bear Stearns. Same story, different numbers.

After Bear Stearns collapsed in March, its acquirer, JPMorgan Chase & Co., offered employees it kept shares in the combined bank equal to their 2007 pay. Workers owned a third of Bear Stearns, and they saw the value of the stake drop to $393 million at the sale price of $10 a share. That compared with $6.7 billion at the $171.51 peak last year. Former Bear Stearns CEO James “Jimmy” Cayne sold a holding once worth $1 billion for $61 million in March.

http://www.garynorth.com/snip/663.htm

Lesson: when the CEO says you should invest in the shares of the company that employs you, think “Enron,” “Bear Stearns,” and “Lehman.”

“AND THE ALL-TIME WINNER IS. . . .”

These guys were all pikers. Why? Because they did not know when to sell. You’ve got to know when to hold ‘em, know when to fold ‘em, know when to walk away, know when to run.

Henry Paulson knew when to walk away.

He had been the CEO of Goldman Sachs(GS) until he accepted the call to become Secretary of the Treasury.

Maybe you did not know the following. When you become Secretary of the Treasury, you must divest yourself of stock holdings. Not to do so would be a conflict of interest. Make sense?

But how could anyone be lured into this office who is a big player? Think of the capital gains taxes! So, the government passed a law that exempts Federal appointees from taxes if they sell their holdings before they take office.

Paulson sold his shares. I would call this very good timing. Because he had a reason for selling, the sale did not depress the share price. He got out. None of the others did. He owned half a billion dollars in Goldman Sachs shares.

http://www.garynorth.com/snip/667.htm

Nice work if you can get it. If you can get it, tell me how.

CONCLUSION

The taxpayers now get to bail out Fannie (FNM)and Freddie (FRE). The Big 3 American auto companies will get $25 billion. AIG will get its $85 billion. It will never happen again. Next time, it will be different. Congress will make sure of this.

To Sign Up

Your assignment, if you accept it . . . Help me compile statements by every so-called expert on how the financial markets were safe, the stock market was going to rise, and “people should not panic and sell stocks.”

For months, high-level government officials assured us that America’s financial markets were safe. They continued to assure us right up until Treasury Secretary Henry Paulson on September 18 said a $700 billion bailout is required to save the economy from a collapse comparable to the Great Depression.

Our leaders, including Paulson, did not have a clue as to what was going on.

The World Wide Web has preserved their assurances. It is now time to collect them in one place. I propose to call this place The Gallery of the Clueless.

The assurances began in August 2007. They accelerated right through September 18.

It did not matter that Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE) were nationalized without vote by Congress on a Sunday afternoon, September 7. The experts remained optimistic.

It did not matter that a week later, also on a Sunday, Merrill Lynch (NYSE:MER) sold itself without a vote by its Board of Directors to Bank of America (NYSE:BAC), which also did not ask for a vote by its Board of Directors.

It did not matter that on Monday, September 15, Lehman Brothers Holdings (NYSE:LEH) declared bankruptcy—the largest bankruptcy by far in American history, dwarfing Enron and WorldCom combined. We were assured on September 15 that everything was under control.

It was not just Paulson, Bernanke, and the President who assured us. It was also almost every talking head from the financial world who appeared on television. The main exception was Prof. Nouriel Roubini, whose grim forecasts have come true, one by one.

On Sunday, September 14, he said that no investment bank would survive. He said the model was fundamentally flawed. Two went bust within 24 hours: Merrill Lynch and Lehman. The other two were bailed out by a change in their legal structure on Friday, September 19. Both Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS) surrendered their status as investment banks, switched to holding companies, thereby coming under Federal regulation, and immediately becoming eligible for bailout money.

We have seen a stream of ex-geniuses depart as multi-millionaires: Angelo Mozilo (Countywide Financial), Charles Prince (Citigroup), Stan O’Neal (Merrill Lunch), and Dick Fuld (Lehman). They join the legendary Franklin Raines (Fannie Mae), who had departed years earlier, and who today is an Obama advisor. Then there were the recent heads of Fannie and Freddie. The head of AIG will be replaced soon.

OH, YEAH?

In 1931, Viking books published a slim volume titled “Oh, Yeah?” It was a collection of quotations from the nation’s former experts of why the stock market was a great place for your money in 1928 and 1929. These quotations were identified as to who said what, when, and where.

