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
Viser opslag med etiketten finanskrisen. Vis alle opslag
Viser opslag med etiketten finanskrisen. Vis alle opslag
onsdag den 24. december 2008
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./
mandag den 8. december 2008
Neoliberalism and Bottom-Line Morality.
From the Reagan era onward I have been impressed with how regularly liberal and left-leaning economists I knew, who went to work in industry and finance, very soon became pro-business, anti-labor, and politically right wing. I think that what got to them was not only the impact of association with businesspeople, but the fact that business profitability became central to their own performance. As business economists, wage increases would seem bad—as encroaching on that profitability and threatening inflation and business growth (and stock prices). Tough environmental rules would also hamper profitability; their relaxation by law or friendly (non-)enforcement would enhance it. It was therefore easy to slide into what we may call "bottom-line morality," with positions on key issues dictated by prospective bottom line effects, but of course rationalized with an ideology that made this all benevolent—in the long run—and made these bottom-line moralists into Good Samaritans as they collected their fat salaries and bonuses while the vast majority waited for trickle-down. (On the fraudulence of this ideology, see David Harvey, A Brief History of Neoliberalism, and Ha-Joon Chang, Bad Samaritans.)
With the steady increase in business's economic and political power over the past 30 years and the parallel decline of organized labor, neoliberal (market-can-do-it-all) ideology has become even more firmly entrenched in establishment thought and practice. The novelist Ayn Rand, most famously the author of Atlas Shrugged, was an extreme proponent of individualist, free enterprise, anti-government ideology, and it is no coincidence that one of her cult admirers and associates, Alan Greenspan, became a leading member of the policy-making elite in the 1980s and into 2006.
Greenspan's "Superlatively Moral System"
Greenspan contributed three chapters to Rand's 1966 book Capitalism: The Unknown Ideal, all of them reflecting her—and Greenspan's—ultra laissez-faire ideology. In one, Greenspan castigates antitrust law and practice as not merely harmful, but with the "hidden intent" of injuring the "productive and efficient members of our society." In another, he claims that all government regulation represented "force and fraud" as the means of consumer protection, whereas it is "profit-seeking which is the unexcelled protector of the consumer." He argues that the market system itself is a "superlatively moral system that the welfare statists propose to improve upon by means of preventive law, snooping bureaucrats, and the chronic goad of fear."
Greenspan contributed to the workings of this "superlatively moral system" at the micro-level back in 1985, writing to the savings and loan authorities on behalf of Charles Keating, head of Lincoln Savings and Loan. In that letter the authorities were urged to exempt Keating from restrictions on risky loans, given his exceptional character and the soundness of his operation, with "no foreseeable risk to the Federal Savings and Loan Corporation." Greenspan was a paid consultant to Lincoln, which failed in 1989 at enormous expense to the FSLIC and taxpayer. Keating ended up in prison. This is the same Charles Keating with whom John McCain had a close relationship and on whose behalf McCain also did some lobbying. Neither Greenspan nor McCain suffered significant damage from this relationship and, despite his extremist ideology, Greenspan became a powerful figure in the U.S. political economy, leading the Fed for many years (1987-2006) and through two major bubbles that he did nothing to constrain.
One important manifestation of Greenspan's world view can be seen in his congressional testimony of July 22, 1997, where he explained that inflation was not increasing despite the lowering unemployment rate because of "a heightened sense of job insecurity," which he described elsewhere as reflecting the "traumatized worker," helpful in keeping wages down. He didn't suggest that job insecurity and the traumatization of workers involved any immoral "goad of fear" or had any negative implications for welfare.
Actually, in this regard Greenspan's view wasn't much different from that of a great many mainstream economists, who were slow to recognize greater job insecurity as a key factor altering the unemployment/inflation relationship, and who were not troubled when they did recognize it. Liberal economist Janet Yellen, co-author with Alan Blinder of a book on the 1990s entitled The Fabulous Decade, told the Federal Reserve Open Market Committee in 1996 that "while the labor market is tight, job insecurity is alive and well. Real wage aspirations seem modest, and the bargaining power of workers is surprisingly low" (quoted in Robert Pollin's Contours of Descent). Robert Pollin points out that Yellen and Blinder didn't let this interfere with their conclusion that the 1990s were "fabulous." Apparently these economists, like Clinton, don't really "feel pain" as long as only workers suffer.
In fact, they are all a throwback to 17th and 18th century mercantilists who, according to historian Edgar S. Furniss, argued that "high wages would prove destructive of national well-being because they would reduce England's competing power by raising production costs. The prevalent doctrine held that wages should be kept at the level of the cost of physical subsistence. Hence the apparent anomaly of the laborer's position: whereas his theoretical social importance was large, his actual economic reward was miserably small.... [Under mercantilism] the dominant class will attempt to bind the burdens upon the shoulders of those groups whose political power is too slight to defend them from exploitation and will find justification for its policies in the plea of national necessity" (Furniss, Position of the Laborer in a System of Nationalism, 1920). Does this ancient view on how burdens should be distributed have some possible application to the bailouts now being put in place to deal with the current financial crisis?
Getting back to Greenspan morality, it is clear from both his Ayn Rand contributions and his writings and public pronouncements of the past 20 years that he views untrammeled capitalism as a "superlatively moral system" not because of businesspeople's benevolence but because market operations in business's self-interest will protect consumers—business will not take on undue risk because that would eventually harm their own welfare. Regulation is thus unnecessary and positively damaging by its arbitrariness and bureaucratic bungling. Greenspan fought long and strenuously for across-the-board deregulation, and against the regulation of derivatives as they grew rapidly in the 1990s, even arguing in 2004 that the innovations like derivatives had contributed to a new stability in the financial system: "Not only have individual financial actors become less vulnerable to shocks from underlying risk factors, but also the financial system as a whole has become more resilient." Such a misunderstanding of reality by a man with great experience and access to the research resources of the Fed can only be understood as a result of the intellectual-ideological bubble within which he worked.
Now that the financial system has collapsed and its leaders have demanded and gotten a huge bailout, what does Greenspan say? Apart from an admitted bafflement, he has stated that business has been too greedy and behaved dishonorably. He is "distressed at how far we [sic] have let concerns for reputation slip in recent years." But this is hogwash. It was rational profit-making that was supposed to control risk, not honorable behavior. Also, if the actual behavior was systemic, and greed can overcome honorable behavior, the Greenspan model has failed on its own terms. But beyond that it was idiotic, as it has long been known that the force of competition, the pressure (and fiduciary obligation) for profits, and regular business myopia in buoyant markets, have repeatedly produced unsustainable excesses. Greenspan's moral model reflects straightforward ideology and bottom line morality. It is also part of a class war perspective where, as noted, labor (and the majority) are viewed in the mercantilist tradition—as a cost to be contained, not as a very large group whose welfare we are trying to maximize. It also helped cause him to misperceive economic reality and make a major and disastrous economic forecasting error.
Greenspan, Rubin, Summers, et al
Both the New York Times and Washington Post had substantial articles on Greenspan's heavy responsibility for the ongoing crisis, in a way beating a dead horse after both papers had treated him with great deference as "the Oracle" for many years (Peter Goodman, "The Reckoning: Taking a Closer Look at a Greenspan Legacy," NYT, Oct. 9, 2008; Anthony Faiola, Ellen Nakashima, and Jill Drew, "What Went Wrong," WP, October 15, 2008). The articles feature the struggle for and against derivatives regulation in the 1990s, with Brooksley E. Born, the head of the Commodity Futures Trading Commission (CFTC) as the pro-regulation protagonist and heroine, and Greenspan as principal villain.
But both articles also call attention to the support given Greenspan in his anti-regulation fight with Born by the leading financial officials of the Clinton administration: Robert Rubin, Larry Summers, and Arthur Levitt, Jr., the first two heading the U.S. Treasury, Levitt the SEC. Rubin looks particularly disingenuous in these articles, claiming to have favored regulating derivatives in 1998, but believing that this was politically unfeasible because of industry opposition and because "there was no potential for mobilizing public opinion." The Times article then paraphrases a former CFTC official that "the political climate would have been different had Mr. Rubin called for regulation."
