Yes, a depression! Spelled: D-e-p-r-e-s-s-i-o-n. Wake up America, recessions don’t work any more. Why? Get serious folks. We had a 30-month recession not long ago. Ten years later the market’s still below its 2000 peak of 11,722. That’s a 20% loss in your retirement portfolio, after inflation. And they’ll do it again in the next decade.

Worse, we’re back in a new recession. But Washington politicians are smothering in with happy-talk, feeding us doctored feel-good statistics as legendary political historian Kevin Phillips wrote in “Numbers Racket: Why the Economy is Worse Than We Know.” So we blindly refuse to bite-the-bullet and stop our out-of-control spiral into collapse. America needs a big wake-up call … and it’s coming soon, whether you like it or not!

In November 2007 we posted “17 reasons America needs a recession.” Today it’s far worse, and getting worser: Most economists noe predict it’ll take till till after 2011 to burn off the excess housing inventory and foreclosure. RGE Monitor say Fannie and Freddie bailouts aren’t working, they’ll soon be “profoundly insolvent,” need to be “nationalized.” Yet here it is three years later and they’re still kiccking that can downhill.

Lessons learned? Zero. Why? Wall Street, Washington and Corporate America are a one-trick pony with one narrow-minded strategy: Economic g-r-o-w-t-h, bull markets, mega-bonuses. In good times they tout “free markets.” But when greed bombs, these big babies throw free market “principles” under the “Reagan Revolution” bus as their lobbyists go whining to Congress for mega-billion taxpayer bail-outs and access at the Fed casino’s discount window to siphon off more taxpayer money. What hypocritical wimps!

Wall Street and its co-conspirators are doing such a miserable job, America needs a new strategy: Stop all the short-term “hole-plugging.” Let go and let an old-fashioned “Good Depression” do the job that our happy-talking leaders refuse to do. Let it clean house and reawaken America to basic values. Otherwise a “Good Depression” will turn into a new “Great Depression.” Here are seven strong reasons favoring this alternative strategy:

One: Yes, an honest diagnosis, “soul-sickness” in American Capitalism
America’s problems are not the economy, not markets, nor even politics. The endless bickering campaign is distracting us from facing our real long-term problems. Yes, our economic pains are real, but they’re just symptoms. Since 2000 America has seen had a relentless, sickening overdose of bad news: stupidity, deceit, corruption and even evil behavior. Americans are n-u-m-b, suffering Post-Traumatic Shock Syndrome. The real problem is our thinking, our brains, minds, something deep in our cosmic soul says Jack Bogle’s The Battle for the Soul of Capitalism. We lost our values, our moral compass.

Two. Yes, time to admit this already like the 1930’s “Great Depression”
Comparing today with the Great Depression has become common sport. In a Newsweek special “Seeing Shades of the 1930s,” Daniel Gross writes: 75 years ago “Wall Street, after two terms of a business-friendly Republican president, self-immolated on a pyre of greed, incompetence and excessive optimism.” Like Dr. Scott Peck says in The Road Less Traveled: “Life is a series of problems. Do we want to moan about them or solve them?” We need to grow up, stop whining, roll our sleeves up, solve real problems.

Three. Yes, “good” depression reveals self-destruct “bubble-thinking”
In a recent Atlantic article Irrational Exuberance author Robert Shiller warns: “Bubbles are primarily social phenomena. Until we understand and address the psychology that fuels them, they’re going to keep forming.” Housing inflated 85% in a decade: “Historically unprecedented … no rational basis for it.” Today there’s a huge excess housing inventory, higher-credit mortgages are now in jeopardy, the write-offs are now projected at $2 trillion, on top of a $3 trillion war, $10 trillion federal budget, and more.

Bubble thinking is contagious, will trigger a pandemic. Shiller says “few people seem immune to boom thinking. The recent bubble grew so large partly because the very people responsible for the financial system’s oversight came to share the general public’s rosy expectations.” Unfortunately our leaders are still ignoring the underlying problem: Nothing is being done about “our psychological vulnerability to bubble thinking.”

Shiller then warns of a new mega-meltdown: “We recently lived through two epidemics of excessive financial optimism. I believe we are close to a third episode, only this one will spread irrational pessimism and distrust—not exuberance … our economic problems will become much worse than they need to be, and our social problems will multiply.”