I own a copy of this compilation. It ended with a 1931 quote from Calvin Coolidge, who was in retirement: “The country is not in good condition.” I intend to assemble a digital equivalent of “Oh, Yeah?” I will post it free of charge on the Web. I want to make it easy for journalists and historians to see just how blind the nation’s leaders were.

This collection will serve as a warning to future investors: ”Don’t trust the assurances of self-interested people whose careers and reputations are at stake.” The new Administration will return to Congress for more rounds of bailouts. Each will be presented as “the final request.” Each will be sold to Congress as last shoe to drop.

The result so far has been a gigantic increase in the nation’s debt. We have gone beyond the point of no return.

Voters know now that the national debt will never be paid off, at least not with dollars worth what they are worth today.
But they think they are helpless. They will let Congress get away with this.

WHAT I NEED FROM YOU

Do a Google search for such topics as these for 2007 and 2008:

“money is safe”, panic AND not “should not sell”, confidence AND banks, confidence AND FDIC, “economically sound” “fundamentally sound”, Paulson AND assurance, Bernanke AND assurance, Dodd AND assurance.

Maybe you can think of others. Look for links after page 1 on Google. Go as far as page 5. Look for juicy ones. Then extract the quotation using cut & paste (Ctrl-c, Ctrl- v). Paste it into an email letter (Ctrl-v). Then paste in the link to the Web source. Repeat the process using YouTube in the search box. If you find some choice videos, send them along with the links.

Put “clueless” in the subject box. Send it to garynorth@garynorth.com.

To Sign Up Click Here

On my site’s page on gold’s daily price, I make available a five-day chart of gold’s price. On that page, you will find my commentary on gold. Beginning on the 18th of March, and posted on the 19th, I wrote that I believed gold had probably entered a bear market. That call looked as though it was way too premature, since gold’s intra-day high had been $1,037 on March 17. In the very early morning of March 17, I ran an article on my site on how to short gold to protect your position in coins.

Here is what I posted on my gold price page. If you have visited my page, you should recall this.

I think gold has entered a bear market. I posted this article on March 19, 2008:

http://www.garynorth.com/public/3263.cfm

The offsetting factor is fear of war with Iran. See my Department: War With Iran.

http://www.garynorth.com/public/department32.cfm

Just for the historical record, here is what I wrote on March 18 and published on March 19.

Gold could fall. I expect it to fall. So, you may pay a price for owning gold coins. I expect to.

If you are not willing to pay the price, you should sell all or part of them, or short gold bullion to compensate you for the loss. In short, count the cost. This is a universal rule (Luke 14:28-30).

I think the precious metals are a bubble market today. It is ending. Here is a crucial sign that it is ending. India is not buying. When Indians stop buying gold, they must be replaced by new buyers. Who might they be?
. . .

One day’s move should not be regarded as a definitive turning point — not after a seven-year run. But there are signs that the run is over for now. It is time to think about recession and even price deflation. As I have said for months, the FED is deflating. We should expect prices to follow.

Silver and platinum also fell on March 18. They are moving together in lock-step, up and down, yet the economic fundamentals for the three are completely different. So, something is driving them that cuts across individual markets. But what? I think it is the last of Greenspan’s bubbles: the commodity bubble. I think the bubble is about to end.

But what about oil? Yes, even oil. But the rate of declining price will be less than with other industrial commodities. I think this will also be true of gold.

I believe in the Austrian School’s theory of money, including the business cycle. I have written a short book on this. I am not so committed to a position proclaiming the ever-rising price of gold that I am willing to abandon Mises’ theory of the boom-bust cycle in order to hold such a position.

Gold is ideal for Mises’ inflationary crack-up boom, although not as good as a home with a garden in the country and a few thousand gallons of diesel. This is not the crack-up boom. There has to be monetary inflation for a crack-up boom to occur. Today, there isn’t any.

If you wonder how I came to this conclusion, read my mini-book, “Mises on Money,” which is posted on Lew Rockwell’s site.

http://www.Lewrockwell.com/north/mom.html

I was convinced on March 18 that the recession caused by the Federal Reserve’s relatively tight money policy would lead to a fall in the price of all commodities, especially the precious metals. I believed that the commodity market was the last of the bubble markets. The real estate market popped in 2006, and had continued downward. I was convinced that the last market of Greenspan’s bubble economy was the commodities market.

