Tag Archives: New York City

Crowdfunding Update!

This is a letter from the three guys at Startup Exemption, by the names of Sherwood Neiss, Jason Best, and Zak Cassady-Dorion, re-printed here with their permission, providing a status update on the Crowdfunding bill that Obama signed last week.

Thanks to these guys primarily, Steve Case (in the background) and many other individuals and groups, this legislation got through Congress in an amazing and relatively short period of time. You are also invited to participate in this process to insure that the bill gets implemented as planned. Enjoy!

President Obama signed Crowdfunding into law as part of the JOBS Act on April 5th. We did it!  It was an amazing experience to be at the White House and watch the President sign into law an idea we had to update the security laws.  To make it legal for entrepreneurs to use the Internet and Social Media to access funds from their friends and family to launch businesses and create jobs to help get us out of the recession.

This is a story about putting a stake in the ground, sticking to policy and out of politics, showing up and being present, being tenacious and never giving up.  It is a story about 3 entrepreneurs who were naive enough to think that just because they had a solution to the funding void facing startups and small businesses that they could actually change deeply entrenched 80 year-old security laws.  And when changing a law takes between 5 and 10 years, to have done it in 15 months, we’ve been told, is quite an accomplishment!

The reality is, we had good timing, a good story (it helps when entrepreneurs and not lobbyists show up to tell it), great teamwork and a true bipartisan desire to make a difference.  There were many people to thank along the way.  We’ve put together this list of folks that played an early and important role.  Without these people, we never would have made it to law.  They are Democrats and Republicans, politicians and staffers, businessmen and women, small and big business, authors, security lawyers and experts, entertainers, advocates, students and reporters.  But most importantly they are believers in what makes our country so great … Entrepreneurs.

What’s next?

While CrowdFund Investing might be signed into law, it won’t go into effect until 2013.  That’s because the SEC has 270 days to make the rules around which the legislation will operate in daily life.  We continue to play an active role in this process. A letter from a group of 13 top equity and debt crowdfunding platforms and industry experts was sent to the President the day of the bill signing.  In it we reiterate our desire to develop a transparent marketplace for crowdfunding where investor confidence is our number one priority.  The President acknowledged this group in his comments.

This group has quickly grown in size (100+) and at a meeting in New York City on April 18th formally organized around a Statement of Intent.  The group has chosen leaders which we endorsed to run this next leg of the race.  The group also formed a trade association (The Crowdfunding Global Professional Association, CFGPA) which will represent the voice of the industry, advocacy and education for both investors and entrepreneurs.  Another group (The Crowdfund Intermediary Regulatory Association, CFIRA) will focus on working with the SEC and potentially providing industry oversight . These are organizations ‘of the industry, for the industry.’  If you have any interest in being part of these associations run by those who have been part of the process all along, please register here.

This past week the group reached out to both FINRA and the SEC on working together to build a trustworthy partnership. Since the legislation mandates that all Crowdfunding websites be registered, the goal is to work with FINRA to see if there’s a way to develop a “Broker-Dealer Light” path for CrowdFund Investing intermediaries or facilitate the formation of a Self-Regulating Organization (SRO) that will oversee the industry.

What’s next for us?

 Lots of speaking engagements!  Sherwood recently spoke about Crowdfunding at the MIT Global Conference in Istanbul, Turkey and keynoted the Rutgers Entrepreneur Day.  Jason testified in front of a Congressional hearing this week about Crowdfunding and is off to speak about Crowdfunding at events in Germany, Sweden and Norway.  We have upcoming engagements in Canada, Brazil and Hong Kong.

People both in the USA and around the world are looking to us as we embark on Web 3.0.  We went from ‘investing for profit’ to ‘investing for social good’ and now we embark on ‘investing from the heart.’

If you or your organization has any interest in learning about CrowdFund Investing, how it will work, how to get involved, who can benefit from it, and what impact it will have globally, then feel free to reach out to us.

Again thank YOU for making this happen!
Sherwood, Jason & Zak

Sherwood Neiss, sherwood@startupexemption.com

Jason Best, jason@startupexemption.com
Zak Cassady-Dorion, zak@startupexemption.com


Think About This Folks. This is Important.

Three disturbing trends in commercial banking

The recession officially ended in July 2009 (HAHAHAHA), and yet the speed and scope of the subsequent recovery have been disappointing (Shocked face here). Recent economic data have been encouraging (Bwahahaha), but there are three ominous trends in the consumer banking space that signal the waters ahead may be choppy. (This is where I say, It was April of last year when the news came out that the University of Texas decided to take physical delivery of $1 billion worth of gold.

What? Me worry? Ha!

By the way, that doesn’t mean the campus is chock full of gold bars — the university actually stuck the gold in an HSBC vault in New York City.) Kyle Bass of Hayman Capital Partners (the same guy who called the Global Financial meltdown and Greece’s impossible situation, and Europe’s as an extension), was the university board member behind the move, and on CNBC on Monday he explained why.

First, he reiterated that he’s still a gold fan: “The pattern is set, we’re going to continue to monetize fiscal deficits by expanding central bank balance sheets… I call it creating money out of thin air.”

I like it. Let’s all “monetize fiscal deficits”. That’s great! 

And, this is why he is gobbling up all the gold he can get his hands on:

1. No new banks were chartered in 2011

The Financial Times reported recently that not one new, or de novo, bank was created in 2011. (The FDIC actually lists three new bank charters for 2011 — the lowest number in more than 75 years — but they all involved bank takeovers of other failed banks.) What are some of the possible implications?

First, investors are clearly still gun-shy about banking. The dearth of new small banks is also a negative sign for small businesses generally, as they are particularly dependent on small banks for loans. Since most employment growth in the U.S. comes from small businesses that use external finance to grow into large businesses, a decline in these businesses’ access to loans could limit future employment growth as well.

The dominant narrative in 2011, like the 2010 version, was one of bank failures and distressed acquisitions. The FDIC reports that about a hundred banks failed and another hundred were absorbed this past year. But industry consolidation has been prevalent since the 1990s, as this graph reveals.

Overall, the number of banks declined by 15 percent in the past five years, to 7,357, while revenues decreased for the fourth consecutive year, to $737 billion. Although this is partly due to the Federal Reserve’s low-to-zero interest-rate policy, which reduces interest income, non-interest income also fell in 2011 for the second consecutive year.

2. The big are getting bigger

Today, about two-thirds of all U.S. commercial bank assets are at five banks: Wells Fargo, Bank of America, Citigroup, U.S. Bancorp and SunTrust Banks. A related and troubling trend is that much of the growth in lending in 2011 was also concentrated at the largest banks. The implication is that the “bigger are getting bigger” trajectory shows no signs of slowing down. And, by the way, Citi failed the latest capital reserve test by the Fed – just this week.

The graph below shows the trend in assets by bank size. Since 1993, big banks’ share of assets has skyrocketed while smaller banks’ share has been in a near-terminal decline.

In addition, the FDIC reports that banks with assets over $1 billion witnessed an increase in business lending in 2011, while firms under that threshold actually saw lending decline. David Reilly’s speculation on what may be fueling this trend is noteworthy:

The difference in lending may be due in part to the fact that bigger banks tend to have a client base that itself is bigger, more credit worthy and more export oriented. Such companies are likely seeing an earlier benefit from a firming of economic conditions in the U.S.

Meanwhile, bigger banks are going after more middle-market clients in a bid to win market share. And while the biggest banks suffered some of the worst blows during the crisis, they seem to have worked through problems at a somewhat faster clip…

In part, that may be because the biggest banks have large credit-card portfolios where losses are quickly flushed out. Smaller banks with mostly residential or commercial real-estate loan books tend to take longer to work their way through problems. Or it could be that bigger banks capitalized on the fact that they received the most government assistance during the crisis and continue to enjoy a cost-of-funding advantage. Um, you think?

