'Grundlovsstridig', 'begreber hentet fra en politistat'... Tuneserloven blev på Folketingets høring i går banket sønder og sammen af juridiske eksperter
Det bliver svært for regering-en og støttepartiet at få gennemført lovforslag 69 - også kaldet 'tuneserloven' - hvis ikke forslaget ændres på vigtige punkter.
Det kunne være en konklusion, efter at tre indbudte eksperter i en bemærkelsesværdig kontant tone i går formiddags i Landstingssalen punkt for punkt gennemgik lovforslaget om skrappere kontrol med udlændinge på tålt ophold. Men den konklusion køber Karsten Lauritzen (V), formanden for Integrationsudvalget, ikke nødvendigvis:
"For mig at se er der ikke kommet noget frem, som forhindrer, at vi skriver betænkning," som han sagde til Information efter høringen.
Juraprofessor Henning Koch fra Københavns Universitet var ellers usædvanlig direkte, da han som den første af tre indbudte eksperter gik på talerstolen:
"De indgreb, som lovforslaget vil medføre for udlændinge på tålt ophold, vil gøre, at der bliver tale om frihedsberøvelse," indledte Koch og henviste til statsretseksperten Alf Ross' værk om dansk forvaltningsret fra 1966.
Tre forhold skal ifølge Ross være opfyldt, for at et indgreb kan defineres som frihedsberøvelse: Der skal være påbud om ophold, der skal ske en eftersøgning, hvis påbuddet overtrædes, og endelig skal en overtrædelse straffes.
"Alle tre betingelser er til fulde opfyldt i L 69, hvor strafferammen for ikke at overholde en daglig meldepligt går helt op til et års fængsel," konkluderede Koch.
Grundlovsstridigt
Så nytter det ikke, fortsatte Koch, at Integrationsministeriet i lovbemærkningerne til L 69 "nærmest besværgende" skriver, at kontrolforanstaltningerne ikke må "have karakter af frihedsberøvelse. For enten er det frihedsberøvelse. Eller også er det ikke," sagde han.
Hvis udlændingemyndighederne vil administrere lovforslaget lige så strikt, som lovbemærkningerne lægger op til, så risikerer ministeren og hendes embedsmænd at handle grundlovsstridigt, mente Koch.
Efter et sus var gået gennem Landstingssalen, forklarede Koch, at lovbemærk-ningerne ikke omtaler en konkret begrundet fare som årsag til, at f.eks. tuneseren, der ifølge PET har haft mordplaner mod avistegner Kurt Westergaard, skal frihedsberøves. Og ifølge Koch er det ikke nok med en abstrakt henvisning til nationens sikkerhed. En fare skal altid være konkret begrundet, hvis den skal føre til frihedsberøvelse.
"Det bliver forfatningsmæssigt umuligt, når farebegrebet er abstrakt og går på en mulig risiko. Det er politistatens begrebsapparat, vi ser her," sagde professoren, hvorefter endnu et sus gik gennem salen.
Mens lovforslagets kritikere så mere og mere tilfredse ud, blev Kochs indlæg modtaget knap så entusiastisk af Dansk Folkepartis Martin Henriksen:
"Et meget ensidigt indlæg, blottet for refleksioner og overvejelser," lød hans karakteristik af indlægget, hvorefter Koch i sin slutreplik opsummerede sit eget synspunkt: "Retsstaten gælder også for udlændinge."
Den næste indbudte ekspert, generalsekretær for Advokatsamfundet Henrik Rothe, skulle belyse, om L 69 vil være lovgivning med tilbagevirkende kraft.
Nej, lød det kortfattede svar, der vil ikke være tale om tilbagevirkende kraft, for udlændinge bliver ikke med L 69 pålagt sanktioner bagud. Rothe hæftede sig derimod ved den motivforskydning, som lovforslaget indebærer. Når myndighederne skal vide, hvor en udlænding på tålt ophold befinder sig, er forklaringen i den gældende lov, at politiet skal kunne få fat i personen, hvis en udvisning uden risiko bliver mulig.
Men L 69 ændrer motivet til også at være præventivt: Den daglige meldepligt og påbuddet om at overnatte i Sandholm skal forhindre nye forbrydelser, f.eks. mod en avistegner i Århus.
"Det minder ganske meget om de begrundelser, vi hører i retten, når en person idømmes varetægtsfængsling for at forebygge yderligere kriminalitet," forklarede Rothe, hvis samlede bedømmelse var, at L 69 uden tvivl vil indebære frihedsberøvelse. "Og derfor er jeg enig i, at det er nødvendigt med domstolskontrol i hvert enkelt tilfælde," sagde han.
Træk forslaget tilbage
Sidste ekspert var lektor i menneskerettigheder Jonas Christoffersen fra Københavns Universitet. Han indledte med at kalde L 69 for en "usædvanlig sjusket og dårlig lovgivning", og hans konklusion var entydig:
Lad være med at vedtage lovforslaget. De gældende regler er fuldt tilstrækkelige til at håndtere de udfordring-er, udlændinge på tålt ophold kan medføre. Afvent i stedet den arbejdsgruppe, som er nedsat for at belyse det komplicerede område.
"I dag er det en festdag, hvor vi fejrer 60-året for menneskerettighederne. Benyt dagen til at tænke over, hvad lovgivningsmagten er på vej ud i," opfordrede han.
Christoffersen sammenlignede også L 69 med den første terrorpakke fra 2002. Dengang ville et familieliv betyde, at en tålt udlænding ikke blev pålagt at tage fast ophold i Sandholm, men det skal udlændingene nu ifølge L 69. Efter fremsættelsen af L 69 er der dog kommet et svar fra Justitsministeriet, hvorefter tålte udlændinge har ret til at være sammen med deres familie i weekenden og til fødselsdage. Ellers vil opholdspåbuddet i Sandholm udgøre en krænkelse af deres menneskerettigheder.
"Så vi har én fortolkning i 2002, en anden i L 69 og nu en tredje i Justitsministeriets svar. Der er noget, der skurrer," mente han.
I fremtiden skal myndighederne hver halve år lave en konkret afvejning af proprotionalitetshensynet for hver enkelt udlænding på tålt ophold, hvis de internationale konventioner skal overholdes, står der endvidere i lovbemærkningerne til L 69.
"Så måske er L 69 stor ståhej for ingenting. Måske fører lovforslaget i virkeligheden til en lempelse af vilkårene for udlændinge på tålt ophold," forudså Christoffersen, der derefter stillede et drilsk spørgsmål til politikerne i salen: Når Justitsministeriet i dag vurderer, at udlændinge på tålt ophold skal have ret til weekendophold med familien, er det så en ny erkendelse? Menneskerettighederne er ikke ændret siden 2002, så hvis myndighederne har administreret efter en anden opfattelse, har man så krænket menneskerettighederne for udlændinge på tålt ophold i seks år?
Dét burde politikerne se at få undersøgt, lød opfordringen fra Christoffersen, en opfordring som straks blev grebet af flere af de tilstedeværende retspolitikere.
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Source URL: http://www.information.dk/176762
torsdag den 25. december 2008
tuneserloven: Klumme af advokat og lektor Jacob Mchangama
Jacob Mchangama skriver om retsstatsprincipper, som overtrædes med udvisninger, der ikke har været for en dommer.
Den seneste tids begivenheder vedrørende to tuneseres angivelige planer om at myrde Kurt Westergaard samt den efterfølgende beslutning om at udvise de to har bekræftet en sørgelig tendens i dansk politisk kultur: nemlig at frihedsrettigheder alene bliver påberåbt, når det passer ind i henholdsvis den værdipolitiske højre- og venstrefløjs politiske kram.
Det er velkendt, at store dele af venstrefløjen under Muhammed-krisen søgte at præsentere sagen, som om den ikke havde med ytringsfrihed at gøre på trods af det faktum, at udfordring af religiøse symboler og dogmer traditionelt har været en af ytringsfrihedens vigtigste funktioner i kampen for samfund, hvor borgerne er frie til at tænke og handle uafhængigt af religiøse autoriteter.
Da PET afslørede det formodede mordkomplot mod Kurt Westergaard, og konsekvenserne af ikke at støtte op om en robust ytringsfrihed blev klar, måtte de, der på venstrefløjen havde benægtet, at Muhammedkrisen handlede om ytringsfrihed, enten forsvinde i debatten eller krybe til korset og nødtvungent støtte Jyllands-Posten og Kurt Westergaard på trods af tidligere fordømmelser.
Samtidig må man undres over, hvorfor venstrefløjen pludselig finder det helt principielt at forsvare retssikkerhedsgarantier i forhold til de to terrormistænkte, når man ikke fandt ytringsfriheden værd at forsvare for så vidt angår Jyllands-Posten. Angiveligt at ville slå en tegner ihjel er vel næppe den form for "ansvarlighed" som venstrefløjen anså som en nødvendig forudsætning for at kunne påberåbe sig ytringsfriheden under Muhammed-krisen.
Under Muhammedkrisen var den værdipolitiske højrefløj - konservative som liberale - til gengæld forenet i et forsvar for det frie ord og den frie tanke. Frihedsrettighederne var ikke til salg.
Men når det kommer til kampen mod terror, er det ofte fra borgerligt - som oftest national-konservativt - hold, man hører krav om indskrænkning af frihedsrettigheder. I sagen vedrørende de to tunesere har mange borgerlige politikere og debattører således udtrykt støtte til den nuværende ordning, hvor administrative udvisninger ikke er underlagt en vis form for domstolskontrol. Det er bemærkelsesværdigt, at den principfasthed vedrørende frihedsrettigheder, som gjaldt under Muhammed-krisen, ikke genfindes, når det drejer sig om terrorlovgivning.
Et ofte hørt argument fra national-konservativt hold - herunder fra Søren Pind, Kai Sørlander og Morten Messerschmidt - er, at det er legitimt at forskelsbehandle mellem danske statsborgere og udlændinge. Også når det kommer til retssikkerhedsgarantier. Ingen fortalere for, at de udviste tunesere skal have prøvet deres sag, har så vidt ses benægtet, at der kan forskelsbehandles mellem danske statsborgere og udlændinge. Det er således helt naturligt, at de to tunesere skal udvises, såfremt der er hold i PETs anklager. En sanktion man naturligvis ikke kan anvende overfor danske statsborgere. Endvidere er det også legitimt at forskelsbehandle, når det kommer til nydelse af offentlige ydelser, stemmeret m.v. Men når det kommer til basale retssikkerhedsgarantier, er det et skråplan at forskelsbehandle på basis af nationalitet, særligt når det kommer til så alvorlige anklager som terrorisme.
At retssikkerhedsgarantier og frihedsrettigheder gælder for såvel statsborgere som udlændinge er ikke - som ellers ofte påstået af national-konservative - udtryk for multikulturalisme og kulturrelativisme, der undergraver nationalstaten. Det ville national-konservative kunne forvisse sig, om hvis de besværede sig med at læse Danmarks Riges Grundlov. Heraf fremgår det udtrykkeligt, at en række af frihedsrettighederne herunder § 71, stk. 3 (grundlovsforhøret), § 72 (boligens ukrænkelighed), § 73 (beskyttelsen af ejendomsretten), § 77 (ytringsfrihed) og § 78, stk. 2 (foreningsfrihed) ikke diskriminerer mellem danske statsborgere og udlændinge, men omfatter enhver. Det samme følger af de frihedsrettigheder og processuelle retsgarantier, som er indeholdt i den Europæiske Menneskerettighedskonvention, der er inkorporeret i dansk ret. Dette ligebehandlingsprincip afspejler et frihedsideal, hvis rødder kan spores langt tilbage i historien.
I den amerikanske uafhængighedserklæring hedder det f.eks., at "at alle mennesker er skabt lige, og at de af deres Skaber har fået visse umistelige rettigheder" - ikke alle amerikanere. Dette frihedsideal om lighed for loven for så vidt angår fundamentale frihedsrettigheder udgør et af kerneprincipperne i det liberale demokrati, hvis overlegenhed i forhold til andre regeringsformer for så vidt angår personlig frihed og velstand er åbenlys. Det er derfor dybt ironisk, at rationalet bag indskrænkning af fundamentale frihedsrettigheder så ofte er ønsket om at bevare egen kultur og demokratiske styreform. De, der ønsker at forskelsbehandle på basis af nationalitet for så vidt angår frihedsrettigheder, skylder således at forklare, hvor langt de er villige til at gå i sådan forskelsbehandling, og hvorledes denne form for forskelsbehandling er i overensstemmelse med den demokratiske styreform, de påstår at beskytte.
Det konkrete tilfælde med de to tunesere, hvor en indgribende administrativ beslutning truffet på baggrund af informationer, der ikke er tilgængelige for adressaten, er undtaget fra domstolsprøvelse, er et eksempel på skridt, der ikke er en retsstat værdig. Den udøvende magts adgang til at træffe indgribende beslutninger på diskretionær basis har alle dage været et onde, som retsstatsprincippet ved dets "checks and balances" skulle modvirke, herunder ved domstolskontrol. Dette kan sagtens lade sig gøre uden dermed at sætte den udøvende magts beslutningskompetence ud af kraft.
Det er således svært at se, at der kan være saglige argumenter mod at lade et uafhængigt organ, hvis medlemmer er sikkerhedsclearede tage stilling til PETs beviser. Et sådant organ vil sandsynligvis lægge afgørende vægt på PETs beviser, og kun i tilfælde hvor beviserne er helt åbenbart utilstrækkelige underkende den ansvarlige ministers beslutning. Dette ville f.eks være i overensstemmelse med den Europæiske Menneskerettighedsdomstols praksis i sager om national sikkerhed. Dermed bevares (i) PETs helt berettigede interesse i hemmeligholdelse af dets informationer, (ii) ministerens adgang til hurtigt at træffe foranstaltninger mod personer der søger at underminere nationens sikkerhed samt (iii) hensynet til retssikkerheden.
Det er i den forbindelse værd at bemærke, at Frankrig - et land der af mange anses for at have den mest effektive anti-terrorbekæmpelse i Europa - langt oftere end herhjemme benytter muligheden for at udvise udlændinge mistænkt for terror. Men franskmændene tillader en vis domstolsprøvelse af sådanne udvisninger. Storbritannien - der er gået ganske vidt i bekæmpelsen af terror - har oprettet et særligt uafhængigt organ, der tager stilling til administrative udvisninger, også udvisninger baseret på hensynet til national sikkerhed.
Skåret ind til benet synes det national-konservative argument for at nægte prøvelse i sager om administrativ udvisning at bunde i en dybtfølt modvilje mod at indtage en holdning, der kunne opfattes som støtte til egne ideologiske hovedmodstandere. Præcis på samme måde som mange på venstrefløjen ikke kunne få sig selv til at anerkende ytringsfriheden, da "den sorte avis" Jyllands-Posten benyttede sig af denne frihed i Muhammed-krisen. Men at insistere på uafhængig prøvelse af administrative udvisninger er ikke at støtte de to tunesere eller at udvise sympati for terrorisme. Ligesom man ikke behøver at abonnere på Jyllands-Posten, blot fordi man støtter avisens ret til at offentliggøre en række tegninger af Muhammed.
Tværtimod er det netop i situationer, hvor frihedsrettigheder og retsstatsprincipper omfatter dem, man er uenig med, at frihedsrettighederne skal stå deres prøve. Anerkender vi alene frihedsrettighederne i situationer, hvor de beskytter dem, vi sympatiserer med, er frihedsrettighederne intet værd, idet de dermed bliver ofre for den herskende politiske vilje og deres beskyttelse dermed bliver diskretionær. Eksemplerne på, at tømmermændene indfinder sig, når retsstatsprincipper bliver sat ud af kraft i en god sags tjeneste, er legio. Er vi f.eks. stolte af vores retsopgør efter besættelsen? Var interneringen af japanere under 2. verdenskrig og oprettelsen af Guantanamo efter 11. september 2001 højdepunkter i USA's historie?
Vi lever ikke i en politistat i Danmark og er heller ikke på vej mod en. Men der er intet automatisk ved vores demokrati og frihedsrettigheder, og den frihed, det har taget århundreder at sikre, kan mistes på et øjeblik. Vi bør derfor værne om vores frihedsrettigheder, selv når det ikke er politisk opportunt, og når vores instinktive menneskelige reaktion er, at de, der påberåber sig frihedsrettighederne, egentlig ikke fortjener deres beskyttelse.
Jacob Mchangama er advokat og ekstern lektor i internationale menneskerettigheder.
kilde: http://www.180grader.dk/klumme/H_jre_og_venstres_automatreaktioner_printer.php
Den seneste tids begivenheder vedrørende to tuneseres angivelige planer om at myrde Kurt Westergaard samt den efterfølgende beslutning om at udvise de to har bekræftet en sørgelig tendens i dansk politisk kultur: nemlig at frihedsrettigheder alene bliver påberåbt, når det passer ind i henholdsvis den værdipolitiske højre- og venstrefløjs politiske kram.
Det er velkendt, at store dele af venstrefløjen under Muhammed-krisen søgte at præsentere sagen, som om den ikke havde med ytringsfrihed at gøre på trods af det faktum, at udfordring af religiøse symboler og dogmer traditionelt har været en af ytringsfrihedens vigtigste funktioner i kampen for samfund, hvor borgerne er frie til at tænke og handle uafhængigt af religiøse autoriteter.
Da PET afslørede det formodede mordkomplot mod Kurt Westergaard, og konsekvenserne af ikke at støtte op om en robust ytringsfrihed blev klar, måtte de, der på venstrefløjen havde benægtet, at Muhammedkrisen handlede om ytringsfrihed, enten forsvinde i debatten eller krybe til korset og nødtvungent støtte Jyllands-Posten og Kurt Westergaard på trods af tidligere fordømmelser.
Samtidig må man undres over, hvorfor venstrefløjen pludselig finder det helt principielt at forsvare retssikkerhedsgarantier i forhold til de to terrormistænkte, når man ikke fandt ytringsfriheden værd at forsvare for så vidt angår Jyllands-Posten. Angiveligt at ville slå en tegner ihjel er vel næppe den form for "ansvarlighed" som venstrefløjen anså som en nødvendig forudsætning for at kunne påberåbe sig ytringsfriheden under Muhammed-krisen.
Under Muhammedkrisen var den værdipolitiske højrefløj - konservative som liberale - til gengæld forenet i et forsvar for det frie ord og den frie tanke. Frihedsrettighederne var ikke til salg.
Men når det kommer til kampen mod terror, er det ofte fra borgerligt - som oftest national-konservativt - hold, man hører krav om indskrænkning af frihedsrettigheder. I sagen vedrørende de to tunesere har mange borgerlige politikere og debattører således udtrykt støtte til den nuværende ordning, hvor administrative udvisninger ikke er underlagt en vis form for domstolskontrol. Det er bemærkelsesværdigt, at den principfasthed vedrørende frihedsrettigheder, som gjaldt under Muhammed-krisen, ikke genfindes, når det drejer sig om terrorlovgivning.
Et ofte hørt argument fra national-konservativt hold - herunder fra Søren Pind, Kai Sørlander og Morten Messerschmidt - er, at det er legitimt at forskelsbehandle mellem danske statsborgere og udlændinge. Også når det kommer til retssikkerhedsgarantier. Ingen fortalere for, at de udviste tunesere skal have prøvet deres sag, har så vidt ses benægtet, at der kan forskelsbehandles mellem danske statsborgere og udlændinge. Det er således helt naturligt, at de to tunesere skal udvises, såfremt der er hold i PETs anklager. En sanktion man naturligvis ikke kan anvende overfor danske statsborgere. Endvidere er det også legitimt at forskelsbehandle, når det kommer til nydelse af offentlige ydelser, stemmeret m.v. Men når det kommer til basale retssikkerhedsgarantier, er det et skråplan at forskelsbehandle på basis af nationalitet, særligt når det kommer til så alvorlige anklager som terrorisme.
