I'm not so arrogant as to believe that I know the perfect solution to our economic problems. Anyone that tells you they know is either a fool or a liar.

However, that doesn't mean we can't discover where we went wrong once you apply a little logic and data to the situation.
For instance, if you realize you have taken a wrong turn, it makes more sense to turn around and go back to the corner where the mistake was made, than it does to drive in a general direction and hope you can find your way home.

When it comes to the economy, its pretty easy to discover when the wrong turn was made - 1972.

1972 was a mildly interesting year. We had the Watergate break-in, the end of American involvement in the Vietnam War, Bloody Sunday in Northern Ireland, The Godfather came out in theaters, and the Rolling Stones released Exile on Main Street.

In contrast, 1972 was a paradigm shift in the world of economics.
September 1972 was the high-water mark for Real Weekly Earnings for the American worker. American paychecks would shrink from then on.
Wealth inequality in America was still near historic lows. Now it's worse than countries like Kenya and Philippines.

The year also marked the first full year of trade and current account deficits in memory. This trend would accelerate in coming decades and become the source of global financial imbalances.

The seismic shifts came from two sources: the end of the Bretton Woods global financial system, and the downfall of the American School of economics.

Bretton Woods

"The economic health of every country is a proper matter of concern to all its neighbors, near and far."
- FDR at the opening of Bretton Woods, 1944

The Bretton Woods system, set up in 1944 for the purpose of preventing the economic chaos of the 1930's that led to World War II, had been in trouble since the London Gold Pool was established in 1961. The collapse of the Gold Pool in 1968 meant that Bretton-Woods was on borrowed time.
On August 15, 1971, Nixon closed the gold window, thus dealing a mortal blow to all fixed rate currencies in the world. The dollar was devalued and other temporary international agreements were made, but 1972 saw one nation after another leave the currency regime. In February 1973, the Bretton Woods currency exchange markets closed.
The downfall of Bretton Woods opened the window to currency speculation, which meant new financial products - derivatives.

Before 1972 there were futures and options, mostly for commodities, but Currency Swap derivatives and Interest Rate Swap derivatives were completely unheard of. Now they are the two dominant flavors in the OTC derivatives market.
Under the Bretton Woods system currencies were stable and predictable, therefore there was almost no market for currency speculation. Price inflation was relatively low because monetary inflation was relatively low. The reason was because Bretton Woods had built-in adjustment mechanisms.

In the world of floating currencies, hedge funds and investment banks make huge profits by launching coordinated attacks (using derivatives as their weapons) against small nations in order to crash their currencies and send their economies into recession.
To protect against these attacks, exporting nations artificially suppress their currencies in order to build up massive cash reserves that could have been better spent helping out their citizens. These huge cash reserve and manipulated currencies serve as global destabilizing forces.
In the post-Bretton Woods world, nations are free to print as much money as they want. This leads to bubbles and busts, that often serve as mechanisms that transfer wealth from the poor to the rich.

Bretton Woods was far from perfect. For instance, unlike the gold standard which had the price specie flow mechanism, Bretton Woods didn't impose equal restraint on all its members. Thus, because of the costs of the Vietnam War, the United States spent the Bretton Woods system into bankruptcy.
That wasn't the only thing wrong with the Bretton Woods system, but it was the reason why it died.

Does that mean we should go back to exactly the gold-dollar standard of Bretton Woods with the pegged currencies? Probably not. But you can't overlook 1) the Bretton Woods era saw one of the greatest global economic expansions in human history, 2) some of the worst abuses by large investment banks and hedge funds would vanish if a new Bretton Woods system was implemented, and 3) the increasingly savage boom-and-bust cycles around the world would be tamed under a new Bretton Woods system.

Regulating casino capitalism

"As for those who persist in usury, they incur Hell, wherein they abide forever."
- Al-Baqarah 2:275

Bretton Woods didn't collapse overnight. It took more than a decade for all of its defects to undermine it. The financial industry didn't immediately transform into the blood-sucking, parasitic monster it has become today. The end of Bretton Woods merely opened up that window. Deregulation was still required.
That deregulation didn't happen in one quick act. It happened in three separate parts that took place over the course of 20 years.

Did you know that Bank of America, J.P. Morgan Chase, and Wells Fargo are currently in violation of federal banking law, but the government won't enforce that law?
The law in question is the Riegle–Neal Interstate Banking and Branching Efficiency Act of 1994, passed by a Democratic Congress and signed by a Democratic President.