According to the FDIC, big banks’ average funding costs are one-third lower. The average funding costs for banks with more than $10 billion in assets is 0.66 percent, compared with about 1 percent for banks with less than $1 billion in assets. Why is that the case? Well, the largest banks have about 20 percent less core capital as a share of total assets compared with smaller banks (8.7 percent of total assets relative to about 10.5 percent for smaller banks). Less equity and lower funding costs result in a return on equity (the key measure for bank profitability) for big banks that is almost double that of banks with less than $100 million in assets.

3. The government dominates consumer credit through big banks

A war is brewing between the private bank sector and the government over who exactly controls the allocation of consumer credit in this country. Consumer credit is probably too tight today. Really? Ya think? A popular refrain that often follows this observation is that if only the government would return some of the decision-making power to the private sector (i.e., let lenders decide who gets approved or denied for a loan), then there would be more lending and the economy would recover faster.

There is undoubtedly some truth to this argument, but the scary proposition is that many of the largest banks are perfectly happy to allow the government to maintain its broad guarantees on consumer loans, effectively absolving private banks from having to evaluate and manage credit risk while simultaneously ensuring that they receive a steady stream of fee income. If you just dropped in from Mars, you would assume immediately that the banks are all government agencies.

The consumer credit market comprises about $13 trillion in outstanding loans or debt. The mortgage market, or home loans, make up the overwhelming majority of this total (a little over $10 trillion). The other major categories are student loans, credit cards and auto loans (about $2.5 trillion). Today, the government has outstanding guarantees on close to 60 percent of all mortgage-related debt, or almost $6 trillion in aggregate. Moreover, practically every new home loan made today is backed by the government, so this percentage and aggregate dollar amount is only climbing. And for certain mortgages, the government is happy to offer special benefits to the banks or lenders that are responsible for the most loan volume.

The effect is that the government is determining the underwriting standards — who gets qualified for a loan and who doesn’t — and is bearing 100 percent of the credit risk on loan defaults, while private banks and lenders serve effectively as middlemen processing paperwork and helping to match consumers with the right government-guaranteed loan product.

The government has also increased its direct-lending activities over the past four years from $680 billion to nearly $1.4. trillion. Most of this growth in direct government lending has come from a quadrupling of student loans, from $98 billion to more than $425 billion. Today, the government now practically stands behind all new student lending.

With credit cards, private banks are still responsible for underwriting standards and default or credit risk, but Congress has introduced new command-and-control price caps on certain products. Auto loans remain relatively untouched, but the Fed did establish in the heat of the crisis the Term Asset-Backed Security Loan Facility (TALF). The TALF provided government financing for banks and other financial institutions to buy billions in auto loans. Plus, it is important to recognize that the Fed’s quantitative easing programs have been the biggest government lending program of all, as the Fed’s asset purchases have amounted to over $2 trillion in loans to the government-sponsored entities, or GSEs (i.e., Fannie and Freddie), and the U.S. Treasury.

What’s particularly disturbing about these three trends is how the underlying dynamics are interrelated and actually reinforcing one another. Small banks are being pushed to the side by big banks. The banks that are “too big to fail” are only getting larger and adding to their market share of consumer loans. But then a closer examination of who exactly is responsible for the losses when a consumer defaults on a loan (increasingly, it’s the taxpayer) reveals the true depths of the government’s influence, if not control, over consumer credit.

Snapping this vicious vortex is perhaps the greatest challenge that policymakers and the U.S. economy face in the coming years. A future where the provision of consumer credit is increasingly dictated by big banks and government bureaucrats is not consistent with the image that Americans like to project across the world, namely that the U.S. is a beacon or defender of private markets and capitalism. You think?

iSellerFINANCE intends to change all of that by offering peer-to-peer small business loans for the little guys that the big banks ignore. September 1st is the beginning of a whole new world of consumer and small business finance.

The King of Hate Radio Strikes Again.

Tracie McMillan calls Rush Limbaugh comments ‘unconscionable and sexist’.

Not only is El Rushbo undaunted by the flack over Sandra Fluke, it actually appears to energize him and encourages him to seek out other female targets. This time, “Authorettes” and the “Over-educated”. If there are women in America who are willing to vote for the Republican candidates who are unable/unwilling to condemn Rush Limbaugh, then there is either something seriously wrong with our culture or me.

Author and Holly (MI) native Tracie McMillan was surprised by comments from radio talk show host Rush Limbaugh Tuesday regarding her gender and education. Does losing 40 sponsors and 2 radio stations send a message to Rush that he should push down on the accelerator?

“What he was saying about me was completely unconscionable and sexist,” said McMillan, 35, of Limbaugh calling her an “authorette” and over-educated” while discussing her new book “The American Way of Eating.” And, not only that, it was stupid! Tracie McMillan is a working class, blue collar woman who grew up in Holly, Michigan. Her father was a lawnmower salesman and her mother had an English degree. Tracie was the oldest of three girls, and helped out at home when her mother fell ill around the time she was 7. The insurance company didn’t want to pay for her care, so when she got too ill to live at home, she bounced between institutions that would hold off on charging the family until the insurance company settled. Her mother left their home when she was 12; they lost the case with the health insurance company when she was 14, and her mother died when she was 16.

Her first job, at 14, was making caramel apples at an apple orchard. At 16, she got a job at Big Boy, stocking the salad bar before moving on to waitress. At 17, she earned a partial scholarship to NYU, moved to New York City, and cobbled together the rest of her tuition and living expenses as a tutor, nanny, waitress, personal assistant and intern; at one point she simultaneously juggled five part-time jobs. She stayed here because she landed in a rent-stabilized apartment that kept the city affordable. Clearly, an elitist authorette and way over-educated.

This “Over-educated Authorette” kept tutoring and freelancing until she got herself a job at City Limits as managing editor. She was a copy editor, photo editor, office manager and deadline nag, and in her free time, she started writing stories about the things that interested her: welfare, child care, anything, really, about how working families eked out a living. She’s proud, and a little shocked, that she’s now won several national awards, including the Harry Chapin Media Award and the James Aronson Award for Social Justice Journalism, and has been recognized by the James Beard Foundation, for her work on these topics. Even though she’s not on staff at a big  magazine or newspaper, the awards put her work in the same league as the publications she beat to win them: the New York Times, Fortune, Businessweek and Time.  But, I’m sure El Rushbo thinks these awards are leftist jack-offs that mean nothing outside of the elitist, self-congratulatory East Coast liberal book clubs.

You want to talk about over-educated authorettes? How about Ann Coulter, who grew up in a wealthy suburb in Connecticut, Then, while attending Cornell University, Coulter helped found The Cornell Review,[5] and was a member of the Delta Gamma national women’s fraternity.[6] She graduated cum laude from Cornell in 1984 with a B.A. in history, and received her J.D. from the University of Michigan Law School in 1988, where she achieved membership in the Order of the Coif and was an editor of the Michigan Law Review.[7] At Michigan, Coulter was president of the local chapter of the Federalist Society and was trained at the National Journalism Center.[8]

After law school, Coulter served as a law clerk in Kansas City, for Pasco Bowman II of the United States Court of Appeals for the Eighth Circuit. After a short time working in New York City in private practice, where she specialized in corporate law, Coulter left to work for the United States Senate Judiciary Committee after the Republican Party took control of Congress in 1994. She handled crime and immigration issues for Senator Spencer Abraham of Michigan and helped craft legislation designed to expedite the deportation of aliens convicted of felonies. She later became a litigator with the Center for Individual Rights. I don’t remember Rush calling Coulter an over-educated authorette, but maybe it’s just me.