At retssikkerhedsgarantier og frihedsrettigheder gælder for såvel statsborgere som udlændinge er ikke - som ellers ofte påstået af national-konservative - udtryk for multikulturalisme og kulturrelativisme, der undergraver nationalstaten. Det ville national-konservative kunne forvisse sig, om hvis de besværede sig med at læse Danmarks Riges Grundlov. Heraf fremgår det udtrykkeligt, at en række af frihedsrettighederne herunder § 71, stk. 3 (grundlovsforhøret), § 72 (boligens ukrænkelighed), § 73 (beskyttelsen af ejendomsretten), § 77 (ytringsfrihed) og § 78, stk. 2 (foreningsfrihed) ikke diskriminerer mellem danske statsborgere og udlændinge, men omfatter enhver. Det samme følger af de frihedsrettigheder og processuelle retsgarantier, som er indeholdt i den Europæiske Menneskerettighedskonvention, der er inkorporeret i dansk ret. Dette ligebehandlingsprincip afspejler et frihedsideal, hvis rødder kan spores langt tilbage i historien.
I den amerikanske uafhængighedserklæring hedder det f.eks., at "at alle mennesker er skabt lige, og at de af deres Skaber har fået visse umistelige rettigheder" - ikke alle amerikanere. Dette frihedsideal om lighed for loven for så vidt angår fundamentale frihedsrettigheder udgør et af kerneprincipperne i det liberale demokrati, hvis overlegenhed i forhold til andre regeringsformer for så vidt angår personlig frihed og velstand er åbenlys. Det er derfor dybt ironisk, at rationalet bag indskrænkning af fundamentale frihedsrettigheder så ofte er ønsket om at bevare egen kultur og demokratiske styreform. De, der ønsker at forskelsbehandle på basis af nationalitet for så vidt angår frihedsrettigheder, skylder således at forklare, hvor langt de er villige til at gå i sådan forskelsbehandling, og hvorledes denne form for forskelsbehandling er i overensstemmelse med den demokratiske styreform, de påstår at beskytte.
Det konkrete tilfælde med de to tunesere, hvor en indgribende administrativ beslutning truffet på baggrund af informationer, der ikke er tilgængelige for adressaten, er undtaget fra domstolsprøvelse, er et eksempel på skridt, der ikke er en retsstat værdig. Den udøvende magts adgang til at træffe indgribende beslutninger på diskretionær basis har alle dage været et onde, som retsstatsprincippet ved dets "checks and balances" skulle modvirke, herunder ved domstolskontrol. Dette kan sagtens lade sig gøre uden dermed at sætte den udøvende magts beslutningskompetence ud af kraft.
Det er således svært at se, at der kan være saglige argumenter mod at lade et uafhængigt organ, hvis medlemmer er sikkerhedsclearede tage stilling til PETs beviser. Et sådant organ vil sandsynligvis lægge afgørende vægt på PETs beviser, og kun i tilfælde hvor beviserne er helt åbenbart utilstrækkelige underkende den ansvarlige ministers beslutning. Dette ville f.eks være i overensstemmelse med den Europæiske Menneskerettighedsdomstols praksis i sager om national sikkerhed. Dermed bevares (i) PETs helt berettigede interesse i hemmeligholdelse af dets informationer, (ii) ministerens adgang til hurtigt at træffe foranstaltninger mod personer der søger at underminere nationens sikkerhed samt (iii) hensynet til retssikkerheden.
Det er i den forbindelse værd at bemærke, at Frankrig - et land der af mange anses for at have den mest effektive anti-terrorbekæmpelse i Europa - langt oftere end herhjemme benytter muligheden for at udvise udlændinge mistænkt for terror. Men franskmændene tillader en vis domstolsprøvelse af sådanne udvisninger. Storbritannien - der er gået ganske vidt i bekæmpelsen af terror - har oprettet et særligt uafhængigt organ, der tager stilling til administrative udvisninger, også udvisninger baseret på hensynet til national sikkerhed.
Skåret ind til benet synes det national-konservative argument for at nægte prøvelse i sager om administrativ udvisning at bunde i en dybtfølt modvilje mod at indtage en holdning, der kunne opfattes som støtte til egne ideologiske hovedmodstandere. Præcis på samme måde som mange på venstrefløjen ikke kunne få sig selv til at anerkende ytringsfriheden, da "den sorte avis" Jyllands-Posten benyttede sig af denne frihed i Muhammed-krisen. Men at insistere på uafhængig prøvelse af administrative udvisninger er ikke at støtte de to tunesere eller at udvise sympati for terrorisme. Ligesom man ikke behøver at abonnere på Jyllands-Posten, blot fordi man støtter avisens ret til at offentliggøre en række tegninger af Muhammed.
Tværtimod er det netop i situationer, hvor frihedsrettigheder og retsstatsprincipper omfatter dem, man er uenig med, at frihedsrettighederne skal stå deres prøve. Anerkender vi alene frihedsrettighederne i situationer, hvor de beskytter dem, vi sympatiserer med, er frihedsrettighederne intet værd, idet de dermed bliver ofre for den herskende politiske vilje og deres beskyttelse dermed bliver diskretionær. Eksemplerne på, at tømmermændene indfinder sig, når retsstatsprincipper bliver sat ud af kraft i en god sags tjeneste, er legio. Er vi f.eks. stolte af vores retsopgør efter besættelsen? Var interneringen af japanere under 2. verdenskrig og oprettelsen af Guantanamo efter 11. september 2001 højdepunkter i USA's historie?
Vi lever ikke i en politistat i Danmark og er heller ikke på vej mod en. Men der er intet automatisk ved vores demokrati og frihedsrettigheder, og den frihed, det har taget århundreder at sikre, kan mistes på et øjeblik. Vi bør derfor værne om vores frihedsrettigheder, selv når det ikke er politisk opportunt, og når vores instinktive menneskelige reaktion er, at de, der påberåber sig frihedsrettighederne, egentlig ikke fortjener deres beskyttelse.
Jacob Mchangama er advokat og ekstern lektor i internationale menneskerettigheder.
kilde: http://www.180grader.dk/klumme/H_jre_og_venstres_automatreaktioner_printer.php
Tuneserloven: Tidligere PET-Chef "Terrordebat er farlig".
Skrevet af: Christian Lehmann
Den tidligere øverste PET-chef Ole Stig Andersen har fået nok af den indskrænkning af afgørende retsprincipper, som politikerne er villige til at acceptere i terrorsager. Unødvendigt og underminerende for retsstaten, kalder han det
Danske politikeres terrorfrygt har nu nået et punkt, hvor man er villig til at underminere respekten for domstolene og tilsidesætte altafgørende principper i vores retsstat.
Sådan lyder de hårde anklager fra Ole Stig Andersen, der var øverste chef for Politiets Efterretningstjeneste (PET) fra 1975 til 1984.
Som den første tidligere øverste PET-chef nogensinde tager han nu bladet fra munden og giver sin uforbeholdne mening om de indskrænkninger af retssikkerheden, som politikerne er villige til at acceptere, lige så snart det handler om 'terror' og 'statens sikkerhed'.
"Det sakrale begreb - statens sikkerhed - bliver brugt til alt for meget unødvendigt hemmelighedskræmmeri.
Nu er man endda også villig til at oprette hemmelige særdomstole. Så har man tabt respekten for domstolssystemet," siger Ole Stig Andersen.
Hans kritik er især udløst af sagen om de to tunesere og en dansk-marokkaner, der af PET mistænkes for at ville dræbe tegneren Kurt Westergaard. Begge tuneserne er administrativt udvist på grundlag af bevismateriale, som PET af hensyn til sine kilder ikke har villet fremlægge for en dommer.
"Man kan sagtens tænke sig terror så voldsom, at det er rimeligt at tale om statens sikkerhed. Men hvad har mordplaner mod en tegner med statens sikkerhed at gøre," siger Ole Stig Andersen.
Agenter kan lyve
Han erkender, at PET og politiet har et behov for at beskytte sine kilder.
"Men hvorfor er en agent, der arbejder for PET i Vollsmose, mere hemmelig og sårbar end en agent, der arbejder i et meget kriminelt og farligt narkomiljø? Forklaringen er nok, at efterforskning i terrorsager finder sted i efterretningstjenesterne. Og dermed har man overtaget det samme begrebsapparat om statens sikkerhed og forholdet til fremmede magter som dengang, hvor man bekæmpede spionage og KGB. Det fører til langt mere hemmelighedskræmmeri end i andre kriminelle sager, der ellers kan være lige så alvorlige og endnu mere destabiliserende for det danske samfund," siger den tidligere PET-chef og henviser til bandekrige, menneskehandel og narkokriminalitet som områder, som politiet sagtens kan håndtere uden yderligere hemmeligholdelse.
- Et argument i debatten har været, at PET også er nødt til at beskytte fortroligt materiale, man har modtaget fra andre landes efterretningstjenester?
"Ja, men alt internationalt politisamarbejde forudsætter, at myndighederne kan stole på hinanden. Og generelt er hensynet til fremmede stater ikke større i disse terrorsager end i sager om for eksempel menneskesmugling eller narkokriminalitet," siger Ole Stig Andersen.
Han henviser til, at en tiltalt og hans forsvarer allerede i dag kan unddrages indsigt i dybt fortroligt efterforskningsmateriale.
"Og hvis jeg sad som dommer, så ville jeg gerne kende efterforskningsgrundlaget. Jeg vil gerne vide, hvilken fremmed efterretningstjeneste en oplysning kommer fra, og hvordan den er fremkommet. Agenter kan sige forkerte ting eller synge den sang, som ophavsgiveren ønsker, at de synger. Og når det kommer til oplysninger fra fremmede magter, så ved både du og jeg, at man selv i USA bruger waterboarding - og under tortur tilstår alle jo alt."
Brug for domstolskontrol
I debatten om tunesersagen har politikere med Pia Kjærsgaard (DF) i spidsen udtrykt fuld tillid til, at PET har grundlaget i orden for sine anklager. Og justitsminister Brian Mikkelsen (K) - der så vidt vides har haft lejlighed til at se hele PET's materiale - har stået ved sin beslutning om at anbefale udvisning.
"Men hvorfor skal man stole mere på en minister end på en højesteretsdommer? En stat, hvor den udøvende magt kan holde sager uoplyste for domstolene, fordi man ikke stoler på dem - synes vi, at det er en stat, der lyder rigtig? "
- Men kan man ikke stole på PET?
"Jo, selvfølgelig kan man det - i langt de fleste tilfælde. Men det er fuldstændigt absurd at basere en retsstat på en blind tro på, at politiet altid har ret. For hvad skulle vi så have domstolskontrol til overhovedet? Så kunne vi lige så godt fjerne domstolskontrollen. Så mangler vi bare et 'Kærlighedsministerium' til at afrette borgerne til at tænke de rigtige tanker," siger Ole Stig Andersen med henvisning til George Orwells berømte roman '1984'.
- For myndighederne kan også begå fejl?
"Det kan jeg godt love dig for, at de gør - og hvis de laver fejl, så indrømmer de det nødigt bagefter. Du er nødt til at erkende, at offentlige myndigheder er mennesker på godt og ondt. Og du er også nødt til at erkende, at magt korrumperer. Det er derfor, at vi har behov for en effektiv, altomfattende domstolskontrol. Og det er også derfor, at vi ikke kan undvære Folketingets Ombudsmand."
Bange for at tage ansvar
Ifølge Ole Stig Andersen er de danske politikere ramt af en "ansvarsfobi", der får dem til at sige ja til alt for villigt at indskrænke af borgernes retssikkerhed og frihed i kampen mod terror.
"Hvis en minister i min tid udsultede PET, og ulykken skete, og de sovjetiske styrker så kom tromlende - så ville der næppe være et Folketingsvalg, hvor den ansvarlige minister kunne holdes ansvarlig bagefter. Men sådan er situationen ikke i dag. Hvis der sker det helt store brag, og du kunne holdes ansvarlig for ikke at have gjort nok, så ville du aldrig overleve som politiker. Det er det, de er bange for. Der er ingen, der tør sige: Nok er nok - og jeg tager ansvaret, hvis der sker noget," siger Ole Stig Andersen.
Source URL: http://www.information.dk/177426
Den tidligere øverste PET-chef Ole Stig Andersen har fået nok af den indskrænkning af afgørende retsprincipper, som politikerne er villige til at acceptere i terrorsager. Unødvendigt og underminerende for retsstaten, kalder han det
Danske politikeres terrorfrygt har nu nået et punkt, hvor man er villig til at underminere respekten for domstolene og tilsidesætte altafgørende principper i vores retsstat.
Sådan lyder de hårde anklager fra Ole Stig Andersen, der var øverste chef for Politiets Efterretningstjeneste (PET) fra 1975 til 1984.
Som den første tidligere øverste PET-chef nogensinde tager han nu bladet fra munden og giver sin uforbeholdne mening om de indskrænkninger af retssikkerheden, som politikerne er villige til at acceptere, lige så snart det handler om 'terror' og 'statens sikkerhed'.
"Det sakrale begreb - statens sikkerhed - bliver brugt til alt for meget unødvendigt hemmelighedskræmmeri.
Nu er man endda også villig til at oprette hemmelige særdomstole. Så har man tabt respekten for domstolssystemet," siger Ole Stig Andersen.
Hans kritik er især udløst af sagen om de to tunesere og en dansk-marokkaner, der af PET mistænkes for at ville dræbe tegneren Kurt Westergaard. Begge tuneserne er administrativt udvist på grundlag af bevismateriale, som PET af hensyn til sine kilder ikke har villet fremlægge for en dommer.
"Man kan sagtens tænke sig terror så voldsom, at det er rimeligt at tale om statens sikkerhed. Men hvad har mordplaner mod en tegner med statens sikkerhed at gøre," siger Ole Stig Andersen.
Agenter kan lyve
Han erkender, at PET og politiet har et behov for at beskytte sine kilder.
"Men hvorfor er en agent, der arbejder for PET i Vollsmose, mere hemmelig og sårbar end en agent, der arbejder i et meget kriminelt og farligt narkomiljø? Forklaringen er nok, at efterforskning i terrorsager finder sted i efterretningstjenesterne. Og dermed har man overtaget det samme begrebsapparat om statens sikkerhed og forholdet til fremmede magter som dengang, hvor man bekæmpede spionage og KGB. Det fører til langt mere hemmelighedskræmmeri end i andre kriminelle sager, der ellers kan være lige så alvorlige og endnu mere destabiliserende for det danske samfund," siger den tidligere PET-chef og henviser til bandekrige, menneskehandel og narkokriminalitet som områder, som politiet sagtens kan håndtere uden yderligere hemmeligholdelse.
- Et argument i debatten har været, at PET også er nødt til at beskytte fortroligt materiale, man har modtaget fra andre landes efterretningstjenester?
"Ja, men alt internationalt politisamarbejde forudsætter, at myndighederne kan stole på hinanden. Og generelt er hensynet til fremmede stater ikke større i disse terrorsager end i sager om for eksempel menneskesmugling eller narkokriminalitet," siger Ole Stig Andersen.
Han henviser til, at en tiltalt og hans forsvarer allerede i dag kan unddrages indsigt i dybt fortroligt efterforskningsmateriale.
"Og hvis jeg sad som dommer, så ville jeg gerne kende efterforskningsgrundlaget. Jeg vil gerne vide, hvilken fremmed efterretningstjeneste en oplysning kommer fra, og hvordan den er fremkommet. Agenter kan sige forkerte ting eller synge den sang, som ophavsgiveren ønsker, at de synger. Og når det kommer til oplysninger fra fremmede magter, så ved både du og jeg, at man selv i USA bruger waterboarding - og under tortur tilstår alle jo alt."
Brug for domstolskontrol
I debatten om tunesersagen har politikere med Pia Kjærsgaard (DF) i spidsen udtrykt fuld tillid til, at PET har grundlaget i orden for sine anklager. Og justitsminister Brian Mikkelsen (K) - der så vidt vides har haft lejlighed til at se hele PET's materiale - har stået ved sin beslutning om at anbefale udvisning.
"Men hvorfor skal man stole mere på en minister end på en højesteretsdommer? En stat, hvor den udøvende magt kan holde sager uoplyste for domstolene, fordi man ikke stoler på dem - synes vi, at det er en stat, der lyder rigtig? "
- Men kan man ikke stole på PET?
"Jo, selvfølgelig kan man det - i langt de fleste tilfælde. Men det er fuldstændigt absurd at basere en retsstat på en blind tro på, at politiet altid har ret. For hvad skulle vi så have domstolskontrol til overhovedet? Så kunne vi lige så godt fjerne domstolskontrollen. Så mangler vi bare et 'Kærlighedsministerium' til at afrette borgerne til at tænke de rigtige tanker," siger Ole Stig Andersen med henvisning til George Orwells berømte roman '1984'.
- For myndighederne kan også begå fejl?
"Det kan jeg godt love dig for, at de gør - og hvis de laver fejl, så indrømmer de det nødigt bagefter. Du er nødt til at erkende, at offentlige myndigheder er mennesker på godt og ondt. Og du er også nødt til at erkende, at magt korrumperer. Det er derfor, at vi har behov for en effektiv, altomfattende domstolskontrol. Og det er også derfor, at vi ikke kan undvære Folketingets Ombudsmand."
Bange for at tage ansvar
Ifølge Ole Stig Andersen er de danske politikere ramt af en "ansvarsfobi", der får dem til at sige ja til alt for villigt at indskrænke af borgernes retssikkerhed og frihed i kampen mod terror.
"Hvis en minister i min tid udsultede PET, og ulykken skete, og de sovjetiske styrker så kom tromlende - så ville der næppe være et Folketingsvalg, hvor den ansvarlige minister kunne holdes ansvarlig bagefter. Men sådan er situationen ikke i dag. Hvis der sker det helt store brag, og du kunne holdes ansvarlig for ikke at have gjort nok, så ville du aldrig overleve som politiker. Det er det, de er bange for. Der er ingen, der tør sige: Nok er nok - og jeg tager ansvaret, hvis der sker noget," siger Ole Stig Andersen.
Source URL: http://www.information.dk/177426
Tuneserloven: Lad Maskerne Falde
Den igangværende økonomiske krise tvinger regeringen og DF til at intensivere kampen for at holde sammen på samfundet. I forsvaret for den danske befolknings privilegier og velstand er alle midler legitime, inklusive racistiske nødlove. Tuneserloven er et afsindigt forsøg på at indhegne vores velstand.
Med Tuneserloven har det danske demokrati således vist, hvor det ønsker at bevæge sig hen: undtagelsestilstand. De juridiske værn, som almindeligvis beskytter os mod overgreb fra statens side, sættes helt eller delvist ud af kraft. Med udpegningen og kriminaliseringen af en gruppe mennesker i Danmark er der taget et uigenkaldeligt skridt hinsides alle idealerne om det liberale demokrati og de almindelige menneskerettigheder, som borgerskabet ellers selv i sin tid introducerede for mere end to hundrede år siden. Tuneserloven viser, at magten nu ikke engang gider gøre sig besværet med at opretholde illusionen om en borgerlig retsstat. Med loven er vi kommet ind i et nyt politisk rum, hvor magten på én gang er lovgivende, dømmende og udøvende. I dag er vi potentielt set alle tunesere.
Hidtil har udlændingepolitikkens racisme og brutalitet været gemt væk under administrative foranstaltninger: flygtninge er i tusindvis blevet afvist ved grænserne, indvandrefamilier er blevet straffet økonomisk gennem starthjælp og deres forhåbninger om at få samlet familien i sikkerhed er blevet forhindret og umuliggjort gennem abstrakte administrative forordninger: 24-årsregel, 29-årsregelen, tilknytningskrav og så videre. Alle abstrakte bureaukratiske forordninger, som i det skjulte gør mange menneskers liv ubærligt. De fremmede skal føle, de er fremmede, og grænserne er lukket for de uønskede. Men disse overgreb har foregået langt fra mediernes søgelys og hinsides middelklassens forbrugs- og investeringshorisont.
