If they are truly disgusted, they should look to themselves for answers.

Since the end of World War II, the dollar has largely replaced gold as the reserve asset central banks hold to back up national currencies. The supply of mineable gold is too limited, and efforts to back up currency with gold would result in chronic shortages of liquidity and global deflation.

When a merchant moves goods, for example, from Thailand to Mexico, the market for pesos into bahts is thin or nonexistent, and the merchant sells pesos for dollars to buy bahts. Similarly, many other cross-boarder trades, financial contracts and debts are denominated in dollars, although the euro is coming into greater use.

Over the years, governments and traders gravitated to the dollar, because the United States has the largest and most diversified economy. Virtually anything made or grown around the world is made or traded in the United States, and money invested in dollars is secure from political upheaval and state confiscation.

Until recently, the dollar has been a well managed currency. The U.S. government resisted the temptation to borrow too much and flood the world with too many dollars and Treasury securities, which provide liquidity the same as do dollars.

The current market determined system of exchange rates emerged by default in the early 1970s, when the Bretton Woods system of government-enforced fixed exchange rates failed, and the United States ended the convertibility of the dollar into gold.

This system has no rules or effective governing structure. Consequently, some governments seized opportunities to manipulate the system to gain competitive advantages in trade. For example, since 1995 China has maintained an undervalued currency by selling huge amounts of yuan for dollars to merchants and currency traders.

The undervalued yuan makes Chinese exports artificially cheap and foreign products too expensive in Chinese markets. China enjoys huge trade surpluses that create millions of jobs and double-digit growth in China. Japan and others have pursued similar strategies.

These policies impose huge trade deficits and unemployment on the United States, create enormous imbalances in the global economy, and contribute importantly to the Great Recession.

The U.S. trade deficit grew from about one percent of GDP in 2001 to more than five percent from 2005 to 2008, and this should have created a shortage of demand for U.S. goods and services and a recession.

However, China invested the dollars obtained suppressing the value of the yuan to purchase U.S. securities. U.S. consumers borrowed those dollars, against their homes and on credit cards, and kept the U.S. economy going.

Finally, the credit bubble burst and an even bigger recession resulted. Huge federal borrowing is now required to finance massive U.S. stimulus spending, bailout banks and otherwise rescue the U.S. economy.

All this borrowing floods capital markets with Treasury securities, which provide the same liquidity as dollars, and pushes down exchange rates for the dollar against every major currency except the Chinese yuan. This reduces the value of the dollars, as expressed in euro and yen, held by China, Russia, Saudi Arabia and others.

Hoisted on the consequences of their own mercantilism, China and others would like to see the dollar replaced by a basket of currencies.

A global currency poses enormous diplomatic and technical challenges, including creating an international body to control its supply and persuading governments to issue debt denominated in this global currency. Without those, private merchants and financiers would still seek a central national currency to facilitate trade and denominate private cross-border contracts and debts.

Even with a global currency, China could still buy dollars with yuan to keep its value suppressed against the dollar and boost exports into the United States. The United States would still have to run large federal deficits to avoid economic meltdown.

China would still be stuck holding dollars that chronically fall in value against other currencies.

If China and others want that problem fixed, they need to abandon currency manipulation and let their populations purchase more U.S. goods and services.

The U.S. economy would grow robustly, federal borrowing would subside and the threat of too many dollars compromising the dollar’s role in international finance would vanish.

Peter Morici is a professor at the Smith School of Business, University of Maryland School, and the former Chief Economist at the U.S. International Trade Commission.

A generation ago, banks took deposits, made loans and collected payments. Bankers quickly felt the consequences of money lent to folks unlikely to repay. During the 1980s, deregulation pushed up interest rates on deposits. Banks got caught with old mortgages on their books yielding less than they paid for deposits. The Savings and Loan Crisis resulted, motivating banks to sell new loans to investors instead of holding those in their portfolios.

Banks wrote mortgages and sold those to Wall Street financial institutions, who bundled loans into bonds and sold those to investors, such as insurance companies and foreign governments. Often, separate mortgage service companies collect payments and foreclose on delinquent loans.

From loan officers to the Wall Street bond salesmen, opportunities to exaggerate the quality of loans emerged. If local banks or Wall Street financial houses could pawn off high-risk, high-fee loans as reasonably safe, they enjoyed big paydays.

Wall Street bankers wrote bogus insurance policies called SWAPS that were supposed to limit losses for investors when mortgages defaulted. AIG wrote many SWAPS without capital to back them up, and banks even wrote SWAPS on each other’s mortgages—like two homeowners on a North Carolina beach promising to pay one another in the event of a hurricane.

The storm came, and AIG and several big banks became insolvent. Washington decided they were too big to fail and bailed them out.

Writing SWAPS and selling bad bonds to unwitting investors permitted bankers to earn huge profits and bonuses. When too many mortgages failed, investors and bank shareholders took enormous losses, and taxpayers bailed out the banks.

Apart from the TARP, the Federal Reserve and FDIC permitted banks to borrow at rock bottom interest rates and enjoy big profits to rebuild their capital. Consequently, widows relying on Certificates of Deposit for income now receive much reduced interest rates. That’s right—Ben Bernanke is taxing grandma to bail out Goldman Sachs.

Flush with profits, the banks are up to their old tricks—again creating highly engineered financial products, selling swaps, setting aside massive profits for bonuses, and manufacturing conditions for another crisis.

If Wall Street banks are too big fail, then they are too big to let go on with this irresponsible behavior. French and German regulators advocate limits on bank compensation, and the Federal Reserve is considering prohibitions on compensation practices that encourage excessive risk taking. The latter is too complex to be realistic—the banks would run circles around such rules, much like lawyers creating tax shelters.

