Update: The U.S. House of Representatives has rejected the Treasury’s $700 billion rescue package. The Dow is down 770 points as I write.

Around a year ago Syntagma was among the first to use the word “Depression” in relation to the trajectory of Western economies.

Today, Monday 29 September, the word is on everyone’s lips.

Despite the rescue package now going through Congress, U.S. Treasury officials are in wild panic mode as truth finally dawns: there is nothing they can do to halt the steep declines in credit issuance that will deliver the most virulent bout of debt-deflation the world has known since the 1930s’ Great Depression.

We are hearing that officials close to Henry Paulson are privately painting a much bleaker picture of the fragility of the global economy than that of President Bush last week.

A Republican is quoted as saying that the message from government officials is that “the economy is dropping into the john. We could see falls of 3,000 or 4,000 points on the Dow. That could happen in just a couple of days.

“What’s being put around behind the scenes is that we’re looking at 1930s stuff. We’re looking at catastrophe, huge, amazing catastrophe. Everybody is extraordinarily scared. It’s going to be really, really nasty.”

A spokesman for BNP Paribas said, “Money markets are imploding. If no action is taken very soon, there is a significant risk that the global economy will collapse.”

But what action can be taken now? Imagine a palatial building across many acres eaten through by hordes of termites. Builders rush in to replace a pillar or two hoping to stabilize the structure. But architects shake their heads knowing that nothing can save the rotten edifice from collapse.

The U.S. Federal Reserve fears an “adverse feedback loop” with terrifying consequences. The “liquidation” of failed banks policy that led to the Great Depression is alive and well and raising its head in the Republican party. That may give them a short-term bounce among very angry voters, but the result could be catastrophic.

John McCain, who seemed to be coasting to victory just a few weeks ago appears to be undermined by his own side. His chances of the White House get slimmer by the day.

Central banks in Britain and Europe are maintaining their high-interest rate policy, despite the need to loosen up credit. Libor — the rate at which banks lend to each other — rose again this morning, regardless of the $700 billion U.S. package. They need to cut and cut again despite their genteel anxiety over “moral hazard”.

We are witnessing a slow-motion shipwreck, caused partly by panic, by different officials working to rigid, uncoordinated targets, and by the lack of anyone competent enough to take overall charge and impose a coherent escape route on the entire system.

The politicians have imploded, the bankers have failed, and the markets are reflecting that turmoil in the only way they know how.

How very fragile are the pillars of our civilization.

John Evans

Related Stories
The Great Harvard Sausage Scandal 2008
Silicon Valley and the credit crunch
Insurers crumble as financial structures fail
Fannie Brown and Freddie Darling

So far during this Crisis we’ve been discussing the crashing of big banks and financial institutions.

Today, the collapse of flatpack furniture giant MFI in the UK illustrates that the rot has set in on Main Street too. This has a long way to go yet.

But what about startups? These are small businesses with embryo staffing arrangements, usually depending on borrowed, credit card or venture capital funds to pay the bills.

Web 2.0 star and now a venture capitalist himself, Jason Calacanis, writing in Jason’s List — an email list for bright business folk — believes that up to 80 percent of them are on the point of going bust:

It’s my believe that the economic downturn will be much worse than it is today, and that 50-80 percent of the venture-backed startups currently operating will shut down or go on life-support (i.e. 3-4 folks working on them) within the next 18 months. Make a list of every Web 2.0 startup to raise an A or B round and cross 80 percent of them off the list, because they will not make it to their next round of funding or profitability.

I know many such startups personally, particularly tech and internet businesses, and this assessment is devastating. It’s also nothing but the truth in all its stark outline.

Around six months ago, we predicted here that another dotcom bust could not be ruled out. It can’t, but there’s always hope before it happens that some features peculiar to tech startups will not be in the direct path of the storm.

The first thing to note is that the internet is a much maturer place to do business now. Many more people depend on it than back then. It’s also stuffed full of very big players indeed, companies that will ride out the crash on a large cushion of cash — Microsoft and Google, for example.

It’s the overextended startups that will splutter to a halt, fall into mothball mode, or their owners will simply walk away and do something else.

The dotcom collapse earlier in the decade had the effect of destroying the paradigm it was built on: that internet businesses didn’t need to make any money at all, just puff themselves up for an IPO on the stock market which would make the founders very rich.

It was a classic bubble that burst with an inevitability that took believers by surprise, but never fooled more experienced observers.