Med Tuneserloven er der kommet ansigter på: 18 juridisk set uskyldige personer er blevet dømt med tilbagevirkende kraft til tilbageholdelse på livstid. Deres eneste forbrydelse er at være fremmede og uønskede.
Reelt befandt de udlændinge, der opholder sig i landet på tålt ophold, sig allerede før vedtagelsen af loven i en limboagtig retstilstand. Rigspolitiet har længe haft beføjelser til at pålægge dem meldepligt, hvis de fandt, at sikkerhedsmæssige grunde talte for det. Forskellen er, at nu skal samtlige personer på tålt ophold frihedsberøves over én kam. Staten placerer en gruppe mennesker i en situation, hvor de frihedsberøves uden om domstolene og med en abstrakt henvisning til nationens sikkerhed. Retsstatens grundlovssikrede rettigheder suspenderes med henvisning til en enkeltsag, en herboende tunesisk mands påståede drabsplan mod en af Jyllands Postens karikaturtegnere. Denne form for tilbageholdelse strider mod internationale konventioner, men staten opfinder blot en ny betegnelse for et fængsel: melde- og opholdspligt.
Med Tuneserloven er alle masker faldet: regeringen og dets støtteparti vil gøre alt, hvad de kan for desperat at holde sammen på det danske folkefællesskab. Det gælder for enhver pris om at opretholde de eksisterende uligheder mellem hvide og ikke-hvide, rige og fattige, statsborgere og ikke-statsborgere.
Dette danske folkefællesskab, som der konstant messende henvises til, er et fantasimonster, men et formålstjenligt fantasimonster, som for Dansk Folkeparti betyder: hvid kristen racisme. Og for regeringen: ekskluderende sortering og værdisætning af menneskeliv på den globale markedsplads. Sammen har regeringen og DF effektivt radikaliseret det nationale demokrati i Danmark og dyrket en form for nationalistisk autenticitetstotalitarisme, der har taget form af hetz af muslimer og kulturradikale, kombineret med besættelseskrige i Irak og Afghanistan. Liberalistisk markedsøkonomi er blevet kombineret med undtagelsestilstand legitimeret af racistisk nationalisme.
Konfronteret med den største finansielle krise siden 1930’erne, der truer med at fordele verdens rigdom anderledes og åbne for en ny runde af imperialistisk strid, skruer regeringen og DF op for deres racistiske kulturkamp i et desperat forsøg på at sikre den danske befolknings privilegier og velstand. I denne kamp er alle midler tilsyneladende legitime, inklusive racistiske nødlove. Målet er at opretholde den uværende magtbalance og sikre at velfærden forbliver ‘hvid’. Men den brutale globale ulighed, som vi danskere nyder så godt af, lader sig ikke opretholde selv med undtagelsestilstand, pigtrådshegn og invasionskrige.
Under undtagelsestilstanden giver det ikke længere mening at forestille sig en dialog mellem rationelle parter, der vil det samme og stræber efter det samme fælles gode. Hvordan kan vi appellere til menneskerettigheder, rimelighed og objektivitet, når de herskende kræfter kun har hån til overs for disse værdier? Lad maskerne falde.
-------------------------------------------
ovenstående er hentet fra kontradoxa på modkraft.dk og er forfattet af en aktivistgrupper der kalder sig Imaginær Fraktion.
http://www.modkraft.dk/spip.php?article9485
Med Tuneserloven har det danske demokrati således vist, hvor det ønsker at bevæge sig hen: undtagelsestilstand. De juridiske værn, som almindeligvis beskytter os mod overgreb fra statens side, sættes helt eller delvist ud af kraft. Med udpegningen og kriminaliseringen af en gruppe mennesker i Danmark er der taget et uigenkaldeligt skridt hinsides alle idealerne om det liberale demokrati og de almindelige menneskerettigheder, som borgerskabet ellers selv i sin tid introducerede for mere end to hundrede år siden. Tuneserloven viser, at magten nu ikke engang gider gøre sig besværet med at opretholde illusionen om en borgerlig retsstat. Med loven er vi kommet ind i et nyt politisk rum, hvor magten på én gang er lovgivende, dømmende og udøvende. I dag er vi potentielt set alle tunesere.
Hidtil har udlændingepolitikkens racisme og brutalitet været gemt væk under administrative foranstaltninger: flygtninge er i tusindvis blevet afvist ved grænserne, indvandrefamilier er blevet straffet økonomisk gennem starthjælp og deres forhåbninger om at få samlet familien i sikkerhed er blevet forhindret og umuliggjort gennem abstrakte administrative forordninger: 24-årsregel, 29-årsregelen, tilknytningskrav og så videre. Alle abstrakte bureaukratiske forordninger, som i det skjulte gør mange menneskers liv ubærligt. De fremmede skal føle, de er fremmede, og grænserne er lukket for de uønskede. Men disse overgreb har foregået langt fra mediernes søgelys og hinsides middelklassens forbrugs- og investeringshorisont.
Med Tuneserloven er der kommet ansigter på: 18 juridisk set uskyldige personer er blevet dømt med tilbagevirkende kraft til tilbageholdelse på livstid. Deres eneste forbrydelse er at være fremmede og uønskede.
Reelt befandt de udlændinge, der opholder sig i landet på tålt ophold, sig allerede før vedtagelsen af loven i en limboagtig retstilstand. Rigspolitiet har længe haft beføjelser til at pålægge dem meldepligt, hvis de fandt, at sikkerhedsmæssige grunde talte for det. Forskellen er, at nu skal samtlige personer på tålt ophold frihedsberøves over én kam. Staten placerer en gruppe mennesker i en situation, hvor de frihedsberøves uden om domstolene og med en abstrakt henvisning til nationens sikkerhed. Retsstatens grundlovssikrede rettigheder suspenderes med henvisning til en enkeltsag, en herboende tunesisk mands påståede drabsplan mod en af Jyllands Postens karikaturtegnere. Denne form for tilbageholdelse strider mod internationale konventioner, men staten opfinder blot en ny betegnelse for et fængsel: melde- og opholdspligt.
Med Tuneserloven er alle masker faldet: regeringen og dets støtteparti vil gøre alt, hvad de kan for desperat at holde sammen på det danske folkefællesskab. Det gælder for enhver pris om at opretholde de eksisterende uligheder mellem hvide og ikke-hvide, rige og fattige, statsborgere og ikke-statsborgere.
Dette danske folkefællesskab, som der konstant messende henvises til, er et fantasimonster, men et formålstjenligt fantasimonster, som for Dansk Folkeparti betyder: hvid kristen racisme. Og for regeringen: ekskluderende sortering og værdisætning af menneskeliv på den globale markedsplads. Sammen har regeringen og DF effektivt radikaliseret det nationale demokrati i Danmark og dyrket en form for nationalistisk autenticitetstotalitarisme, der har taget form af hetz af muslimer og kulturradikale, kombineret med besættelseskrige i Irak og Afghanistan. Liberalistisk markedsøkonomi er blevet kombineret med undtagelsestilstand legitimeret af racistisk nationalisme.
Konfronteret med den største finansielle krise siden 1930’erne, der truer med at fordele verdens rigdom anderledes og åbne for en ny runde af imperialistisk strid, skruer regeringen og DF op for deres racistiske kulturkamp i et desperat forsøg på at sikre den danske befolknings privilegier og velstand. I denne kamp er alle midler tilsyneladende legitime, inklusive racistiske nødlove. Målet er at opretholde den uværende magtbalance og sikre at velfærden forbliver ‘hvid’. Men den brutale globale ulighed, som vi danskere nyder så godt af, lader sig ikke opretholde selv med undtagelsestilstand, pigtrådshegn og invasionskrige.
Under undtagelsestilstanden giver det ikke længere mening at forestille sig en dialog mellem rationelle parter, der vil det samme og stræber efter det samme fælles gode. Hvordan kan vi appellere til menneskerettigheder, rimelighed og objektivitet, når de herskende kræfter kun har hån til overs for disse værdier? Lad maskerne falde.
-------------------------------------------
ovenstående er hentet fra kontradoxa på modkraft.dk og er forfattet af en aktivistgrupper der kalder sig Imaginær Fraktion.
http://www.modkraft.dk/spip.php?article9485
The Crisis and what to do about it - Soros
1.
The salient feature of the current financial crisis is that it was not caused by some external shock like OPEC raising the price of oil or a particular country or financial institution defaulting. The crisis was generated by the financial system itself. This fact—that the defect was inherent in the system —contradicts the prevailing theory, which holds that financial markets tend toward equilibrium and that deviations from the equilibrium either occur in a random manner or are caused by some sudden external event to which markets have difficulty adjusting. The severity and amplitude of the crisis provides convincing evidence that there is something fundamentally wrong with this prevailing theory and with the approach to market regulation that has gone with it. To understand what has happened, and what should be done to avoid such a catastrophic crisis in the future, will require a new way of thinking about how markets work.
Consider how the crisis has unfolded over the past eighteen months. The proximate cause is to be found in the housing bubble or more exactly in the excesses of the subprime mortgage market. The longer a double-digit rise in house prices lasted, the more lax the lending practices became. In the end, people could borrow 100 percent of inflated house prices with no money down. Insiders referred to subprime loans as ninja loans—no income, no job, no questions asked.
The excesses became evident after house prices peaked in 2006 and subprime mortgage lenders began declaring bankruptcy around March 2007. The problems reached crisis proportions in August 2007. The Federal Reserve and other financial authorities had believed that the subprime crisis was an isolated phenomenon that might cause losses of around $100 billion. Instead, the crisis spread with amazing rapidity to other markets. Some highly leveraged hedge funds collapsed and some lightly regulated financial institutions, notably the largest mortgage originator in the US, Countrywide Financial, had to be acquired by other institutions in order to survive.
Confidence in the creditworthiness of many financial institutions was shaken and interbank lending was disrupted. In quick succession, a variety of esoteric credit markets—ranging from collateralized debt obligations (CDOs) to auction-rated municipal bonds—broke down one after another. After periods of relative calm and partial recovery, crisis episodes recurred in January 2008, precipitated by a rogue trader at Société Générale; in March, associated with the demise of Bear Stearns; and then in July, when IndyMac Bank, the largest savings bank in the Los Angeles area, went into receivership, becoming the fourth-largest bank failure in US history. The deepest fall of all came in September, caused by the disorderly bankruptcy of Lehman Brothers in which holders of commercial paper—for example, short-term, unsecured promissory notes—issued by Lehman lost their money.
Then the inconceivable occurred: the financial system actually melted down. A large money market fund that had invested in commercial paper issued by Lehman Brothers "broke the buck," i.e., its asset value fell below the dollar amount deposited, breaking an implicit promise that deposits in such funds are totally safe and liquid. This started a run on money market funds and the funds stopped buying commercial paper. Since they were the largest buyers, the commercial paper market ceased to function. The issuers of commercial paper were forced to draw down their credit lines, bringing interbank lending to a standstill. Credit spreads—i.e., the risk premium over and above the riskless rate of interest—widened to unprecedented levels and eventually the stock market was also overwhelmed by panic. All this happened in the space of a week.
With the financial system in cardiac arrest, resuscitating it took precedence over considerations of moral hazard—i.e., the danger that coming to the rescue of a financial institution in difficulties would reward and encourage reckless behavior in the future—and the authorities injected ever larger quantities of money. The balance sheet of the Federal Reserve ballooned from $800 billion to $1,800 billion in a couple of weeks. When that was not enough, the American and European financial authorities committed themselves not to allow any other major financial institution to fail.
These unprecedented measures have begun to have an effect: interbank lending has resumed and the London Interbank Offered Rate (LIBOR) has improved. The financial crisis has shown signs of abating. But guaranteeing that the banks at the center of the global financial system will not fail has precipitated a new crisis that caught the authorities unawares: countries at the periphery, whether in Eastern Europe, Asia, or Latin America, could not offer similarly credible guarantees, and financial capital started fleeing from the periphery to the center. All currencies fell against the dollar and the yen, some of them precipitously. Commodity prices dropped like a stone and interest rates in emerging markets soared. So did premiums on insurance against credit default. Hedge funds and other leveraged investors suffered enormous losses, precipitating margin calls and forced selling that have also spread to markets at the center.
Unfortunately the authorities are always lagging behind events. The International Monetary Fund is establishing a new credit facility that allows financially sound periphery countries to borrow without any conditions up to five times their annual quota, but that is too little too late. A much larger pool of money is needed to reassure markets. And if the top tier of periphery countries is saved, what happens to the lower-tier countries? The race to save the international financial system is still ongoing. Even if it is successful, consumers, investors, and businesses are undergoing a traumatic experience whose full impact on global economic activity is yet to be felt. A deep recession is now inevitable and the possibility of a depression cannot be ruled out. When I predicted earlier this year that we were facing the worst financial crisis since the 1930s, I did not anticipate that conditions would deteriorate so badly.
2.
This remarkable sequence of events can be understood only if we abandon the prevailing theory of market behavior. As a way of explaining financial markets, I propose an alternative paradigm that differs from the current one in two respects. First, financial markets do not reflect prevailing conditions accurately; they provide a picture that is always biased or distorted in one way or another. Second, the distorted views held by market participants and expressed in market prices can, under certain circumstances, affect the so-called fundamentals that market prices are supposed to reflect. This two-way circular connection between market prices and the underlying reality I call reflexivity.
While the two-way connection is present at all times, it is only occasionally, and in special circumstances, that it gives rise to financial crises. Usually markets correct their own mistakes, but occasionally there is a misconception or misinterpretation that finds a way to reinforce a trend that is already present in reality and by doing so it also reinforces itself. Such self- reinforcing processes may carry markets into far-from-equilibrium territory. Unless something happens to abort the reflexive interaction sooner, it may persist until the misconception becomes so glaring that it has to be recognized as such. When that happens the trend becomes unsustainable and when it is reversed the self-reinforcing process starts working in the opposite direction, causing a sharp downward movement.
The typical sequence of boom and bust has an asymmetric shape. The boom develops slowly and accelerates gradually. The bust, when it occurs, tends to be short and sharp. The asymmetry is due to the role that credit plays. As prices rise, the same collateral can support a greater amount of credit. Rising prices also tend to generate optimism and encourage a greater use of leverage—borrowing for investment purposes. At the peak of the boom both the value of the collateral and the degree of leverage reach a peak. When the price trend is reversed participants are vulnerable to margin calls and, as we've seen in 2008, the forced liquidation of collateral leads to a catastrophic acceleration on the downside.
Bubbles thus have two components: a trend that prevails in reality and a misconception relating to that trend. The simplest and most common example is to be found in real estate. The trend consists of an increased willingness to lend and a rise in prices. The misconception is that the value of the real estate is independent of the willingness to lend. That misconception encourages bankers to become more lax in their lending practices as prices rise and defaults on mortgage payments diminish. That is how real estate bubbles, including the recent housing bubble, are born. It is remarkable how the misconception continues to recur in various guises in spite of a long history of real estate bubbles bursting.
Bubbles are not the only manifestations of reflexivity in financial markets, but they are the most spectacular. Bubbles always involve the expansion and contraction of credit and they tend to have catastrophic consequences. Since financial markets are prone to produce bubbles and bubbles cause trouble, financial markets have become regulated by the financial authorities. In the United States they include the Federal Reserve, the Treasury, the Securities and Exchange Commission, and many other agencies.
It is important to recognize that regulators base their decisions on a distorted view of reality just as much as market participants—perhaps even more so because regulators are not only human but also bureaucratic and subject to political influences. So the interplay between regulators and market participants is also reflexive in character. In contrast to bubbles, which occur only infrequently, the cat-and-mouse game between regulators and markets goes on continuously. As a consequence reflexivity is at work at all times and it is a mistake to ignore its influence. Yet that is exactly what the prevailing theory of financial markets has done and that mistake is ultimately responsible for the severity of the current crisis.
3.
In my book The New Paradigm for Financial Markets,[*] I argue that the current crisis differs from the various financial crises that preceded it. I base that assertion on the hypothesis that the explosion of the US housing bubble acted as the detonator for a much larger "super-bubble" that has been developing since the 1980s. The underlying trend in the super-bubble has been the ever-increasing use of credit and leverage. Credit—whether extended to consumers or speculators or banks—has been growing at a much faster rate than the GDP ever since the end of World War II. But the rate of growth accelerated and took on the characteristics of a bubble when it was reinforced by a misconception that became dominant in 1980 when Ronald Reagan became president and Margaret Thatcher was prime minister in the United Kingdom.
The misconception is derived from the prevailing theory of financial markets, which, as mentioned earlier, holds that financial markets tend toward equilibrium and that deviations are random and can be attributed to external causes. This theory has been used to justify the belief that the pursuit of self-interest should be given free rein and markets should be deregulated. I call that belief market fundamentalism and claim that it employs false logic. Just because regulations and all other forms of governmental interventions have proven to be faulty, it does not follow that markets are perfect.
Although market fundamentalism is based on false premises, it has served well the interests of the owners and managers of financial capital. The globalization of financial markets allowed financial capital to move around freely and made it difficult for individual states to tax it or regulate it. Deregulation of financial transactions also served the interests of the managers of financial capital; and the freedom to innovate enhanced the profitability of financial enterprises. The financial industry grew to a point where it represented 25 percent of the stock market capitalization in the United States and an even higher percentage in some other countries.
Since market fundamentalism is built on false assumptions, its adoption in the 1980s as the guiding principle of economic policy was bound to have negative consequences. Indeed, we have experienced a series of financial crises since then, but the adverse consequences were suffered principally by the countries that lie on the periphery of the global financial system, not by those at the center. The system is under the control of the developed countries, especially the United States, which enjoys veto rights in the International Monetary Fund.
Whenever a crisis endangered the prosperity of the United States—as for example the savings and loan crisis in the late 1980s, or the collapse of the hedge fund Long Term Capital Management in 1998—the authorities intervened, finding ways for the failing institutions to merge with others and providing monetary and fiscal stimulus when the pace of economic activity was endangered. Thus the periodic crises served, in effect, as successful tests that reinforced both the underlying trend of ever-greater credit expansion and the prevailing misconception that financial markets should be left to their own devices.
It was of course the intervention of the financial authorities that made the tests successful, not the ability of financial markets to correct their own excesses. But it was convenient for investors and governments to deceive themselves. The relative safety and stability of the United States, compared to the countries at the periphery, allowed the United States to suck up the savings of the rest of the world and run a current account deficit that reached nearly 7 percent of GNP at its peak in the first quarter of 2006. Eventually even the Federal Reserve and other regulators succumbed to the market fundamentalist ideology and abdicated their responsibility to regulate. They ought to have known better since it was their actions that kept the United States economy on an even keel. Alan Greenspan, in particular, believed that giving users of financial innovations such as derivatives free rein brought such great benefits that having to clean up behind the occasional financial mishap was a small price to pay. And his analysis of the costs and benefits of his permissive policies was not totally wrong while the super-bubble lasted. Only now has he been forced to acknowledge that there was a flaw in his argument.
Financial engineering involved the creation of increasingly sophisticated instruments, or derivatives, for leveraging credit and "managing" risk in order to increase potential profit. An alphabet soup of synthetic financial instruments was concocted: CDOs, CDO squareds, CDSs, ABXs, CMBXs, etc. This engineering reached such heights of complexity that the regulators could no longer calculate the risks and came to rely on the risk management models of the financial institutions themselves. The rating companies followed a similar path in rating synthetic financial instruments, deriving considerable additional revenues from their proliferation. The esoteric financial instruments and techniques for risk management were based on the false premise that, in the behavior of the market, deviations from the mean occur in a random fashion. But the increased use of financial engineering set in motion a process of boom and bust. So eventually there was hell to pay. At first the occasional financial crises served as successful tests. But the subprime crisis came to play a different role: it served as the culmination or reversal point of the super-bubble.
It should be emphasized that this interpretation of the current situation does not necessarily follow from my model of boom and bust. Had the financial authorities succeeded in containing the subprime crisis—as they thought at the time they would be able to do—this would have been seen as just another successful test instead of the reversal point. I have cried wolf three times: first with The Alchemy of Finance in 1987, then with The Crisis of Global Capitalism in 1998, and now. Only now did the wolf arrive.