Better to limit bonuses and salaries of bankers to a fixed percentage of net income that aligns financial sector salaries with those of other industries. Harsh for sure, but so is the pain bankers’ recklessness has imposed.

Bankers should not be allowed to pay themselves royally and put the nation at risk again.

Peter Morici is a professor at the University of Maryland School of Business and former chief economist at the US International Trade Commission.

Since May, real consumer spending has been gradually rising. Technology spending is looking up, as computers age and Asian growth pulls demand for sophisticated components. New home construction is showing new life.

These will permit 2 percent GDP growth in the second half of 2009, but a second credit squeeze could knock down the economy again.

Regional banks are in a sorry state, laboring under failing commercial loans. Through August 2008, the FDIC closed or merged 83 banks into stronger institutions and 400 more banks are on the critical list.

Many forgot how to be bankers. With one eye on quarterly profits and the other on the Country Club BBQ, many loaned to retailers and commercial real estate ventures with dubious business prospects.

Even a casual trip through suburbia from 2005 to 2007 revealed too many stores selling the same stuff, and bankers were best positioned to know consumers were overextended.

Main Street scions of finance tried to diversify risk by selling loans to Wall Street, which packaged those loans into Commercial Mortgage Backed Securities (CMBS) and then sold the securities back to the banks. This round tripped debt is collapsing, destroying bank balance sheets.

The Obama Administration’s financial sector rehabilitation plan originally proposed public-private partnerships to purchase and work out residential and commercial debt.

Instead, the FDIC, with limited resources, is merging insolvent banks into somewhat stronger banks by agreeing to absorb huge losses.

Retailers, commercial property leases and CMBS failed later in the recession than the housing market, and the full impact on regional bank lending and credit markets is just coming into focus.

Moderate-sized businesses—those supposed to build President Obama’s green economy—can’t get credit. Wall Street bankers are not much interested in collateralizing business debt through regional banks—New York has had enough of the lending acumen of Main Street bankers.

Finally, big firms are paying smaller suppliers slower but demanding payments from them sooner, imposing a cash flow squeeze on the moderate-sized business whose bankers are turning them away.

Cash flow, credit and collapse could be the bywords of 2010 as smaller businesses and banks continue to fail and the recession takes a second dip.

The FDIC insurance fund stood at $10.4 billion in June and total losses are likely to double that. Either surviving banks will pay much larger insurance fees—making credit even tighter—or the Treasury will lend the FDIC money against fees that may be collected in better times.

The Obama Administration and Fed have done just about everything possible to keep doors open at the nation’s largest banks, lending money so cheaply that even an economics professor could make one profitable.

It’s high time for systemic relief for smaller banks—a Bad Bank to work out their loans and a wholesale revamping of how community bankers run their cottage investment houses.

Endlessly, pundits and analysts pronounce that small businesses are the innovators and job creators and critical to recovery.

They can’t do that job without meaningful rehabilitation of regional banks.
Peter Morici is a professor at the Smith School of Business, University of Maryland School, and the former Chief Economist at the U.S. International Trade Commission.

By conventional wisdom, the housing bubble, credit crisis, and collapse in consumer spending caused the recession.

With home sales rising, new cars flying off lots, and Wall Street profits soaring, analysts see an imminent recovery, but the economy is running on steroids.

About 90 percent of existing home sales are distress sales—foreclosures and homeowners in financial difficulties. New home purchases are juiced by the $8000 first-time buyer subsidy that expires December 1.

Summer car sales were pumped by the “cash for clunkers” program.

Regional banks are failing under bad commercial loans and mortgage-backed securities purchased from Wall Street financial houses. In part, Wall Street posts big profits by shifting its debauchery onto smaller brethren, and the FDIC may run out of cash to guarantee regional banks’ deposits.

Clueless behavior by big players is frightening. Automakers are boosting production, assuming car sales will continue at their torrid summer pace.

Wall Street is planning big year-end bonuses instead of shoring up capital for a possible second dip in the recession. The backup may be a Broadway lyricist to pen “Bail ‘em out again Ben.”

Consumers, recognizing danger, stay away from the malls and seize what dollars they have.

The economy will be lifted by businesses rebuilding depleted inventories and replacing outdated computers and federal stimulus dollars. Those simply will not deliver annual GDP growth greater than 2.5 percent or many new jobs.

The stock market will rally with modest growth, because U.S. multinationals produce so much in Asia where growth is robust.

To Wall Street, the recovery will appear V-shaped, but for ordinary workers, it will be an X.

Unemployment will reach 10 percent, and stay there until President Obama stops obsessing about redistributing wealth by nationalizing car companies and health care and raising taxes on energy and the wealthy.

The country needs pro-growth policies—fixing the huge trade deficit and the banks.

Dollars spent on imports that do not return to purchase exports can’t be spent on American products. That saps demand for American-made products, keeps factories and offices shuttered, and idles workers.

The trade deficit is mostly oil and Chinese consumer goods. Export more, import less, or the economy flops.

Without bank credit, businesses can’t expand, entrepreneurs can’t create, and workers don’t work.

Obama dodges the toughest aspects of the banking morass. Compensation structures built on the too big to fail doctrine permit Wall Street to take huge risks, shift losses onto smaller investors and the government, and suffer too few consequences for their calamities. Until those change, Wall Street bankers will be too busy chasing rainbows to adequately reestablish lines of credit to regional banks essential for business expansion.

Buy only as much as you sell, reasonable pay for honest work, and let the reckless fail.

Old time religion?  That’s what made America great.

Peter Morici is a professor at the Smith School of Business, University of Maryland School, and the former Chief Economist at the U.S. International Trade Commission.