The problem was that entry costs, even then, were very low compared with similar bricks-and-mortar operations. The potential was obvious, but people simply went mad with the hubris of it all.

The current bursting bubble in house prices — one of the biggest asset classes out there — is apparently similar but much more infectious in that it penetrates to the very core of the financial system and affects everyone, not just a few thousand geeks who thought they had reinvented the world.

If you were involved with the online world at the start of the century you’ll know how it felt to go under with a bang. It must feel eerily similar now.

Small-to-medium businesses with no debt, some cash reserves and crucially no need for further rounds of funding — like Syntagma Media — will survive, if they play their cards right. The danger is that their server companies won’t and they find themselves suddenly cut off.

This Crisis will affect everyone in different ways. It would be a prudent move to assess any business’s configuration to determine its weak points. That could save their skin.

I don’t suppose you’ve thought much about sausages lately. You should, sausages can be very instructive.

Many people buy supermarket sausages, but most of us prefer not to know what’s in them.

Put them in a pan and the aroma is so lip-smackingly enticing we would forgive our butchers almost anything. The smell arises from a cleverly assembled mixture of herbs and spices designed by food technologists to whet our appetities and taste buds before we’ve even bitten into the succulent pink objects they create for us. In food terms they really are masters of the universe.

If, however, we decide to delve into the innards of these encased and elongated meatballs, we get a completely different picture. For the contents are blended into a reddish goo in which excessive fat is made palatable by chemicals called emulsifiers. The meat itself is sliced and diced from every part of an animal’s carcass, including the bits we don’t normally talk about. If you think you’ve never eaten eyes or testicles or intestinal matter, think on, they are there on your breakfast plate every morning.

The point I’m making — somewhat ellipically — is that most of the old financial system is a dog’s breakfast.

Derivatives in particular, especially asset-backed structured vehicles (what a mouthful for a packet of sausages) bear a great deal of similarity to their culinary equivalents. The minced mush is largely made up of bits of sub-prime mortgages squashed together with a few half-decent ones. The alluring aroma is added by the blue-chip rating agencies, while the packaging is designed by investment bankers — who paradoxically have now almost ceased to exist.

Who would have thought that in 2008 we could make a credible comparison between sausage-makers and the high-flying gadabouts of the celestial world of brokerage and financing.

Today we hear that the two surviving giant American investment banks, Goldman Sachs and Morgan Stanley, have turned themselves into “holding banks”, which will allow them to beg on the streets for any deposits we the people may have remaining after their Attila the Hun rampage through our domestic balance sheets. They will also gain access to Government funds designed to bail out the banks.

In common parlance, Goldman and Morgan and the other stricken titans are signing on the dole.

Of course, most of the movers and shakers have already salted away their massive bonuses and are probably even now relaxing with a cocktail or two on their yachts in Monte Carlo harbour.

They have left us with a colossal mountain to climb. In the UK, house prices have a further 25-30 percent to fall, according to Roger Bootle, and already Britain’s largest mortgage lender, HBOS, has failed. How many other banks will go before we hit bottom?

Who, then, are the people that created this vastly complex set of financial instruments based on the always-temporary phenomenon of rapidly-rising asset prices? And who were their managers who let them do it?

It appears that a large number of them are alumni of the Harvard Business School, even those working in Britain and Europe. President Bush is one of them. British PM Gordon Brown has surrounded himself with such types for more than a decade.

U.S. Treasury Secretary, Henry Paulson, once CEO of Goldman Sachs, is a member of this esoteric band of brothers. Not surprisingly, his main effort currently is to package up all the bad debts of the banking sector into one giant sausage and dump it into the arms of the taxpayer. Not only have the public been fleeced by the Harvard Templars, they have to pay off their debts as well.

Unfair though that may seem I’m aware that it is probably the only way to save world financial markets. The “flight to safety” from U.S Treasury funds mid-week was the Crack of Doom approaching at violent speed. A dollar default was much nearer than any of us imagined.

Here’s a suggestion to the politicians working on better regulation for the City of London, Wall Street and Frankfurt. Item one in the new schedule: Never employ anyone with an MBA from Harvard.

Have a nice lunch. It won’t come free. Avoid the sausages.

The crashing of America’s giant investment banks is beginning to sound like an Amazonian logging operation.

In quick succession Bear Stearns, Lehman Brothers and Merrill Lynch have all gone south to the lumberjacks. Of the Masters of the Universe, only Morgan Stanley and Goldman Sachs survive.

For how long?