My interpretation of financial markets based on reflexivity can explain events better than it can predict them. It is less ambitious than the previous theory. It does not claim to determine the outcome as equilibrium theory does. It can assert that a boom must eventually lead to a bust, but it cannot determine either the extent or the duration of a boom. Indeed, those of us who recognized that there was a housing bubble expected it to burst much sooner. Had it done so, the damage would have been much smaller and the super-bubble may have remained intact. Most of the damage was caused by mortgage-related securities issued in the last two years of the housing boom.
The fact that the new paradigm does not claim to predict the future explains why it did not make any headway until now, but in the light of recent experience it can no longer be ignored. We must come to terms with the fact that reflexivity introduces an element of uncertainty into financial markets that the previous theory left out of account. That theory was used to establish mathematical models for calculating risk and converting bundles of subprime mortgages into tradable securities, as well as other forms of debt. Uncertainty by definition cannot be quantified. Excessive reliance on those mathematical models did untold harm.
4.
The new paradigm has far-reaching implications for the regulation of financial markets. Since they are prone to create asset bubbles, regulators such as the Fed, the Treasury, and the SEC must accept responsibility for preventing bubbles from growing too big. Until now financial authorities have explicitly rejected that responsibility.
It is impossible to prevent bubbles from forming, but it should be possible to keep them within tolerable bounds. It cannot be done by controlling only the money supply. Regulators must also take into account credit conditions because money and credit do not move in lockstep. Markets have moods and biases and it falls to regulators to counterbalance them. That requires the use of judgment and since regulators are also human, they are bound to make mistakes. They have the advantage, however, of getting feedback from the market and that should enable them to correct their mistakes. If a tightening of margin and minimum capital requirements does not deflate a bubble, they can tighten them some more. But the process is not foolproof because markets can also be wrong. The search for the optimum equilibrium has to be a never-ending process of trial and error.
The cat-and-mouse game between regulators and market participants is already ongoing, but its true nature has not yet been acknowledged. Alan Greenspan was a past master of manipulation with his Delphic utterances, but instead of acknowledging what he was doing he pretended that he was merely a passive observer of the facts. Reflexivity remained a state secret. That is why the super-bubble could develop so far during his tenure.
Since money and credit do not move in lockstep and asset bubbles cannot be controlled purely by monetary means, additional tools must be employed, or more accurately reactivated, since they were in active use in the 1950s and 1960s. I refer to variable margin requirements and minimal capital requirements, which are meant to control the amount of leverage market participants can employ. Central banks even used to issue guidance to banks about how they should allocate loans to specific sectors of the economy. Such directives may be preferable to the blunt instruments of monetary policy in combating "irrational exuberance" in particular sectors, such as information technology or real estate.
Sophisticated financial engineering of the kind I have mentioned can render the calculation of margin and capital requirements extremely difficult if not impossible. In order to activate such requirements, financial engineering must also be regulated and new products must be registered and approved by the appropriate authorities before they can be used. Such regulation should be a high priority of the new Obama administration. It is all the more necessary because financial engineering often aims at circumventing regulations.
Take for example credit default swaps (CDSs), instruments intended to insure against the possibility of bonds and other forms of debt going into default, and whose price captures the perceived risk of such a possibility occurring. These instruments grew like Topsy because they required much less capital than owning or shorting the underlying bonds. Eventually they grew to more than $50 trillion in nominal size, which is a many-fold multiple of the underlying bonds and five times the entire US national debt. Yet the market in credit default swaps has remained entirely unregulated. AIG, the insurance company, lost a fortune selling credit default swaps as a form of insurance and had to be bailed out, costing the Treasury $126 billion so far. Although the CDS market may be eventually saved from the meltdown that has occurred in many other markets, the sheer existence of an unregulated market of this size has been a major factor in increasing risk throughout the entire financial system.
Since the risk management models used until now ignored the uncertainties inherent in reflexivity, limits on credit and leverage will have to be set substantially lower than those that were tolerated in the recent past. This means that financial institutions in the aggregate will be less profitable than they have been during the super-bubble and some business models that depended on excessive leverage will become uneconomical. The financial industry has already dropped from 25 percent of total market capitalization to 16 percent. This ratio is unlikely to recover to anywhere near its previous high; indeed, it is likely to end lower. This may be considered a healthy adjustment, but not by those who are losing their jobs.
In view of the tremendous losses suffered by the general public, there is a real danger that excessive deregulation will be succeeded by punitive reregulation. That would be unfortunate because regulations are liable to be even more deficient than the market mechanism. As I have suggested, regulators are not only human but also bureaucratic and susceptible to lobbying and corruption. It is to be hoped that the reforms outlined here will preempt a regulatory overkill.
—November 6, 2008
Notes
[*]The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means (PublicAffairs, 2008).
The salient feature of the current financial crisis is that it was not caused by some external shock like OPEC raising the price of oil or a particular country or financial institution defaulting. The crisis was generated by the financial system itself. This fact—that the defect was inherent in the system —contradicts the prevailing theory, which holds that financial markets tend toward equilibrium and that deviations from the equilibrium either occur in a random manner or are caused by some sudden external event to which markets have difficulty adjusting. The severity and amplitude of the crisis provides convincing evidence that there is something fundamentally wrong with this prevailing theory and with the approach to market regulation that has gone with it. To understand what has happened, and what should be done to avoid such a catastrophic crisis in the future, will require a new way of thinking about how markets work.
Consider how the crisis has unfolded over the past eighteen months. The proximate cause is to be found in the housing bubble or more exactly in the excesses of the subprime mortgage market. The longer a double-digit rise in house prices lasted, the more lax the lending practices became. In the end, people could borrow 100 percent of inflated house prices with no money down. Insiders referred to subprime loans as ninja loans—no income, no job, no questions asked.
The excesses became evident after house prices peaked in 2006 and subprime mortgage lenders began declaring bankruptcy around March 2007. The problems reached crisis proportions in August 2007. The Federal Reserve and other financial authorities had believed that the subprime crisis was an isolated phenomenon that might cause losses of around $100 billion. Instead, the crisis spread with amazing rapidity to other markets. Some highly leveraged hedge funds collapsed and some lightly regulated financial institutions, notably the largest mortgage originator in the US, Countrywide Financial, had to be acquired by other institutions in order to survive.
Confidence in the creditworthiness of many financial institutions was shaken and interbank lending was disrupted. In quick succession, a variety of esoteric credit markets—ranging from collateralized debt obligations (CDOs) to auction-rated municipal bonds—broke down one after another. After periods of relative calm and partial recovery, crisis episodes recurred in January 2008, precipitated by a rogue trader at Société Générale; in March, associated with the demise of Bear Stearns; and then in July, when IndyMac Bank, the largest savings bank in the Los Angeles area, went into receivership, becoming the fourth-largest bank failure in US history. The deepest fall of all came in September, caused by the disorderly bankruptcy of Lehman Brothers in which holders of commercial paper—for example, short-term, unsecured promissory notes—issued by Lehman lost their money.
Then the inconceivable occurred: the financial system actually melted down. A large money market fund that had invested in commercial paper issued by Lehman Brothers "broke the buck," i.e., its asset value fell below the dollar amount deposited, breaking an implicit promise that deposits in such funds are totally safe and liquid. This started a run on money market funds and the funds stopped buying commercial paper. Since they were the largest buyers, the commercial paper market ceased to function. The issuers of commercial paper were forced to draw down their credit lines, bringing interbank lending to a standstill. Credit spreads—i.e., the risk premium over and above the riskless rate of interest—widened to unprecedented levels and eventually the stock market was also overwhelmed by panic. All this happened in the space of a week.
With the financial system in cardiac arrest, resuscitating it took precedence over considerations of moral hazard—i.e., the danger that coming to the rescue of a financial institution in difficulties would reward and encourage reckless behavior in the future—and the authorities injected ever larger quantities of money. The balance sheet of the Federal Reserve ballooned from $800 billion to $1,800 billion in a couple of weeks. When that was not enough, the American and European financial authorities committed themselves not to allow any other major financial institution to fail.
These unprecedented measures have begun to have an effect: interbank lending has resumed and the London Interbank Offered Rate (LIBOR) has improved. The financial crisis has shown signs of abating. But guaranteeing that the banks at the center of the global financial system will not fail has precipitated a new crisis that caught the authorities unawares: countries at the periphery, whether in Eastern Europe, Asia, or Latin America, could not offer similarly credible guarantees, and financial capital started fleeing from the periphery to the center. All currencies fell against the dollar and the yen, some of them precipitously. Commodity prices dropped like a stone and interest rates in emerging markets soared. So did premiums on insurance against credit default. Hedge funds and other leveraged investors suffered enormous losses, precipitating margin calls and forced selling that have also spread to markets at the center.
Unfortunately the authorities are always lagging behind events. The International Monetary Fund is establishing a new credit facility that allows financially sound periphery countries to borrow without any conditions up to five times their annual quota, but that is too little too late. A much larger pool of money is needed to reassure markets. And if the top tier of periphery countries is saved, what happens to the lower-tier countries? The race to save the international financial system is still ongoing. Even if it is successful, consumers, investors, and businesses are undergoing a traumatic experience whose full impact on global economic activity is yet to be felt. A deep recession is now inevitable and the possibility of a depression cannot be ruled out. When I predicted earlier this year that we were facing the worst financial crisis since the 1930s, I did not anticipate that conditions would deteriorate so badly.
2.
This remarkable sequence of events can be understood only if we abandon the prevailing theory of market behavior. As a way of explaining financial markets, I propose an alternative paradigm that differs from the current one in two respects. First, financial markets do not reflect prevailing conditions accurately; they provide a picture that is always biased or distorted in one way or another. Second, the distorted views held by market participants and expressed in market prices can, under certain circumstances, affect the so-called fundamentals that market prices are supposed to reflect. This two-way circular connection between market prices and the underlying reality I call reflexivity.
While the two-way connection is present at all times, it is only occasionally, and in special circumstances, that it gives rise to financial crises. Usually markets correct their own mistakes, but occasionally there is a misconception or misinterpretation that finds a way to reinforce a trend that is already present in reality and by doing so it also reinforces itself. Such self- reinforcing processes may carry markets into far-from-equilibrium territory. Unless something happens to abort the reflexive interaction sooner, it may persist until the misconception becomes so glaring that it has to be recognized as such. When that happens the trend becomes unsustainable and when it is reversed the self-reinforcing process starts working in the opposite direction, causing a sharp downward movement.
The typical sequence of boom and bust has an asymmetric shape. The boom develops slowly and accelerates gradually. The bust, when it occurs, tends to be short and sharp. The asymmetry is due to the role that credit plays. As prices rise, the same collateral can support a greater amount of credit. Rising prices also tend to generate optimism and encourage a greater use of leverage—borrowing for investment purposes. At the peak of the boom both the value of the collateral and the degree of leverage reach a peak. When the price trend is reversed participants are vulnerable to margin calls and, as we've seen in 2008, the forced liquidation of collateral leads to a catastrophic acceleration on the downside.
Bubbles thus have two components: a trend that prevails in reality and a misconception relating to that trend. The simplest and most common example is to be found in real estate. The trend consists of an increased willingness to lend and a rise in prices. The misconception is that the value of the real estate is independent of the willingness to lend. That misconception encourages bankers to become more lax in their lending practices as prices rise and defaults on mortgage payments diminish. That is how real estate bubbles, including the recent housing bubble, are born. It is remarkable how the misconception continues to recur in various guises in spite of a long history of real estate bubbles bursting.
Bubbles are not the only manifestations of reflexivity in financial markets, but they are the most spectacular. Bubbles always involve the expansion and contraction of credit and they tend to have catastrophic consequences. Since financial markets are prone to produce bubbles and bubbles cause trouble, financial markets have become regulated by the financial authorities. In the United States they include the Federal Reserve, the Treasury, the Securities and Exchange Commission, and many other agencies.
It is important to recognize that regulators base their decisions on a distorted view of reality just as much as market participants—perhaps even more so because regulators are not only human but also bureaucratic and subject to political influences. So the interplay between regulators and market participants is also reflexive in character. In contrast to bubbles, which occur only infrequently, the cat-and-mouse game between regulators and markets goes on continuously. As a consequence reflexivity is at work at all times and it is a mistake to ignore its influence. Yet that is exactly what the prevailing theory of financial markets has done and that mistake is ultimately responsible for the severity of the current crisis.
3.
In my book The New Paradigm for Financial Markets,[*] I argue that the current crisis differs from the various financial crises that preceded it. I base that assertion on the hypothesis that the explosion of the US housing bubble acted as the detonator for a much larger "super-bubble" that has been developing since the 1980s. The underlying trend in the super-bubble has been the ever-increasing use of credit and leverage. Credit—whether extended to consumers or speculators or banks—has been growing at a much faster rate than the GDP ever since the end of World War II. But the rate of growth accelerated and took on the characteristics of a bubble when it was reinforced by a misconception that became dominant in 1980 when Ronald Reagan became president and Margaret Thatcher was prime minister in the United Kingdom.
The misconception is derived from the prevailing theory of financial markets, which, as mentioned earlier, holds that financial markets tend toward equilibrium and that deviations are random and can be attributed to external causes. This theory has been used to justify the belief that the pursuit of self-interest should be given free rein and markets should be deregulated. I call that belief market fundamentalism and claim that it employs false logic. Just because regulations and all other forms of governmental interventions have proven to be faulty, it does not follow that markets are perfect.
Although market fundamentalism is based on false premises, it has served well the interests of the owners and managers of financial capital. The globalization of financial markets allowed financial capital to move around freely and made it difficult for individual states to tax it or regulate it. Deregulation of financial transactions also served the interests of the managers of financial capital; and the freedom to innovate enhanced the profitability of financial enterprises. The financial industry grew to a point where it represented 25 percent of the stock market capitalization in the United States and an even higher percentage in some other countries.
Since market fundamentalism is built on false assumptions, its adoption in the 1980s as the guiding principle of economic policy was bound to have negative consequences. Indeed, we have experienced a series of financial crises since then, but the adverse consequences were suffered principally by the countries that lie on the periphery of the global financial system, not by those at the center. The system is under the control of the developed countries, especially the United States, which enjoys veto rights in the International Monetary Fund.
Whenever a crisis endangered the prosperity of the United States—as for example the savings and loan crisis in the late 1980s, or the collapse of the hedge fund Long Term Capital Management in 1998—the authorities intervened, finding ways for the failing institutions to merge with others and providing monetary and fiscal stimulus when the pace of economic activity was endangered. Thus the periodic crises served, in effect, as successful tests that reinforced both the underlying trend of ever-greater credit expansion and the prevailing misconception that financial markets should be left to their own devices.
It was of course the intervention of the financial authorities that made the tests successful, not the ability of financial markets to correct their own excesses. But it was convenient for investors and governments to deceive themselves. The relative safety and stability of the United States, compared to the countries at the periphery, allowed the United States to suck up the savings of the rest of the world and run a current account deficit that reached nearly 7 percent of GNP at its peak in the first quarter of 2006. Eventually even the Federal Reserve and other regulators succumbed to the market fundamentalist ideology and abdicated their responsibility to regulate. They ought to have known better since it was their actions that kept the United States economy on an even keel. Alan Greenspan, in particular, believed that giving users of financial innovations such as derivatives free rein brought such great benefits that having to clean up behind the occasional financial mishap was a small price to pay. And his analysis of the costs and benefits of his permissive policies was not totally wrong while the super-bubble lasted. Only now has he been forced to acknowledge that there was a flaw in his argument.
Financial engineering involved the creation of increasingly sophisticated instruments, or derivatives, for leveraging credit and "managing" risk in order to increase potential profit. An alphabet soup of synthetic financial instruments was concocted: CDOs, CDO squareds, CDSs, ABXs, CMBXs, etc. This engineering reached such heights of complexity that the regulators could no longer calculate the risks and came to rely on the risk management models of the financial institutions themselves. The rating companies followed a similar path in rating synthetic financial instruments, deriving considerable additional revenues from their proliferation. The esoteric financial instruments and techniques for risk management were based on the false premise that, in the behavior of the market, deviations from the mean occur in a random fashion. But the increased use of financial engineering set in motion a process of boom and bust. So eventually there was hell to pay. At first the occasional financial crises served as successful tests. But the subprime crisis came to play a different role: it served as the culmination or reversal point of the super-bubble.
It should be emphasized that this interpretation of the current situation does not necessarily follow from my model of boom and bust. Had the financial authorities succeeded in containing the subprime crisis—as they thought at the time they would be able to do—this would have been seen as just another successful test instead of the reversal point. I have cried wolf three times: first with The Alchemy of Finance in 1987, then with The Crisis of Global Capitalism in 1998, and now. Only now did the wolf arrive.
My interpretation of financial markets based on reflexivity can explain events better than it can predict them. It is less ambitious than the previous theory. It does not claim to determine the outcome as equilibrium theory does. It can assert that a boom must eventually lead to a bust, but it cannot determine either the extent or the duration of a boom. Indeed, those of us who recognized that there was a housing bubble expected it to burst much sooner. Had it done so, the damage would have been much smaller and the super-bubble may have remained intact. Most of the damage was caused by mortgage-related securities issued in the last two years of the housing boom.
The fact that the new paradigm does not claim to predict the future explains why it did not make any headway until now, but in the light of recent experience it can no longer be ignored. We must come to terms with the fact that reflexivity introduces an element of uncertainty into financial markets that the previous theory left out of account. That theory was used to establish mathematical models for calculating risk and converting bundles of subprime mortgages into tradable securities, as well as other forms of debt. Uncertainty by definition cannot be quantified. Excessive reliance on those mathematical models did untold harm.
4.
The new paradigm has far-reaching implications for the regulation of financial markets. Since they are prone to create asset bubbles, regulators such as the Fed, the Treasury, and the SEC must accept responsibility for preventing bubbles from growing too big. Until now financial authorities have explicitly rejected that responsibility.
It is impossible to prevent bubbles from forming, but it should be possible to keep them within tolerable bounds. It cannot be done by controlling only the money supply. Regulators must also take into account credit conditions because money and credit do not move in lockstep. Markets have moods and biases and it falls to regulators to counterbalance them. That requires the use of judgment and since regulators are also human, they are bound to make mistakes. They have the advantage, however, of getting feedback from the market and that should enable them to correct their mistakes. If a tightening of margin and minimum capital requirements does not deflate a bubble, they can tighten them some more. But the process is not foolproof because markets can also be wrong. The search for the optimum equilibrium has to be a never-ending process of trial and error.
The cat-and-mouse game between regulators and market participants is already ongoing, but its true nature has not yet been acknowledged. Alan Greenspan was a past master of manipulation with his Delphic utterances, but instead of acknowledging what he was doing he pretended that he was merely a passive observer of the facts. Reflexivity remained a state secret. That is why the super-bubble could develop so far during his tenure.
Since money and credit do not move in lockstep and asset bubbles cannot be controlled purely by monetary means, additional tools must be employed, or more accurately reactivated, since they were in active use in the 1950s and 1960s. I refer to variable margin requirements and minimal capital requirements, which are meant to control the amount of leverage market participants can employ. Central banks even used to issue guidance to banks about how they should allocate loans to specific sectors of the economy. Such directives may be preferable to the blunt instruments of monetary policy in combating "irrational exuberance" in particular sectors, such as information technology or real estate.
Sophisticated financial engineering of the kind I have mentioned can render the calculation of margin and capital requirements extremely difficult if not impossible. In order to activate such requirements, financial engineering must also be regulated and new products must be registered and approved by the appropriate authorities before they can be used. Such regulation should be a high priority of the new Obama administration. It is all the more necessary because financial engineering often aims at circumventing regulations.