Back to Tracie. Over time, her work has appeared in a wide range of publications including the New York Times, Harper’s, Slate, Saveur, Salon and Gastronomica. In October 2012, she was named a Senior Fellow at Brandeis University’s Schuster Institute for Investigative Journalism. (It’s unpaid, but the title helps). Her first book, The American Way of Eating, a nonfiction project examining food and class in America, was published by Scribner in February 2012.

McMillan is currently on a book tour, describing her experience in which she works undercover in fields in California, the produce department of a Walmart store outside of Detroit and an Applebee’s restaurant in New York City to research how food comes to people’s tables and questioning why Americans eat the way they do every day.

The 35-year-old McMillan said she was about to shut off her Internet access when a couple of tweets showed up on her Twitter page regarding Limbaugh’s comments.

“I had no idea Rush Limbaugh had any idea who I am,” she said. “Frankly, I don’t think he does have any idea who I am other than the (New York) Times (book) review.”

McMillan moved to New York after receiving a partial scholarship to NYU, where she received a bachelor’s degree in political science, while working several part-time jobs.

During his comments on-air, Limbaugh stated, “What is it with all of these young single white women?,  They’re over-educated, but that doesn’t mean they’re intelligent,” according to show transcript.

“To say that women who have worked their butts off to get a B.A. are over-educated … do you think any women shouldn’t go to school?” McMillan said.

Students at the University of Michigan-Flint were taken aback by Limbaugh’s comments about McMillan and Sandra Fluke, a Georgetown University law student he called a “slut” and “prostitute” last week after discussing her approval of the use of birth control during a recent hearing on Capitol Hill.

“You’re not looking at their education, but their gender,” said Davison resident Corynn Bowden, a 21-year-old University of Michigan-Flint junior. “He’s not a woman himself. He can’t even be in their shoes if he tried.’

Alyssa Miller, 24, of Lapeer, MI, said sexism is “obviously still around and something that’s still prevalent,” and the bias may be more hidden than other forms of prejudice.

A pre-med student majoring in biology, Miller said she’s had people suggest a change in her major because of the prevalence of men in the field.

“I took it as insulting my intelligence, personally,” she said. “It’s something that’s probably never going to change.” 

While calling Limbaugh’s comments “a whole other level of jerk,” McMillan said the attention has helped get out her message on nutritional problems among Americans, including obesity.

Mark Valacak, health officer of the Genesee County Health Department, said the problem is widespread in Flint, with a recent poll showing the Flint/Genesee County area as the fifth-most obese in the nation.

He said the issue stems from a lack of healthy food options, with just one national food retailer with a store within Flint’s city limits. 

“I think it’s a contributing factor to the obesity problem in this community,” he said. “You have to have access to healthy food options and easy access.”

McMillan tackled the issue to focus on a growing problem among the American population, which allowed her to continue to touch on social issues.

She’s written articles for the New York Times, Salon, Slate and other publications on a variety of issues, but McMillan wants her latest work to show the issues in the food industry and open up dialogue on nutrition.

“Figuring out how to build that kind of an infrastructure is a big part of the book,” she said. “I want a conversation on how we make sure everyone has good food.”

Despite the comments, McMillan has found the controversy “really fascinating” and joked that “I need to send (Rush) some flowers” for creating the attention.

“I think my work is worth as much on its (own) merits,” she said. “He’s certainly helped me professionally in a way I’d never be able to manufacture.”

And, I think El Rushbo has a serious case of grandiose, insecure, psychopathic misogyny and should see a talking doctor. And, his audience should do the same. And, now I am convinced he will be with us for a long time.

Absolute Must Read.

DAVID STOCKMAN: You’d Be A Fool To Hold Anything But Cash Now

This is an Associated Press story.
NEW YORK (AP) — He was an architect of one of the biggest tax cuts in U.S. history. He spent much of his career after politics using borrowed money to take over companies. He targeted the riskiest ones that most investors shunned — car-parts makers, textile mills.

 That is one image of David Stockman, the former White House budget director who, after resigning in protest over deficit spending, made a fortune in corporate buyouts.

But spend time with him and you discover this former wunderkind of the Reagan revolution is many other things now — an advocate for higher taxes, a critic of the work that made him rich and a scared investor who doesn’t own a single stock for fear of another financial crisis.

Stockman suggests you’d be a fool to hold anything but cash now, and maybe a few bars of gold. He thinks the Federal Reserve’s efforts to ease the pain from the collapse of our “national leveraged buyout” — his term for decades of reckless, debt-fueled spending by government, families and companies — is pumping stock and bond markets to dangerous heights.

Known for his grasp of budgetary minutiae, first as a Michigan congressman and then as Reagan’s budget director, Stockman still dazzles with his command of numbers. Ask him about jobs, and he’ll spit out government estimates for non-farm payrolls down to the tenth of a decimal point. Prod him again and, as from a grim pinata, more figures spill out: personal consumption expenditures, credit market debt and the clunky sounding but all-important non-residential fixed investment.

Stockman may seem as exciting as an insurance actuary, but he knows how to tell a good story. And the punch line to this one is gripping. He says the numbers for the U.S. don’t add up to anything but a painful, slow-growing future.

Now 65 and gray, but still wearing his trademark owlish glasses, Stockman took time from writing his book about the financial collapse, “The Triumph of Crony Capitalism,” to talk to The Associated Press at his book-lined home in Greenwich, Conn.

Within reach was Dickens’ “Hard Times” — two copies.

Below are excerpts, edited for clarity.


Q: Why are you so down on the U.S. economy?

A: It’s become super-saturated with debt.

Typically the private and public sectors would borrow $1.50 or $1.60 each year for every $1 of GDP growth. That was the golden constant. It had been at that ratio for 100 years save for some minor squiggles during the bottom of the Depression. By the time we got to the mid-’90s, we were borrowing $3 for every $1 of GDP growth. And by the time we got to the peak in 2006 or 2007, we were actually taking on $6 of new debt to grind out $1 of new GDP.

People were taking $25,000, $50,000 out of their home for the fourth refinancing. That’s what was keeping the economy going, creating jobs in restaurants, creating jobs in retail, creating jobs as gardeners, creating jobs as Pilates instructors that were not supportable with organic earnings and income.

It wasn’t sustainable. It wasn’t real consumption or real income. It was bubble economics.

So even the 1.6 percent (annual GDP growth in the past decade) is overstating what’s really going on in our economy.

Q: How fast can the U.S. economy grow?

A: People would say the standard is 3, 3.5 percent. I don’t even know if we could grow at 1 or 2 percent. When you have to stop borrowing at these tremendous rates, the rate of GDP expansion stops as well.

Q: But the unemployment rate is falling and companies in the Standard & Poor’s 500 are making more money than ever.

A: That’s very short-term. Look at the data that really counts. The 131.7 million (jobs in November) was first achieved in February 2000. That number has gone nowhere for 12 years.

Another measure is the rate of investment in new plant and equipment. There is no sustained net investment in our economy. The rate of growth since 2000 (in what the Commerce Department calls non-residential fixed investment) has been 0.8 percent — hardly measurable.

(Non-residential fixed investment is the money put into office buildings, factories, software and other equipment.)

We’re stalled, stuck.

Q: What will 10-year Treasurys yield in a year or five years?

A: I have no guess, but I do know where it is now (a yield of about 2 percent) is totally artificial. It’s the result of massive purchases by not only the Fed but all of the other central banks of the world.

Q: What’s wrong with that?

A: It doesn’t come out of savings. It’s made up money. It’s printing press money. When the Fed buys $5 billion worth of bonds this morning, which it’s doing periodically, it simply deposits $5 billion in the bank accounts of the eight dealers they buy the bonds from.

Q: And what are the consequences of that?

A: The consequences are horrendous. If you could make the world rich by having all the central banks print unlimited money, then we have been making a mistake for the last several thousand years of human history.

Q: How does it end?

