Geithner’s comments in the United Arab Emirates capital Abu Dhabi came on the second leg of a two-day trip to the Middle East, where he is seeking to convince Arab leaders on the Obama administration’s efforts to fix the U.S. economy.

“We want to rebuild a stronger foundation for more balanced growth globally,” Geithner said after a closed-door meeting about education and economic development with UAE Foreign Trade Minister Sheikha Lubna al-Qasimi and other officials. “We need to make sure as we emerge from this crisis we’re not sowing the seeds of imbalances that will lead to future crises.”

We need to recognize that:

* The export of heavy industry from the U.S. to other nations is a key factor in the present trade imbalance, and in the terminal dependency upon monetary manipulation and, more benignly, the service economy, which are dysfunctional and unsustainable, respectively.

* A large part of what remains of U.S. industry is dedicated to military production, which is a net negative for the real economy, and that dependence upon the external projection of power has destroyed the integrity of the U.S. economy, while building a fifth column in the form of a military-industrial complex that tends to lock the U.S. in to this destabilizing policy.

* Other centers of power have emerged as the internal decay of the U.S. through militarism and other corruption has undermined U.S. economic power and military alliances.

We need some truly creative ways of addressing these problems, such as:

* Making deals with nations with net surplus reserves that have grown tired of financing U.S. overspending, to obtain additional investment in exchange for the U.S. (and its clients) drawing back from present aggressive policies, and also by using these funds for a massive conversion of the military industry to civilian productive purposes (e.g., green technology) that the world needs and that can therefore ultimately correct the trade imbalance.

* Cutting the military budget and using the proceeds for part of the required stimulus.

* Including as part of the stimulus package Federal grants for worker-run cooperatives to take over idled manufacturing facilities, as happened during the recent Argentine crisis.

* Putting zombie banks out of their misery and dealing with the chain reaction of failures by replacing these failed institutions with direct public investment, instead of pouring TARP funds down a bottomless pit of financial chicanery.

* Tight regulation of what remains of the financial sector.

Can we do it? It comes down to whether we have the will to survive.

Your idea that private retail(?) investors will absorb the addtional load implies that they are setting the prices. And those folks tend to be more fickle than the institutional central banks and they do have more alternatives. As prices are set at the margin…

And I’m arguing that there structural imbalances weren’t very important in the crisis, which is to say that even if you had no imbalances, the crisis would have still happened.

geert: It is not because the crisis started with sub-primes that it is the main cause of the crisis.

What I argue is that no subprime -> no crisis. Subprime + structural balance -> crisis. So even if you had high savings rates and a very low GDP, with so much bad lending, you’d still have a crisis.

geert: If this will be a short lived crisis then I’ll agree with you, but if we need to struggle thru a severe recession I would be looking at the real consumer class.

Even if we do have a severe recession, then it doesn’t mean that there was a major structural problem to begin with.

geert: If that middle class is that good and not overborrowed, then why do they get in trouble? Unemployment? So fast? Odd to say the least.

Yes. Most middle class families will run out of liquid current assets if they are without work for six months. You can start dipping into IRA’s and 401(k)’s but that tends to be a bad idea especially if everyone does it at the same time.

The moment you have any chance of unemployment, people just suddenly stop spending. If you look at what happened between August and October, it wasn’t that people hit their credit card limits, it’s that point that everyone suddenly said “oh my goodness, I might lose my job” at which point spending stops cold.

The number of non-retired people that could financially survive extended unemployment is very small. If most people didn’t have to work, they wouldn’t.

The Fed’s holdings of Treasuries – counting the securities it has lent out to the market – fell by $427 billion.

They sold the agencies (indirectly) to the Fed, which paid for them with printed money

History shows this exercise is not sustainable