It should also be recognized that Rubin and Summers are no slouches when it comes to supporting the bailout of fat-cat investors. In his superb book The Global Class War, Jeff Faux features the fact that the corporate establishment which dominates both U.S. political parties is part of the "Party of Davos," that gets together periodically at lush facilities in Davos, Switzerland to party, hob-nob, and plan in the interest of the global business elite. The book focuses heavily on the character and passage of the North American Free Trade Agreement (NAFTA) and then the immediately following Mexican crisis and bailout. NAFTA was a corporate project, strongly opposed by a great majority of Democratic Party voters and by a majority of Democratic legislators. But with Robert Rubin's urging, Clinton put passage of this legislation ahead of health care reform, put a huge political effort into getting it passed, and thereby set the stage for both the failure of health care reform and the Democratic Party's political debacle in 1994. Of course the business community appreciated Clinton's service and here and elsewhere he justified their earlier vetting of his candidacy, organized by Rubin himself.
Rubin had a serious conflict of interest in pushing NAFTA and the subsequent bailout of investors in Mexican securities. He had been a high-ranking official of Goldman Sachs, which did substantial Mexican business, and he had—and even continued to maintain—a number of Mexican clients. NAFTA served only the Party of Davos in the United States and a tiny elite of wealthy people who dominated a famously corrupt political system in Mexico. It was opposed by a U.S. majority and by aware and uncorrupted Mexicans; in Mexico the majority would eventually be seriously damaged by this instrument of the global class war. Its central feature was privileging foreign investors in Mexico, providing also for the gradual elimination of tariffs on agricultural goods and therefore for economic disaster for several million Mexican farmers and their families. (One of Clinton's most notable lies was his claim that NAFTA would serve to slow down Mexican immigration into the United States by spurring investment and development in Mexico.)
The analogy with the current U.S. crisis and bailout is more dramatic when we consider the Mexican crisis of 1994-1995. Shortly after the enactment of NAFTA in 1994, the Mexican government, which for political reasons had tried to peg the peso, suffered a crisis of investor confidence and an unsustainable drain on its foreign reserves. As economist David Felix described it, in the Fall of 1994 "Mexican tesobono holders began cashing in and exiting to dollars [this bond was payable in pesos but with pesos indexed to the dollar], followed belatedly by foreign holders, who were still stuck with $29 billion worth of tesobonos when in December 1994 the Mexican central bank, its dollar reserves nearly exhausted, let the exchange rate float and helplessly watched it sink. The U.S. Treasury and IMF hastily cobbled together a $51 billion bailout fund, and required the Mexican government to use over half to pay off the $29 billion tesobonos with dollars. Since the government's contractual obligation to tesobono holders was merely to pay them more pesos when the peso price of dollars rose, the bailout obligation amounted to a forced ex post rewriting of the contract with tesobono holders to save them from taking a bath" ("Why International Capital Mobility Should be Curbed, and How It Could Be Done," ICTFU, Dec. 2001).
In his chapter "Alan, Larry, and Bob Save the Privileged," Faux describes how in 1994 Greenspan, Summers, and Rubin helped create a climate of fear, telling Congress that "the entire world was now at risk." Governor George W. Bush of Texas was lauded by Rubin for "instinctively grasping what was at stake" and giving public support to the bailout. Rubin even "called Gingrich, who called Greenspan who called Rush Limbaugh to promote the bailout to the rightwing listeners of his radio show." In fact, the sales claims for the bailout were phony and the IMF financial contribution to the bailout was illegal. Mexico didn't suffer any "debt crisis" as it was only obligated to provide pesos, not dollars—the payment of dollars was forced on the Mexican government by U.S. officials, who persuaded the U.S. media that the dollar payments were required by the tesobono contracts. U.S. officials told this lie and required this payment of Mexico, not only to help U.S. investors, but also to dissuade Mexico from resorting to capital controls, which they could have done in accord with IMF rules, but which would have set a pattern in violation of the neoliberal principles being enforced on the Third World by the United States and IMF. Article 6 of the IMF Articles of Agreement not only would have allowed Mexican capital controls, it prohibits IMF emergency funding to facilitate capital flight—violated in this case in accord with U.S. demands and higher neoliberal principles (or rather interests).
Faux points out that the bailout money "was not used to rejuvenate the Mexican economy. It did not underwrite job creation for the unemployed or debt relief for the bankrupted small businesspeople or aid to hospitals and schools that were suddenly broke. It was used to make whole the Wall Street holders of tesobonos, who had originally bought the risky Mexican bonds because Salinas was giving them a high yield." Instead of capital controls Rubin and Summers insisted on budget reductions and "reform" of the Mexican financial system, which was followed by and resulted in the "steepest economic crash since the Great Depression." The Mexican middle class "was decimated" by the forced contraction and Mexican taxpayers eventually being forced to pay the bills for the bailout. Rubin claimed that this was all because "Mexico...had made a serious policy mistake." But Faux points out that "Mexico" didn't do this, but rather Salinas and his successor Zedillo, "both of whom 'Alan, Larry and Bob' had promoted to the American Congress as honest, competent reformers who had to be supported with NAFTA, even if it meant thousands of American losing their jobs."
Faux also points out that as part of NAFTA, and in the wake of the Mexican forced contraction and budget crisis, privatization of Mexican public assets was accelerated, and local oligarchs and foreign banks (and customers of Goldman Sachs) could now buy up assets at bargain prices. So the Party of Davos and its local comprador allies did very well at the same time as ordinary Mexicans were put through the wringer. As Faux says, "The NAFTA financial model—liberalization of trade and finance leading to a speculative bubble, a subsequent crash, and the protection of investors from the consequences of their own actions—was repeated in various forms in the 1990s throughout the global markets in Thailand, Brazil, Bolivia, South Korea, Indonesia, Russia and Argentina."
That was written in 2006. Now that the NAFTA financial model has hit home in the United States itself, we can see how the Party of Davos, with Goldman Sachs once again in the lead, is doing its darndest to continue to socialize risks for investors and pass off costs to ordinary citizens. And with Bob Rubin and Larry Summers waiting in the wings, the Democrats swallowing the latest bailouts, and Wall Street still funding the Party generously, we may have more of the same in a new Democratic administration.
http://zcommunications.org/zmag/viewArticle/19835
With the steady increase in business's economic and political power over the past 30 years and the parallel decline of organized labor, neoliberal (market-can-do-it-all) ideology has become even more firmly entrenched in establishment thought and practice. The novelist Ayn Rand, most famously the author of Atlas Shrugged, was an extreme proponent of individualist, free enterprise, anti-government ideology, and it is no coincidence that one of her cult admirers and associates, Alan Greenspan, became a leading member of the policy-making elite in the 1980s and into 2006.
Greenspan's "Superlatively Moral System"
Greenspan contributed three chapters to Rand's 1966 book Capitalism: The Unknown Ideal, all of them reflecting her—and Greenspan's—ultra laissez-faire ideology. In one, Greenspan castigates antitrust law and practice as not merely harmful, but with the "hidden intent" of injuring the "productive and efficient members of our society." In another, he claims that all government regulation represented "force and fraud" as the means of consumer protection, whereas it is "profit-seeking which is the unexcelled protector of the consumer." He argues that the market system itself is a "superlatively moral system that the welfare statists propose to improve upon by means of preventive law, snooping bureaucrats, and the chronic goad of fear."
Greenspan contributed to the workings of this "superlatively moral system" at the micro-level back in 1985, writing to the savings and loan authorities on behalf of Charles Keating, head of Lincoln Savings and Loan. In that letter the authorities were urged to exempt Keating from restrictions on risky loans, given his exceptional character and the soundness of his operation, with "no foreseeable risk to the Federal Savings and Loan Corporation." Greenspan was a paid consultant to Lincoln, which failed in 1989 at enormous expense to the FSLIC and taxpayer. Keating ended up in prison. This is the same Charles Keating with whom John McCain had a close relationship and on whose behalf McCain also did some lobbying. Neither Greenspan nor McCain suffered significant damage from this relationship and, despite his extremist ideology, Greenspan became a powerful figure in the U.S. political economy, leading the Fed for many years (1987-2006) and through two major bubbles that he did nothing to constrain.
