The problem is not the fiscal stimulus. It is not pork barrel politics. It is not the banks. Nor is it the bankers. It's not even the debt. It's the cost of debt. And it's just like Japan, 1990-2009.
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Everyone should just calm down and get a grip. The problem is not the fiscal stimulus. It is not pork barrel politics. It is not the banks. Nor is it those parasites, the bankers. It's not even the debt.

It's the cost of debt. And it's just like Japan, 1990-2009.

Don't be fooled by the zero short-term Fed Funds Rate. Other more important rates are much higher and rising. The average 30-year-fixed-rate-mortgage has just climbed back upwards to 5.28%.

To stop the downward spiral, the Fed must lower borrowing costs across-the-board -- short and long rates, safe and risky. Soon bankruptcies will slow, defaults will ease, foreclosures will let up, and unemployment start to fall. There's even a chance the undeserving banks could be saved. But it has got to be done soon, before the downward debt-deflationary spiral spins out of control.

Just think about it. Home-owners -- some of whom were good for their debts just a year ago -- are defaulting. Why? Because they're losing their jobs, or their contracts or their businesses. Everything must be done to help them hang on.

Yet at this time -- the gravest debt crisis in US history -- corporate and mortgage interest rates are high and rising. What is the Fed thinking?

And take U.S. companies -- many are sound businesses faced by slumping markets. To compound this challenge they have back-breaking borrowing costs on debt they were persuaded to take on by bankers and financiers -- and they're going bust.

They can't be blamed for the slump in the markets -- that's down to the bankers. And they can't be blamed for borrowing. After all, the lending binge was cheered on and facilitated by the Fed, by politicians, by officials and by orthodox economists.

Now these innocents have been abandoned. Banks and capital markets are refusing to lend enough to roll-over the debt, and to keep sound businesses going. Where they do lend, the price -- i.e. interest rates -- has soared.

It's these borrowing costs that are bankrupting businesses, and can be directly blamed for the rise in job losses. More bankruptcies, more job losses, more properties on the market - all this is pushing down prices, while the cost of debt rises.

It is just like Japan, 1990-2009.

Between 1992 and 2001 Japanese Finance Ministers launched 10 emergency budgets in a desperate bid for a fiscal stimulus that would revive the economy and create jobs. But without having first fixed borrowing costs, the emergency budgets just made things worse -- because they triggered rises in the long-term cost of borrowing.

Now while the US fiscal stimulus is vital -- it will create jobs where the market has failed -- government spending has a downside. Ask the Japanese. Without lowering interest rates first they were building roads and bridges to nowhere.

Be clear -- there's no reason why the Fed cannot control interest rates across-the-board. Without Federal Reserve management of borrowing costs, big spending by the US government could help drive interest rates up -- in particular long-term rates. I really hate to admit it, but the Republicans have a point here.

They're wrong of course to say that budget deficits are like household deficits and implicitly unsound. They're not like household deficits. The government's budget will recover when the economy recovers. Plain and simple. In the meantime the government has to step in where the market has failed. But if the fiscal stimulus takes precedence over the management of borrowing costs - it could make things worse.

It's a sequencing issue. John Maynard Keynes understood it, but his so-called followers, including Larry Summers and Tim Geithner, don't seem to get it. Keynes would have argued strongly to get borrowing costs down now - as a matter of urgency. Then use the fiscal stimulus to create jobs and revive the fast-expiring economy.

The Obama administration's advisers are not heeding Keynes. By cherry-picking his theory so that bankers and other free-marketeers can get their hands on taxpayer funds, they are doing the great man, and the global economy, a dis-service. Never mind tax-payers.

Above all, by not learning from Japan; by refusing to take control over all rates of interest - short and long, safe and risky - the Fed, US politicians and their advisors are driving this great country into the Mother of all Depressions. Just ask the Japanese.

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