Take for example credit default swaps (CDSs), instruments intended to insure against the possibility of bonds and other forms of debt going into default, and whose price captures the perceived risk of such a possibility occurring. These instruments grew like Topsy because they required much less capital than owning or shorting the underlying bonds. Eventually they grew to more than $50 trillion in nominal size, which is a many-fold multiple of the underlying bonds and five times the entire US national debt. Yet the market in credit default swaps has remained entirely unregulated. AIG, the insurance company, lost a fortune selling credit default swaps as a form of insurance and had to be bailed out, costing the Treasury $126 billion so far. Although the CDS market may be eventually saved from the meltdown that has occurred in many other markets, the sheer existence of an unregulated market of this size has been a major factor in increasing risk throughout the entire financial system.
Since the risk management models used until now ignored the uncertainties inherent in reflexivity, limits on credit and leverage will have to be set substantially lower than those that were tolerated in the recent past. This means that financial institutions in the aggregate will be less profitable than they have been during the super-bubble and some business models that depended on excessive leverage will become uneconomical. The financial industry has already dropped from 25 percent of total market capitalization to 16 percent. This ratio is unlikely to recover to anywhere near its previous high; indeed, it is likely to end lower. This may be considered a healthy adjustment, but not by those who are losing their jobs.
In view of the tremendous losses suffered by the general public, there is a real danger that excessive deregulation will be succeeded by punitive reregulation. That would be unfortunate because regulations are liable to be even more deficient than the market mechanism. As I have suggested, regulators are not only human but also bureaucratic and susceptible to lobbying and corruption. It is to be hoped that the reforms outlined here will preempt a regulatory overkill.
—November 6, 2008
Notes
[*]The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means (PublicAffairs, 2008).
The Coming Capitalist Consensus - Walden Bello
Not surprisingly, the swift unraveling of the global economy combined with the ascent to the U.S. presidency of an African-American liberal has left millions anticipating that the world is on the threshold of a new era. Some of President-elect Barack Obama’s new appointees – in particular ex-Treasury Secretary Larry Summers to lead the National Economic Council, New York Federal Reserve Board chief Tim Geithner to head Treasury, and former Dallas Mayor Ron Kirk to serve as trade representative – have certainly elicited some skepticism. But the sense that the old neoliberal formulas are thoroughly discredited have convinced many that the new Democratic leadership in the world’s biggest economy will break with the market fundamentalist policies that have reigned since the early 1980s.
One important question, of course, is how decisive and definitive the break with neoliberalism will be. Other questions, however, go to the heart of capitalism itself. Will government ownership, intervention, and control be exercised simply to stabilize capitalism, after which control will be given back to the corporate elites? Are we going to see a second round of Keynesian capitalism, where the state and corporate elites along with labor work out a partnership based on industrial policy, growth, and high wages – though with a green dimension this time around? Or will we witness the beginnings of fundamental shifts in the ownership and control of the economy in a more popular direction? There are limits to reform in the system of global capitalism, but at no other time in the last half century have those limits seemed more fluid.
President Nicolas Sarkozy of France has already staked out one position. Declaring that “laissez-faire capitalism is dead,” he has created a strategic investment fund of 20 billion euros to promote technological innovation, keep advanced industries in French hands, and save jobs. “The day we don’t build trains, airplanes, automobiles, and ships, what will be left of the French economy?” he recently asked rhetorically. “Memories. I will not make France a simple tourist reserve.” This kind of aggressive industrial policy aimed partly at winning over the country’s traditional white working class can go hand-in-hand with the exclusionary anti-immigrant policies with which the French president has been associated.
Global Social Democracy
A new national Keynesianism along Sarkozyan lines, however, is not the only alternative available to global elites. Given the need for global legitimacy to promote their interests in a world where the balance of power is shifting towards the South, western elites might find more attractive an offshoot of European Social Democracy and New Deal liberalism that one might call “Global Social Democracy” or GSD.
Even before the full unfolding of the financial crisis, partisans of GSD had already been positioning it as alternative to neoliberal globalization in response to the stresses and strains being provoked by the latter. One personality associated with it is British Prime Minister Gordon Brown, who led the European response to the financial meltdown via the partial nationalization of the banks. Widely regarded as the godfather of the “Make Poverty History” campaign in the United Kingdom, Brown, while he was still the British chancellor, proposed what he called an “alliance capitalism” between market and state institutions that would reproduce at the global stage what he said Franklin Roosevelt did for the national economy: “securing the benefits of the market while taming its excesses.” This must be a system, continued Brown, that “captures the full benefits of global markets and capital flows, minimizes the risk of disruption, maximizes opportunity for all, and lifts up the most vulnerable – in short, the restoration in the international economy of public purpose and high ideals.”
Joining Brown in articulating the Global Social Democratic discourse has been a diverse group consisting of, among others, the economist Jeffrey Sachs, George Soros, former UN Secretary General Kofi Annan, the sociologist David Held, Nobel laureate Joseph Stiglitz, and even Bill Gates. There are, of course, differences of nuance in the positions of these people, but the thrust of their perspectives is the same: to bring about a reformed social order and a reinvigorated ideological consensus for global capitalism.
Among the key propositions advanced by partisans of GSD are the following:
Globalization is essentially beneficial for the world; the neoliberals have simply botched the job of managing it and selling it to the public;
It is urgent to save globalization from the neoliberals because globalization is reversible and may, in fact, already be in the process of being reversed;
Growth and equity may come into conflict, in which case one must prioritize equity;
Free trade may not, in fact, be beneficial in the long run and may leave the majority poor, so it is important for trade arrangements to be subject to social and environmental conditions;
Unilateralism must be avoided while fundamental reform of the multilateral institutions and agreements must be undertaken – a process that might involve dumping or neutralizing some of them, like the WTO’s Trade-Related Intellectual Property Rights Agreement (TRIPs);
Global social integration, or reducing inequalities both within and across countries, must accompany global market integration;
The global debt of developing countries must be cancelled or radically reduced, so the resulting savings can be used to stimulate the local economy, thus contributing to global reflation;
Poverty and environmental degradation are so severe that a massive aid program or “Marshall Plan” from the North to the South must be mounted within the framework of the “Millennium Development Goals”;
A “Second Green Revolution” must be put into motion, especially in Africa, through the widespread adoption of genetically engineered seeds.
Huge investments must be devoted to push the global economy along more environmentally sustainable paths, with government taking a leading role (“Green Keynesianism” or “Green Capitalism”);
Military action to solve problems must be deemphasized in favor of diplomacy and “soft power,” although humanitarian military intervention in situations involving genocide must be undertaken.
The Limits of Global Social Democracy
Global Social Democracy has not received much critical attention, perhaps because many progressives are still fighting the last war, that is, against neoliberalism. A critique is urgent, and not only because GSD is neoliberalism’s most likely successor. More important, although GSD has some positive elements, it has, like the old Social Democratic Keynesian paradigm, a number of problematic features.
A critique might begin by highlighting problems with four central elements in the GSD perspective.
First, GSD shares neoliberalism’s bias for globalization, differentiating itself mainly by promising to promote globalization better than the neoliberals. This amounts to saying, however, that simply by adding the dimension of “global social integration,” an inherently socially and ecologically destructive and disruptive process can be made palatable and acceptable. GSD assumes that people really want to be part of a functionally integrated global economy where the barriers between the national and the international have disappeared. But would they not in fact prefer to be part of economies that are subject to local control and are buffered from the vagaries of the international economy? Indeed, today’s swift downward trajectory of interconnected economies underscores the validity of one of anti-globalization movement’s key criticisms of the globalization process..
Second, GSD shares neoliberalism’s preference for the market as the principal mechanism for production, distribution, and consumption, differentiating itself mainly by advocating state action to address market failures. The kind of globalization the world needs, according to Jeffrey Sachs in The End of Poverty, would entail “harnessing…the remarkable power of trade and investment while acknowledging and addressing limitations through compensatory collective action.” This is very different from saying that the citizenry and civil society must make the key economic decisions and the market, like the state bureaucracy, is only one mechanism of implementation of democratic decision-making.
Third, GSD is a technocratic project, with experts hatching and pushing reforms on society from above, instead of being a participatory project where initiatives percolate from the ground up.
Fourth, GSD, while critical of neoliberalism, accepts the framework of monopoly capitalism, which rests fundamentally on deriving profit from the exploitative extraction of surplus value from labor, is driven from crisis to crisis by inherent tendencies toward overproduction, and tends to push the environment to its limits in its search for profitability. Like traditional Keynesianism in the national arena, GSD seeks in the global arena a new class compromise that is accompanied by new methods to contain or minimize capitalism’s tendency toward crisis. Just as the old Social Democracy and the New Deal stabilized national capitalism, the historical function of Global Social Democracy is to iron out the contradictions of contemporary global capitalism and to relegitimize it after the crisis and chaos left by neoliberalism. GSD is, at root, about social management.
Obama has a talent for rhetorically bridging different political discourses. He is also a “blank slate” when it comes to economics. Like FDR, he is not bound to the formulas of the ancien regime. He is a pragmatist whose key criterion is success at social management. As such, he is uniquely positioned to lead this ambitious reformist enterprise.
Reveille for Progressives
While progressives were engaged in full-scale war against neoliberalism, reformist thinking was percolating in critical establishment circles. This thinking is now about to become policy, and progressives must work double time to engage it. It is not just a matter of moving from criticism to prescription. The challenge is to overcome the limits to the progressive political imagination imposed by the aggressiveness of the neoliberal challenge in the 1980s combined with the collapse of the bureaucratic socialist regimes in the early 1990s. Progressives should boldly aspire once again to paradigms of social organization that unabashedly aim for equality and participatory democratic control of both the national economy and the global economy as prerequisites for collective and individual liberation.
Like the old post-war Keynesian regime, Global Social Democracy is about social management. In contrast, the progressive perspective is about social liberation.
Copyright © 2008, Institute for Policy Studies
-------
Walden Bello is a columnist for Foreign Policy In Focus, a senior analyst at the Bangkok-based Focus on the Global South, president of the Freedom from Debt Coalition, and a professor of sociology at the University of the Philippines.
One important question, of course, is how decisive and definitive the break with neoliberalism will be. Other questions, however, go to the heart of capitalism itself. Will government ownership, intervention, and control be exercised simply to stabilize capitalism, after which control will be given back to the corporate elites? Are we going to see a second round of Keynesian capitalism, where the state and corporate elites along with labor work out a partnership based on industrial policy, growth, and high wages – though with a green dimension this time around? Or will we witness the beginnings of fundamental shifts in the ownership and control of the economy in a more popular direction? There are limits to reform in the system of global capitalism, but at no other time in the last half century have those limits seemed more fluid.
President Nicolas Sarkozy of France has already staked out one position. Declaring that “laissez-faire capitalism is dead,” he has created a strategic investment fund of 20 billion euros to promote technological innovation, keep advanced industries in French hands, and save jobs. “The day we don’t build trains, airplanes, automobiles, and ships, what will be left of the French economy?” he recently asked rhetorically. “Memories. I will not make France a simple tourist reserve.” This kind of aggressive industrial policy aimed partly at winning over the country’s traditional white working class can go hand-in-hand with the exclusionary anti-immigrant policies with which the French president has been associated.
Global Social Democracy
A new national Keynesianism along Sarkozyan lines, however, is not the only alternative available to global elites. Given the need for global legitimacy to promote their interests in a world where the balance of power is shifting towards the South, western elites might find more attractive an offshoot of European Social Democracy and New Deal liberalism that one might call “Global Social Democracy” or GSD.
Even before the full unfolding of the financial crisis, partisans of GSD had already been positioning it as alternative to neoliberal globalization in response to the stresses and strains being provoked by the latter. One personality associated with it is British Prime Minister Gordon Brown, who led the European response to the financial meltdown via the partial nationalization of the banks. Widely regarded as the godfather of the “Make Poverty History” campaign in the United Kingdom, Brown, while he was still the British chancellor, proposed what he called an “alliance capitalism” between market and state institutions that would reproduce at the global stage what he said Franklin Roosevelt did for the national economy: “securing the benefits of the market while taming its excesses.” This must be a system, continued Brown, that “captures the full benefits of global markets and capital flows, minimizes the risk of disruption, maximizes opportunity for all, and lifts up the most vulnerable – in short, the restoration in the international economy of public purpose and high ideals.”
Joining Brown in articulating the Global Social Democratic discourse has been a diverse group consisting of, among others, the economist Jeffrey Sachs, George Soros, former UN Secretary General Kofi Annan, the sociologist David Held, Nobel laureate Joseph Stiglitz, and even Bill Gates. There are, of course, differences of nuance in the positions of these people, but the thrust of their perspectives is the same: to bring about a reformed social order and a reinvigorated ideological consensus for global capitalism.
Among the key propositions advanced by partisans of GSD are the following:
Globalization is essentially beneficial for the world; the neoliberals have simply botched the job of managing it and selling it to the public;
It is urgent to save globalization from the neoliberals because globalization is reversible and may, in fact, already be in the process of being reversed;
Growth and equity may come into conflict, in which case one must prioritize equity;
Free trade may not, in fact, be beneficial in the long run and may leave the majority poor, so it is important for trade arrangements to be subject to social and environmental conditions;
Unilateralism must be avoided while fundamental reform of the multilateral institutions and agreements must be undertaken – a process that might involve dumping or neutralizing some of them, like the WTO’s Trade-Related Intellectual Property Rights Agreement (TRIPs);
Global social integration, or reducing inequalities both within and across countries, must accompany global market integration;
The global debt of developing countries must be cancelled or radically reduced, so the resulting savings can be used to stimulate the local economy, thus contributing to global reflation;
Poverty and environmental degradation are so severe that a massive aid program or “Marshall Plan” from the North to the South must be mounted within the framework of the “Millennium Development Goals”;
A “Second Green Revolution” must be put into motion, especially in Africa, through the widespread adoption of genetically engineered seeds.
Huge investments must be devoted to push the global economy along more environmentally sustainable paths, with government taking a leading role (“Green Keynesianism” or “Green Capitalism”);
Military action to solve problems must be deemphasized in favor of diplomacy and “soft power,” although humanitarian military intervention in situations involving genocide must be undertaken.
The Limits of Global Social Democracy
Global Social Democracy has not received much critical attention, perhaps because many progressives are still fighting the last war, that is, against neoliberalism. A critique is urgent, and not only because GSD is neoliberalism’s most likely successor. More important, although GSD has some positive elements, it has, like the old Social Democratic Keynesian paradigm, a number of problematic features.
A critique might begin by highlighting problems with four central elements in the GSD perspective.
First, GSD shares neoliberalism’s bias for globalization, differentiating itself mainly by promising to promote globalization better than the neoliberals. This amounts to saying, however, that simply by adding the dimension of “global social integration,” an inherently socially and ecologically destructive and disruptive process can be made palatable and acceptable. GSD assumes that people really want to be part of a functionally integrated global economy where the barriers between the national and the international have disappeared. But would they not in fact prefer to be part of economies that are subject to local control and are buffered from the vagaries of the international economy? Indeed, today’s swift downward trajectory of interconnected economies underscores the validity of one of anti-globalization movement’s key criticisms of the globalization process..
Second, GSD shares neoliberalism’s preference for the market as the principal mechanism for production, distribution, and consumption, differentiating itself mainly by advocating state action to address market failures. The kind of globalization the world needs, according to Jeffrey Sachs in The End of Poverty, would entail “harnessing…the remarkable power of trade and investment while acknowledging and addressing limitations through compensatory collective action.” This is very different from saying that the citizenry and civil society must make the key economic decisions and the market, like the state bureaucracy, is only one mechanism of implementation of democratic decision-making.
Third, GSD is a technocratic project, with experts hatching and pushing reforms on society from above, instead of being a participatory project where initiatives percolate from the ground up.
Fourth, GSD, while critical of neoliberalism, accepts the framework of monopoly capitalism, which rests fundamentally on deriving profit from the exploitative extraction of surplus value from labor, is driven from crisis to crisis by inherent tendencies toward overproduction, and tends to push the environment to its limits in its search for profitability. Like traditional Keynesianism in the national arena, GSD seeks in the global arena a new class compromise that is accompanied by new methods to contain or minimize capitalism’s tendency toward crisis. Just as the old Social Democracy and the New Deal stabilized national capitalism, the historical function of Global Social Democracy is to iron out the contradictions of contemporary global capitalism and to relegitimize it after the crisis and chaos left by neoliberalism. GSD is, at root, about social management.
Obama has a talent for rhetorically bridging different political discourses. He is also a “blank slate” when it comes to economics. Like FDR, he is not bound to the formulas of the ancien regime. He is a pragmatist whose key criterion is success at social management. As such, he is uniquely positioned to lead this ambitious reformist enterprise.
Reveille for Progressives
While progressives were engaged in full-scale war against neoliberalism, reformist thinking was percolating in critical establishment circles. This thinking is now about to become policy, and progressives must work double time to engage it. It is not just a matter of moving from criticism to prescription. The challenge is to overcome the limits to the progressive political imagination imposed by the aggressiveness of the neoliberal challenge in the 1980s combined with the collapse of the bureaucratic socialist regimes in the early 1990s. Progressives should boldly aspire once again to paradigms of social organization that unabashedly aim for equality and participatory democratic control of both the national economy and the global economy as prerequisites for collective and individual liberation.
Like the old post-war Keynesian regime, Global Social Democracy is about social management. In contrast, the progressive perspective is about social liberation.
Copyright © 2008, Institute for Policy Studies
-------
Walden Bello is a columnist for Foreign Policy In Focus, a senior analyst at the Bangkok-based Focus on the Global South, president of the Freedom from Debt Coalition, and a professor of sociology at the University of the Philippines.
Dismantling the Imperial Presidency - Aziz Huq
President-elect Obama's first appointments to the Justice, State and Defense Departments mark no radical change. Rather, they return to a centrist consensus familiar from the Clinton years. But pragmatic incrementalism and studied bipartisanship will do little to undo the centerpiece of the Bush/Cheney era's legacy. At its heart, that regime was intent on forcing the Constitution into a new mold of executive dominance.
Obama enters the White House in a slipstream of forces that will hinder attempts to abandon this constitutional vision. He may be a careful constitutional scholar, but we can't rely on Obama alone to reorient the constitutional order. It will be up to progressives to insist on fundamental repudiation of the Bush/Cheney era.
At first blush, Obama's victory is cause for optimism. As a senator he roundly rejected the signature Bush/Cheney national security policies: torture, "extraordinary rendition," Guantánamo and--until July--warrantless surveillance. Obama appointees like Eric Holder as attorney general speak unequivocally against these violations of constitutional and human rights (to be sure, in Holder's case it was after early equivocation).
The most significant Bush/Cheney innovation was planted at the taproot of our Constitution. It was the insistence that the president can exercise what Cheney in 1987 called "monarchical notions of prerogative." That he can, in other words, override validly enacted statutes and treaties simply by invoking national security. This monarchical claim underwrote not only the expansion of torture, extraordinary rendition and warrantless surveillance but also the stonewalling of Congressional and judicial inquiries in the name of "executive privilege" and "state secrets."
The Bush/Cheney White House leveraged pervasive post-9/11 fears to reverse what Cheney called "the erosion of presidential power" since Watergate. Relying on pliant Justice Department lawyers for legal cover, it put into practice a vision of executive power unconstrained by Congress or the courts. It achieved what James Madison once called the "accumulation of all powers, legislative, executive and judiciary, in the same hands," which he condemned as "the very definition of tyranny."
Radical change is needed to re-establish legitimate bounds to executive power. We must again place beyond the pale Nixon's famous aphorism that "when the president does it, that means it's not illegal." But radical change--as early appointments and policy signals from the Obama transition team suggest--comes easier as campaign slogan than governing practice. And there are many reasons to fear a go-slow approach from Obama when it comes to restoring the constitutional equilibrium.
No matter how decent, any new president is tempted by the tools and trappings of executive authority. However tainted the Oval Office is now, Obama's perspective will change dramatically on entering the White House. He is already reading more daily security briefs than Bush and beginning each day with a barrage of fearful intelligence, hinting at dangers that largely never materialize. Submersion in that flow of intelligence will wrenchingly change his sense of the world's risks.