One important manifestation of Greenspan's world view can be seen in his congressional testimony of July 22, 1997, where he explained that inflation was not increasing despite the lowering unemployment rate because of "a heightened sense of job insecurity," which he described elsewhere as reflecting the "traumatized worker," helpful in keeping wages down. He didn't suggest that job insecurity and the traumatization of workers involved any immoral "goad of fear" or had any negative implications for welfare.
Actually, in this regard Greenspan's view wasn't much different from that of a great many mainstream economists, who were slow to recognize greater job insecurity as a key factor altering the unemployment/inflation relationship, and who were not troubled when they did recognize it. Liberal economist Janet Yellen, co-author with Alan Blinder of a book on the 1990s entitled The Fabulous Decade, told the Federal Reserve Open Market Committee in 1996 that "while the labor market is tight, job insecurity is alive and well. Real wage aspirations seem modest, and the bargaining power of workers is surprisingly low" (quoted in Robert Pollin's Contours of Descent). Robert Pollin points out that Yellen and Blinder didn't let this interfere with their conclusion that the 1990s were "fabulous." Apparently these economists, like Clinton, don't really "feel pain" as long as only workers suffer.
In fact, they are all a throwback to 17th and 18th century mercantilists who, according to historian Edgar S. Furniss, argued that "high wages would prove destructive of national well-being because they would reduce England's competing power by raising production costs. The prevalent doctrine held that wages should be kept at the level of the cost of physical subsistence. Hence the apparent anomaly of the laborer's position: whereas his theoretical social importance was large, his actual economic reward was miserably small.... [Under mercantilism] the dominant class will attempt to bind the burdens upon the shoulders of those groups whose political power is too slight to defend them from exploitation and will find justification for its policies in the plea of national necessity" (Furniss, Position of the Laborer in a System of Nationalism, 1920). Does this ancient view on how burdens should be distributed have some possible application to the bailouts now being put in place to deal with the current financial crisis?
Getting back to Greenspan morality, it is clear from both his Ayn Rand contributions and his writings and public pronouncements of the past 20 years that he views untrammeled capitalism as a "superlatively moral system" not because of businesspeople's benevolence but because market operations in business's self-interest will protect consumers—business will not take on undue risk because that would eventually harm their own welfare. Regulation is thus unnecessary and positively damaging by its arbitrariness and bureaucratic bungling. Greenspan fought long and strenuously for across-the-board deregulation, and against the regulation of derivatives as they grew rapidly in the 1990s, even arguing in 2004 that the innovations like derivatives had contributed to a new stability in the financial system: "Not only have individual financial actors become less vulnerable to shocks from underlying risk factors, but also the financial system as a whole has become more resilient." Such a misunderstanding of reality by a man with great experience and access to the research resources of the Fed can only be understood as a result of the intellectual-ideological bubble within which he worked.
Now that the financial system has collapsed and its leaders have demanded and gotten a huge bailout, what does Greenspan say? Apart from an admitted bafflement, he has stated that business has been too greedy and behaved dishonorably. He is "distressed at how far we [sic] have let concerns for reputation slip in recent years." But this is hogwash. It was rational profit-making that was supposed to control risk, not honorable behavior. Also, if the actual behavior was systemic, and greed can overcome honorable behavior, the Greenspan model has failed on its own terms. But beyond that it was idiotic, as it has long been known that the force of competition, the pressure (and fiduciary obligation) for profits, and regular business myopia in buoyant markets, have repeatedly produced unsustainable excesses. Greenspan's moral model reflects straightforward ideology and bottom line morality. It is also part of a class war perspective where, as noted, labor (and the majority) are viewed in the mercantilist tradition—as a cost to be contained, not as a very large group whose welfare we are trying to maximize. It also helped cause him to misperceive economic reality and make a major and disastrous economic forecasting error.
Greenspan, Rubin, Summers, et al
Both the New York Times and Washington Post had substantial articles on Greenspan's heavy responsibility for the ongoing crisis, in a way beating a dead horse after both papers had treated him with great deference as "the Oracle" for many years (Peter Goodman, "The Reckoning: Taking a Closer Look at a Greenspan Legacy," NYT, Oct. 9, 2008; Anthony Faiola, Ellen Nakashima, and Jill Drew, "What Went Wrong," WP, October 15, 2008). The articles feature the struggle for and against derivatives regulation in the 1990s, with Brooksley E. Born, the head of the Commodity Futures Trading Commission (CFTC) as the pro-regulation protagonist and heroine, and Greenspan as principal villain.
But both articles also call attention to the support given Greenspan in his anti-regulation fight with Born by the leading financial officials of the Clinton administration: Robert Rubin, Larry Summers, and Arthur Levitt, Jr., the first two heading the U.S. Treasury, Levitt the SEC. Rubin looks particularly disingenuous in these articles, claiming to have favored regulating derivatives in 1998, but believing that this was politically unfeasible because of industry opposition and because "there was no potential for mobilizing public opinion." The Times article then paraphrases a former CFTC official that "the political climate would have been different had Mr. Rubin called for regulation."
It should also be recognized that Rubin and Summers are no slouches when it comes to supporting the bailout of fat-cat investors. In his superb book The Global Class War, Jeff Faux features the fact that the corporate establishment which dominates both U.S. political parties is part of the "Party of Davos," that gets together periodically at lush facilities in Davos, Switzerland to party, hob-nob, and plan in the interest of the global business elite. The book focuses heavily on the character and passage of the North American Free Trade Agreement (NAFTA) and then the immediately following Mexican crisis and bailout. NAFTA was a corporate project, strongly opposed by a great majority of Democratic Party voters and by a majority of Democratic legislators. But with Robert Rubin's urging, Clinton put passage of this legislation ahead of health care reform, put a huge political effort into getting it passed, and thereby set the stage for both the failure of health care reform and the Democratic Party's political debacle in 1994. Of course the business community appreciated Clinton's service and here and elsewhere he justified their earlier vetting of his candidacy, organized by Rubin himself.
Rubin had a serious conflict of interest in pushing NAFTA and the subsequent bailout of investors in Mexican securities. He had been a high-ranking official of Goldman Sachs, which did substantial Mexican business, and he had—and even continued to maintain—a number of Mexican clients. NAFTA served only the Party of Davos in the United States and a tiny elite of wealthy people who dominated a famously corrupt political system in Mexico. It was opposed by a U.S. majority and by aware and uncorrupted Mexicans; in Mexico the majority would eventually be seriously damaged by this instrument of the global class war. Its central feature was privileging foreign investors in Mexico, providing also for the gradual elimination of tariffs on agricultural goods and therefore for economic disaster for several million Mexican farmers and their families. (One of Clinton's most notable lies was his claim that NAFTA would serve to slow down Mexican immigration into the United States by spurring investment and development in Mexico.)
The analogy with the current U.S. crisis and bailout is more dramatic when we consider the Mexican crisis of 1994-1995. Shortly after the enactment of NAFTA in 1994, the Mexican government, which for political reasons had tried to peg the peso, suffered a crisis of investor confidence and an unsustainable drain on its foreign reserves. As economist David Felix described it, in the Fall of 1994 "Mexican tesobono holders began cashing in and exiting to dollars [this bond was payable in pesos but with pesos indexed to the dollar], followed belatedly by foreign holders, who were still stuck with $29 billion worth of tesobonos when in December 1994 the Mexican central bank, its dollar reserves nearly exhausted, let the exchange rate float and helplessly watched it sink. The U.S. Treasury and IMF hastily cobbled together a $51 billion bailout fund, and required the Mexican government to use over half to pay off the $29 billion tesobonos with dollars. Since the government's contractual obligation to tesobono holders was merely to pay them more pesos when the peso price of dollars rose, the bailout obligation amounted to a forced ex post rewriting of the contract with tesobono holders to save them from taking a bath" ("Why International Capital Mobility Should be Curbed, and How It Could Be Done," ICTFU, Dec. 2001).