A: At some point confidence is lost, and people don’t want to own the (Treasury) paper. I mean why in the world, when the inflation rate has been 2.5 percent for the last 15 years, would you want to own a five-year note today at 80 basis points (0.8 percent)?

If the central banks ever stop buying, or actually begin to reduce their totally bloated, abnormal, freakishly large balance sheets, all of these speculators are going to sell their bonds in a heartbeat.

That’s what happened in Greece.

Here’s the heart of the matter. The Fed is a patsy. It is a pathetic dependent of the big Wall Street banks, traders and hedge funds. Everything (it does) is designed to keep this rickety structure from unwinding. If you had a (former Fed Chairman) Paul Volcker running the Fed today — utterly fearless and independent and willing to scare the hell out of the market any day of the week — you wouldn’t have half, you wouldn’t have 95 percent, of the speculative positions today.

Q: You sound as if we’re facing a financial crisis like the one that followed the collapse of Lehman Brothers in 2008.

A: Oh, far worse than Lehman. When the real margin call in the great beyond arrives, the carnage will be unimaginable.

Q: How do investors protect themselves? What about the stock market?

A: I wouldn’t touch the stock market with a 100-foot pole. It’s a dangerous place. It’s not safe for men, women or children.

Q: Do you own any shares?

A: No.

Q: But the stock market is trading cheap by some measures. It’s valued at 12.5 times expected earnings this year. The typical multiple is 15 times.

A: The typical multiple is based on a historic period when the economy could grow at a standard rate. The idea that you can capitalize this market at a rate that was safe to capitalize it in 1990 or 1970 or 1955 is a large mistake. It’s a Wall Street sales pitch.

Q: Are you in short-term Treasurys?

A: I’m just in short-term, yeah. Call it cash. I have some gold. I’m not going to take any risk.

Q: Municipal bonds?

A: No.

Q: No munis, no stocks. Wow. You’re not making any money.

A: Capital preservation is what your first, second and third priority ought to be in a system that is so jerry-built, so fragile, so exposed to major breakdown that it’s not worth what you think you might be able to earn over six months or two years or three years if they can keep the bailing wire and bubble gum holding the system together, OK? It’s not worth it.

Q: Give me your prescription to fix the economy.

Broccoli Vegetables

A: We have to eat our broccoli for a good period of time. And that means our taxes are going to go up on everybody, not just the rich. It means that we have to stop subsidizing debt by getting a sane set of people back in charge of the Fed, getting interest rates back to some kind of level that reflects the risk of holding debt over time. I think the federal funds rate ought to be 3 percent or 4 percent. (It is zero to 0.25 percent.) I mean, that’s normal in an economy with inflation at 2 percent or 3 percent.

Q: Social Security?

A: It has to be means-tested. And Medicare needs to be means-tested. If you’re a more affluent retiree, you should have your benefits cut back, pay a higher premium for Medicare.

Q: Taxes?

A: Let the Bush tax cuts expire. Let the capital gains go back to the same rate as ordinary income. (Capital gains are taxed at 15 percent, while ordinary income is taxed at marginal rates up to 35 percent.)

Q: Why?

A: Why not? I mean, is return on capital any more virtuous than some guy who’s driving a bus all day and working hard and trying to support his family? You know, with capital gains, they give you this mythology. You’re going to encourage a bunch of more jobs to appear. No, most of capital gains goes to speculators in real estate and other assets who basically lever up companies, lever up buildings, use the current income to pay the interest and after a holding period then sell the residual, the equity, and get it taxed at 15 percent. What’s so brilliant about that?

Q: You worked for Blackstone, a financial services firm that focuses on leveraged buyouts and whose gains are taxed at 15 percent, then started your own buyout fund. Now you’re saying there’s too much debt. You were part of that debt explosion, weren’t you?

A: Well, yeah, and maybe you can learn something from what happens over time. I was against the debt explosion in the Reagan era. I tried to fight the deficit, but I couldn’t. When I was in the private sector, I was in the leveraged buyout business. I finally learned a heck of a lot about the dangers of debt.

I’m a libertarian. If someone wants to do leveraged buyouts, more power to them. If they want to have a brothel, let them run a brothel. But it doesn’t mean that public policy ought to be biased dramatically to encourage one kind of business arrangement over another. And right now public policy and taxes and free money from the Fed are encouraging way too much debt, way too much speculation and not enough productive real investment and growth.

Q: Why are you writing a book?

A: I got so outraged by the bailouts of Wall Street in September 2008. I believed that Bush and (former Treasury Secretary Hank) Paulson were totally trashing the Reagan legacy, whatever was left, which did at least begin to resuscitate the idea of free markets and a free economy. And these characters came in and panicked and basically gave capitalism a smelly name and they made it impossible to have fiscal discipline going forward. If you’re going to bail out Wall Street, what aren’t you going to bail out? So that started my re-engagement, let’s say, in the policy debate.

Q: Are you hopeful?

A: No.

Occupy Rallies Against Powerful Right-Wing Group You’ve Never Heard Of.

If you are a reasoned Democrat, or a moderate Independent, or a moderate Republican or Fiscal Conservative, you probably wander around scratching your head at where much of the legislation that flows through Congress comes from. I sure do.

Well, this seems to be the source of most of it. Today, occupiers in 80 American cities will hold the movement’s largest coordinated demonstration since fall: a huge protest against the American Legislative Exchange Council (ALEC).

Never heard of it? That’s the point.

“It’s an extremely secretive organization,” says David Osborn, an organizer with Occupy Portland‘s Portland Action Lab, which is spearheading the national protest (known on Twitter as #F29 and #ShutDownTheCorporations). “Our goal is to expose the destructive role that it plays in our society.”

Founded in 1973 as a “nonpartisan membership organization for conservative state lawmakers,” ALEC brings together elected officials and corporations like Walmart, Bank of America, and McDonald’s to draft model legislation that often promotes a right-wing agenda. It claims to be behind 10 percent of bills introduced in state legislatures.

Now, I have no problem with Walmart or B of A being who they are. I love free market capitalism. But, I do have a problem with them using politicians to gain a market advantage. Apple Computer, based on their market cap of $400B is now the most valuable public company in the world, and it didn’t happen because of K street lobbyists. And, their profit last year was 4 times Walmart’s based on less than half of Walmart’s revenue (profit of $13.1B compared to Walmart’s $3.1B and revenue of $46.3B compared to Walmart’s $109.5B), with no assist from the American Legislative Exchange Council (ALEC).

This group began gaining attention from progressive activists in July, when the Center for Media and Democracy obtained and published a trove of more than 800 “model bills” crafted and voted upon by ALEC’s members. Since then, the Center’s website, ALEC Exposed, has drawn attention to ALEC’s conservative agenda and funders, which include ExxonMobil, the Olin and Scaife families, and foundations tied to Koch Industries. “ALEC is like a speed-dating service for lonely legislators and corporate executives,” says Mark Pocan, a Democratic state assemblyman in Wisconsin, where ALEC played a role in last year’s efforts to cripple public-sector unions. “The corporations write the bills and the legislators sign their names to the bills. In the end, we’re stuck with bad laws and nobody knows where they came from.”

Prominent bills drafted by ALEC include Arizona’s SB 1070 (the nation’s strictest anti-immigration legislation) and proposals introduced in 38 states to undermine Obama’s health care law by making it illegal to penalize residents for failing to obtain health insurance. A recent study of ALEC’s impact in Virginia found that it was responsible for 50 bills introduced there, including the privatization of public schools. And, if you know Virginia at all, you know what’s wrong with that.

Democratic lawmakers in Arizona and Wisconsin are fighting back. Their proposed ALEC Accountability Act would require the group to register as a lobbying organization, thereby forcing it to disclose its financiers. Pocan, the Wisconsin assemblyman, went so far as to crash an ALEC convention in New Orleans and post his findings on YouTube.