So Obama will be tempted to maintain Bush's innovations in executive power. While the terror threat remains substantial, as the Mumbai attack shows, the Bush administration has left counterterrorism policy in tatters. We have no rational strategy for terrorist interdiction and prevention. Obama's nominations of Robert Gates as defense secretary and Gen. James Jones as national security adviser suggest he is acutely aware of these deficits and of the Democrats' perceived vulnerability on national security. Nor are terrorists the only threat that might lead Obama to reach for emergency powers: credit crunches and fiscal meltdowns can also prompt unilateral executive action, with consequences as sweeping as any national security initiative.
Internal pressure for changing the White House position on executive power will thus wane as the new administration settles in. And pressure from the other two branches is unlikely to swell. The Obama White House will at first face a friendly Congress eager to show results on the economy and healthcare. Unlike the recently oppositional Congress, legislators in the majority have little incentive to make constitutional waves (expect some stalwarts, such as Senator Russ Feingold, to buck this trend). Matters are not helped by the turn from the feckless to the competent. Legislators and the public care most about the constitutional restraints on executive power when the occupant of the White House raises concerns about abuses of power. A more capable leader's entrance saps immediate pressure for reform, even when openings for such limits can be glimpsed.
Nor will the judiciary, listing rightward with President Bush's 324 appointments, provide much constraint. In his appointments to the Supreme Court and the District of Columbia Circuit Court of Appeals (which hears many key constitutional cases), Bush seems to have selected executive-power mavens, including Chief Justice John Roberts, Justice Samuel Alito and Judge Janice Rogers Brown. Their opinions already evince strong deference to executive claims of secrecy and expediency. Paradoxically, then, one of Bush's key legacies will be a judiciary that instinctually hews to an executive controlled by a Democratic president.
I am thus not optimistic that the Obama administration will of its own volition restore the constitutional balance, even if it gives up some of Bush/Cheney's most extravagant and offensive policies. With formidable forces arrayed against them, advocates for the Constitution's original equilibrium of powers must choose their battles carefully.
Three areas are particularly important in the administration's early days: torture, the law that the executive follows and accountability. In each case, measures can be taken that would correct a policy the Obama administration clearly disagrees with and simultaneously help dismantle the Bush/Cheney constitutional revolution. (The other pressing issue to face the incoming administration--detention policy--is so complex and difficult, largely thanks to the outgoing administration's compounded mistakes, that it needs to be looked at separately.)
Begin with torture. President Bush's repeated disavowals of government-sanctioned torture have created cognitive dissonance: White House protestations that "we don't torture" are no longer believed. An Obama administration dedicated to restoring America's tarnished international reputation must do more than talk. The best way to begin is for Congress to enact and President Obama to sign already introduced legislation that would limit the intelligence community to the specific interrogation tactics listed in the recently revised Army Field Manual. This law would make it clear that the CIA in particular cannot use what it euphemistically calls "enhanced interrogation techniques." In signing the law, Obama should eschew the weaseling signing provisos favored by Bush and instead forthrightly recognize that there is no presidential override when it comes to torture. This bill is a golden opportunity to restore international credibility and repudiate the monarchical presidency. So it is unfortunate that Democratic Senators Dianne Feinstein and Ron Wyden have already begun backsliding on it.
Also on the torture front, the Obama administration should candidly acknowledge past wrongs, thereby abandoning the Bush/Cheney demand for absolute secrecy. In legal cases filed by torture victims such as Maher Arar, Khaled el-Masri and Shafiq Rasul, the Bush administration has parried demands for acknowledgment or restitution with a sweeping constitutional theory of "state secrets." Rejecting this theory would be a significant step in dismantling the Bush/Cheney view of executive unilateralism. It would be the smallest measure of justice to abandon this theory as ill founded and also to offer profound apologies and restitution to victims. It would be a public acknowledgment that our fears are never an excuse for anyone's suffering.
Torture is only one aspect of a larger distortion of the Constitution. Changing the executive's operating definitions of the law will be critical to rolling back the Bush/Cheney vision. Now this vision is largely memorialized in Justice Department opinions, many still secret. Some of them directly address presidential prerogatives to override laws. Others deal with specific constitutional rights, such as Fourth Amendment privacy rights and the freedom from indefinite detention without trial.
While there is not much general public pressure to change these positions, many constitutional scholars and advocacy groups have protested these opinions. Consistent pressure is required to ensure that the Obama Justice Department cleans house. All department opinions on executive power should be revealed, and troubling ones should be red-flagged so officials will know they can no longer rely on them. The Justice Department should then develop opinions that systematically repudiate the most offensive positions, in particular the idea of monarchical prerogatives to override the law.
Traditionally, opinions have been prepared by the Office of Legal Counsel in secret and then closely held within the administration. Given executive-branch lawyers' habitual pro-presidential tilt, this process should be refashioned. Not only should opinions be made public after publication; the OLC should invite comment and criticism from the public and scholars during drafting, much as other federal regulations are subject to pre-publication "notice and comment."
Finally, there is the thorny matter of accountability. Absent accountability, the lesson of the Bush/Cheney era would be that those who violate the law can, if brazen enough, get away with it. Yet the Obama transition team has signaled no appetite for criminal proceedings. And in any case, indictments might be pre-empted by a blanket pardon before January 20.
Many others have made a compelling case for prosecutions. But what if they don't happen? Paradoxically, blanket presidential pardons may be the least bad alternative. If prosecutions proceed, they may not be edifying. Admissible evidence will be sparse, given secrecy rules. Officials will protest at being sandbagged after having relied on (flawed) OLC opinions. And there is the danger of a repeat of the Iran/Contra trials, where Oliver North used the dock as a soapbox. Given these risks, a blanket pardon perversely might send the clearest signal that the malaise of the Bush/Cheney era was endemic.
Yet this is no reason to renounce accountability. Several commentators have urged a commission to establish full documentation of what was done and its legal justifications. An investigative commission could be less amenable to manipulation than trials. If it could carry out its work in a bipartisan spirit, while insisting on the investigative tools needed to cut through secrecy, such as subpoena power, it could establish a definitive historical record of Bush/Cheney's extraordinary power grab. Bringing to public scrutiny the imperial presidency's infractions will, I suspect, be as good a way as any of thoroughly discrediting that constitutional vision.
No one should assume that the end of the Bush presidency marks the end of the imperial presidency. The Obama administration faces a geostrategic environment of growing uncertainty, with treasury, reputation and military depleted by eight feckless years. It would be foolhardy simply to assume that the worst will be swept away. Yet the opportunities exist for progressives to insist that Obama stay true to his message of hope and his promise of restoring America's tarnished Constitution.
------
Aziz Huq directs the liberty and national security project at New York University's Brennan Center for Justice. He is co-author of Unchecked and Unbalanced: Presidential Power in a Time of Terror (New Press, 2007)
Obama enters the White House in a slipstream of forces that will hinder attempts to abandon this constitutional vision. He may be a careful constitutional scholar, but we can't rely on Obama alone to reorient the constitutional order. It will be up to progressives to insist on fundamental repudiation of the Bush/Cheney era.
At first blush, Obama's victory is cause for optimism. As a senator he roundly rejected the signature Bush/Cheney national security policies: torture, "extraordinary rendition," Guantánamo and--until July--warrantless surveillance. Obama appointees like Eric Holder as attorney general speak unequivocally against these violations of constitutional and human rights (to be sure, in Holder's case it was after early equivocation).
The most significant Bush/Cheney innovation was planted at the taproot of our Constitution. It was the insistence that the president can exercise what Cheney in 1987 called "monarchical notions of prerogative." That he can, in other words, override validly enacted statutes and treaties simply by invoking national security. This monarchical claim underwrote not only the expansion of torture, extraordinary rendition and warrantless surveillance but also the stonewalling of Congressional and judicial inquiries in the name of "executive privilege" and "state secrets."
The Bush/Cheney White House leveraged pervasive post-9/11 fears to reverse what Cheney called "the erosion of presidential power" since Watergate. Relying on pliant Justice Department lawyers for legal cover, it put into practice a vision of executive power unconstrained by Congress or the courts. It achieved what James Madison once called the "accumulation of all powers, legislative, executive and judiciary, in the same hands," which he condemned as "the very definition of tyranny."
Radical change is needed to re-establish legitimate bounds to executive power. We must again place beyond the pale Nixon's famous aphorism that "when the president does it, that means it's not illegal." But radical change--as early appointments and policy signals from the Obama transition team suggest--comes easier as campaign slogan than governing practice. And there are many reasons to fear a go-slow approach from Obama when it comes to restoring the constitutional equilibrium.
No matter how decent, any new president is tempted by the tools and trappings of executive authority. However tainted the Oval Office is now, Obama's perspective will change dramatically on entering the White House. He is already reading more daily security briefs than Bush and beginning each day with a barrage of fearful intelligence, hinting at dangers that largely never materialize. Submersion in that flow of intelligence will wrenchingly change his sense of the world's risks.
So Obama will be tempted to maintain Bush's innovations in executive power. While the terror threat remains substantial, as the Mumbai attack shows, the Bush administration has left counterterrorism policy in tatters. We have no rational strategy for terrorist interdiction and prevention. Obama's nominations of Robert Gates as defense secretary and Gen. James Jones as national security adviser suggest he is acutely aware of these deficits and of the Democrats' perceived vulnerability on national security. Nor are terrorists the only threat that might lead Obama to reach for emergency powers: credit crunches and fiscal meltdowns can also prompt unilateral executive action, with consequences as sweeping as any national security initiative.
Internal pressure for changing the White House position on executive power will thus wane as the new administration settles in. And pressure from the other two branches is unlikely to swell. The Obama White House will at first face a friendly Congress eager to show results on the economy and healthcare. Unlike the recently oppositional Congress, legislators in the majority have little incentive to make constitutional waves (expect some stalwarts, such as Senator Russ Feingold, to buck this trend). Matters are not helped by the turn from the feckless to the competent. Legislators and the public care most about the constitutional restraints on executive power when the occupant of the White House raises concerns about abuses of power. A more capable leader's entrance saps immediate pressure for reform, even when openings for such limits can be glimpsed.
Nor will the judiciary, listing rightward with President Bush's 324 appointments, provide much constraint. In his appointments to the Supreme Court and the District of Columbia Circuit Court of Appeals (which hears many key constitutional cases), Bush seems to have selected executive-power mavens, including Chief Justice John Roberts, Justice Samuel Alito and Judge Janice Rogers Brown. Their opinions already evince strong deference to executive claims of secrecy and expediency. Paradoxically, then, one of Bush's key legacies will be a judiciary that instinctually hews to an executive controlled by a Democratic president.
I am thus not optimistic that the Obama administration will of its own volition restore the constitutional balance, even if it gives up some of Bush/Cheney's most extravagant and offensive policies. With formidable forces arrayed against them, advocates for the Constitution's original equilibrium of powers must choose their battles carefully.
Three areas are particularly important in the administration's early days: torture, the law that the executive follows and accountability. In each case, measures can be taken that would correct a policy the Obama administration clearly disagrees with and simultaneously help dismantle the Bush/Cheney constitutional revolution. (The other pressing issue to face the incoming administration--detention policy--is so complex and difficult, largely thanks to the outgoing administration's compounded mistakes, that it needs to be looked at separately.)
Begin with torture. President Bush's repeated disavowals of government-sanctioned torture have created cognitive dissonance: White House protestations that "we don't torture" are no longer believed. An Obama administration dedicated to restoring America's tarnished international reputation must do more than talk. The best way to begin is for Congress to enact and President Obama to sign already introduced legislation that would limit the intelligence community to the specific interrogation tactics listed in the recently revised Army Field Manual. This law would make it clear that the CIA in particular cannot use what it euphemistically calls "enhanced interrogation techniques." In signing the law, Obama should eschew the weaseling signing provisos favored by Bush and instead forthrightly recognize that there is no presidential override when it comes to torture. This bill is a golden opportunity to restore international credibility and repudiate the monarchical presidency. So it is unfortunate that Democratic Senators Dianne Feinstein and Ron Wyden have already begun backsliding on it.
Also on the torture front, the Obama administration should candidly acknowledge past wrongs, thereby abandoning the Bush/Cheney demand for absolute secrecy. In legal cases filed by torture victims such as Maher Arar, Khaled el-Masri and Shafiq Rasul, the Bush administration has parried demands for acknowledgment or restitution with a sweeping constitutional theory of "state secrets." Rejecting this theory would be a significant step in dismantling the Bush/Cheney view of executive unilateralism. It would be the smallest measure of justice to abandon this theory as ill founded and also to offer profound apologies and restitution to victims. It would be a public acknowledgment that our fears are never an excuse for anyone's suffering.
Torture is only one aspect of a larger distortion of the Constitution. Changing the executive's operating definitions of the law will be critical to rolling back the Bush/Cheney vision. Now this vision is largely memorialized in Justice Department opinions, many still secret. Some of them directly address presidential prerogatives to override laws. Others deal with specific constitutional rights, such as Fourth Amendment privacy rights and the freedom from indefinite detention without trial.
While there is not much general public pressure to change these positions, many constitutional scholars and advocacy groups have protested these opinions. Consistent pressure is required to ensure that the Obama Justice Department cleans house. All department opinions on executive power should be revealed, and troubling ones should be red-flagged so officials will know they can no longer rely on them. The Justice Department should then develop opinions that systematically repudiate the most offensive positions, in particular the idea of monarchical prerogatives to override the law.
Traditionally, opinions have been prepared by the Office of Legal Counsel in secret and then closely held within the administration. Given executive-branch lawyers' habitual pro-presidential tilt, this process should be refashioned. Not only should opinions be made public after publication; the OLC should invite comment and criticism from the public and scholars during drafting, much as other federal regulations are subject to pre-publication "notice and comment."
Finally, there is the thorny matter of accountability. Absent accountability, the lesson of the Bush/Cheney era would be that those who violate the law can, if brazen enough, get away with it. Yet the Obama transition team has signaled no appetite for criminal proceedings. And in any case, indictments might be pre-empted by a blanket pardon before January 20.
Many others have made a compelling case for prosecutions. But what if they don't happen? Paradoxically, blanket presidential pardons may be the least bad alternative. If prosecutions proceed, they may not be edifying. Admissible evidence will be sparse, given secrecy rules. Officials will protest at being sandbagged after having relied on (flawed) OLC opinions. And there is the danger of a repeat of the Iran/Contra trials, where Oliver North used the dock as a soapbox. Given these risks, a blanket pardon perversely might send the clearest signal that the malaise of the Bush/Cheney era was endemic.
Yet this is no reason to renounce accountability. Several commentators have urged a commission to establish full documentation of what was done and its legal justifications. An investigative commission could be less amenable to manipulation than trials. If it could carry out its work in a bipartisan spirit, while insisting on the investigative tools needed to cut through secrecy, such as subpoena power, it could establish a definitive historical record of Bush/Cheney's extraordinary power grab. Bringing to public scrutiny the imperial presidency's infractions will, I suspect, be as good a way as any of thoroughly discrediting that constitutional vision.
No one should assume that the end of the Bush presidency marks the end of the imperial presidency. The Obama administration faces a geostrategic environment of growing uncertainty, with treasury, reputation and military depleted by eight feckless years. It would be foolhardy simply to assume that the worst will be swept away. Yet the opportunities exist for progressives to insist that Obama stay true to his message of hope and his promise of restoring America's tarnished Constitution.
------
Aziz Huq directs the liberty and national security project at New York University's Brennan Center for Justice. He is co-author of Unchecked and Unbalanced: Presidential Power in a Time of Terror (New Press, 2007)
onsdag den 24. december 2008
Higher Wages or Bubblenomics: What's it gonna be?
Wages, wages, wages. It all gets down to wages.
A strong economy must be built on a solid foundation of steadily rising wages. If wages don't keep pace with production, the only way the economy can grow is through the expansion of debt, which leads to disaster.
Consider this: the US economy is 72 percent consumer spending. That means the Gross Domestic Product (GDP) cannot grow if salaries don't keep up with the price of living. Low Income Families (LOF)--that is, any couple making less than $80,000--represent 50 percent of all consumer spending. These LOF's spend everything they earn just to maintain their present standard of living. So, how can these families help to grow the economy if they're already spending every last farthing they earn?
They can't! Which is why wages have to go up. The cost to short-term profits is miniscule compared to the turmoil of a deep recession which is what the world is facing right now. The present crisis could have been avoided if there was a better balance between management and labor. But the unions are weak, so salaries have languished while Wall Street has grown more powerful, stretching its tentacles into the government and spreading its anti-labor dogma wherever it goes.
The investor class has rejiggered the system to meet their particular needs. Financial wizardry has replaced factories, capital formation and hard assets while real wealth has been replaced by chopped up bits of mortgage paper, stitched together by Ivy League MBAs, and sold to investors as priceless gemstones. This is the system that Bernanke is trying to resuscitate with his multi-trillion dollar injections; a system that shifts a larger and larger amount of the nation's wealth to a smaller and smaller group of elites.
When Alan Greenspan appeared before Congress a few months ago, he admitted that he had discovered a "flaw" in his theory of how markets operate. The former Fed chief was referring to his belief that investment bankers could be trusted to regulate themselves. Whether one believes Greenspan was telling the truth or not is irrelevant. What really matters is that the wily Maestro managed to skirt the larger issues and stick to his script. Congress never challenged Greenspan's discredited, trickle-down economic theories which guided his policymaking from the get-go. Nor was he asked to explain how a consumer-driven economy can thrive when salaries stay flat for 30 years. An answer to that question might have exposed Greenspan's penchant for low interest rates and deregulation, the two fuel-sources for the massive speculative bubbles which emerged on Greenspan's watch. These are the tools the Fed chief used for 18 years to enrich his buddies at the big brokerage houses while workers slipped further and further into debt.
There's no "flaw" in Greenspan's thinking; his views perfectly reflect his unwavering commitment to the rich and powerful. That's never changed. Since retiring, he has continued to ingratiate himself to his Wall Street paymasters while fattening his bank account with royalties from his best seller. Unfortunately, his success has come at great cost to the country.
Millions of homeowners are now facing eviction, consumers are tapped out, and the job market is in a shambles. When equity bubbles unwind, it's never pretty and the Greenspan implosion has been particularly nasty. Assets are being sold at fire sale prices and there's a frantic rush to the safety of US Treasurys. It's a catastrophe.
That said, it may seem like a bad time to boost workers' pay, but that's not the case. Crisis creates opportunities for change---real structural change. And that's what's needed.
The bottom line is that this whole mess could have been avoided if demand was predicated on wage increases instead of asset inflation. Of course, that precludes the Fed's traditional remedies for economic malaise--easy money and massive leveraging. Just last week, Bernanke announced a plan to buy $800 billion of securities backed by mortgages and credit card debt in an effort to stimulate more borrowing. The Fed chairman would rather drown the country in red ink than support pay raises for workers. Go figure? This just illustrates the class bias that underscores the Fed's policies, which is why pointless to debate the issue or try to find common ground. The only way to effect real change is with political power.
From Bernanke and Greenspan's perspective, any small gain by workers is tantamount to communism. They will continue to do everything in their power to preserve the current labor-debasing system which keeps workers just one paycheck away from the homeless shelter. This type of hostility is neither good for the economy nor the country. It just intensifies class animosities by accentuating the chasm between rich and poor. The only way to overcome these differences is by narrowing the wealth gap and rewarding hard work with fair pay.
John Bellamy Foster and Fred Magdoff explain how establishment economists and their corporate patrons developed their ideas of how to use equity bubbles to grow the economy and shift wealth from workers to elites. In their Monthly Review article "Financial Implosion and Stagnation":
"It was the reality of economic stagnation beginning in the 1970s, as heterodox economists Riccardo Bellofiore and Joseph Halevi have recently emphasized, that led to the emergence of “the new financialized capitalist regime,” a kind of “paradoxical financial Keynesianism” whereby demand in the economy was stimulated primarily “thanks to asset-bubbles.” Moreover, it was the leading role of the United States in generating such bubbles—despite (and also because of) the weakening of capital accumulation proper—together with the dollar’s
reserve currency status, that made U.S. monopoly-finance capital the “catalyst of world effective demand.”