In his chapter "Alan, Larry, and Bob Save the Privileged," Faux describes how in 1994 Greenspan, Summers, and Rubin helped create a climate of fear, telling Congress that "the entire world was now at risk." Governor George W. Bush of Texas was lauded by Rubin for "instinctively grasping what was at stake" and giving public support to the bailout. Rubin even "called Gingrich, who called Greenspan who called Rush Limbaugh to promote the bailout to the rightwing listeners of his radio show." In fact, the sales claims for the bailout were phony and the IMF financial contribution to the bailout was illegal. Mexico didn't suffer any "debt crisis" as it was only obligated to provide pesos, not dollars—the payment of dollars was forced on the Mexican government by U.S. officials, who persuaded the U.S. media that the dollar payments were required by the tesobono contracts. U.S. officials told this lie and required this payment of Mexico, not only to help U.S. investors, but also to dissuade Mexico from resorting to capital controls, which they could have done in accord with IMF rules, but which would have set a pattern in violation of the neoliberal principles being enforced on the Third World by the United States and IMF. Article 6 of the IMF Articles of Agreement not only would have allowed Mexican capital controls, it prohibits IMF emergency funding to facilitate capital flight—violated in this case in accord with U.S. demands and higher neoliberal principles (or rather interests).
Faux points out that the bailout money "was not used to rejuvenate the Mexican economy. It did not underwrite job creation for the unemployed or debt relief for the bankrupted small businesspeople or aid to hospitals and schools that were suddenly broke. It was used to make whole the Wall Street holders of tesobonos, who had originally bought the risky Mexican bonds because Salinas was giving them a high yield." Instead of capital controls Rubin and Summers insisted on budget reductions and "reform" of the Mexican financial system, which was followed by and resulted in the "steepest economic crash since the Great Depression." The Mexican middle class "was decimated" by the forced contraction and Mexican taxpayers eventually being forced to pay the bills for the bailout. Rubin claimed that this was all because "Mexico...had made a serious policy mistake." But Faux points out that "Mexico" didn't do this, but rather Salinas and his successor Zedillo, "both of whom 'Alan, Larry and Bob' had promoted to the American Congress as honest, competent reformers who had to be supported with NAFTA, even if it meant thousands of American losing their jobs."
Faux also points out that as part of NAFTA, and in the wake of the Mexican forced contraction and budget crisis, privatization of Mexican public assets was accelerated, and local oligarchs and foreign banks (and customers of Goldman Sachs) could now buy up assets at bargain prices. So the Party of Davos and its local comprador allies did very well at the same time as ordinary Mexicans were put through the wringer. As Faux says, "The NAFTA financial model—liberalization of trade and finance leading to a speculative bubble, a subsequent crash, and the protection of investors from the consequences of their own actions—was repeated in various forms in the 1990s throughout the global markets in Thailand, Brazil, Bolivia, South Korea, Indonesia, Russia and Argentina."
That was written in 2006. Now that the NAFTA financial model has hit home in the United States itself, we can see how the Party of Davos, with Goldman Sachs once again in the lead, is doing its darndest to continue to socialize risks for investors and pass off costs to ordinary citizens. And with Bob Rubin and Larry Summers waiting in the wings, the Democrats swallowing the latest bailouts, and Wall Street still funding the Party generously, we may have more of the same in a new Democratic administration.
http://zcommunications.org/zmag/viewArticle/19835
fredag den 17. oktober 2008
Taking Hard New Look at a Greenspan Legacy
“Not only have individual financial institutions become less vulnerable to shocks from underlying risk factors, but also the financial system as a whole has become more resilient.” — Alan Greenspan in 2004
George Soros, the prominent financier, avoids using the financial contracts known as derivatives “because we don’t really understand how they work.” Felix G. Rohatyn, the investment banker who saved New York from financial catastrophe in the 1970s, described derivatives as potential “hydrogen bombs.”
And Warren E. Buffett presciently observed five years ago that derivatives were “financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”
One prominent financial figure, however, has long thought otherwise. And his views held the greatest sway in debates about the regulation and use of derivatives — exotic contracts that promised to protect investors from losses, thereby stimulating riskier practices that led to the financial crisis. For more than a decade, the former Federal Reserve Chairman Alan Greenspan has fiercely objected whenever derivatives have come under scrutiny in Congress or on Wall Street. “What we have found over the years in the marketplace is that derivatives have been an extraordinarily useful vehicle to transfer risk from those who shouldn’t be taking it to those who are willing to and are capable of doing so,” Mr. Greenspan told the Senate Banking Committee in 2003. “We think it would be a mistake” to more deeply regulate the contracts, he added.
Today, with the world caught in an economic tempest that Mr. Greenspan recently described as “the type of wrenching financial crisis that comes along only once in a century,” his faith in derivatives remains unshaken.
The problem is not that the contracts failed, he says. Rather, the people using them got greedy. A lack of integrity spawned the crisis, he argued in a speech a week ago at Georgetown University, intimating that those peddling derivatives were not as reliable as “the pharmacist who fills the prescription ordered by our physician.”
But others hold a starkly different view of how global markets unwound, and the role that Mr. Greenspan played in setting up this unrest.
“Clearly, derivatives are a centerpiece of the crisis, and he was the leading proponent of the deregulation of derivatives,” said Frank Partnoy, a law professor at the University of San Diego and an expert on financial regulation.
The derivatives market is $531 trillion, up from $106 trillion in 2002 and a relative pittance just two decades ago. Theoretically intended to limit risk and ward off financial problems, the contracts instead have stoked uncertainty and actually spread risk amid doubts about how companies value them.
If Mr. Greenspan had acted differently during his tenure as Federal Reserve chairman from 1987 to 2006, many economists say, the current crisis might have been averted or muted.
Over the years, Mr. Greenspan helped enable an ambitious American experiment in letting market forces run free. Now, the nation is confronting the consequences.
Derivatives were created to soften — or in the argot of Wall Street, “hedge” — investment losses. For example, some of the contracts protect debt holders against losses on mortgage securities. (Their name comes from the fact that their value “derives” from underlying assets like stocks, bonds and commodities.) Many individuals own a common derivative: the insurance contract on their homes.
On a grander scale, such contracts allow financial services firms and corporations to take more complex risks that they might otherwise avoid — for example, issuing more mortgages or corporate debt. And the contracts can be traded, further limiting risk but also increasing the number of parties exposed if problems occur.
Throughout the 1990s, some argued that derivatives had become so vast, intertwined and inscrutable that they required federal oversight to protect the financial system. In meetings with federal officials, celebrated appearances on Capitol Hill and heavily attended speeches, Mr. Greenspan banked on the good will of Wall Street to self-regulate as he fended off restrictions.
Ever since housing began to collapse, Mr. Greenspan’s record has been up for revision. Economists from across the ideological spectrum have criticized his decision to let the nation’s real estate market continue to boom with cheap credit, courtesy of low interest rates, rather than snuffing out price increases with higher rates. Others have criticized Mr. Greenspan for not disciplining institutions that lent indiscriminately.
But whatever history ends up saying about those decisions, Mr. Greenspan’s legacy may ultimately rest on a more deeply embedded and much less scrutinized phenomenon: the spectacular boom and calamitous bust in derivatives trading.
Faith in the System
Some analysts say it is unfair to blame Mr. Greenspan because the crisis is so sprawling. “The notion that Greenspan could have generated a totally different outcome is naïve,” said Robert E. Hall, an economist at the conservative Hoover Institution, a research group at Stanford.
Mr. Greenspan declined requests for an interview. His spokeswoman referred questions about his record to his memoir, “The Age of Turbulence,” in which he outlines his beliefs.
“It seems superfluous to constrain trading in some of the newer derivatives and other innovative financial contracts of the past decade,” Mr. Greenspan writes. “The worst have failed; investors no longer fund them and are not likely to in the future.”
In his Georgetown speech, he entertained no talk of regulation, describing the financial turmoil as the failure of Wall Street to behave honorably.
“In a market system based on trust, reputation has a significant economic value,” Mr. Greenspan told the audience. “I am therefore distressed at how far we have let concerns for reputation slip in recent years.”
As the long-serving chairman of the Fed, the nation’s most powerful economic policy maker, Mr. Greenspan preached the transcendent, wealth-creating powers of the market.
A professed libertarian, he counted among his formative influences the novelist Ayn Rand, who portrayed collective power as an evil force set against the enlightened self-interest of individuals. In turn, he showed a resolute faith that those participating in financial markets would act responsibly.
An examination of more than two decades of Mr. Greenspan’s record on financial regulation and derivatives in particular reveals the degree to which he tethered the health of the nation’s economy to that faith.