In the works since January, today’s protests are just as much about the broader issue of corporate control of politics. “We are rejecting a society that does not allow us to control our future,” says a call to action on Shut Down the Corporations, the umbrella website for the protests. Here’s a rundown of some of the planned actions:

  • Southern California: Actions targeting one of the largest Walmart distribution centers in support of nonunion warehouse workers
  • New York City: A teach-in by Rolling Stone writer Matt Taibbi (coiner of the “vampire squid” meme) and actions targeting Bank of America, Pfizer, and the Koch brothers
  • Salt Lake City: A mock debutante ball in the state capitol that will draw attention to a Utah replica of Arizona’s anti-immigrant law
  • Portland, Oregon: Actions targeting ALEC corporations throughout the city
  • Phoenix: A rally at the state capitol focusing on union-busting and anti-immigrant bills followed by a “museum-style” tour of ALEC corporations

That last one should be fun.

Crowdfunding Re-builds The Inner-city. Watch For It.

City of Hope

Not all the news coming out of Detroit is grim. Here are five ideas that could transform the Motor City—or yours.

Greg Ruffing/Redux


For nine years, Midnight Golf has been providing college prep—and putting tips—to high school seniors from Detroit’s neediest families. In a city where about 35 percent of freshmen go on to graduate, the program, founded by a social worker and single mom in 2001, has sent more than 350 kids to college. During two three-hour sessions every week (PDF), students receive college counseling and hone their resumé-writing and public-speaking skills—and then they head to the golf course and practice their game with PGA players. Paging Tiger Woods: Redemption awaits!


A local multimillionaire wants to turn Detroit’s vacant lots into the world’s largest urban farmJohn Hantz, the founder of a successful financial-services company and one of the few wealthy men living in Detroit proper, has pledged to spend roughly a third of his $100 million fortune growing a verdant empire—10,000 acres of berries, apples, tomatoes, lettuce, and Christmas trees. He’s currently lobbying for tax incentives on the lots—he argues that the now-tax-delinquent land will put more cash in the city‘s coffers if assessed as farmland. Hantz insists that the farms will employ some 250 Detroiters and become a family destination, with produce stands, pick-your-own fields, and picnic spots galore.

But critics are not so sure: Some have called Hantz’s venture a land grab. Others fear that a for-profit superfarm will pull business from the smaller farms that are already thriving in the city, including Earthworks, a nonprofit organic operation on 1.5 acres of rented vacant lots, and the Detroit Black Community Food Security Network, which runs farms and a produce co-op in neighborhoods where fresh fruits and veggies are hard to come by.


At the center of the city’s burgeoning bike scene (fewer people equals fewer cars on the streets, and the city is pancake-flat) is a two-year-old nonprofit bike shop called the Hub of Detroit, where customers can pick out old bikes in the back room, then pay the staff to refurbish them. Profits support the Back Alley Bikes training program, which for a decade has been teaching youth how to build and fix their own rides.


Just 18 months ago, Spaulding Court, a 20-unit faux Gothic townhouse complex in Detroit’s North Corktown neighborhood, was a near-vacant and weed-infested eyesore. But in January, 25-year-old structural engineer Jon Koller founded a nonprofit called the Friends of Spaulding Court and bought the classic limestone structure for $1,000. With $60,000 in loans, some rounded up via the crowd-funding sites Kickstarter and Loveland, the group stripped the junkie-ravaged apartments, installed plumbing, and planted a garden. Today, with three occupied units and counting, Spaulding Court is the centerpiece of an increasingly lively block—an organic farm, a food cart, and a park are all a stone’s throw away.


With the auto market reinvigorated, all car manufacturers are switching to the clean-energy sector. Last September, an Irish solar-power company contracted with Detroit-based race-car manufacturer McLaren Performance Technologies to produce parts for solar dishes (think satellite dishes with panels). Meanwhile, Nextek Power Systems aims to make buildings more efficient by improving the conversion of AC electricity from the grid to the DC power that’s used to run some appliances. The company has helped corporations including Target and Frito-Lay to improve their energy efficiency, and is working with the Pentagon on charging stations for electric cars. And in the city’s Midtown neighborhood, a business incubator calledTechTown nurtures new high-tech companies, many in the alternative-energy field. One of its tenants, founded by a couple of auto-industry vets, is Clean Emission Fluids, which makes machines to custom blend biofuels for gas stations and trucking companies.

It looks like Crowdfunding is a great platform for fueling all of these initiatives. Stay tuned.

Some Interesting Social Age WebSites.

Inbed.Me: Meeting People On Your Travels Before You Even Arrive

They say that travel is more about the people you meet than the places you see.  That philosophy is alive and well at Inbed.me, a new website that helps users find and interact with fellow travelers – before they even board a plane.

Inbed.me, which was created in June 2011 during Startup Weekend in New York City, is a new extension of social media to the world of hostel travel.  Unlike CouchSurfer.com, inbed.me is less about finding a cheap place to stay than it is about pairing travelers with other site users who are going to the same destination.  It’s intended to make users’ vacations more social and ensure that, before they even take off, people already have a set of friends they can explore with and get to know.  The site has already received positive press and won second place out of 20 startups during Startup Weekend.

“We believe that online travel planning should take advantage of the beauty of the social web,” Diego Saez-Gil, CEO of InBed.me, toldMashable. “By connecting with other travelers with similar interests going to the same destinations, travelers will be able to get tips and plan activities together.”
Inbed.me is novel and interactive but it’s clearly not for everyone.  The site is primarily for hostel and inn travelers (aka college kids and aging hippies), which suggests it appeals to a niche clientele of visitors who are already looking for a cheap and social travel experience.  Travelers to hotels, people already part of large groups, and families are not part of the sites’ target market.  So, if you are travelling to New York and staying at the Four Seasons, inbed.me ain’t for you.

But for those travelers who are looking for a uniquely social experience in budget accommodations, it offers a new way to check both the safety and sociability of a potential hostel.  Is it the kind of place where you want to stay?  Are the other visitors there interested in interacting with you on their vacation?  Before now, there was absolutely no way to answer those sorts of questions, which was what made travel the adventurous crapshoot it has always been.  Inbed.me offers the potential to answer those questions and completely change travel experience of its users.

YoBucko: Practical (Financial) Magic

You’re 24-years-old and a recent college graduate – now you can breathe easy! Wrong. You may be done with that god-awful class, your lab partner with B.O., and living in a broom closet with four other people, but now you get to pay off those student loans. And did I mention? You know nothing about finance or money, except, of course, how to spend it.

Not to worry, though, because that’s what Eric Bell expected, which is why he founded YoBucko, a free, online personal finance guide targeted at 20-something-year-olds who are just starting out. The platform consists of two primary features: a social support network and an online marketplace.

The website is so simple that at first glance it seems like the only thing they offer is articles related to a variety of topics: loans, education, taxes, jobs, credit, and budgeting, among other issues. But you can find all that on your own with Google. Continue clicking around, though, and you can find a veritable minefield of information. Across the top of the site are multiple tabs such as “Learn: where you can find the articles by topic, “Ask YoBucko”, which includes FAQ’s and the option to ask specific questions of your own, the option to sign up for their newsletter and even “Tools”, which offers users topic specific worksheets and financial calculators. One particular strength is the “Shop” option (no, sadly, it’s not t-shirts with the pig on them). The shop function brings to financial services and products what websites like BizRate and NexTag offer for other products, allowing you to compare prices on credit cards, student loans, different types of insurance, software and more.

The marketplace compiles product reviews from thousands of users and experts, then generates a percentage score that enables users of the website to quickly locate only the top three solutions in each product category. That, essentially, is why YoBucko seems to be better than just uselessly fishing for solutions on Google, since it does the sifting for you. Also available are multiple support groups and forums where you can connect with financial experts and others just like you.

