Way back in 1987, during our last recession, the Fed took steps to bring the U.S. economy out of the doldrums. Those steps led directly to the current global recession.

Credit was “liberalized,” meaning that banks could lower their standards for who they loaned money to: businesses, foreign governments, brokerage firms, and other banks. High risk projects and investments entered the picture, and many banks poured money into the “tiger economies” of Asia and emerging markets in Latin America, Russia and Eastern Europe. Today, the crisis in Russia is a good example of just how risky those investments were.

In the early 1990s, during Boris Yeltsin’s first term in office, he privatized a large number of state-owned industries: mining concerns, oil and natural gas companies, utilities, the beverage alcohol industry, etc. These companies were bought up by the only folks in the former Soviet Republics who had money and were considered “reliable” credit risks: ex-Communist party members and apparatchiks. These were the same folks who managed state firms during the Soviet era–or “mismanaged,” since most managers of state-run companies drained cash out of them to maintain their dachas, private cars, and tickets to the Bolshoi. Well-schooled in corruption, these former apparatchiks saw the newly deregulated Russian economy as a profiteering free-for-all, and naturally snapped up controlling interests in privatized companies at bargain prices.

Before the Russian government offered these assets for sale, they stripped bad loans off the books and assumed the debt burden of these companies. They privatized the assets, but nationalized the debts. These old debts from the Soviet era make up a large part of the current foreign debt load weighing down the Russian government.

After buying controlling interests in these assets with loans from Russian banks, the apparatchiks went on to borrow as much cash as they could from western banks (mostly German and Swiss) in order to “expand” the businesses. This was supposed to fuel Russian economic growth, provide jobs for workers laid off from state industries, and get the Russian stock market off to a nice start. Instead of putting the cash into expanding the companies, however, Russian entrepreneurs invested it in risky developments, the Russian stock market, derivatives, and foreign investments. Much of the cash was funneled into accounts in off-shore banks in the Middle East and the Carribean. Having learned during the Soviet era how to keep two sets of books–the real ones and the ones for the state auditors–these managers were able to hide the theft for a long time. But, as the Asian financial crisis closed in, commodity prices fell, the ranks of unemployed workers swelled, and it became obvious that the money had disappeared: employees had not been paid for a long time. Strikes ensued, factories ceased producing goods for want of raw materials, miners left the mines, oil workers walked off the job, and the economy ground to a halt. The crisis hit home.

Earlier this year, the Russian government accepted a $22 billion bailout package from the IMF. The first installment was paid out in July but, instead of being used to cover Russia’s short term debt payments, the government used it to prop up the ruble just long enough for Russian entrepreneurs to get their cash out of the country. The first installment of the bailout money went directly into the pockets of corrupt businessmen, and now the IMF has refused to give the Russian government the second installment until it outlines a clear plan for the economy that adheres to strict IMF doctrine. Of course, it was IMF-style privatizations that brought on the crisis in the first place.

The new Russian Prime Minister Yevgeny Primakov has an impossible task. On one side is a population of people who can’t afford to buy food, who are just getting by on home-grown vegetables and barter. With inflation that will top out at around 300 percent by the end of this year, it’s going to be the roughest winter in Russia in decades. Right now, the population is demanding two things: that the government pay their back salaries no matter what it takes, and that Yeltsin and Co. abandon all IMF economic “reform” policies. On the other side is the IMF and that desperately-needed second installment that Russia has to have in order to pay its workers and cover its long-term debt payments. Stuck between a rock and a hard place, the Yeltsin government is near collapse. In the meantime, regional governors are taking matters into their own hands and instituting economic policies of their own. It’s only a matter of time before one of these governors decides he could do a better job at running the country; Alexander Lebed, governor of Siberia, has already demanded that Yeltsin resign.

It’s important to understand that this scenario is not unique to Russia. Gangster-style economics goes hand-in-hand with capitalism all over the globe. South Korea has its chaebols (huge family-owned corporations) that have survived on political nepotism and graft. The Suharto family not only ran Indonesia, but they also commandeered huge chunks of government funds to start whatever business projects they wanted. Japan, widely considered the economic engine and main stabilizing force of the region, has been rocked by a long string of banking, industrial, and political scandals involving payoffs, kick-backs, and bribery. Favoritism, corruption, theft, and welfare for the rich are all main characteristics of unregulated global capitalism.

While the Russian collapse has proved that it’s not simply an “Asian” phenomenon, as racist western economists have claimed over the past year, one recent development proves that the U.S. is also part of the global gangster economy. Last Wednesday, top officials of 16 of the world’s largest banks and brokerage firms spent more than $3.5 billion to shore up a single U.S. mutual fund. The Long-Term Capital Management Fund–a “hedge” fund–had invested in $90 billion worth of bond-based derivatives that are now mostly worthless. The fund only had about $2.3 billion in real assets to back up those ethereal investments. Essentially, in a scramble to save the economies of Europe and the U.S., 16 banks bought up large portions of nothing.

To top it all off, this hedge fund is not unique, nor is it some esoteric type of investment run by marginal characters. Investors in the fund include major banks, brokerage firms, and wealthy investors. The fund itself was formed and managed by three former Salomon Brothers employees and two Nobel-prize winning economists, Robert H. Merton and Myron S. Scholes. In short, it’s a black hole that sits squarely in the center of the western financial system. If it or a similar entity goes down, then the crisis will hit home here.