As the nascent derivatives market took hold in the early 1990s, and in subsequent years, critics denounced an absence of rules forcing institutions to disclose their positions and set aside funds as a reserve against bad bets.
Time and again, Mr. Greenspan — a revered figure affectionately nicknamed the Oracle — proclaimed that risks could be handled by the markets themselves.
“Proposals to bring even minimalist regulation were basically rebuffed by Greenspan and various people in the Treasury,” recalled Alan S. Blinder, a former Federal Reserve board member and an economist at Princeton University. “I think of him as consistently cheerleading on derivatives.”
Arthur Levitt Jr., a former chairman of the Securities and Exchange Commission, says Mr. Greenspan opposes regulating derivatives because of a fundamental disdain for government.
Mr. Levitt said that Mr. Greenspan’s authority and grasp of global finance consistently persuaded less financially sophisticated lawmakers to follow his lead.
“I always felt that the titans of our legislature didn’t want to reveal their own inability to understand some of the concepts that Mr. Greenspan was setting forth,” Mr. Levitt said. “I don’t recall anyone ever saying, ‘What do you mean by that, Alan?’ ”
Still, over a long stretch of time, some did pose questions. In 1992, Edward J. Markey, a Democrat from Massachusetts who led the House subcommittee on telecommunications and finance, asked what was then the General Accounting Office to study derivatives risks.
Two years later, the office released its report, identifying “significant gaps and weaknesses” in the regulatory oversight of derivatives.
“The sudden failure or abrupt withdrawal from trading of any of these large U.S. dealers could cause liquidity problems in the markets and could also pose risks to others, including federally insured banks and the financial system as a whole,” Charles A. Bowsher, head of the accounting office, said when he testified before Mr. Markey’s committee in 1994. “In some cases intervention has and could result in a financial bailout paid for or guaranteed by taxpayers.”
In his testimony at the time, Mr. Greenspan was reassuring. “Risks in financial markets, including derivatives markets, are being regulated by private parties,” he said.
“There is nothing involved in federal regulation per se which makes it superior to market regulation.”
Mr. Greenspan warned that derivatives could amplify crises because they tied together the fortunes of many seemingly independent institutions. “The very efficiency that is involved here means that if a crisis were to occur, that that crisis is transmitted at a far faster pace and with some greater virulence,” he said.
But he called that possibility “extremely remote,” adding that “risk is part of life.”
Later that year, Mr. Markey introduced a bill requiring greater derivatives regulation. It never passed.
Resistance to Warnings
In 1997, the Commodity Futures Trading Commission, a federal agency that regulates options and futures trading, began exploring derivatives regulation. The commission, then led by a lawyer named Brooksley E. Born, invited comments about how best to oversee certain derivatives.
Ms. Born was concerned that unfettered, opaque trading could “threaten our regulated markets or, indeed, our economy without any federal agency knowing about it,” she said in Congressional testimony. She called for greater disclosure of trades and reserves to cushion against losses.
Ms. Born’s views incited fierce opposition from Mr. Greenspan and Robert E. Rubin, the Treasury secretary then. Treasury lawyers concluded that merely discussing new rules threatened the derivatives market. Mr. Greenspan warned that too many rules would damage Wall Street, prompting traders to take their business overseas.
“Greenspan told Brooksley that she essentially didn’t know what she was doing and she’d cause a financial crisis,” said Michael Greenberger, who was a senior director at the commission. “Brooksley was this woman who was not playing tennis with these guys and not having lunch with these guys. There was a little bit of the feeling that this woman was not of Wall Street.”
Ms. Born declined to comment. Mr. Rubin, now a senior executive at the banking giant Citigroup, says that he favored regulating derivatives — particularly increasing potential loss reserves — but that he saw no way of doing so while he was running the Treasury.
“All of the forces in the system were arrayed against it,” he said. “The industry certainly didn’t want any increase in these requirements. There was no potential for mobilizing public opinion.”
Mr. Greenberger asserts that the political climate would have been different had Mr. Rubin called for regulation.
In early 1998, Mr. Rubin’s deputy, Lawrence H. Summers, called Ms. Born and chastised her for taking steps he said would lead to a financial crisis, according to Mr. Greenberger. Mr. Summers said he could not recall the conversation but agreed with Mr. Greenspan and Mr. Rubin that Ms. Born’s proposal was “highly problematic.”
On April 21, 1998, senior federal financial regulators convened in a wood-paneled conference room at the Treasury to discuss Ms. Born’s proposal. Mr. Rubin and Mr. Greenspan implored her to reconsider, according to both Mr. Greenberger and Mr. Levitt.
Ms. Born pushed ahead. On June 5, 1998, Mr. Greenspan, Mr. Rubin and Mr. Levitt called on Congress to prevent Ms. Born from acting until more senior regulators developed their own recommendations. Mr. Levitt says he now regrets that decision. Mr. Greenspan and Mr. Rubin were “joined at the hip on this,” he said. “They were certainly very fiercely opposed to this and persuaded me that this would cause chaos.”
Ms. Born soon gained a potent example. In the fall of 1998, the hedge fund Long Term Capital Management nearly collapsed, dragged down by disastrous bets on, among other things, derivatives. More than a dozen banks pooled $3.6 billion for a private rescue to prevent the fund from slipping into bankruptcy and endangering other firms.
Despite that event, Congress froze the Commodity Futures Trading Commission’s regulatory authority for six months. The following year, Ms. Born departed.
In November 1999, senior regulators — including Mr. Greenspan and Mr. Rubin — recommended that Congress permanently strip the C.F.T.C. of regulatory authority over derivatives.
Mr. Greenspan, according to lawmakers, then used his prestige to make sure Congress followed through. “Alan was held in very high regard,” said Jim Leach, an Iowa Republican who led the House Banking and Financial Services Committee at the time. “You’ve got an area of judgment in which members of Congress have nonexistent expertise.”
As the stock market roared forward on the heels of a historic bull market, the dominant view was that the good times largely stemmed from Mr. Greenspan’s steady hand at the Fed.
“You will go down as the greatest chairman in the history of the Federal Reserve Bank,” declared Senator Phil Gramm, the Texas Republican who was chairman of the Senate Banking Committee when Mr. Greenspan appeared there in February 1999.
Mr. Greenspan’s credentials and confidence reinforced his reputation — helping him to persuade Congress to repeal Depression-era laws that separated commercial and investment banking in order to reduce overall risk in the financial system.
“He had a way of speaking that made you think he knew exactly what he was talking about at all times,” said Senator Tom Harkin, a Democrat from Iowa. “He was able to say things in a way that made people not want to question him on anything, like he knew it all. He was the Oracle, and who were you to question him?”
In 2000, Mr. Harkin asked what might happen if Congress weakened the C.F.T.C.’s authority.
“If you have this exclusion and something unforeseen happens, who does something about it?” he asked Mr. Greenspan in a hearing.
Mr. Greenspan said that Wall Street could be trusted. “There is a very fundamental trade-off of what type of economy you wish to have,” he said. “You can have huge amounts of regulation and I will guarantee nothing will go wrong, but nothing will go right either,” he said.
Later that year, at a Congressional hearing on the merger boom, he argued that Wall Street had tamed risk.
“Aren’t you concerned with such a growing concentration of wealth that if one of these huge institutions fails that it will have a horrendous impact on the national and global economy?” asked Representative Bernard Sanders, an independent from Vermont.
“No, I’m not,” Mr. Greenspan replied. “I believe that the general growth in large institutions have occurred in the context of an underlying structure of markets in which many of the larger risks are dramatically — I should say, fully — hedged.”
The House overwhelmingly passed the bill that kept derivatives clear of C.F.T.C. oversight. Senator Gramm attached a rider limiting the C.F.T.C.’s authority to an 11,000-page appropriations bill. The Senate passed it. President Clinton signed it into law.
Pressing Forward
Still, savvy investors like Mr. Buffett continued to raise alarms about derivatives, as he did in 2003, in his annual letter to shareholders of his company, Berkshire Hathaway.
“Large amounts of risk, particularly credit risk, have become concentrated in the hands of relatively few derivatives dealers,” he wrote. “The troubles of one could quickly infect the others.”
