Since my post last week on A Grand Theory Of Our Present Dilemma, I have been inundated with a great deal of personal communications from friends and colleagues that point out that quite a few other economists have been advancing the same notion that the financialization of the American economy was a feint to hide the underlying stagnation of the “real economy”. My friend Ken Miller, former Vice Chairman of Credit Suisse/First Boston pointed me to the work of his father in law Paul Sweezy. Others have pointed out the work of the Deutsche Bank analyst, Jim Reid. In the chart below, Reid points out that in the last ten years, U.S. financial sector profits have deviated from the mean to the tune of $1.2 trillion and that a return to the mean would inevitably mean a give-back of that amount.

Reid’s report was written last July, long before we realized the incredible amount of potentially worthless CDO’s still were sitting on bank balance sheets.The U.S. Controller of the Currency’s latest report shows that the total amount of derivatives sitting on bank balance sheets has only fallen by 3% in the last quarter and still totals an astonishing $175 Trillion.

What is obvious is that the gains from the financialization of the economy only went to the top 1% and that wages for the rest of the population as a percentage of GDP have continued to fall.

At the same time as we juiced up the financial economy, the real economy continued to stagnate. The overcapacity that I have been talking about is not particularly new, but it will now get much more serious.

 As Sweezy points out, our contemporary notion of a progressive economist, Paul Krugman may have discounted Milton’s Friedman’s monetary solution to a depression,but his solution was hardly comforting to those of us not interested in the military industrial complex’s answer to our problems.

If monetary policy failed to avert the reemergence of “mass unemployment” on the level of the 1930s, which he thought unlikely, there was always “an easy solution, expansionary fiscal policy.” Krugman’s proof: “the giant public works program that restored full employment, otherwise known as the Second World War.”

On Sunday, in his interview with Matt Lauer, President Obama said that “it is likely that the banks have not fully acknowledged all the losses that they’re going to experience,” and that more banks were likely to fail. I’m afraid this is an understatement. What worries me the most is that we are nowhere near the bottom of this crisis and already the signs of civil unrest caused by the crisis are everywhere.

I am not a seer, and have no idea where this this furious gale will bear the ship of state. I do know that America has the ability to reinvent herself and am comforted by the words of de Tocqueville.

Democratic nations care but little for what has been, but they are haunted by visions of what will be; in this direction their unbounded imagination grows and dilates beyond all measure….Democracy, which shuts the past against the poet, opens the future before him.