This is the worst-case scenario from Europe, and it just might come true: Italy defaults on its debts. Every major Italian bank collapses. Recession grips the eurozone. Sovereign defaults and bank failures ripple across the Continent. Saddled with bad loans to nations and lenders in Europe, American banks hemorrhage cash. Credit freezes in the United States. Multinational companies, unable to raise money, curb U.S. investment and hiring. Wall Street demands, but fails to get, new bailouts. The entire developed world plummets into recession and, quite possibly, depression.

This, in contrast, is the placid warning that President Obama gave Americans about the threat: “If Europe is contracting,” he said on Monday, “then it’s much more difficult for us to create good jobs here at home.” There’s still a chance that Europeans, through some combination of fiscal and monetary action, can stop the crisis before it shatters the feeble U.S. recovery. But the worst case is so much worse than Obama’s description, and Washington has failed to prepare voters for the possibility. “The [potential] shock we’re talking about is of very large magnitude,” says Viral Acharya, a New York University professor who studies financial risk extensively. “If you’re just having an Armageddon coming your way, [America’s] buffers may not be adequate.”

The eurozone’s struggles are already hurting the U.S. recovery. Stocks have fallen, and exports to the European Union—the world’s largest economy—are dropping as the Continent slides into recession. In the best case, the pain inflicted on the United States basically stops there. Europeans marshal the political will to bail out Italy and Spain, and they wall off Greece from the financial system at large. Lending slows but doesn’t stop. The European recession proves comparatively mild, and America avoids one.

But the situation could worsen quickly for the United States. The biggest risk is a massive credit freeze. Loans from European banks account for one-fifth to one-quarter of the American lending market, Acharya says, and loans from those banks would disappear fast if they begin tumbling under bad sovereign debts. American banks would likely pull back on lending, too. Consumers and businesses would curb spending. “The precipitating event for the global financial crisis and the Great Recession was the bankruptcy of a single, relatively small broker-dealer, Lehman Brothers. The bankruptcy of a nation as large as Italy would be many times more severe,” says Karl Smith, an economist at the University of North Carolina who cowrites the popular economics blog Modeled Behavior. “In theory, there is no limit to how bad it could get.”

Early warnings of economic doom will show up in indicators of credit stress—signs that lending has tightened here—such as the LIBOR rate (the amount of interest that banks charge to lend money to one another) and the TED spreads (the difference between those interbank rates and the return on U.S. government debt). Those indicators are already rising methodically. When they spike toward 2008 levels, watch out.

Read more here.

Chu, a bookish physicist and Nobel laureate, took full responsibility for decisions on the loan, but did not apologize. He said his department did its due diligence on the risks, and was not influenced by Solyndra investor George Kaiser, an Obama donor.

He tried to give long and detailed answers, irking Republicans running the hearing.

“I don’t want you to take all of my time – can you just give a really short answer?” said Cliff Stearns, the Florida Republican who has led the committee’s probe.

Republicans argue the government could have pulled the plug earlier, but instead restructured the deal.

Chu said he believed the department made the best of a bad situation. “It was a difficult decision and we were always, always focused on that path that led to as much taxpayer recovery as possible,” he told lawmakers.

But Solyndra was not able to find any acceptable buyers by a Wednesday deadline. The company and its main creditors agreed to put off an auction of its assets for two months in the hope stronger bids emerge.

Chu said he now does not expect the government to recover much of its investment.

“That remains to seen, but I’m anticipating not very much,” he said.

Read more here. Note that Chu was testifying under oath and claimed to have no contact from the White House regarding the loan. Note also that, as Peter Schweizer’s new book details, Solyndra is just the tip of the ice-berg.

This credit implosion comes after a sustained period when muni bonds were performing much better than corporate bonds. During the credit crisis; corporate bonds prices dropped by 30%, while muni bonds suffered very modest losses. The main reason for this stability was bail-out money showered on state and local governments by the Obama Administration. But fed money has dried up and property reassessments are falling for the first time since the 1970s. Strains on core operating expenses and revenue sources will likely persist, according to Moody’s: “This will be mostly due to economic stagnation, high unemployment, declining home values, and low consumer confidence,” said Steed. “We expect downgrades to continue exceeding upgrades in upcoming quarters.” This is polite ratings speak for: “duck and cover”.

The state revenues fell by $14.3 billion, even as the national economy has seemed to stabilize. The quarter ending September 30th saw 163 ratings reductions, the second highest 90 total in history. Over 100 of those downgrades were cities and school districts where falling property-tax collection is playing catch-up on the downside to the 30% fall in real estate values.