There are some other websites, like FeeFighters, that appear to be competition for YoBucko. But FeeFighters only helps users compare prices and fees for various credit cards. YoBucko, conversely, integrates information services like articles and videos, interactive forums and practical real-world help across a range of topics, which you need to in order achieve your financial goals. Maybe now you can finally move on from your Ramen-noodles-every-night diet and be a real grown-up.

Pinterest: The Visual Way To Share

Social media’s pervasive touch gives individuals numerous ways to share information. Between FacebookLinkedInGoogle+, and Twitter, users get constant updates on their contacts’ interests and activities. But social media lags in terms of promoting safe visual media sharing with people outside of your friend zone. Meet Pinterest: one of the hottest social media websites and the best way to share photos you have taken or found with everyone out there in the world.

Pinterest is genuinely new: it provides an easy-to-use, intuitive way to share images and it lets users share them with everyone. Previously, sharing visual media was much more difficult than sharing information or updates. Photos on Facebook or Twitter often look small and too many of them will make your whole profile appear crowded and messy. More important, other social media is geared at letting you share your social media with your friends for personal reasons.  Pinterest is different: it is about sharing images that interest you with strangers who may share your taste.  It’s a new form of social media sharing, one that is safe, artistic, visual, and impersonal, which explains its instant appeal to a large demographic of web users.

The site appeals to a very large set of users but it has targeted a narrower demographic than most existing social media: 97-percent of Pinterest’s Facebook fans are women. But, considering it appeals to a wide demographic range of women, that is not much of a limitation and the site has taken off since its inception.  It has already reached the 10 million unique visitors per month mark and continues to grow exponentially.

Pinterest will survive because it offers a totally different model for social media engagement.  It’s not “look at me,” it’s “look at this,” which appeals to web users who want an outlet to share visual ideas that may not be directly connected to their own lives. In its own way, Pinterest is a reaction against the constant personal crowing of social media, a rebellion against the non-stop endless influx of personal information about the individuals in our lives.  Because it is very simple to use – users simply join the community, upload content, and share it – and it lacks the overused ‘personal touch’ of Facebook and Twitter, it is unique and should have staying power in the social media world.

Right. I Mean How Can You Protect Your Family When You Can Only Buy One Gun a Year. Sheesh.

Virginia gun law about to change. 

Control advocates will likely recoil in horror soon when Virginia Governor Bob McDonnell signs into law a bill axing the one-handgun-a month law, which passed the Virginia Senate Monday on a 21-19 vote, reflecting the new reality of party power in that chamber.

The law was originally passed in 1993 when the current instant background checks did not exist as an effort to reduce firearms being purchased in the state and resold illegally elsewhere. New York City was a favorite destination of gun traffickers.

But today, with the computerized federal background check, not to mention the (considered by some) redundant state check, proponents argue that the one-gun limit is no longer necessary.

They appear to have prevailed.

Gun control and all things firearms related are always lively issues in Virginia politics, serving as a litmus test for many as to any given politico’s commitment either to limited government or public safety, take your pick depending which side of the fence you are on.

The most recent local gun show (another favorite target of gun control advocates) was held this past weekend at the racetrack on Laburnum Avenue in Henrico, and attracted the largest crowd in the show’s history.

One dealer displayed a portrait of President Barack Obama emblazoned with the title “Salesman of the Month.”

This is in a way, good news for Democrats, since as the economy continues to gradually improve, Obama’s re-election seems more likely to many voters. And although he has not introduced any gun control legislation, the fear remains among Second Amendment advocates that such is in the works, not to mention possible Supreme Court appointments in a second term that could negate the recent high court decision that the Second Amendment guarantees an individual right to own weapons.

In Virginia, there has been a bit of interest in the almost certain repeal of the ban on Sunday hunting, a move also made possible by the re-alignment of power in state government, although a number of Senate Democrats voted for its repeal and some GOP members did not.

As with the repeal of the one-gun-a month ban, Gov. McDonnell has indicated he will sign it. Of course.

A Wipeout That Didn’t Have to Happen.

BOBBY L. HAYES, an engineering entrepreneur in Incline Village, Nev., used to trust financial institutions. This is the story of why he no longer does.

Mr. Hayes won a securities arbitration last week and was awarded $1.38 million from the panel that heard the case. Banc of America Securities, now Merrill Lynch, must pay the award, which represents all the money Mr. Hayes lost on a complex security, plus accrued interest, lawyers’ costs and hearing fees.

The Hayes case highlights this question: Exactly how did Wall Street price the loans that it bundled into securities and sold to investors?

For anyone hoping to hold firms and individuals accountable for misconduct in the credit crisis, valuation practices are a rich vein to mine. Last week, for example, prosecutors in New York City wrung guilty pleas from two former mortgage traders at Credit Suisse who admitted inflating the values of mortgage bonds that the bank held on its books. As the subprime disaster spread in 2007 and 2008, one trader said he mismarked the bonds to please his superiors; another said the fraud was intended to keep him in line for a rich bonus. The bank itself was not charged.

The outcome of Mr. Hayes’s case seemed to confirm his argument that prices on some of the loans in the pool were artificially inflated at the time of purchase. We can’t know for sure, though, because the arbitrators did not say why they ruled as they did.

Mr. Hayes said he told his broker that he didn’t want to take risks with the money that went into the investment, a collateralized loan obligation known as Lyon Capital Management VII that was issued in July 2007. “I was a trusting client, and it was like a bad dream,” Mr. Hayes said. “I had a lot more assets in the bank, and it was unfathomable to me that they would deliberately do this to even a small depositor.”

When Banc of America Securities was concocting the Lyon Capital deal, a $400 million collection of commercial loans that it planned to sell to investors, Wall Street’s labyrinthine and lucrative loan-pooling machine was starting to break down.

An expert witness who testified at the arbitration said that as the security was being cobbled together, the loans purchased over previous months were losing value. Instead of owning up to that fact, this witness said, Banc of America Securities sold the investment as if the loans still carried prices from months earlier.

By selling the Lyon Capital deal with inflated asset values, Banc of America Securities was able to make sure that it did not incur losses on the loans purchased for the security.

Thomas C. Bradley, a lawyer based in Reno, Nev., who represented Mr. Hayes, said that while the security was being created, the loans lost 5 percent of their value. “Our whole case rode on the premise that the investment was intrinsically worthless as of the day the investments closed,” Mr. Bradley said. “The panel agreed.”

MR. HAYES had been sold the riskiest piece of the loan pool, known as the equity or E tranche. Because of the way losses are distributed in these instruments, the loans in the pool had to decline only by one-half of 1 percent before Mr. Hayes’s investment would be wiped out. The entire security was liquidated at a loss of around $75 million about 16 months after it was sold.

Bill Haldin, a spokesman for Bank of America, the parent company, said it disagreed with the arbitrators’ decision. “Following the purchase of this investment, the market experienced extreme volatility,” he said. The bank denied that the investment was worthless when it was sold to Mr. Hayes. Of course they did.

Craig J. McCann, founder of the Securities Litigation and Consulting Group in Fairfax, Va., testified on behalf of Mr. Hayes at the arbitration. His firm has done research on the problems posed to investors by firms that collect loans during a period of steep asset price declines. He has identified several cases where securities contained loans that had been bought at prices substantially higher than their market value when the pools were issued.

“If the loans drop in value during the warehousing period, as they did in this case precipitously, then the trust is agreeing to pay something significantly more than the market value of the securities,” Mr. McCann said. “The right thing for Banc of America to do would have been to only charge the trust the current market value of the loans or at least disclose to investors the trust is paying $400 million when the loans are worth $380 million.”