Greenspan figured out how to strengthen the grip of the banking sector by creating asset bubbles. That was his great contribution during the Clinton years. The leveraging of complex financial products and the surge in real estate prices gave the impression of prosperity, but it was all smoke and mirrors. The "wealth effect" vanished as soon as the interest payments on mortgages could no longer be paid. That's when Maestro's bubble blew up and Greenspan retired to write his memoirs.
So far, world stock indexes have lost over $30 trillion and there will probably be another bloody leg down in 2009. As the underlying economy contracts, there's no need for a lumbering, oversized financial system. Institutions will have to be shut down and their assets will have to be sold at auction. That means prices will continue to fall, business activity will falter, and GDP will shrivel. The mismatch between output and falling demand presages a painful correction. When credit gets scarce, business activity slows, and nervous investors head for the exits. That forces businesses to lay off workers which causes prices to fall even further, accelerating the pace of deflation. Economist Henry Liu made these observations in his article "China and the Global financial Crisis":
"US neoliberal trade globalization, having promised a primrose garden of economic growth, has instead led the global economy into a jungle of poison reed, resulting in the worst financial disaster in a century, setting the whole world ablaze with a financial firestorm. This unhappy fate was finally acknowledged as having been policy-induced by Alan Greenspan, the former Chairman of the US Federal Reserve who was largely responsible for the monetary indulgence that had caused this hundred-year financial perfect storm....The Federal Reserve under Greenspan repeatedly created money faster than the global economy could profitably absorb, creating serial bubbles denominated in fiat dollars. Greenspan insisted that it was not possible, nor desirable, to identify an economic bubble in the making as he was inflating it with easy money, lest economic growth should be prematurely cut short. It was a perfect example of the rule that intoxication begins when a drinker becomes unable to know its time to stop drinking." (Henry C.K. Liu China and the Global Financial Crisis", Asia Times)
The Fed wants to stimulate demand by slashing the price of money to 0% while pumping trillions of dollars into the financial system (quantitative easing). But the millions of foreclosures, credit card and student loan defaults, indicate that the underlying economy is rapidly contracting and cannot support such an oversized system. Something's gotta' give. Homeowners and consumers are poorer than they were a year ago. They're focused on paying down their debts not creating new ones. Attitudes towards spending have changed; people are hunkering down. That's why Bernanke's radical liquidity experiment is doomed. There's no way to reflate a bubble if consumers refuse to spend.
If the Fed is serious about fulfilling its mandate, it should abandon its serial bubblemaking altogether and return to basics; productivity, good wages and sound money. The country's future rests on its workers. They don't need a bailout, just a raise.
A strong economy must be built on a solid foundation of steadily rising wages. If wages don't keep pace with production, the only way the economy can grow is through the expansion of debt, which leads to disaster.
Consider this: the US economy is 72 percent consumer spending. That means the Gross Domestic Product (GDP) cannot grow if salaries don't keep up with the price of living. Low Income Families (LOF)--that is, any couple making less than $80,000--represent 50 percent of all consumer spending. These LOF's spend everything they earn just to maintain their present standard of living. So, how can these families help to grow the economy if they're already spending every last farthing they earn?
They can't! Which is why wages have to go up. The cost to short-term profits is miniscule compared to the turmoil of a deep recession which is what the world is facing right now. The present crisis could have been avoided if there was a better balance between management and labor. But the unions are weak, so salaries have languished while Wall Street has grown more powerful, stretching its tentacles into the government and spreading its anti-labor dogma wherever it goes.
The investor class has rejiggered the system to meet their particular needs. Financial wizardry has replaced factories, capital formation and hard assets while real wealth has been replaced by chopped up bits of mortgage paper, stitched together by Ivy League MBAs, and sold to investors as priceless gemstones. This is the system that Bernanke is trying to resuscitate with his multi-trillion dollar injections; a system that shifts a larger and larger amount of the nation's wealth to a smaller and smaller group of elites.
When Alan Greenspan appeared before Congress a few months ago, he admitted that he had discovered a "flaw" in his theory of how markets operate. The former Fed chief was referring to his belief that investment bankers could be trusted to regulate themselves. Whether one believes Greenspan was telling the truth or not is irrelevant. What really matters is that the wily Maestro managed to skirt the larger issues and stick to his script. Congress never challenged Greenspan's discredited, trickle-down economic theories which guided his policymaking from the get-go. Nor was he asked to explain how a consumer-driven economy can thrive when salaries stay flat for 30 years. An answer to that question might have exposed Greenspan's penchant for low interest rates and deregulation, the two fuel-sources for the massive speculative bubbles which emerged on Greenspan's watch. These are the tools the Fed chief used for 18 years to enrich his buddies at the big brokerage houses while workers slipped further and further into debt.
There's no "flaw" in Greenspan's thinking; his views perfectly reflect his unwavering commitment to the rich and powerful. That's never changed. Since retiring, he has continued to ingratiate himself to his Wall Street paymasters while fattening his bank account with royalties from his best seller. Unfortunately, his success has come at great cost to the country.
Millions of homeowners are now facing eviction, consumers are tapped out, and the job market is in a shambles. When equity bubbles unwind, it's never pretty and the Greenspan implosion has been particularly nasty. Assets are being sold at fire sale prices and there's a frantic rush to the safety of US Treasurys. It's a catastrophe.
That said, it may seem like a bad time to boost workers' pay, but that's not the case. Crisis creates opportunities for change---real structural change. And that's what's needed.
The bottom line is that this whole mess could have been avoided if demand was predicated on wage increases instead of asset inflation. Of course, that precludes the Fed's traditional remedies for economic malaise--easy money and massive leveraging. Just last week, Bernanke announced a plan to buy $800 billion of securities backed by mortgages and credit card debt in an effort to stimulate more borrowing. The Fed chairman would rather drown the country in red ink than support pay raises for workers. Go figure? This just illustrates the class bias that underscores the Fed's policies, which is why pointless to debate the issue or try to find common ground. The only way to effect real change is with political power.
From Bernanke and Greenspan's perspective, any small gain by workers is tantamount to communism. They will continue to do everything in their power to preserve the current labor-debasing system which keeps workers just one paycheck away from the homeless shelter. This type of hostility is neither good for the economy nor the country. It just intensifies class animosities by accentuating the chasm between rich and poor. The only way to overcome these differences is by narrowing the wealth gap and rewarding hard work with fair pay.
John Bellamy Foster and Fred Magdoff explain how establishment economists and their corporate patrons developed their ideas of how to use equity bubbles to grow the economy and shift wealth from workers to elites. In their Monthly Review article "Financial Implosion and Stagnation":
"It was the reality of economic stagnation beginning in the 1970s, as heterodox economists Riccardo Bellofiore and Joseph Halevi have recently emphasized, that led to the emergence of “the new financialized capitalist regime,” a kind of “paradoxical financial Keynesianism” whereby demand in the economy was stimulated primarily “thanks to asset-bubbles.” Moreover, it was the leading role of the United States in generating such bubbles—despite (and also because of) the weakening of capital accumulation proper—together with the dollar’s
reserve currency status, that made U.S. monopoly-finance capital the “catalyst of world effective demand.”
Greenspan figured out how to strengthen the grip of the banking sector by creating asset bubbles. That was his great contribution during the Clinton years. The leveraging of complex financial products and the surge in real estate prices gave the impression of prosperity, but it was all smoke and mirrors. The "wealth effect" vanished as soon as the interest payments on mortgages could no longer be paid. That's when Maestro's bubble blew up and Greenspan retired to write his memoirs.
So far, world stock indexes have lost over $30 trillion and there will probably be another bloody leg down in 2009. As the underlying economy contracts, there's no need for a lumbering, oversized financial system. Institutions will have to be shut down and their assets will have to be sold at auction. That means prices will continue to fall, business activity will falter, and GDP will shrivel. The mismatch between output and falling demand presages a painful correction. When credit gets scarce, business activity slows, and nervous investors head for the exits. That forces businesses to lay off workers which causes prices to fall even further, accelerating the pace of deflation. Economist Henry Liu made these observations in his article "China and the Global financial Crisis":
"US neoliberal trade globalization, having promised a primrose garden of economic growth, has instead led the global economy into a jungle of poison reed, resulting in the worst financial disaster in a century, setting the whole world ablaze with a financial firestorm. This unhappy fate was finally acknowledged as having been policy-induced by Alan Greenspan, the former Chairman of the US Federal Reserve who was largely responsible for the monetary indulgence that had caused this hundred-year financial perfect storm....The Federal Reserve under Greenspan repeatedly created money faster than the global economy could profitably absorb, creating serial bubbles denominated in fiat dollars. Greenspan insisted that it was not possible, nor desirable, to identify an economic bubble in the making as he was inflating it with easy money, lest economic growth should be prematurely cut short. It was a perfect example of the rule that intoxication begins when a drinker becomes unable to know its time to stop drinking." (Henry C.K. Liu China and the Global Financial Crisis", Asia Times)
The Fed wants to stimulate demand by slashing the price of money to 0% while pumping trillions of dollars into the financial system (quantitative easing). But the millions of foreclosures, credit card and student loan defaults, indicate that the underlying economy is rapidly contracting and cannot support such an oversized system. Something's gotta' give. Homeowners and consumers are poorer than they were a year ago. They're focused on paying down their debts not creating new ones. Attitudes towards spending have changed; people are hunkering down. That's why Bernanke's radical liquidity experiment is doomed. There's no way to reflate a bubble if consumers refuse to spend.
If the Fed is serious about fulfilling its mandate, it should abandon its serial bubblemaking altogether and return to basics; productivity, good wages and sound money. The country's future rests on its workers. They don't need a bailout, just a raise.
World Faces "Total" Financial Meltdown: Bank of Spain Chief
The governor of the Bank of Spain on Sunday issued a bleak assessment of the economic crisis, warning that the world faced a "total" financial meltdown unseen since the Great Depression.
"The lack of confidence is total," Miguel Angel Fernandez Ordonez said in an interview with Spain's El Pais daily.
"The inter-bank (lending) market is not functioning and this is generating vicious cycles: consumers are not consuming, businessmen are not taking on workers, investors are not investing and the banks are not lending.
"There is an almost total paralysis from which no-one is escaping," he said, adding that any recovery -- pencilled in by optimists for the end of 2009 and the start of 2010 -- could be delayed if confidence is not restored.
Ordonez recognised that falling oil prices and lower taxes could kick-start a faster-than-anticipated recovery, but warned that a deepening cycle of falling consumer demand, rising unemployment and an ongoing lending squeeze could not be ruled out.
"This is the worst financial crisis since the Great Depression" of 1929, he added.
Ordonez said the European Central Bank, of which he is a governing council member, would cut interest rates in January if inflation expectations went much below two percent.
"If, among other variables, we observe that inflation expectations go much below two percent, it's logical that we will lower rates."
Regarding the dire situation in the United States, Ordonez said he backed the decision by the US Federal Reserve to cut interest rates almost to zero in the face of profound deflation fears.
Central banks are seeking to jumpstart movements on crucial interbank money markets that froze after the US market for high-risk, or subprime mortgages collapsed in mid 2007, and locked tighter after the US investment bank Lehman Brothers declared bankruptcy in mid September.
Interbank markets are a key link in the chain which provides credit to businesses and households.
Copyright AFP 2008, AFP
"The lack of confidence is total," Miguel Angel Fernandez Ordonez said in an interview with Spain's El Pais daily.
"The inter-bank (lending) market is not functioning and this is generating vicious cycles: consumers are not consuming, businessmen are not taking on workers, investors are not investing and the banks are not lending.
"There is an almost total paralysis from which no-one is escaping," he said, adding that any recovery -- pencilled in by optimists for the end of 2009 and the start of 2010 -- could be delayed if confidence is not restored.
Ordonez recognised that falling oil prices and lower taxes could kick-start a faster-than-anticipated recovery, but warned that a deepening cycle of falling consumer demand, rising unemployment and an ongoing lending squeeze could not be ruled out.
"This is the worst financial crisis since the Great Depression" of 1929, he added.
Ordonez said the European Central Bank, of which he is a governing council member, would cut interest rates in January if inflation expectations went much below two percent.
"If, among other variables, we observe that inflation expectations go much below two percent, it's logical that we will lower rates."
Regarding the dire situation in the United States, Ordonez said he backed the decision by the US Federal Reserve to cut interest rates almost to zero in the face of profound deflation fears.
Central banks are seeking to jumpstart movements on crucial interbank money markets that froze after the US market for high-risk, or subprime mortgages collapsed in mid 2007, and locked tighter after the US investment bank Lehman Brothers declared bankruptcy in mid September.
Interbank markets are a key link in the chain which provides credit to businesses and households.
Copyright AFP 2008, AFP
Capitalist Fools - Joseph Stieglitz (nobelprisvinder i økonomi).
Capitalist Fools
December 16th, 2008 · No Comments
Joseph Stiglitz in Vanity Fair argues that in the debate over remaking financial policy, it is crucial to get the history right about the causes of the crisis. He puts the blame on five key decisions and moments: Reagan’s appointment of free market zealot Greenspan as Chair of the Federal Reserve, the repeal of Glass-Steagall act and other laws that increased de-regulation of the financial sector, Bush’s tax cuts for the rich and unprecedented low interest rates that encouraged excessive borrowing and lending, failure to tackle stock options or incentive structures for rating agencies which instead encouraged everyone to hide the real figures, and finally the misdirected actions of the Bush administration to the crisis that bailed out bankers and shareholders but not those facing foreclosures of their homes.
“There will come a moment when the most urgent threats posed by the credit crisis have eased and the larger task before us will be to chart a direction for the economic steps ahead. This will be a dangerous moment. Behind the debates over future policy is a debate over history - a debate over the causes of our current situation. The battle for the past will determine the battle for the present. So it’s crucial to get the history straight.
What were the critical decisions that led to the crisis? Mistakes were made at every fork in the road - we had what engineers call a “system failure,” when not a single decision but a cascade of decisions produce a tragic result. Let’s look at five key moments.
*No. 1: Firing the Chairman*
In 1987 the Reagan administration decided to remove Paul Volcker as chairman of the Federal Reserve Board and appoint Alan Greenspan in his place. Volcker had done what central bankers are supposed to do. On his watch, inflation had been brought down from more than 11 percent to under 4 percent. In the world of central banking, that should have earned him a grade of A+++ and assured his re-appointment. But Volcker also understood that financial markets need to be regulated. Reagan wanted someone who did not believe any such thing, and he found him in a devotee of the objectivist philosopher and free-market zealot Ayn Rand.
Greenspan played a double role. The Fed controls the money spigot, and in the early years of this decade, he turned it on full force. But the Fed is also a regulator. If you appoint an anti-regulator as your enforcer, you know what kind of enforcement you’ll get. A flood of liquidity combined with the failed levees of regulation proved disastrous.
Greenspan presided over not one but two financial bubbles. After the high-tech bubble popped, in 2000-2001, he helped inflate the housing bubble. The first responsibility of a central bank should be to maintain the stability of the financial system. If banks lend on the basis of artificially high asset prices, the result can be a meltdown - as we are seeing now, and as Greenspan should have known. He had many of the tools he needed to cope with the situation. To deal with the high-tech bubble, he could have increased margin requirements (the amount of cash people need to put down to buy stock). To deflate the housing bubble, he could have curbed predatory lending to low-income households and prohibited other insidious practices (the no-documentation - or “liar” - loans, the interest-only loans, and so on). This would have gone a long way toward protecting us. If he didn’t have the tools, he could have gone to Congress and asked for them.
Of course, the current problems with our financial system are not solely the result of bad lending. The banks have made mega-bets with one another through complicated instruments such as derivatives, credit-default swaps, and so forth. With these, one party pays another if certain events happen - for instance, if Bear Stearns goes bankrupt, or if the dollar soars. These instruments were originally created to help manage risk - but they can also be used to gamble. Thus, if you felt confident that the dollar was going to fall, you could make a big bet accordingly, and if the dollar indeed fell, your profits would soar. The problem is that, with this complicated intertwining of bets of great magnitude, no one could be sure of the financial position of anyone else - or even of one’s own position. Not surprisingly, the credit markets froze.
Here too Greenspan played a role. When I was chairman of the Council of Economic Advisers, during the Clinton administration, I served on a committee of all the major federal financial regulators, a group that included Greenspan and Treasury Secretary Robert Rubin. Even then, it was clear that derivatives posed a danger. We didn’t put it as memorably as Warren Buffett - who saw derivatives as “financial weapons of mass destruction” - but we took his point. And yet, for all the risk, the deregulators in charge of the financial system - at the Fed, at the Securities and Exchange Commission, and elsewhere - decided to do nothing, worried that any action might interfere with “innovation” in the financial system. But innovation, like “change,” has no inherent value. It can be bad (the “liar” loans are a good example) as well as good.
No. 2: Tearing Down the Walls
The deregulation philosophy would pay unwelcome dividends for years to come. In November 1999, Congress repealed the Glass-Steagall Act - the culmination of a $300 million lobbying effort by the banking and financial-services industries, and spearheaded in Congress by Senator Phil Gramm. Glass-Steagall had long separated commercial banks (which lend money) and investment banks (which organize the sale of bonds and equities); it had been enacted in the aftermath of the Great Depression and was meant to curb the excesses of that era, including grave conflicts of interest. For instance, without separation, if a company whose shares had been issued by an investment bank, with its strong endorsement, got into trouble, wouldn’t its commercial arm, if it had one, feel pressure to lend it money, perhaps unwisely? An ensuing spiral of bad judgment is not hard to foresee.
I had opposed repeal of Glass-Steagall. The proponents said, in effect, Trust us: we will create Chinese walls to make sure that the problems of the past do not recur. As an economist, I certainly possessed a healthy degree of trust, trust in the power of economic incentives to bend human behavior toward self-interest - toward short-term self-interest, at any rate, rather than Tocqueville’s “self interest rightly understood.”
The most important consequence of the repeal of Glass-Steagall was indirect - it lay in the way repeal changed an entire culture. Commercial banks are not supposed to be high-risk ventures; they are supposed to manage other people’s money very conservatively. It is with this understanding that the government agrees to pick up the tab should they fail. Investment banks, on the other hand, have traditionally managed rich people’s money - people who can take bigger risks in order to get bigger returns. When repeal of Glass-Steagall brought investment and commercial banks together, the investment-bank culture came out on top. There was a demand for the kind of high returns that could be obtained only through high leverage and big risktaking.
There were other important steps down the deregulatory path. One was the decision in April 2004 by the Securities and Exchange Commission, at a meeting attended by virtually no one and largely overlooked at the time, to allow big investment banks to increase their debt-to-capital ratio (from 12:1 to 30:1, or higher) so that they could buy more mortgage-backed securities, inflating the housing bubble in the process. In agreeing to this measure, the S.E.C. argued for the virtues of self-regulation: the peculiar notion that banks can effectively police themselves. Self-regulation is preposterous, as even Alan Greenspan now concedes, and as a practical matter it can’t, in any case, identify systemic risks - the kinds of risks that arise when, for instance, the models used by each of the banks to manage their portfolios tell all the banks to sell some security all at once.
As we stripped back the old regulations, we did nothing to address the new challenges posed by 21st-century markets. The most important challenge was that posed by derivatives. In 1998 the head of the Commodity Futures Trading Commission, Brooksley Born, had called for such regulation - a concern that took on urgency after the Fed, in that same year, engineered the bailout of Long-Term Capital Management, a hedge fund whose trillion-dollar-plus failure threatened global financial markets. But Secretary of the Treasury Robert Rubin, his deputy, Larry Summers, and Greenspan were adamant - and successful - in their opposition. Nothing was done.