John Dillon, chief municipal-bond strategist at Morgan Stanley, said after a downgrade: “Usually management snaps to attention.” To stay solvent states and localities have tried to cut costs and raise revenues. Most have delayed infrastructure projects, increased garbage collection fees, and even closed parks. But raising property taxes awakens taxpayer vengeance and threats of recalling local politicians. Anne Van Praagh, managing director at Moody’s, said fiscal conditions of some local governments can deteriorate more quickly now than in previous recessions. Moody’s recently cut seven states or localities by three grades or more.
Fresno, California’s fifth-most-populous city, two weeks ago had $477 million of their debt “super-downgraded” three levels by Moody’s and is under a “negative” outlook for the risk of further downgrades. Moody’s emphasized city’s budget gap is so large due to a “weak economic base, with unfavorable demographic and economic trends,” and the city lacks “ability to absorb additional budgetary pressure.” Furthermore: “Like all California cities, Fresno’s ability to raise revenues is highly constrained; its primary budget balancing option is cost reduction”. This is ratings speak for: property collection may fall 20% and the city must fire police and firemen.

The neighboring City of Stockton looks even worse. Following a Securities & Exchange Commission filing; the city admitted they will probably be the first in California to default on redevelopment agency bonds. Long criticized as crony capitalist honey-buckets; developers lavished huge donations across the state to gain access to tax free city financing of mega-projects with no-money-down. After the agency debt was downgrade to “junk”, Stockton optimistically stated they only expect a 3.17% drop in property values for 2012. Good Luck on that number!

With muni bonds generally in the hands of older citizens, there has not been the panic selling by institutions when bonds are downgraded. But many individuals have their entire life savings in municipal bonds. When defaults become a reality, the press will run endless stories of tearful traumatized seniors and cringing corrupted politicians. Then there will be panic!

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Greece is relying on rescue loans to remain solvent. But lagging efforts to tame a bloated budget deficit and enforce reforms are threatening that lifeline, which is conditional on fiscal progress.

Athens is trying to convince international creditors that it deserves to get the next, sixth tranche of money due from a bailout fund. Government spokesman Elias Mossialos said late Monday that Greece will get the bailout money.

Despite over 20 months of austerity and two international bailouts each worth about euro110 billion ($150 billion), Greece’s finances remain in a parlous state.

Over the past few days, Finance Minister Evangelos Venizelos has issued a series of pledges to accelerate delayed reforms meant to cut the cost and size of the public sector, and raised the prospect of firing up to 20,000 public servants—which would break a major taboo in a country where state employees have guaranteed jobs for life.

In a last desperate bid to plug the revenue hole, the government on Sunday imposed a new, two-year blanket tax on property.

The planned second Greek bailout has faced delays in implementation—not least because of Finland’s demand for collateral for its contribution, which annoyed other Europeans.

Merkel said she was “very optimistic” of resolving that.

“I think we want to, and will, find a way that is in principle open to all partners and still fulfills Finland’s requirements,” she said.

Read the whole thing here.

Back in 2008, as I ran for Vice President of the United States on the Libertarian Presidential ticket, I made a prediction I’m very proud of today. I said, “Voting for McCain is voting for four more years of Bush. But voting for Obama is voting for four years of Karl Marx.” How’s that working for you?

I also predicted that Obama’s entire Presidency would be devoted to saving the union- the teachers union, government employees union, and auto union. Sure enough, the White House now comes adorned with a union label. If you look closely at Obama’s forehead, you’ll find it’s stamped SEIU. Obama’s signature initiative Obamacare affects every American citizen, except union members. Real life under Obama is more shocking than fiction.

A year ago, while economists and Obama administration lackeys talked of a recovery, I publicly stated we’d never left the last recession and the worst was yet to come. I predicted that “Obama’s Axis of Evil” policies of taxation, regulation, government strangulation, unionization, litigation and illegal immigration would turn a serious economic crisis into The Greatest Depression Ever. It’s all unfolding before our very eyes on a daily basis.

As conditions got progressively worse during 2010, I predicted the Tea Parties would pull off one of the great landslide victories in U.S. political history that November.

Then when matters got even worse in the summer of 2011, I predicted Obama’s strategy would be to blame the victim (the Tea Party) that was merely trying to save America from financial ruin. On Labor Day, union goon Jimmy Hoffa, Jr. screamed to a crowd at an Obama rally, “Let’s take these Tea Party sons of bitches out.” When times get desperate…as the economy crumbles…as it becomes clear the progressive scam is ending…the oldest trick in the book is to demonize the victims. It has only just begun.