Investors go from market to market, trying to find the next market that is going to boom. This chase proves to be futile. They chase bubble markets; they get killed by bubble markets. I was convinced that commodities were going to fall, and that this was the end of the road for the bubble markets.

In July, the commodities market did begin to fall. I think this publicly marked the end of the commodity bubble. One thing could bring it back: war with Iran. That would be disastrous internationally, and it will push the price of oil and the
precious metals much higher. It was the threat of war with Iran that kept gold above $900 — not monetary policy, not the fundamentals of the market, not technical indicators, and not any of the other meaningless statistical indicators that are used by defenders of a bubble market to persuade investors that the market is anything except a bubble market.

You will no doubt see lots of reports on this or that indicator that shows that the correction in gold and silver and
platinum and palladium and copper and zinc and all the other metals is temporary. I don’t think it is temporary.

I still worry about war in Iran. I don’t think people should ever discount too heavily the idiocy of governments regarding war. The absolute stupidity of the President of Georgia in launching a military invasion of the Russian-dominated province of South Ossetia last Friday is indicative of what rulers do without counting the cost of their actions. This is normal. So, while the fall in prices of oil and the precious metals has given me some confidence that neither United States nor the State of Israel will launch a pre-emptory strike against Iran in the near future, I am certainly not willing to bet all of my money, including gold, on this assumption.

Nevertheless, I have been public in my warning since the middle of March that I believed that the bull market in gold and silver has ended. If we are talking economic fundamentals, gold and silver have had their big run. From now on and for months ahead, the pressure will be downward.

“The economic stimulus package is flawed policy in the first place”, says MoneyWeek magazine’s Richard Benson.

The US government hopes to revive its ailing economy with tax rebates. But with the cost of living soaring and consumers deep in debt, this will have little effect.
There is a mountain of consumer debt out there, and debt collectors are hoping for a big chunk, if not all, of that little rebate check. For every check issued, there are 10 or more people holding their hand out for it. This year you will get butchered at the butcher shop because of the price of beef, and burned at the bakery. Grain is so expensive, even the French middle class can’t afford a baguette any more.

For the average American, this rebate check represents only one car, credit card, or partial mortgage payment. When you consider it cost well over $60 now to fill up the gas tank for a mid-sized car, and a lot more to go out to eat, it won’t go very far.

On the household front, millions of homeowners haven’t even finished paying their heating bills from last winter, and over six million Americans asked for energy assistance funds so their power wouldn’t be shut off. (In California alone, 1.7 million households are behind on their utility payments.)

“The good news is that the Federal government is sending a little tax-free money back to us in the form of stimulus checks. Never look a gift horse in the mouth, especially when it’s coming from the horse thief who stole it from you,” says Gary North of the Daily Reckoning.

The bad news is that this money will be borrowed. Every penny will be added to the on-budget debt of the United States government.

What is the estimated deficit today for fiscal 2008? This figure is buried in the recently released report, “The Cyclically Adjusted and Standardized Budget Estimates” (April 2008). The figure is $361 billion. A year ago, it was $162 billion Next year, the CBO estimates, the deficit will be a mere $133 billion. Write that figure down in your diary of accounting illusions. (The phrase “Arthur Andersen” comes to mind.)

On March 12, the Treasury made its estimate: $410 billion. This was the same as in February. These are large figures. We are only in the early stage of a recession. It has barely begun to raise the unemployment rate. Yet consumer confidence is at the lowest level since the recession of 1982 (Reuters/University of Michigan Surveys of Consumers). Recall that 1982 was the year of the low point of the Dow: 777 (August).

Today’s loss of confidence has not yet affected the stock market significantly. Optimism still reigns among most stock market investors.

As the deficit soars, which it will, the government will absorb more resources that would have gone into the private sector.  In a recession, investors seek safety. They want to protect themselves against falling stocks and bankrupt corporations. They buy Federal government-issued debt on the assumption that the Federal government will not default in a recession. This money does not go to fund private capital.

This is bad for the economy but good — in the short run — for investors