No. 3: Applying the Leeches
Then along came the Bush tax cuts, enacted first on June 7, 2001, with a follow-on installment two years later. The president and his advisers seemed to believe that tax cuts, especially for upper-income Americans and corporations, were a cure-all for any economic disease - the modern-day equivalent of leeches. The tax cuts played a pivotal role in shaping the background conditions of the current crisis. Because they did very little to stimulate the economy, real stimulation was left to the Fed, which took up the task with unprecedented low-interest rates and liquidity.
The war in Iraq made matters worse, because it led to soaring oil prices. With America so dependent on oil imports, we had to spend several hundred billion more to purchase oil - money that otherwise would have been spent on American goods. Normally this would have led to an economic slowdown, as it had in the 1970s. But the Fed met the challenge in the most myopic way imaginable. The flood of liquidity made money readily available in mortgage markets, even to those who would normally not be able to borrow. And, yes, this succeeded in forestalling an economic downturn; America’s household saving rate plummeted to zero. But it should have been clear that we were living on borrowed money and borrowed time.
The cut in the tax rate on capital gains contributed to the crisis in another way. It was a decision that turned on values: those who speculated (read: gambled) and won were taxed more lightly than wage earners who simply worked hard. But more than that, the decision encouraged leveraging, because interest was tax-deductible. If, for instance, you borrowed a million to buy a home or took a $100,000 home-equity loan to buy stock, the interest would be fully deductible every year. Any capital gains you made were taxed lightly - and at some possibly remote day in the future. The Bush administration was providing an open invitation to excessive borrowing and lending - not that American consumers needed any more encouragement.
No. 4: Faking the Numbers
Meanwhile, on July 30, 2002, in the wake of a series of major scandals - notably the collapse of WorldCom and Enron - Congress passed the Sarbanes-Oxley Act. The scandals had involved every major American accounting firm, most of our banks, and some of our premier companies, and made it clear that we had serious problems with our accounting system. Accounting is a sleep-inducing topic for most people, but if you can’t have faith in a company’s numbers, then you can’t have faith in anything about a company at all.
Unfortunately, in the negotiations over what became Sarbanes-Oxley a decision was made not to deal with what many, including the respected former head of the S.E.C. Arthur Levitt, believed to be a fundamental underlying problem: stock options. Stock options have been defended as providing healthy incentives toward good management, but in fact they are “incentive pay” in name only. If a company does well, the C.E.O. gets great rewards in the form of stock options; if a company does poorly, the compensation is almost as substantial but is bestowed in other ways. This is bad enough. But a collateral problem with stock options is that they provide incentives for bad accounting: top management has every incentive to provide distorted information in order to pump up share prices.
The incentive structure of the rating agencies also proved perverse. Agencies such as Moody’s and Standard & Poor’s are paid by the very people they are supposed to grade. As a result, they’ve had every reason to give companies high ratings, in a financial version of what college professors know as grade inflation. The rating agencies, like the investment banks that were paying them, believed in financial alchemy - that F-rated toxic mortgages could be converted into products that were safe enough to be held by commercial banks and pension funds. We had seen this same failure of the rating agencies during the East Asia crisis of the 1990s: high ratings facilitated a rush of money into the region, and then a sudden reversal in the ratings brought devastation. But the financial overseers paid no attention.
No. 5: Letting It Bleed
The final turning point came with the passage of a bailout package on October 3, 2008 - that is, with the administration’s response to the crisis itself. We will be feeling the consequences for years to come. Both the administration and the Fed had long been driven by wishful thinking, hoping that the bad news was just a blip, and that a return to growth was just around the corner. As America’s banks faced collapse, the administration veered from one course of action to another. Some institutions (Bear Stearns, A.I.G., Fannie Mae, Freddie Mac) were bailed out. Lehman Brothers was not. Some shareholders got something back. Others did not.
The original proposal by Treasury Secretary Henry Paulson, a three-page document that would have provided $700 billion for the secretary to spend at his sole discretion, without oversight or judicial review, was an act of extraordinary arrogance. He sold the program as necessary to restore confidence. But it didn’t address the underlying reasons for the loss of confidence. The banks had made too many bad loans. There were big holes in their balance sheets. No one knew what was truth and what was fiction.
The bailout package was like a massive transfusion to a patient suffering from internal bleeding - and nothing was being done about the source of the problem, namely all those foreclosures. Valuable time was wasted as Paulson pushed his own plan, “cash for trash,” buying up the bad assets and putting the risk onto American taxpayers. When he finally abandoned it, providing banks with money they needed, he did it in a way that not only cheated America’s taxpayers but failed to ensure that the banks would use the money to restart lending. He even allowed the banks to pour out money to their shareholders as taxpayers were pouring money into the banks.
The other problem not addressed involved the looming weaknesses in the economy. The economy had been sustained by excessive borrowing. That game was up. As consumption contracted, exports kept the economy going, but with the dollar strengthening and Europe and the rest of the world declining, it was hard to see how that could continue. Meanwhile, states faced massive drop-offs in revenues - they would have to cut back on expenditures. Without quick action by government, the economy faced a downturn. And even if banks had lent wisely - which they hadn’t - the downturn was sure to mean an increase in bad debts, further weakening the struggling financial sector.
The administration talked about confidence building, but what it delivered was actually a confidence trick. If the administration had really wanted to restore confidence in the financial system, it would have begun by addressing the underlying problems - the flawed incentive structures and the inadequate regulatory system.
Was there any single decision which, had it been reversed, would have changed the course of history? Every decision - including decisions not to do something, as many of our bad economic decisions have been - is a consequence of prior decisions, an interlinked web stretching from the distant past into the future. You’ll hear some on the right point to certain actions by the government itself - such as the Community Reinvestment Act, which requires banks to make mortgage money available in low-income neighborhoods. (Defaults on C.R.A. lending were actually much lower than on other lending.) There has been much finger-pointing at Fannie Mae and Freddie Mac, the two huge mortgage lenders, which were originally government-owned. But in fact they came late to the subprime game, and their problem was similar to that of the private sector: their C.E.O.’s had the same perverse incentive to indulge in gambling.
The truth is most of the individual mistakes boil down to just one: a belief that markets are self-adjusting and that the role of government should be minimal. Looking back at that belief during hearings this fall on Capitol Hill, Alan Greenspan said out loud, “I have found a flaw.” Congressman Henry Waxman pushed him, responding, “In other words, you found that your view of the world, your ideology, was not right; it was not working.” “Absolutely, precisely,” Greenspan said. The embrace by America - and much of the rest of the world - of this flawed economic philosophy made it inevitable that we would eventually arrive at the place we are today.
——–
/Joseph E. Stiglitz, a Nobel Prize winning economist, is a professor at Columbia University./
December 16th, 2008 · No Comments
Joseph Stiglitz in Vanity Fair argues that in the debate over remaking financial policy, it is crucial to get the history right about the causes of the crisis. He puts the blame on five key decisions and moments: Reagan’s appointment of free market zealot Greenspan as Chair of the Federal Reserve, the repeal of Glass-Steagall act and other laws that increased de-regulation of the financial sector, Bush’s tax cuts for the rich and unprecedented low interest rates that encouraged excessive borrowing and lending, failure to tackle stock options or incentive structures for rating agencies which instead encouraged everyone to hide the real figures, and finally the misdirected actions of the Bush administration to the crisis that bailed out bankers and shareholders but not those facing foreclosures of their homes.
“There will come a moment when the most urgent threats posed by the credit crisis have eased and the larger task before us will be to chart a direction for the economic steps ahead. This will be a dangerous moment. Behind the debates over future policy is a debate over history - a debate over the causes of our current situation. The battle for the past will determine the battle for the present. So it’s crucial to get the history straight.
What were the critical decisions that led to the crisis? Mistakes were made at every fork in the road - we had what engineers call a “system failure,” when not a single decision but a cascade of decisions produce a tragic result. Let’s look at five key moments.
*No. 1: Firing the Chairman*
In 1987 the Reagan administration decided to remove Paul Volcker as chairman of the Federal Reserve Board and appoint Alan Greenspan in his place. Volcker had done what central bankers are supposed to do. On his watch, inflation had been brought down from more than 11 percent to under 4 percent. In the world of central banking, that should have earned him a grade of A+++ and assured his re-appointment. But Volcker also understood that financial markets need to be regulated. Reagan wanted someone who did not believe any such thing, and he found him in a devotee of the objectivist philosopher and free-market zealot Ayn Rand.
Greenspan played a double role. The Fed controls the money spigot, and in the early years of this decade, he turned it on full force. But the Fed is also a regulator. If you appoint an anti-regulator as your enforcer, you know what kind of enforcement you’ll get. A flood of liquidity combined with the failed levees of regulation proved disastrous.
Greenspan presided over not one but two financial bubbles. After the high-tech bubble popped, in 2000-2001, he helped inflate the housing bubble. The first responsibility of a central bank should be to maintain the stability of the financial system. If banks lend on the basis of artificially high asset prices, the result can be a meltdown - as we are seeing now, and as Greenspan should have known. He had many of the tools he needed to cope with the situation. To deal with the high-tech bubble, he could have increased margin requirements (the amount of cash people need to put down to buy stock). To deflate the housing bubble, he could have curbed predatory lending to low-income households and prohibited other insidious practices (the no-documentation - or “liar” - loans, the interest-only loans, and so on). This would have gone a long way toward protecting us. If he didn’t have the tools, he could have gone to Congress and asked for them.
Of course, the current problems with our financial system are not solely the result of bad lending. The banks have made mega-bets with one another through complicated instruments such as derivatives, credit-default swaps, and so forth. With these, one party pays another if certain events happen - for instance, if Bear Stearns goes bankrupt, or if the dollar soars. These instruments were originally created to help manage risk - but they can also be used to gamble. Thus, if you felt confident that the dollar was going to fall, you could make a big bet accordingly, and if the dollar indeed fell, your profits would soar. The problem is that, with this complicated intertwining of bets of great magnitude, no one could be sure of the financial position of anyone else - or even of one’s own position. Not surprisingly, the credit markets froze.
Here too Greenspan played a role. When I was chairman of the Council of Economic Advisers, during the Clinton administration, I served on a committee of all the major federal financial regulators, a group that included Greenspan and Treasury Secretary Robert Rubin. Even then, it was clear that derivatives posed a danger. We didn’t put it as memorably as Warren Buffett - who saw derivatives as “financial weapons of mass destruction” - but we took his point. And yet, for all the risk, the deregulators in charge of the financial system - at the Fed, at the Securities and Exchange Commission, and elsewhere - decided to do nothing, worried that any action might interfere with “innovation” in the financial system. But innovation, like “change,” has no inherent value. It can be bad (the “liar” loans are a good example) as well as good.
No. 2: Tearing Down the Walls
The deregulation philosophy would pay unwelcome dividends for years to come. In November 1999, Congress repealed the Glass-Steagall Act - the culmination of a $300 million lobbying effort by the banking and financial-services industries, and spearheaded in Congress by Senator Phil Gramm. Glass-Steagall had long separated commercial banks (which lend money) and investment banks (which organize the sale of bonds and equities); it had been enacted in the aftermath of the Great Depression and was meant to curb the excesses of that era, including grave conflicts of interest. For instance, without separation, if a company whose shares had been issued by an investment bank, with its strong endorsement, got into trouble, wouldn’t its commercial arm, if it had one, feel pressure to lend it money, perhaps unwisely? An ensuing spiral of bad judgment is not hard to foresee.
I had opposed repeal of Glass-Steagall. The proponents said, in effect, Trust us: we will create Chinese walls to make sure that the problems of the past do not recur. As an economist, I certainly possessed a healthy degree of trust, trust in the power of economic incentives to bend human behavior toward self-interest - toward short-term self-interest, at any rate, rather than Tocqueville’s “self interest rightly understood.”
The most important consequence of the repeal of Glass-Steagall was indirect - it lay in the way repeal changed an entire culture. Commercial banks are not supposed to be high-risk ventures; they are supposed to manage other people’s money very conservatively. It is with this understanding that the government agrees to pick up the tab should they fail. Investment banks, on the other hand, have traditionally managed rich people’s money - people who can take bigger risks in order to get bigger returns. When repeal of Glass-Steagall brought investment and commercial banks together, the investment-bank culture came out on top. There was a demand for the kind of high returns that could be obtained only through high leverage and big risktaking.
There were other important steps down the deregulatory path. One was the decision in April 2004 by the Securities and Exchange Commission, at a meeting attended by virtually no one and largely overlooked at the time, to allow big investment banks to increase their debt-to-capital ratio (from 12:1 to 30:1, or higher) so that they could buy more mortgage-backed securities, inflating the housing bubble in the process. In agreeing to this measure, the S.E.C. argued for the virtues of self-regulation: the peculiar notion that banks can effectively police themselves. Self-regulation is preposterous, as even Alan Greenspan now concedes, and as a practical matter it can’t, in any case, identify systemic risks - the kinds of risks that arise when, for instance, the models used by each of the banks to manage their portfolios tell all the banks to sell some security all at once.
As we stripped back the old regulations, we did nothing to address the new challenges posed by 21st-century markets. The most important challenge was that posed by derivatives. In 1998 the head of the Commodity Futures Trading Commission, Brooksley Born, had called for such regulation - a concern that took on urgency after the Fed, in that same year, engineered the bailout of Long-Term Capital Management, a hedge fund whose trillion-dollar-plus failure threatened global financial markets. But Secretary of the Treasury Robert Rubin, his deputy, Larry Summers, and Greenspan were adamant - and successful - in their opposition. Nothing was done.
No. 3: Applying the Leeches
Then along came the Bush tax cuts, enacted first on June 7, 2001, with a follow-on installment two years later. The president and his advisers seemed to believe that tax cuts, especially for upper-income Americans and corporations, were a cure-all for any economic disease - the modern-day equivalent of leeches. The tax cuts played a pivotal role in shaping the background conditions of the current crisis. Because they did very little to stimulate the economy, real stimulation was left to the Fed, which took up the task with unprecedented low-interest rates and liquidity.
The war in Iraq made matters worse, because it led to soaring oil prices. With America so dependent on oil imports, we had to spend several hundred billion more to purchase oil - money that otherwise would have been spent on American goods. Normally this would have led to an economic slowdown, as it had in the 1970s. But the Fed met the challenge in the most myopic way imaginable. The flood of liquidity made money readily available in mortgage markets, even to those who would normally not be able to borrow. And, yes, this succeeded in forestalling an economic downturn; America’s household saving rate plummeted to zero. But it should have been clear that we were living on borrowed money and borrowed time.
The cut in the tax rate on capital gains contributed to the crisis in another way. It was a decision that turned on values: those who speculated (read: gambled) and won were taxed more lightly than wage earners who simply worked hard. But more than that, the decision encouraged leveraging, because interest was tax-deductible. If, for instance, you borrowed a million to buy a home or took a $100,000 home-equity loan to buy stock, the interest would be fully deductible every year. Any capital gains you made were taxed lightly - and at some possibly remote day in the future. The Bush administration was providing an open invitation to excessive borrowing and lending - not that American consumers needed any more encouragement.
No. 4: Faking the Numbers
Meanwhile, on July 30, 2002, in the wake of a series of major scandals - notably the collapse of WorldCom and Enron - Congress passed the Sarbanes-Oxley Act. The scandals had involved every major American accounting firm, most of our banks, and some of our premier companies, and made it clear that we had serious problems with our accounting system. Accounting is a sleep-inducing topic for most people, but if you can’t have faith in a company’s numbers, then you can’t have faith in anything about a company at all.
Unfortunately, in the negotiations over what became Sarbanes-Oxley a decision was made not to deal with what many, including the respected former head of the S.E.C. Arthur Levitt, believed to be a fundamental underlying problem: stock options. Stock options have been defended as providing healthy incentives toward good management, but in fact they are “incentive pay” in name only. If a company does well, the C.E.O. gets great rewards in the form of stock options; if a company does poorly, the compensation is almost as substantial but is bestowed in other ways. This is bad enough. But a collateral problem with stock options is that they provide incentives for bad accounting: top management has every incentive to provide distorted information in order to pump up share prices.
The incentive structure of the rating agencies also proved perverse. Agencies such as Moody’s and Standard & Poor’s are paid by the very people they are supposed to grade. As a result, they’ve had every reason to give companies high ratings, in a financial version of what college professors know as grade inflation. The rating agencies, like the investment banks that were paying them, believed in financial alchemy - that F-rated toxic mortgages could be converted into products that were safe enough to be held by commercial banks and pension funds. We had seen this same failure of the rating agencies during the East Asia crisis of the 1990s: high ratings facilitated a rush of money into the region, and then a sudden reversal in the ratings brought devastation. But the financial overseers paid no attention.
No. 5: Letting It Bleed
The final turning point came with the passage of a bailout package on October 3, 2008 - that is, with the administration’s response to the crisis itself. We will be feeling the consequences for years to come. Both the administration and the Fed had long been driven by wishful thinking, hoping that the bad news was just a blip, and that a return to growth was just around the corner. As America’s banks faced collapse, the administration veered from one course of action to another. Some institutions (Bear Stearns, A.I.G., Fannie Mae, Freddie Mac) were bailed out. Lehman Brothers was not. Some shareholders got something back. Others did not.
The original proposal by Treasury Secretary Henry Paulson, a three-page document that would have provided $700 billion for the secretary to spend at his sole discretion, without oversight or judicial review, was an act of extraordinary arrogance. He sold the program as necessary to restore confidence. But it didn’t address the underlying reasons for the loss of confidence. The banks had made too many bad loans. There were big holes in their balance sheets. No one knew what was truth and what was fiction.
The bailout package was like a massive transfusion to a patient suffering from internal bleeding - and nothing was being done about the source of the problem, namely all those foreclosures. Valuable time was wasted as Paulson pushed his own plan, “cash for trash,” buying up the bad assets and putting the risk onto American taxpayers. When he finally abandoned it, providing banks with money they needed, he did it in a way that not only cheated America’s taxpayers but failed to ensure that the banks would use the money to restart lending. He even allowed the banks to pour out money to their shareholders as taxpayers were pouring money into the banks.
The other problem not addressed involved the looming weaknesses in the economy. The economy had been sustained by excessive borrowing. That game was up. As consumption contracted, exports kept the economy going, but with the dollar strengthening and Europe and the rest of the world declining, it was hard to see how that could continue. Meanwhile, states faced massive drop-offs in revenues - they would have to cut back on expenditures. Without quick action by government, the economy faced a downturn. And even if banks had lent wisely - which they hadn’t - the downturn was sure to mean an increase in bad debts, further weakening the struggling financial sector.
The administration talked about confidence building, but what it delivered was actually a confidence trick. If the administration had really wanted to restore confidence in the financial system, it would have begun by addressing the underlying problems - the flawed incentive structures and the inadequate regulatory system.
Was there any single decision which, had it been reversed, would have changed the course of history? Every decision - including decisions not to do something, as many of our bad economic decisions have been - is a consequence of prior decisions, an interlinked web stretching from the distant past into the future. You’ll hear some on the right point to certain actions by the government itself - such as the Community Reinvestment Act, which requires banks to make mortgage money available in low-income neighborhoods. (Defaults on C.R.A. lending were actually much lower than on other lending.) There has been much finger-pointing at Fannie Mae and Freddie Mac, the two huge mortgage lenders, which were originally government-owned. But in fact they came late to the subprime game, and their problem was similar to that of the private sector: their C.E.O.’s had the same perverse incentive to indulge in gambling.
The truth is most of the individual mistakes boil down to just one: a belief that markets are self-adjusting and that the role of government should be minimal. Looking back at that belief during hearings this fall on Capitol Hill, Alan Greenspan said out loud, “I have found a flaw.” Congressman Henry Waxman pushed him, responding, “In other words, you found that your view of the world, your ideology, was not right; it was not working.” “Absolutely, precisely,” Greenspan said. The embrace by America - and much of the rest of the world - of this flawed economic philosophy made it inevitable that we would eventually arrive at the place we are today.
——–
/Joseph E. Stiglitz, a Nobel Prize winning economist, is a professor at Columbia University./
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