So with this successful track record, I thought perhaps a few more predictions from my crystal ball would be helpful:

• Europe is within days of a massive economic implosion that will put the entire global economy at risk of economic disaster. The Greek bailout is now in tatters. The EU is about to break apart. European banks are insolvent. There isn’t enough money in all the world to save the EU. This will set off a chain reaction of epic proportions across the globe.
• At least the EU downfall is good for one thing. They are Exhibit A proving that the toxic cesspool of big government, big taxes, big spending, big unions, fat pensions, early retirement, and too many people working for government is poison to any country’s economic survival. The EU experiment proves that government is too big to succeed. Unfortunately Obama’s model for America is Europe.
• The bad news is Europe won’t go down without a fight…with America’s money. The result of this economic Armageddon will be “the mother of all bailouts.” I predict Bernanke and the Fed will team with central bankers all over the world to create the biggest coordinated economic rescue in world history. Call it QE3…call it “the mother of all bailouts”…call it “Stimulus Squared.” The name doesn’t matter. The dollars involved will be the headline grabber. Trillions of dollars of artificial money will be pumped into the system in a desperate attempt to save the world economy. This will be the biggest government intervention in world history. And as always- it will fail miserably.
• The short term result of more central bank financial fraud and intervention will be a rising stock market and relief the world over. Global media will hail Obama and the Fed as saviors. You’ll hear economic experts claim “We’ve saved the world’s economy.” But of course they will be wrong- again. Just as dozens of stimulus programs never “saved” Japan, but instead left her in a coma for two lost decades, and gave her the world’s worst debt problem. Soon we shall see the results of this arrogant and perverted thinking on a global scale- with a much worse economic crash, a shocking stock market decline, and a longer Great Depression.
• In response to this economic chaos, crisis and despair, as well as skyrocketing inflation and collapse of fiat currencies, the streets of America will resemble the anarchy of Greece. Gold will soon soar to $3000 per ounce, on the way to $6000 and higher.
• Obama will go down in history as the man who presided over the destruction of the U.S. economy and the unimaginable loss of our country’s AAA credit rating.
• Obama will lose in November 2012 by landslide proportions to either Texas Governor Rick Perry or New Jersey Governor Chris Christie. The Tea Party- the group Obama has demonized- will once again prove itself the most important force in U.S. politics.
• But it will all be too little, too late. The Obama Great Depression is here. We are in for perhaps the ugliest decade in world economic history.

Hopefully we will learn important lessons from this painful episode:

Socialism always sounds sexy, until your economy collapses and your government runs out of other people’s money. It’s always the same ending.

You can’t put a “community activist” who has never run a business, created a job, or made a payroll, and has only one talent- reading teleprompters- in charge of the world’s biggest economy. This story was always going to end badly. That one was easy to predict.

A few examples of taxpayer waste that Bondi should be focusing on:

• State-funded Daytona State College, Florida A&M University, Edison State College, and Miami-Dade College all currently face losing their accreditation due to issues ranging from low performance standards to admitting students without required courses to employing too few professors.

• Florida’s biggest state universities are under fire for rampant abuses within their athletic programs.  Numerous Florida State University athletic teams have been forced to vacate wins due to academic misconduct, while University of Miami athletes have been discovered accepting illegal gifts and money.  The University of Central Florida is also under investigation for recruiting misconduct.

• The Florida state college corruption extends all the way up to state elected officials; former Florida House Speaker Ray Sansom came under fire for securing funding for a building at Northwest Florida State College that was in fact an airport hangar for political donors’ private jets.

Sounds like enough material for some high-profile state investigations, right?  Actually, Attorney General Bondi is focusing her government investigation on a handful of small, for-profit schools.  The charges against the schools largely revolve around allegedly false claims used by recruiters leading to enrollment of students who were under-qualified and/or unable to repay their loans upon completion.

Could it be that Bondi and others, including federal regulators, are attacking for-profit colleges chiefly because they have taken a piece of the higher education pie in recent years that was traditionally serviced by state-run community colleges and vocational schools?  The fervor with which state officials in Florida, Kentucky, Texas, and other states are going after for-profit schools suggests motivation beyond the desire to prevent a few gullible students from falling for glitzy ad campaigns.

At the federal level, the Department of Education’s proposed ‘Gainful Employment’ rule would create new narrow metrics to define “gainful employment” based on student debt-to-income levels and loan repayment rates.

What the DOE’s formulaic approach is missing is that these institutions serve student communities with significant risk factors such as low incomes, full-time employment, and delayed enrollment which adversely impact degree attainment and account for their having a higher loan default rate than less inclusive institutions.  Even with these challenges, the fact remains that for-profit colleges have a better record of graduating low-income and minority populations than public institutions and private, not-for-profit schools, at a substantially lower total government and taxpayer cost.

To all of the 63,239,109 citizens who voted against Kerry’s bid to be president in 2004, I thank you.  One weekend of this man was bad enough.  Only one driven by blind partisanship could blame the Tea Party for a downgrade that was, as economics professor Steve Horowitz rightly pointed out: “50 to 75 years in the making.  Us spending beyond our means, trying to do things we simply can’t do, and not having the revenues to support that spending. Spending that just shouldn’t be there in the first place.”  Indeed, the moment the New Deal kicked in, the clock started ticking.  S&P’s message was clear.  Welfare statism, the kind of pay-as-you go ponzi schemes masked as social safety nets that John Kerry pines for, is a fool’s bargain.  Ask Europe.