Four: Yes, a “good” depression will stir outrage, force real reforms
In the 2008 Journal, Jim Grant, respected editor of the Interest Rate Observer, framed his title as a question: “Why No Outrage?” Why? He notes: “Through history, outrageous financial behavior has been met with outrage. But today Wall Street’s damaging recklessness has been met with near-silence, from a too tolerant populace.” Tolerant? No, n-u-m-b! “Human progress seems to be the likeliest culprit.” Fear-driven, we prefer the devil we know to a new one. Yet while “Wall Street may be sweating to fill out this year’s bonus pool,” Grant worries that Wall Street will run “itself and the rest of the American financial system right over a cliff.” A “good” depression brings outrage.

Five. Yes, “good” depression forces Wall Street to “think-outside-box”
In a great Bloomberg Markets feature, “No Easy Fix,” we’re told Wall Street’s “profit formula has hit a wall … Wall Street’s money-making machine is broken and efforts to repair it after the biggest losses in history are likely to undermine profits for years to come.” Merrill Lynch is a good example: They’re selling 615 million new shares, a 38% dilution, while hanging on to “$30.6 billion in crummy derivatives,” says Dennis Berman in The Journal. Merrill’s stock’s about half the 2004 price of $55. Merrill “needs to come up with $2.8 billion in new profit, not sales, to get back to its 2004 per share earnings levels. That’s $43,000 in new profit for each of Merrill’s 65,000 employees.”

Unfortunately, Merrill’s cashcows (off-balance sheet gimmicks, derivatives, repackaged asset-backed securitization) that made mega-bucks the past decade “have largely disappeared. That puts the burden on Merrill’s old-line businesses, brokerage, asset management and investment banking.” Solutions? Cut costs, steal market share or “gradually start to take on more risk on Merrill’s trading desks, which produced the bulk of the $30 billion in losses the past 12 months.”

Warning: Expect more desperate, hi-risk and stupid moves: A new BusinessWeek report says Wall Street’s already lobbying Congress to raid America’s $2.3 trillion “pension honey pot.” Warning: These are the same greed-in-good Gekkos that brought us the last two rapid-fire meltdowns. Stop them before they turn the next into a “Great Depression.”

Six. Yes, a “good depression” can prevent America’s “decline and fall”
In The Price of Liberty: Paying for America’s Wars, Robert Hormats, Goldman Sachs Int’l Vice Chairman, traces America’s wartime financing from the Revolutionary War to present wars. Today we’re “relying on faith over experience, hoping that sustained growth will erase deficits and that the ballooning costs of Social Security, Medicare and Medicaid will be manageable in the coming decades without difficult reforms.”

Former U.S. Comptroller General, David Walker put it in more omenous terms: “There are striking similarities between America’s current situation and that of another great power from the past: Rome.” They fell for three reasons “worth remembering: declining moral values and political civility at home, an overconfident and overextended military in foreign lands, and fiscal irresponsibility by the central government.”

And Pulitzer-prize winning geographer Jared Diamond takes an even broader historical view in Collapse: How Societies Choose to Succeed or Fail: Many “civilizations share a sharp curve of decline. Indeed, a society’s demise may begin only a decade or two after it reaches its peak population, wealth and power.” He draws historical parallels with America in the past decade. Warning: Wall Street’s next meltdown won’t be a mere statistical recession. Our monetary system, our financial system and our tax base are burning out. Like our over-extended military, we are handicapped in our ability to face new threats, much as were Rome, the Mayans and other great civilizations.

Seven. Yes, a “good” depression will shock America’s “warring” soul
The President said he’s a “war president.” The American economy is a war economy driven by our warring soul. We spend 54% of the tax dollar on war, 47% of the world’s total military spending. A half century ago President Eisenhower warned of this “military industrial complex” that’s running America into bankruptcy. Today, our economy thrives on war and disasters, generating such “spectacular profits that many people around the world” are convinced America’s “rich and powerful must be deliberately causing catastrophes so that they can exploit them” says Naomi Klein in Shock Doctrine.

Klien’s snapshot of Wall Street’s soul is disturbing: “An economic system that requires constant growth, while bucking almost all serious attempts at environmental regulation, generates a steady stream of disasters all on its own, whether military, economical or financial. The appetite for easy, short profits, offered by purely speculative investment has turned the stock, currency and real estate markets into crisis-creation machines” Pray for a “Good Depression” … before they trigger a “Great Depression.”

original in MarketWatch: Aug.11’08