But business continued.
And when Mr. Greenspan began to hear of a housing bubble, he dismissed the threat. Wall Street was using derivatives, he said in a 2004 speech, to share risks with other firms.
Shared risk has since evolved from a source of comfort into a virus. As the housing crisis grew and mortgages went bad, derivatives actually magnified the downturn.
The Wall Street debacle that swallowed firms like Bear Stearns and Lehman Brothers, and imperiled the insurance giant American International Group, has been driven by the fact that they and their customers were linked to one another by derivatives.
In recent months, as the financial crisis has gathered momentum, Mr. Greenspan’s public appearances have become less frequent.
His memoir was released in the middle of 2007, as the disaster was unfolding, and his book tour suddenly became a referendum on his policies. When the paperback version came out this year, Mr. Greenspan wrote an epilogue that offers a rebuttal of sorts.
“Risk management can never achieve perfection,” he wrote. The villains, he wrote, were the bankers whose self-interest he had once bet upon.
“They gambled that they could keep adding to their risky positions and still sell them out before the deluge,” he wrote. “Most were wrong.”
No federal intervention was marshaled to try to stop them, but Mr. Greenspan has no regrets.
“Governments and central banks,” he wrote, “could not have altered the course of the boom.”
George Soros, the prominent financier, avoids using the financial contracts known as derivatives “because we don’t really understand how they work.” Felix G. Rohatyn, the investment banker who saved New York from financial catastrophe in the 1970s, described derivatives as potential “hydrogen bombs.”
And Warren E. Buffett presciently observed five years ago that derivatives were “financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”
One prominent financial figure, however, has long thought otherwise. And his views held the greatest sway in debates about the regulation and use of derivatives — exotic contracts that promised to protect investors from losses, thereby stimulating riskier practices that led to the financial crisis. For more than a decade, the former Federal Reserve Chairman Alan Greenspan has fiercely objected whenever derivatives have come under scrutiny in Congress or on Wall Street. “What we have found over the years in the marketplace is that derivatives have been an extraordinarily useful vehicle to transfer risk from those who shouldn’t be taking it to those who are willing to and are capable of doing so,” Mr. Greenspan told the Senate Banking Committee in 2003. “We think it would be a mistake” to more deeply regulate the contracts, he added.
Today, with the world caught in an economic tempest that Mr. Greenspan recently described as “the type of wrenching financial crisis that comes along only once in a century,” his faith in derivatives remains unshaken.
The problem is not that the contracts failed, he says. Rather, the people using them got greedy. A lack of integrity spawned the crisis, he argued in a speech a week ago at Georgetown University, intimating that those peddling derivatives were not as reliable as “the pharmacist who fills the prescription ordered by our physician.”
But others hold a starkly different view of how global markets unwound, and the role that Mr. Greenspan played in setting up this unrest.
“Clearly, derivatives are a centerpiece of the crisis, and he was the leading proponent of the deregulation of derivatives,” said Frank Partnoy, a law professor at the University of San Diego and an expert on financial regulation.
The derivatives market is $531 trillion, up from $106 trillion in 2002 and a relative pittance just two decades ago. Theoretically intended to limit risk and ward off financial problems, the contracts instead have stoked uncertainty and actually spread risk amid doubts about how companies value them.
If Mr. Greenspan had acted differently during his tenure as Federal Reserve chairman from 1987 to 2006, many economists say, the current crisis might have been averted or muted.
Over the years, Mr. Greenspan helped enable an ambitious American experiment in letting market forces run free. Now, the nation is confronting the consequences.
Derivatives were created to soften — or in the argot of Wall Street, “hedge” — investment losses. For example, some of the contracts protect debt holders against losses on mortgage securities. (Their name comes from the fact that their value “derives” from underlying assets like stocks, bonds and commodities.) Many individuals own a common derivative: the insurance contract on their homes.
On a grander scale, such contracts allow financial services firms and corporations to take more complex risks that they might otherwise avoid — for example, issuing more mortgages or corporate debt. And the contracts can be traded, further limiting risk but also increasing the number of parties exposed if problems occur.
Throughout the 1990s, some argued that derivatives had become so vast, intertwined and inscrutable that they required federal oversight to protect the financial system. In meetings with federal officials, celebrated appearances on Capitol Hill and heavily attended speeches, Mr. Greenspan banked on the good will of Wall Street to self-regulate as he fended off restrictions.
Ever since housing began to collapse, Mr. Greenspan’s record has been up for revision. Economists from across the ideological spectrum have criticized his decision to let the nation’s real estate market continue to boom with cheap credit, courtesy of low interest rates, rather than snuffing out price increases with higher rates. Others have criticized Mr. Greenspan for not disciplining institutions that lent indiscriminately.
But whatever history ends up saying about those decisions, Mr. Greenspan’s legacy may ultimately rest on a more deeply embedded and much less scrutinized phenomenon: the spectacular boom and calamitous bust in derivatives trading.
Faith in the System
Some analysts say it is unfair to blame Mr. Greenspan because the crisis is so sprawling. “The notion that Greenspan could have generated a totally different outcome is naïve,” said Robert E. Hall, an economist at the conservative Hoover Institution, a research group at Stanford.
Mr. Greenspan declined requests for an interview. His spokeswoman referred questions about his record to his memoir, “The Age of Turbulence,” in which he outlines his beliefs.
“It seems superfluous to constrain trading in some of the newer derivatives and other innovative financial contracts of the past decade,” Mr. Greenspan writes. “The worst have failed; investors no longer fund them and are not likely to in the future.”
In his Georgetown speech, he entertained no talk of regulation, describing the financial turmoil as the failure of Wall Street to behave honorably.
“In a market system based on trust, reputation has a significant economic value,” Mr. Greenspan told the audience. “I am therefore distressed at how far we have let concerns for reputation slip in recent years.”
As the long-serving chairman of the Fed, the nation’s most powerful economic policy maker, Mr. Greenspan preached the transcendent, wealth-creating powers of the market.
A professed libertarian, he counted among his formative influences the novelist Ayn Rand, who portrayed collective power as an evil force set against the enlightened self-interest of individuals. In turn, he showed a resolute faith that those participating in financial markets would act responsibly.
An examination of more than two decades of Mr. Greenspan’s record on financial regulation and derivatives in particular reveals the degree to which he tethered the health of the nation’s economy to that faith.
As the nascent derivatives market took hold in the early 1990s, and in subsequent years, critics denounced an absence of rules forcing institutions to disclose their positions and set aside funds as a reserve against bad bets.
Time and again, Mr. Greenspan — a revered figure affectionately nicknamed the Oracle — proclaimed that risks could be handled by the markets themselves.
“Proposals to bring even minimalist regulation were basically rebuffed by Greenspan and various people in the Treasury,” recalled Alan S. Blinder, a former Federal Reserve board member and an economist at Princeton University. “I think of him as consistently cheerleading on derivatives.”
Arthur Levitt Jr., a former chairman of the Securities and Exchange Commission, says Mr. Greenspan opposes regulating derivatives because of a fundamental disdain for government.
Mr. Levitt said that Mr. Greenspan’s authority and grasp of global finance consistently persuaded less financially sophisticated lawmakers to follow his lead.
“I always felt that the titans of our legislature didn’t want to reveal their own inability to understand some of the concepts that Mr. Greenspan was setting forth,” Mr. Levitt said. “I don’t recall anyone ever saying, ‘What do you mean by that, Alan?’ ”
Still, over a long stretch of time, some did pose questions. In 1992, Edward J. Markey, a Democrat from Massachusetts who led the House subcommittee on telecommunications and finance, asked what was then the General Accounting Office to study derivatives risks.
Two years later, the office released its report, identifying “significant gaps and weaknesses” in the regulatory oversight of derivatives.
“The sudden failure or abrupt withdrawal from trading of any of these large U.S. dealers could cause liquidity problems in the markets and could also pose risks to others, including federally insured banks and the financial system as a whole,” Charles A. Bowsher, head of the accounting office, said when he testified before Mr. Markey’s committee in 1994. “In some cases intervention has and could result in a financial bailout paid for or guaranteed by taxpayers.”
In his testimony at the time, Mr. Greenspan was reassuring. “Risks in financial markets, including derivatives markets, are being regulated by private parties,” he said.