Prior to passage of this act, banks were restricted from operating widespread, multi-state branching networks. Plus, many states had their own restrictions on banks. These restrictions dated all the way back to the National Bank Act of 1864. The result was a nation full of relatively small banks. The idea was that competitive equality was good for the industry. Local banks invested their money locally, while large banks drained funds from rural areas and directed them to large cities.

The Riegle-Neal Act deregulated this limitation on the financial industry. Now banks could go national almost without restriction. The result has been a dramatic decrease in the number of small banks in the country.
However, there was one caveat built into the bill - no single bank could have more than 10% of all the deposits in the country.

The 10% limit remained in effect for a little over a decade. When the crisis struck in 2008, the Treasury and Fed encouraged the consolidation of the banking industry between the weak and the strong. The 10 percent cap became the victim of the crisis in the same way that laws against torture were also ignored.

One of the primary means for Wall Street banks to bring in revenue these days is charging fees for pretty much everything. They will haul in 38 Billion dollars on overdraft fees this year, with a median APR of 4,547%. That's enough to make a loan shark blush. They will rake in another $48 Billion from credit card swipe fees.
The best example of predation by the banks is in the form of payday loans. The major banks have always been silent owners behind this loan shark filth that suck the life blood out of the poorest, but lately they have come out into the open.

A few of the nation's largest banks -- including Minneapolis-based U.S. Bancorp, Wells Fargo & Co. of San Francisco, and Fifth Third Bancorp of Cincinnati -- are now marketing payday loan-type products, with triple-digit interest rates, to their checking account customers.

Would it surprise you that as recently as 1979 this sort of usury was regulated and illegal? Would it also surprise you that it was a Democratic Congress and a Democratic President that revoked those laws?

The law in question was the Depository Institution Deregulation and Monetary Control Act of 1980. William Greider explained in his book Secrets of the Temple, "Passage of the Monetary Control Act had very little to do with how effectively the Federal Reserve could control the supply of money. It's purpose was to protect the Federal Reserve's political base."
The law did a lot of things such as requiring banks to operate under the Federal Reserve umbrella (commercial banks were leaving the Fed at the time), gave banks more opportunities to merge and consolidate, raised deposit insurance levels, and, oh yeah, allowed S&L's to speculate in commercial real estate. But it also did one other thing that seems very relevant today.

Eliminates State mortgage usury ceilings and restrictions on discount points, finance charges and other charges...

The most important part of the Glass-Steagall regulation of the New Deal was Regulation Q. This law regulated the amount of interest and fees that banks could charge for over 47 years.
The Monetary Control Act gutted Regulation Q, and all state usury laws were unilaterally suspended. The law was a political trade-off. The Federal Reserve became stronger at the banks expense, but the banks endorsed the law because they got the most prized gift of all - a free pass to prey on the most vulnerable in American society, and they got a multi-billion dollar tax cut to boot.
It seems rather ironic that the give-aways to the wealthy that Reagan and the Republicans of the 1980's were famous for started entirely with the Democrats.

"I think we will look back in 10 years' time and say we should not have done this but we did because we forgot the lessons of the past, and that that which is true in the 1930's is true in 2010. I wasn't around during the 1930's or the debate over Glass-Steagall. But I was here in the early 1980's when it was decided to allow the expansion of savings and loans. We have now decided in the name of modernization to forget the lessons of the past, of safety and of soundness."
- - Senator Byron L. Dorgan, Democrat of North Dakota, 1999

Much ink has been spilled over the demise of Glass-Steagall in 1999. While that was an important moment in the deregulation of the financial industry, it was hardly the most significant.
If we rolled financial deregulation back to 1972 it would force the break-up of the Too-Big-Too-Fail banks, thus eliminating the need for future taxpayer bailouts and the corrupting influence that Wall Street holds over Washington.

Just as important, we would no longer need the new credit card regulation that has gotten the banks so upset, because we would have Regulation Q again, which would immediately ban the loan shark practices that Wall Street can still get away with.