With CDOs (Collateralized Debt Obligations) having poisoned the world’s financial system, like seeping toxic waste, a new danger is now forming on the horizon.

CDSs (Credit Default Swaps — insurance policies for bonded commercial IOUs), which are out there in their billions, are beginning to crumble in the face of massive defaults.

The world’s biggest insurer AIG is already in Lehman-style retreat — its shares plummeted by 70 percent in early trading yesterday — as is the monoline AMBAC. The CDS crisis is now with us. When optimistic Anatole Kaletsky of The Times (London) says we are getting into 1930s territory, you know we have a serious problem.

So what precisely are CDSs and how will their demise affect most of us in coming days, weeks, months and years?

George Soros estimates that the value of CDSs now equals half of U.S. household wealth, an almost unimaginable number, now put at $58 trillion.

CDSs are hedges made by investors in case a company defaults on its debts. In effect you bet on a company failing to protect your investment in the event it does just that.

The problem arises when large numbers of companies go bust and the CDSs themselves become worthless since no-one can pay them out.

A CDS seller undertakes to compensate a buyer if a corporate bond defaults. Since there is no limit to the size of cover taken out, the value of CDSs often exceeds a company’s debts.

Moreover, many CDSs are bought with borrowed money so the infection of the system drives deep into the financial heartland like veins in a blue cheese.

The danger now is debt deflation: a rapid reversal of debt issuance, or deleveraging as it is called.

Tim Congdon of the London School of Economics says, “Banking system capital is being wiped out. The risk is that this could lead to a contraction of credit and set off a self-reinforcing downward spiral, leading to the sort of debt-deflation we saw in the 1930s.

“It is already clear that money growth has ground to a halt over the past three months. We must prevent it from actually contracting. If the Fed and European Central Bank don’t cut interest rates soon, it is going to be a problem.”

The Bank of England’s rigid inflation target, set by Gordon Brown when inflation was low, is now a millstone around Governor Mervyn King’s neck at a time when energy, food and commodity price rises are being imported from global markets.

The Eurozone is similarly caught in a time warp relating to Germany’s neurotic fear of hyperinflation. Add the growing divergence between euro economies and a far deeper than necessary downturn is guaranteed for Western European countries.

America, which is free from those constraints, already has 2 percent interest rates. It is, however, suffering a double blow: the fading of the effect from the summer fiscal stimulus and a loss of export competitiveness as the dollar rises.

What began as bad government, worse regulation, grasping banks, financial structures that lacked resilience because they were built on sand, has turned into a perfect storm that is about to come ashore and swallow much of our familiar financial and economic landscapes.

As we wrote here a year ago, while the current triple crises are different from the 1930s, and may not bite so deep, the damage will take just as long to repair.

When a bubble of such exuberant overconfidence bursts, the fallaway has to be profound before a new wave can summon enough energy to restart the cycle.

What consolations can we find among this heap of misery? As usual Einstein has a thoughtful response:

“We act as though comfort and luxury were the chief requirements of life, when all that we need to make us happy is something to be enthusiastic about.”

Happy enthusiasm.

Imagine Barack Obama becoming President of the U.S. and announcing he will use the Democrat-dominated Congress to pass a bill partially outlawing white men from getting jobs.

You can’t really, can you? It’s unthinkable. It would be political — and possibly physical — suicide.

Yet that is precisely what the British nasty party, Newish Labour, is considering doing. Its latest wheeze is to ban the indigenous population — minus women, of course — from getting jobs just when the icy winds of economic recession, and possibly worse, are blowing in from America.

Let’s just remind ourselves of what it’s like now out there in the real world :

The Bank of England is right now being deluged with demands by British banks to borrow £23.6 billion ($50bn) as lenders scramble to prop up their capital amid plunging global stock markets and asset values.

The Bank had offered just £5 billion ($10.4bn) to banks over a three-day period in an attempt to increase the flow of money between lenders.

Banks are running scared after the overnight news that the U.S. Federal Reserve has cut the discount rate by 0.25 percent and facilitated the fire sale of Bear Stearns to J.P. Morgan Chase at a fraction of its value.

Meanwhile, our government socially engineers while the City burns.

As subprime politicians in a subprime government, they should be sliced and diced and bundled into political instruments for sale to any institution that wants them.

Don’t hold your breath.

Postscript Our apologies for yet another political and economic article in this studiously non-political site. The news is getting so alarming now that it’s proving impossible to ignore the elephant in the broom cupboard — which is what the global financial situation now is.