“There is nothing involved in federal regulation per se which makes it superior to market regulation.”
Mr. Greenspan warned that derivatives could amplify crises because they tied together the fortunes of many seemingly independent institutions. “The very efficiency that is involved here means that if a crisis were to occur, that that crisis is transmitted at a far faster pace and with some greater virulence,” he said.
But he called that possibility “extremely remote,” adding that “risk is part of life.”
Later that year, Mr. Markey introduced a bill requiring greater derivatives regulation. It never passed.
Resistance to Warnings
In 1997, the Commodity Futures Trading Commission, a federal agency that regulates options and futures trading, began exploring derivatives regulation. The commission, then led by a lawyer named Brooksley E. Born, invited comments about how best to oversee certain derivatives.
Ms. Born was concerned that unfettered, opaque trading could “threaten our regulated markets or, indeed, our economy without any federal agency knowing about it,” she said in Congressional testimony. She called for greater disclosure of trades and reserves to cushion against losses.
Ms. Born’s views incited fierce opposition from Mr. Greenspan and Robert E. Rubin, the Treasury secretary then. Treasury lawyers concluded that merely discussing new rules threatened the derivatives market. Mr. Greenspan warned that too many rules would damage Wall Street, prompting traders to take their business overseas.
“Greenspan told Brooksley that she essentially didn’t know what she was doing and she’d cause a financial crisis,” said Michael Greenberger, who was a senior director at the commission. “Brooksley was this woman who was not playing tennis with these guys and not having lunch with these guys. There was a little bit of the feeling that this woman was not of Wall Street.”
Ms. Born declined to comment. Mr. Rubin, now a senior executive at the banking giant Citigroup, says that he favored regulating derivatives — particularly increasing potential loss reserves — but that he saw no way of doing so while he was running the Treasury.
“All of the forces in the system were arrayed against it,” he said. “The industry certainly didn’t want any increase in these requirements. There was no potential for mobilizing public opinion.”
Mr. Greenberger asserts that the political climate would have been different had Mr. Rubin called for regulation.
In early 1998, Mr. Rubin’s deputy, Lawrence H. Summers, called Ms. Born and chastised her for taking steps he said would lead to a financial crisis, according to Mr. Greenberger. Mr. Summers said he could not recall the conversation but agreed with Mr. Greenspan and Mr. Rubin that Ms. Born’s proposal was “highly problematic.”
On April 21, 1998, senior federal financial regulators convened in a wood-paneled conference room at the Treasury to discuss Ms. Born’s proposal. Mr. Rubin and Mr. Greenspan implored her to reconsider, according to both Mr. Greenberger and Mr. Levitt.
Ms. Born pushed ahead. On June 5, 1998, Mr. Greenspan, Mr. Rubin and Mr. Levitt called on Congress to prevent Ms. Born from acting until more senior regulators developed their own recommendations. Mr. Levitt says he now regrets that decision. Mr. Greenspan and Mr. Rubin were “joined at the hip on this,” he said. “They were certainly very fiercely opposed to this and persuaded me that this would cause chaos.”
Ms. Born soon gained a potent example. In the fall of 1998, the hedge fund Long Term Capital Management nearly collapsed, dragged down by disastrous bets on, among other things, derivatives. More than a dozen banks pooled $3.6 billion for a private rescue to prevent the fund from slipping into bankruptcy and endangering other firms.
Despite that event, Congress froze the Commodity Futures Trading Commission’s regulatory authority for six months. The following year, Ms. Born departed.
In November 1999, senior regulators — including Mr. Greenspan and Mr. Rubin — recommended that Congress permanently strip the C.F.T.C. of regulatory authority over derivatives.
Mr. Greenspan, according to lawmakers, then used his prestige to make sure Congress followed through. “Alan was held in very high regard,” said Jim Leach, an Iowa Republican who led the House Banking and Financial Services Committee at the time. “You’ve got an area of judgment in which members of Congress have nonexistent expertise.”
As the stock market roared forward on the heels of a historic bull market, the dominant view was that the good times largely stemmed from Mr. Greenspan’s steady hand at the Fed.
“You will go down as the greatest chairman in the history of the Federal Reserve Bank,” declared Senator Phil Gramm, the Texas Republican who was chairman of the Senate Banking Committee when Mr. Greenspan appeared there in February 1999.
Mr. Greenspan’s credentials and confidence reinforced his reputation — helping him to persuade Congress to repeal Depression-era laws that separated commercial and investment banking in order to reduce overall risk in the financial system.
“He had a way of speaking that made you think he knew exactly what he was talking about at all times,” said Senator Tom Harkin, a Democrat from Iowa. “He was able to say things in a way that made people not want to question him on anything, like he knew it all. He was the Oracle, and who were you to question him?”
In 2000, Mr. Harkin asked what might happen if Congress weakened the C.F.T.C.’s authority.
“If you have this exclusion and something unforeseen happens, who does something about it?” he asked Mr. Greenspan in a hearing.
Mr. Greenspan said that Wall Street could be trusted. “There is a very fundamental trade-off of what type of economy you wish to have,” he said. “You can have huge amounts of regulation and I will guarantee nothing will go wrong, but nothing will go right either,” he said.
Later that year, at a Congressional hearing on the merger boom, he argued that Wall Street had tamed risk.
“Aren’t you concerned with such a growing concentration of wealth that if one of these huge institutions fails that it will have a horrendous impact on the national and global economy?” asked Representative Bernard Sanders, an independent from Vermont.
“No, I’m not,” Mr. Greenspan replied. “I believe that the general growth in large institutions have occurred in the context of an underlying structure of markets in which many of the larger risks are dramatically — I should say, fully — hedged.”
The House overwhelmingly passed the bill that kept derivatives clear of C.F.T.C. oversight. Senator Gramm attached a rider limiting the C.F.T.C.’s authority to an 11,000-page appropriations bill. The Senate passed it. President Clinton signed it into law.
Pressing Forward
Still, savvy investors like Mr. Buffett continued to raise alarms about derivatives, as he did in 2003, in his annual letter to shareholders of his company, Berkshire Hathaway.
“Large amounts of risk, particularly credit risk, have become concentrated in the hands of relatively few derivatives dealers,” he wrote. “The troubles of one could quickly infect the others.”
But business continued.
And when Mr. Greenspan began to hear of a housing bubble, he dismissed the threat. Wall Street was using derivatives, he said in a 2004 speech, to share risks with other firms.
Shared risk has since evolved from a source of comfort into a virus. As the housing crisis grew and mortgages went bad, derivatives actually magnified the downturn.
The Wall Street debacle that swallowed firms like Bear Stearns and Lehman Brothers, and imperiled the insurance giant American International Group, has been driven by the fact that they and their customers were linked to one another by derivatives.
In recent months, as the financial crisis has gathered momentum, Mr. Greenspan’s public appearances have become less frequent.
His memoir was released in the middle of 2007, as the disaster was unfolding, and his book tour suddenly became a referendum on his policies. When the paperback version came out this year, Mr. Greenspan wrote an epilogue that offers a rebuttal of sorts.
“Risk management can never achieve perfection,” he wrote. The villains, he wrote, were the bankers whose self-interest he had once bet upon.
“They gambled that they could keep adding to their risky positions and still sell them out before the deluge,” he wrote. “Most were wrong.”
No federal intervention was marshaled to try to stop them, but Mr. Greenspan has no regrets.
“Governments and central banks,” he wrote, “could not have altered the course of the boom.”
Oxford Research Group: The Financial Crisis and Sustainable Security
Introduction
Oxford Research Group’s International Security Monthly Briefings focus primarily on issues such as the conflicts in Iraq, Afghanistan and Pakistan, the evolution of western counter-terrorism policies and the development of the al-Qaida movement. On occasions they also cover matters such as energy security, climate change and world food prospects. In view of the serious financial situation that has developed in recent months, this briefing provides an initial analysis of the possible impact of the crisis on security.
This is undertaken in the context of ORG’s work on sustainable security which, in turn, is predicated on an underlying analysis of the security issues that are likely to be most prominent in the next two to three decades. This assesses that there are four main trends that are particularly salient.