The American System

"Two systems are before the world;... One looks to increasing the necessity of commerce; the other to increasing the power to maintain it. One looks to underworking the Hindoo, and sinking the rest of the world to his level; the other to raising the standard of man throughout the world to our level. One looks to pauperism, ignorance, depopulation, and barbarism; the other to increasing wealth, comfort, intelligence, combination of action, and civilization. One looks towards universal war; the other towards universal peace. One is the English system; the other we may be proud to call the American system, for it is the only one ever devised the tendency of which was that of elevating while equalizing the condition of man throughout the world."
- Henry C. Carey, The Harmony of Interests

Most Americans aren't aware that America once had a national economic plan, and it existed from the days of President Lincoln to President Nixon in one form or another. During that 112 year period America grew from an agrarian, frontier nation, to the most mighty economic power the world had ever seen.
Obviously there had to be something good in that economic plan.

The roots of the American School of Economics go back to Alexander Hamilton, Friedrich List, and Henry Clay of the Whig Party.
The American School of Economics was far different from the dominant economic thought of today.

The key components of the American School directly confront, deny and refute the economic imperialism that the so-called "Free Trade" school championed then by England and imposed by means mostly foul upon Europe over the years. It rejects free trade by imposing a system of duties, tariffs and other measures designed to defend the nation against economic threats by foreign predators. It uses government-directed spending projects meant to provide the infrastructure necessary for individuals to develop into the highly-educated and highly-trained people capable of being the ambitious and enterprising productive people we are famous for being. It chartered a national bank, owned wholly by the government, that administered the lines of credit necessary to get all of this done and otherwise oversaw the monetary policy of the state- and thus remained utterly accountable to the people by way of Congress and the Presidency.

The American School of Economics also involved government support for the development of science and a public school system. Through this economic philosophy America set the standard in manufacturing, higher education, scientific research and development, finance, and general standard of living.

So what happened? Under President Nixon the decision was made to remove protective trade barrier and go to a Free Trade model in 1973.
According to The Myth of Free Trade by Dr. Ravi Batra:

"Unlike most of its trading partners, real wages in the United States have been tumbling since 1973, the first year of the country's switch to laissez-faire...Before 1973, the U.S. economy was more or less closed and self-reliant, so that efficiency gains in industry generated only a modest price fall, and real earnings soared for all Americans....Moreover, it turns out that 1973 was the first year in its entire history when the United States became an open economy with free trade.
"Since 1973 and free trade, the link between real wages and productivity was severed, where its commitment to free trade soared faster than domestic economic activity. Real wages for 80% of the labor force have been steadily shrinking in spite of rising productivity. Free trade skews the real value of manufactured goods, through cheaper foreign labor or weaker foreign currencies in relative prices, despite increased productivity and innovation, in turn creating a shrinking consumer base."

Trade barriers had been dropped a great deal under FDR, but they still existed for important industries all through the 1950's and 1960's. Also, where tariffs were dropped, a system of subsidies were put in place, while infrastructure spending was accelerated. This hybrid version of the American System ended with President Nixon.

"[They say] if you had not had the Protective Tariff things would be a little cheaper. Well, whether a thing is cheap or dear depends upon what we can earn by our daily labor. Free trade cheapens the product by cheapening the producer. Protection cheapens the product by elevating the producer. Under free trade the trader is the master and the producer the slave. Protection is but the law of nature, the law of self-preservation, of self-development, of securing the highest and best destiny of the race of man."
- President William McKinley

Besides adopting a free trade model, America has turned away from the other tenants of the American School of Economics. Specifically, it has neglected public infrastructure projects in the hope that privatization of public assets would do a more capable and efficient job. This strategy has also failed miserably.

The third leg of the American School of Economics was to create a financial infrastructure that would "use of sovereign powers for the regulation of credit to encourage the development of the economy, and to deter speculation."
In a trifecta, this too has been an utter failure.

The Allied victory led to the dominance of Anglo-American banking practice based on loans against property or income streams already in place. Because of this, today’s bank credit has become decoupled from capital formation, taking the form mainly of mortgage credit (80%), and loans secured by corporate stock (for mergers, acquisitions and corporate raids) as well as for speculation. The effect is to spur asset-price inflation on credit, in ways that benefit the few at the expense of the economy at large.

As we stand here today, the British System that Henry Carey warned about more than a century ago has become the dominant economic system in America and the world, and the results are exactly as he predicted.
The world has changed since 1972 and we can't go back to that point. However, ignoring and denying the mistakes that have been made in the last three decades is an even bigger crime. Instead of trying to modify and fix this failed system we are using today, we should instead try to modify and improve the successful system that we ditched for no good reason 38 years ago.