How dare Kerry deride representatives for following through with their commitments to their electorate?  The sweep of the House for the GOP in 2010 was as clear a mandate as can be offered by the American public that the reckless spending had to stop—a mandate to which the Tea Party representatives especially remained faithful.  They were sent to Washington to stop the out-of-control spending bus cold.  The entrenched interests like Kerry wanted the bus to continue heading off the cliff at 60 mph.  Yet, because the Tea Partiers did not want to “compromise” and slow the bus down to 30 mph they were labeled “extremists.”  They understand what Europe is learning.  The nanny state experiment that has lasted for a mere three generations is already collapsing under the weight of mathematics as so cleverly encapsulated in Margaret Thatcher’s famous quote…“you eventually run out of other people’s money.”

Only in Washington and the liberal media would the desire to halt clearly reckless spending and head off crippling deficits down the road through fiscal discipline rather than more public confiscation be labeled “extreme.”  It just shows how dependent large segments of the population, and the politicians who serve them so they may continue to serve themselves, have become on the ever-expanding big government model…as good a reason as any to put the breaks it once and for all, before it takes us all over the edge.

Still, with such obvious peril before us, how is it we cannot move forward constructively?  One clue is the make-up of Congress itself. As so astutely noted by astrophysicist Dr. Neil deGrasse Tyson on Bill Maher’s Real Time of all places, 57% of senators and 38% of House members cite “law” as their profession.   Much of our governing body has been trained not to run organizations, as in business, or solve problems, as in the physical sciences, but rather to win arguments…often regardless of the facts.  It’s like a debate team where you do not know if you are on the pro or the con position of the issue at hand until you are assigned and then must argue accordingly.   This is why senators Barack Obama, Joe Biden, Harry Reid, and, ahem, John Kerry (all attorneys) could  vote against an increase in the debt ceiling in 2006 and then so deftly turn a semi-circle and demonize those same votes cast by some on the GOP just five years later.  Their clarion calls of GOP “hostage-taking” of the debt ceiling debate today is nothing short of bare-naked hypocrisy, and they know it.

When freshman senator Marco Rubio (R-FL) made this very point on the Senate floor, he was challenged by John Kerry himself, who offered revealing words to the effect that, well, those prominent Democrats knew their votes didn’t matter so we shouldn’t pay too much attention.  Their votes were “symbolic” he said.  But what if their votes had mattered?  What if one of the 48 Democrats who voted against raising the debt ceiling then had to actually cast the deciding vote?  What if, asked Rubio, senator Obama—or Kerry for that matter—had had his way?  I wonder, would he have still voted to freeze the debt ceiling?  That’s rather “extreme” is it not?

John Kerry is the poster-child for why Washington has fallen down the rabbit hole.  He is the richest man in Congress; he made his money the old-fashioned way…he married it.  He is a man who’s been on Capitol Hill since I was in high school.  Kerry is so deeply immersed in the game of politics, so detached from the real world we live in, that he is astoundingly blind to just how cynical his “this-is-the-way-it’s-done-in-this-town” logic of his reply to Rubio looks to the rest of us…or to a freshman senator who came there to do something more than be something.  Either raising the debt limit shows a lack of leadership (Democrats 2006) or it’s economic statesmanship (Democrats 2011).   It cannot be both.  Games, games, and more games.  Enough already!

Even with all this said, to my knowledge no one on Meet The Press even bothered to point out to the incensed Kerry that  95 Democrats in the House voted against raising the debt ceiling versus 66 Republicans, and 29 Democratic senators also opposed it.   Maybe next time.

A final thought: To those immersed in government this demand for deeper cuts reeks of stubborn, even dangerous naiveté.  But this is not an empty platitude for we in the private sector must live this paradigm every day.  When you run a business and deal with a closed system of revenues that cannot be raised on a whim through either taxation or the printing press, you have to look at the spending side of the ledger.  One would be amazed at how creative he/she can be, how suddenly unnecessary once untouchable expenditures become, when one’s back is to the wall.  That is the experience that running a business can provide—experience that all too few in Washington have.  Sure, sometimes the cuts you make, be they salaries, personnel, supplies, downsizing, shelving expansion plans, etc. hurt bad.  But that is the discipline that only true capitalism (not too-big-to-fail cronyism) imposes upon its participants.  In our world, the decisions one makes have a real impact on his/her organization; thus do they require far more courage and integrity than do  merely casting  “symbolic” votes to cynically advance a political career.  If this type of real courage is now defined as “extremism” then I’ll trust my country’s future to a Tea Party extremist over a five-term Massachusetts idle rich “statesman” any day.