The loans were gathered for the LCM security from November 2006 to June 2007, as the credit markets were coming unglued. The prospectus for the deal did point out that the loan purchases made during the period would be reflected on account summaries at acquisition costs. What was not made clear, though, was that those costs were considerably above current values; investors, therefore, would incur immediate losses when they bought the security, Mr. McCann said.

Banc of America Securities later changed its disclosures about the potential for losses embedded in loan pools like the Lyon Capital deal. In a similar offering dated August 2007, the prospectus noted that because of declining market values of loans, it was likely that the value of the portfolio “on the closing date will be substantially less than the principal amount” of the loans in the pool.

Another problem with the Lyon Capital deal, Mr. McCann said, was a conflict of interest in its structure, which was disclosed in the prospectus. Affiliates of Banc of America Securities, it noted, were among those selling loans to the firm for inclusion in the pool. Collecting loans for lengthy periods also allows for opportunistic trade allocation, Mr. McCann said. If, for example, the loans had risen in value while the security was being created, one might well wonder if those loans would have ever made it into the final product. Well, one doesn’t really wonder. One KNOWS they wouldn’t.

Even though he won his case, Mr. Hayes said he was still livid. “I no longer trust any financial institution,” he added.

Something tells me he’s not alone in that.

The End Of Europe.

Britain is burning. Strange that it should be so. After all, the catastrophic economic news of recent days, including the highly controversial downgrading of U.S. debt by Standard & Poor’s, the burgeoning euro crisis in continental Europe and the market turmoil that followed both, has been made in New York City, Brussels and Berlin, not in the streets of North London. But if you look closer, it all makes sense. Britain, like the U.S., has been a center of both great wealth creation and a widening wealth divide over the past 20 years, thanks to the rise and, more recently, fall of the markets and global economic growth.

Now the U.K. is sharing the suffering of the rest of Europe — namely, deep budget cuts that are hurting vulnerable populations the most. As youth programs, education subsidies and housing allowances are axed by a state desperate to get out from under crushing sovereign debt, it’s clear why the poorest populations in the most economically unequal large European nation are taking to the streets.

The only surprising thing is that it didn’t happen sooner. We’ve known since the beginning of the financial crisis and subsequent economic downturn that the world order was changing in profound ways. But we’ve tried to wish it all away with talk of temporary blips and cyclical recessions. We’ve come up with every possible excuse, from tsunamis to a lack of market certainty, to explain why rich-country economies aren’t rebounding.

But the past two weeks of dismal economic news have made the new reality impossible to ignore: the West — and most immediately Europe — is in serious trouble. This is no blip but a crisis of the old order, a phrase once used by historian Arthur Schlesinger Jr. to describe the failures of capitalism in the 1920s. It is a crisis that is shaking not only markets, jobs and national growth prospects but an entire way of thinking about how the world works — in this case, the assumption that life gets better and opportunities richer for each successive generation in the West.

As bad as things might seem in the U.S., the smoldering center of the crisis is Europe. Volatile continental markets and angry demonstrations from Athens to Madrid are manifestations of the desperate scramble by European politicians to contain the euro-zone debt crisis that threatens to unravel the single currency and destabilize the region. The European Union and the euro zone were supposed to bring about economic stability and remove traditional barriers to growth, such as tariffs and regulations. Instead it’s become a selfish union in which flailing economies feed rising nationalism, angst over immigration and simmering distrust between rich and less affluent countries. “Europe is at the center of the global financial problems,” wrote Michael Hartnett, chief global equity strategist for Bank of America Merrill Lynch, in a recent note to investors. “Those problems have been exacerbated by the inability, or the unwillingness, of policymakers … to address the debt issues.”

Why the Euro Is Everyone’s Problem

While the crisis may seem to be Europe’s problem, if it results in a breakup of the euro zone or even a growth-dampening series of costly bailouts, it will reverberate from Beijing to Boston and back. Europe is the largest trading partner of both the U.S. and China. It’s home to one of the world’s largest pools of wealthy consumers. If they stop buying our stuff, everyone suffers. Meanwhile, a dramatic depreciation of the euro or a dissolution of the union would make nations from Asia to Latin America that hold the euro as a reserve currency much weaker. Even the mere effort to contain the crisis with looser monetary policy on either side of the Atlantic creates a risk of inflation and hot money that could punish emerging markets, economists like Goldman Sachs’ Jim O’Neill have warned.

The worries have now come to a head. Borrowing costs for Europe’s weaker economies, like Greece, Ireland, Portugal, Spain and Italy, have skyrocketed as halfhearted measures to stabilize markets have made investors suddenly wary that the European center is not going to hold and that richer countries like Germany simply aren’t committed to the monetary union. That’s why bond spreads are widening, European stocks are tanking and the European Central Bank is desperately trying to calm markets by buying up weaker countries’ debt.

All this could have happened six months ago or three months ago or three months from now. But the crisis exploded in the past week because of the slow-growth news coming out of the U.S. As improbable as it sounds, “Europe’s Plan A, B and C was to outgrow its debt problem via the normalization of the economic situation in the U.S.,” says Harvard economist Kenneth Rogoff. “When they saw the U.S. growth numbers coming in so much weaker than they expected, it became clear that the world wasn’t going to normalize. And they panicked.”

While economists were betting on 4% growth in the U.S. earlier this year, numbers released in recent days show that the American economy grew a paltry 1.3% in the second quarter of last year, after a truly anemic first-quarter figure of 0.4%. With growth like that, we can’t even save ourselves from 9%-plus unemployment at home, let alone save the world. The much feared 2% economy, now the consensus prediction for U.S. growth this year, has become a reality. We are no longer the economic counterweight to Europe. We are Europe.

According to Rogoff, the pre-eminent seer of the crisis, who wrote the sovereign-debt history This Time Is Different: Eight Centuries of Financial Follies with economist Carmen Reinhart in 2009, Europe and the U.S. are not experiencing a typical recession or even a double-dip Great Recession. That problem can ultimately be corrected with the right mix of conventional policy tools like quantitative easing and massive bailouts. Rather, the West is going through something much more profound: a second Great Contraction of growth, the first being the period after the Great Depression. It is a slow- or no-growth waltz that plays out not over months but over many years. That’s what happens after deep financial crises that require bailouts by beleaguered states, which are then left with few resources and tools to cope with a stagnant, high-unemployment environment rife with populist politics, social instability and violence of the kind we’ve most likely only begun to see in the streets of Athens and London.

It’s a very different era than the historically exceptional period of rapid global growth from 1991 to 2008, the period in which the European Union, the euro and the dream of greater European integration were born. The linchpin of this age of optimism was, of course, the U.S. It helped rebuild Europe after World War II and toppled its main ideological competitor, the Soviet Union. The dollar and U.S. government debt, backed by America’s well-functioning democracy and strong growth prospects, remained the largest, most liquid and (seemingly) safest investments on the planet. It was in this environment, in which all boats were rising, that the euro began to gain strength.

Needless to say, the global picture has changed. It is a measure not only of the long tail of America’s special position in the global economy but also of just how bad things are in Europe and elsewhere that there hasn’t been a rush out of U.S. Treasuries. Following the S&P downgrade, ascribed to our slower growth and debt-ceiling shenanigans, investors piled into Treasuries as the market tanked. China, the largest foreign holder of T-bills, issued a stern warning to the U.S. to “cure its addiction to debt.” But central bankers from Beijing aren’t breaking down doors in Frankfurt to convert their dollar holdings to euros. The euro is the only viable alternative to the dollar as a global reserve currency. The British pound is history, and emerging-market currencies are still too small, volatile and controlled. And while plenty of investors are fleeing into gold, the world gold market isn’t big enough to accommodate serious dollar diversification without massive inflation in gold itself. Prices are already at record levels.

