At Marketwatch, Paul Farrell on “America’s Outrageous War Economy.” Sad but true.

Ultimately, the price of our greed may be the fulfillment of Kevin Phillips’ warning in “Wealth and Democracy:” “Most great nations, at the peak of their economic power, become arrogant and wage great world wars at great cost, wasting vast resources, taking on huge debt, and ultimately burning themselves out.”

Best line seen today: “A taxpayer voting for Obama is like a chicken voting for Colonel Sanders.”

It is a myth that the high foreclosure rate is the result of interest rate resets. True, there is a coming tsunami of Options ARMS that will reach their maximum negative amortization, but it is not here yet. Early evidence suggests that somewhere between 40% and 50% will default immediately. But the real problem remains fraud, fraud and more fraud. First in subprime, now in Alt-A.

Buyers — many with Latino surnames — bought homes in new subdivisions in Watsonville for $600,000 to $700,000 with loans that didn’t require proof of income. In the industry, they were known as “no documentation loans.” Biancalana called them “don’t ask-don’t tell loans.”

Emilio Martinez, a private investigator running for City Council in Watsonville, said many Latino borrowers came to him claiming they had been cheated by their mortgage brokers.

But in reviewing the documents, he found that in a majority of cases, the incomes of the borrowers had been inflated to qualify for the loan. One example: a couple employed at a sandwich shop earning $35,360 bought a $628,000 home with 100 percent financing and no down payment.

It is interesting to me that the US, with its extreme religiosity, shows dishonesty on such a massive scale. Lenders are doing everything in their power to avoid recognizing this problem because it is a political and public relations disaster. Also, in many cases, the lenders were guilty of at least turning a blind eye. Although some went even further. Remember the art department? It should be no surprise that extending even more credit to allow borrowers to bring their payments current just puts off the problem.

Governor Schwarzenegger is proposing to raise the state sales tax by 1% on a “temporary” basis (don’t make me laugh). This is to raise revenues to close the $15 billion budget shortfall that California is facing, and will make the sales tax in some counties, which can add voter-approved surcharges, as high as 9.75%.

Government spending in California is completely out of control. Compensation of public employees is ludicrously high as powerful unions have extorted higher and higher settlements from compliant politicians, and non-union employees have ridden on their coat-tails. Gerrymandering has made elections a non-event, and the incumbent Democrats have thwarted all attempts at reducing expenditures.

Californians have revolted before, passing the now-legendary Proposition 13 to limit the increases in property taxes. The politicians then tried raising the state income tax on higher incomes, which actually resulted in a revenue decline the last time they tried it, as the affected taxpayers then worked harder at avoiding taxes. Failing that route, they then turned to borrowing. Past abuse and the credit crunch are closing that off also (The only state with a lower credit rating than California is Louisiana), so they’re back to the well for a higher sales tax. The outcome is predictable - people will move heaven and earth to avoid spending money on taxable items in California. Look for a big battle on sales tax collection with the out-of-state e-retailers, like Amazon, as well as more retailer bankruptcies.

The tax grab is getting bigger and bigger, even the little things like $4 to cross the state bridges, soon to be $5. A fleabite, you say? Not if you commute to work every day. Any move to cut expenses brings out the sob stories from the public sector unions, of course, with massive advertising. But the people are already hurting, the median house price was down 38% y-o-y as of last month and the foreclosure rate was at a 20-year high, up 260% from a year ago. At some point, the people are going to find the exactions of the bureaucrats intolerable and there will be another tax revolt.

Alexis de Tocqueville said that “in a democracy, people get the government that they deserve.” So true.

Elizabeth Bailey has recently replaced Martin Feldstein as the chairman of the National Bureau of Economic Research (NBER). The Bush administration and the Republican party live in fear that the NBER will declare a recession. Mr Feldstein, who still serves on the recession dating committee, recently observed:

The U.S. may now be in a “very long” recession that will drive the unemployment rate higher, with little that the Federal Reserve can do to help.

An official recession would be a big negative for the Republicans in the fall elections, which is why every statistical and propaganda effort conceivable is being made to disguise the reality of recession. Paul Kasriel of Northern Trust lays out the evidence and sums up:

After the November elections, the National Bureau of Economic Research will tell us what we and the Fed already know - the U.S. economy currently is in a recession. Industrial commodity prices appear to have peaked, which will begin to moderate the trend in headline U.S. inflation in a couple of months. Businesses have little pricing power at the consumer level. There is no evidence of a wage-price spiral. The inflation-expectations’ anchor does not appear to be dragging. The dollar appears to have stabilized, in large part because of economic growth in the rest of the world appears to be slowing significantly. Losses continue to mount on the books of financial institutions, which will inhibit credit creation. Is the Fed going to raise its funds rate target over the remainder of 2008? Not bloody likely!