Digby explains the US financial crisis

Influential blogger Digby in an interview with Glen Greenwald:
" This is a trap that they are - look, this happens all the time. There is a historical pattern that we can turn to, which is that Republicans make a habit of looting the treasury - this isn't the first time it's happened. During the vanted Reagan years, we had the S&L crisis which up 'till this point was the largest since the great depression, which was also a Republican crisis. And the problem is that they fetishize this idea of deregulation, they create shadow banking systems, which is essentially what the S&L scandal was, and again, here we have another shadow banking system, that they created with no regulations, and with this huge amount of exposure and risk, to the economy as a whole. They make a lot of money over a period of time; I mean tremendous amounts of money. Over the last few years, when people look at the wreckage of this particular scandal, they're going to find that people on Wall St. were swallowing a fire hose of money, for years now. We've been talking a lot about the new gilded age - this is what we're talking about. And so, they have this pattern of deregulating and creating these opportunities for themselves to take these huge risks knowing that the government is going to essentially be the bailout of last resort if it doesn't work.

This is the biggest moral hazard in world history, to allow this to happen. And we are having, we wind up again with the gun to our heads, going, well, okay, either fix it, or we're going to take everybody down with them."
Moreover, according to James Grant, there is the problem of 'deficits without tears':
"The dollar emerged at the center of the monetary system that took its name from the 1944 convention in Bretton Woods, N.H. The American currency alone was made exchangeable into gold. The other currencies, when they got their peacetime legs back under them, were made exchangeable into the dollar.
.....and the Nixon administration, on Aug. 15, 1971, decreed that the dollar would henceforth be convertible into nothing except small change. The age of the pure paper dollar was fairly launched.

In the absence of a golden anchor, the United States produced as many dollars as the world cared to absorb. And the world’s appetite was prodigious. “Balance of payments” crises were now, for this country, things of the past. “Liquidity,” that bubbly speculative elixir, gurgled from the founts of the world’s central banks.

It was the very lack of gold-standard inhibition that permitted the buildup of titanic dollar balances overseas. At the end of 2007, no less than $9.4 trillion in dollar-denominated securities were sitting in the vaults of foreign investors. Not a few of these trillions were the property of Asian central banks. So, although the United States has run heavy and persistent current account deficits — $6.7 trillion in total since 1982 — they have been “deficits without tears,” to quote the French economist Jacques Rueff. The dollars American debtors sent abroad America’s creditors sent right back in the shape of investments in American stocks, bonds and factories.

Under the Bretton Woods system, worried foreign creditors would long ago have cleaned out Fort Knox. But, conveniently, the dollar is uncollateralized and unconvertible. America’s overseas creditors hold it for many reasons. Some — notably Asian central banks — acquire dollars simply to help make their exports grow. But even the governments that scoop up dollars for no better reason than to manipulate their own currency’s value presumably put some store in the integrity of American finance.

As never before, that trust is being put to the test. In the best of times, the Treasury and the Federal Reserve pretended as if the dollar were America’s currency alone. Now, in some of the worst of times, Washington is treating its vital overseas dollar constituency as if it weren’t even there."