It’s unclear at this stage whether the euro will even survive the debt crisis that has engulfed Europe, one that is in many ways worse than the one we’re experiencing in the U.S. On the surface, the picture doesn’t seem so bleak. After all, the average euro-zone deficit is only 6% of GDP, compared with 10.6% in the U.S., and Europe’s debt-to-GDP ratio, while similar to America’s, isn’t rising as fast. The difference is that the U.S. has time and favorable borrowing rates on its side; Europe has neither. Also, the U.S. can tackle its fiscal problems if it finds the will to rise above partisan politics; the politics of the E.U. — and in particular its lack of true political integration — makes it impossible for it to actually get to the root of the euro crisis.

That’s because the euro zone is essentially a selfish union. Europeans want to benefit economically from their proximity to one another and want at all costs to avoid expensive and destructive wars — either trade or shooting — with their neighbors. Beyond that, many of their political, cultural and social agendas diverge. At each stage in the development of modern Europe, from the creation of the European Union to the introduction of the euro, it has always been difficult to get nations to agree to deeper political integration, which is hardly surprising given what a heterogeneous place Europe is. That’s why in 2005 voters rejected a European constitution that would have required member states to cede much more power to the E.U.

The Casino Continent

The result is a monetary union that can sometimes resemble a casino. The existence of a European Central Bank (ECB) means that countries like Greece, Belgium and Ireland are free to borrow from the credit window and take on more debt than they can handle. But the fact that there’s no centralized political control or accountability means that more-prudent member countries like Germany have no way to stop weaker states from undermining the viability of their shared currency.

Of course, there’s also no one to tell Germany that it shouldn’t let its state-owned banks leverage themselves 50 to 1 on junk assets. The hypocrisy of it all is evidenced by the fact that nearly all the euro-zone countries have flouted the core economic rule that in theory limits annual budget deficits to 3% and debt-to-GDP ratios to 60% for all members. “We created the stability pact as a set of rules for the euro. But it has become a pact of cheaters and liars,” says Jean Arthuis, a centrist politician and head of the finance commission in the upper house of France’s Parliament.

The euro zone’s early doubters always believed that Greece or other weak nations would cheat on the deficit issue. The result now is a continent — and a common currency — that is shaky, requiring perhaps trillions in capital injections from France and Germany, first among others, into a rescue fund to prevent the euro’s collapse.

Even in good times, it is never easy to balance the fiscal needs of a high-cost exporter like Germany with those of cheap and cheerful service economies like Greece, Spain and Portugal. In bad times, it’s impossible. The poorer peripheral countries in Europe used to be able to devalue their individual currencies to maintain global competitiveness. Post-euro, with that quiver removed, they have two choices. They can make painful structural reforms that are unpopular with voters, including cutting welfare programs, reforming tax collection, trimming pensions and increasing competitiveness by working harder and longer (starting with the politicians currently sunning themselves while the euro crumbles). Or they can borrow from the ECB and hope to grow their way out of trouble. It’s obvious from the debt loads of European nations which road was chosen. “Europe is about to blow,” says Rogoff. “There is no longer any question of standing still … They are going to have to fix things at home.”

That’s not so easy on a continent with a currency and a monetary system underpinned by multiple political systems, economies and fiscal priorities. Figuring out how to bail out the euro zone is a lot tougher than figuring out how to bail out the U.S. financial system, although throwing money at the problem is a certainty. For starters, there’s no single institution or figure, like former Treasury Secretary Henry Paulson, that can marshal the troops and put together a TARP-style program for indebted nations. The head of the ECB, Jean-Claude Trichet, has been trying to play that role, buying up billions of euros’ worth of shaky Italian and Spanish bonds. But even as the two most important leaders in Europe, German Chancellor Angela Merkel and French President Nicolas Sarkozy, have been patting him on the back for his efforts, they’ve also been reluctant to get serious about giving more money to the euro-zone rescue fund that was set up to deal with crises exactly like this one.

The message is clear: the two strongest nations in the euro zone don’t yet have the stomach to commit to saving the common currency. The markets, which as ever loathe uncertainty, have reacted badly because investors know the ECB’s efforts are just a Band-Aid. The central bank simply doesn’t have the firepower to stem the crisis.

How to Bail Out Europe

There is a way out. Germany, one of the strongest and most solvent economies not only in Europe but in the rich world, could swoop in and save the day by leading an effort to guarantee all Spanish and Italian debt as well as the debt of the major European banks. This would calm markets. But it would be hugely expensive, not to mention politically contentious. After all, why should prudent Germans — who have their economic house in order — have to rescue a bunch of spendthrift, books-cooking Greeks and Italians? It’s a tough sell politically, as evidenced by a June poll showing that 71% of Germans have little confidence in the euro, up from 46% in 2008.

The reality is, the Germans are in for pain no matter what. Euroskeptics like to argue that Europe might be better off economically without the common currency — the Germans would enjoy the privileges of a strong deutsche mark, and Greece could devalue the drachma enough that its hotels would be full of even more sunburned German tourists. But if the euro goes under, most experts believe there would be, as HSBC chief economist Stephen King (not this Stephen King) put it, “unmitigated financial chaos.” Skyrocketing borrowing costs for many of Europe’s slow-growth, highly indebted countries would result in a recession or even a depression that wouldn’t leave Germany unscathed. After all, about 40% of German exports stay in Europe. Meanwhile, competitors like Italy (which has a strong manufacturing sector) could nibble at Germany’s economic edge by offering lower prices thanks to their highly devalued currency.

Bailing out Europe would represent a huge economic and political cost. Assuming it became politically acceptable, Germany would need to be able to make sure that Portugal, Italy, Greece and Spain — and any other European “PIGS” — cleaned up their act. And that, in turn, would require a real political union in Europe, one in which Brussels, the euro capital, and perhaps to a disproportionate extent Berlin had control of the purse strings and fiscal policies of the euro zone.

As difficult and politically improbable as it sounds, experts like Rogoff, as well as many politicians and economists in Europe, believe it will happen, and possibly quite soon. But that would be only the beginning of the hard work. Fixing the crisis of the old order will require serious reforms of everything from Europe’s sclerotic labor markets to its still vulnerable financial sector. (American banks, despite their troubles, are much better run and capitalized than European ones. I know, hard to believe.) Most important, it will require painful and deeply unpopular austerity measures that could lead to more violence among populations already struggling to cope with the downturn.

Rioting of the kind we’ve seen in London and Athens is just one side effect of the new age of austerity. Populist politics is another. Just as the economic downturn in the U.S. helped fuel the Tea Party, Europe’s debt crisis is fueling a resurgence of polarizing, right-wing politics embodied by figures like Marine Le Pen in France. Xenophobia and anti-immigrant sentiment are rife, a fact most dramatically illustrated by the mass shootings at a Norwegian youth camp last year. Even in mainstream politics, there’s a sense that unity is impossible. Within the past few months, Sarkozy, Merkel and British Prime Minister David Cameron have all spoken about the end of the European dream of multiculturalism.

The turmoil is a portent for the U.S. We are ultimately facing the same problem as old Europe: how to grow amid a continuing downturn when the public sector can’t or won’t spend more to jump-start the economy. It’s clear that we’ve still got a lot of work to do before that problem is solved.

In the meantime, both Europe and the U.S. will continue to struggle with the crisis of the old order. Populations will have to come to terms with no longer being able to afford the public services they want. Investors will have to cope with a world in which AAA assets aren’t what they used to be. Businesses will deal with stagnating demand, and workers will face flat wages and high unemployment. All this will take place at a time that is in many ways the opposite of the optimistic two decades that preceded the financial crisis. Think the 1970s, without inflation (though there are those who think a whiff of inflation to wipe out debt might not be a bad idea). It’s the end of an era in which the West and Western ideas of how to create prosperity succeeded. The crisis in Europe and the challenges yet to come on either side of the Atlantic take us into a whole new era. The rules and risks of it are only just becoming clear. 2012 should be fun!