Firstly, global socio-economic divisions are widening, with most of the benefits of the past three decades of economic growth being concentrated in the hands of a trans-global elite community of about 1.2 billion people, mainly in the countries of the Atlantic community and the West Pacific, but with elite communities in the tens of millions in countries such as China, India and Brazil. Improvements in education, literacy and communications in recent decades have increased the awareness of many marginalised people of this unjust distribution of wealth. In extreme circumstances this can lead to the rise of violent and extreme social movements such as the Naxalites in India.
Secondly, climate change is expected to have profound effects on that majority of the world’s population living in the tropical and sub-tropical regions but without the economic resources to respond to severe storms, rising sea levels and drastic changes in rainfall distribution. Increased migration and social and political unrest are likely consequences.
Thirdly, resource competition, especially over energy resources in the Persian Gulf region and elsewhere, will, on present trends, be an increasing source of tension and conflict.
Lastly, the strong tendency of powerful elites to maintain security, by military force if necessary, is expected to be counter-productive, as has already been seen by many of the consequences of the war on terror.
Countering such trends involves a fundamental commitment to emancipation and socio-economic justice. This includes fair trade, debt cancellation, assistance for sustainable development, a radical cut in carbon emissions, rapidly increased use of renewable energy resources and the development of conflict prevention and conflict resolution policies that avoid the use of force (see Beyond Terror).
The Financial Crisis and Historical Experience
The current crisis has three main characteristics:
* It is global. While most emphasis was initially on the sub-prime market in the United States, the crisis has spread rapidly through the UK and across Europe, has resulted in a 60% fall in the Shanghai stock market in a year, steep stock market falls across much of Latin America and bank crises in Australia and New Zealand.
* It has initially been a crisis of liquidity and confidence in the financial sector rather than a decline in industrial and retail activities, but it is expected to have a substantial effect on industrial and commercial output as sources of investment finance diminish.
* It is likely to last at least two years, with several more years for recovery.
Prior to the sub-prime issue, the international economy was already affected by rapid oil price rises and a more general bull market of rising prices for primary commodities. One early effect was a substantial increase in food prices that had a particular impact on poorer communities across the world (see the May 2008 briefing, Food Poverty and Security).
The 2008 crisis is not directly comparable to the 1929 Wall Street crash, which was not truly global, nor to the 1987 stock market problems in Europe nor even the widespread Asian downturn of the 1990s, even though these had some global ramifications. The only comparable previous global crisis was that of 1973-74. Then, unilateral moves by Arab oil producers during the Yom Kippur/Ramadan War of October 1973 precipitated a remarkable 450% increase in oil prices within ten months, resulting in an unusual combination of economic stagnation and inflation. A parallel issue was a rapid increase food prices.
The worst excesses of the food crisis were averted partly by a decline in food prices because of the onset of the recession, together with some emergency aid coming from some of the newly-rich oil producers. The experience of stagflation in industrial countries resulted less in a move towards mixed economies with a higher level of state planning, and more to the development of free-market ideas, not least in the form of what was later termed “Reaganomics”.
The 25 years from 1980 saw the rapid development of free market globalisation that stimulated substantial economic growth but with a notable lack of socio-economic justice as wealth-poverty divisions widened. Towards the end of the 2000s, the combination of oil price rises and economic overextension, especially in sub-prime markets, resulted in a transnational banking crisis.
Impacts on Poorer Communities
Some aspects of the current crisis will have relatively little impact on poorer communities. For example, oil prices are unlikely to maintain their current levels as demand falls due to a decline in economic activity. It would be possible for oil producers to act together to maintain higher prices but this is unlikely for two reasons. One is that the Organisation of Petroleum Exporting Countries (OPEC) does not have sufficient political unity to exert control over the market, unlike the 1973-74 period. The second is that sovereign wealth funds and other investment vehicles of some oil-rich states depend on buoyant stock markets in North America, Europe and East Asia. Maintaining very high oil prices would therefore tend to damage such investments.
Lower oil prices will be of some help to poorer countries struggling to meet the higher costs of their oil imports. Furthermore, the oil price decline is also likely to have some impact on food prices, resulting in price decreases that will be of some help to the poorest communities.
These, though, are among the few aspects of the current economic environment that might have some limited advantage for poorer people. In almost every other respect the outcome is less positive. For example, weak economies in major countries that normally attract migrant labour mean that remittances from labourers to their home countries will diminish as jobs become scarcer and wages decline. Such remittances are not just important across South and Southeast Asia but are also important for several Latin American economies. Furthermore, increases in unemployment in countries that are destinations for migrant workers will lead to a reaction against such workers, as has been seen recently in South Africa. This can readily extend to increased support for far-right political parties.
Another early consequence of an economic downturn will be a decline in international tourism and travel. Whatever the damaging impact that tourism can have on poorer communities, it is still the case that there is some monetary transfer involved, and some poorer states depend heavily in such earnings.
More importantly, a decline in economic activity will have a substantial impact on commodity prices, affecting the export earnings for poorer countries for a wide range of commodities including copper, tin, coffee, tea, sugar, cotton and hardwoods. Even now, many southern countries depend on such commodity exports for the substantial majority of all their export earnings. It is here that previous experience is particularly relevant to the current crisis and its effects on the majority world.
A New International Economic Order?
In the early 1970s, a substantial increase in commodity prices put the economies of most industrialised countries under some strain, especially as they were also experiencing the oil price rises. The UN Conference on Trade and Development (UNCTAD) had already been attempting to bring a degree of planning into world commodity markets, encouraging individual commodity agreements for products such as coffee and tin that were designed to provide stability along with some slow but steady increases in prices. Such agreements were seen as helping to alter the terms of trade between third world and industrialised states in a manner that would greatly improve the development prospects of the former.
By early 1974 the wild fluctuations in commodity markets were so marked that industrialised countries such as the US, UK, France and Japan were ready to accept the need for international market planning, and a Declaration on a New International Economic Order was agreed at a special session of the UN General Assembly in April 1974. The core of this proposal was the Integrated Programme for Commodities (IPC) which would bring in a series of linked commodity agreements backed by a Common Fund to finance the setting up of the necessary commodity buffer stocks. At the time many development economists believed that the IPC could provide a really valuable boost to the development prospects of many poorer countries, helping to bring in a new era of fair trade. However, that it was even proposed was mainly due to the temporary problems being faced by the world’s wealthy economies.
In the event, the increase in oil prices resulted in a decrease in industrial activity, a fall in primary commodity prices and, almost immediately, a general loss of interest in the IPC by the major industrial powers. What was eventually established, later in the 1970s, was a pale shadow of the original programme, and this had little impact as the era of the free market unfolded in the 1980s. The loss of that programme is a reminder that, in times of economic downturn, the prospects for poorer communities rarely loom large in the recovery policies of the world’s wealthy states.
Such behaviour has reached almost grotesque proportions in the current crisis, with wealthy states willing to commit more than a trillion dollars to rescue their own banking system in crisis. These are financial outlays that are enormous when compared with those that are being committed to achieving the United Nations Millennium Development Goals.
Responding to the Current Crisis
Although the current crisis does not have direct historical parallels, the marked tendency will therefore be for the most powerful economies to engage primarily in responding to their own problems. Much of this will be at the level of individual states, such as recent US Government intervention in the mortgage and insurance markets and numerous interventions across Europe. There is also likely to be some degree of cooperation between the more wealthy states of the North Atlantic community, drawn mainly from the members of the OECD.
Previous experience indicates that the emphasis will be almost entirely on domestic concerns rather than the wider global community. While this might provide some relief among the poorer sectors of the populations of wealthy states, it will do nothing to help the much larger numbers of impoverished people of the majority world. Moreover, further action to limit third world debt is unlikely and there will almost certainly be pressure on aid budgets. Even key issues such as climate change and the risk of resource conflict are likely to slip down the political agenda.
The implications of this are serious, in that any hindrance to facilitating sustainable development across the countries of the South will increase human insecurity and suffering. Furthermore, any limitation in addressing the urgent issue of climate change will just add to the problems of the South as the damaging effects of climate change increase their impact. Some of the most fragile of the world’s economies, from much of Africa through to Southwest Asia, will suffer most from economic recession and the impact of climate change. More generally, the bitterness that already exists across continents will be reinforced by a perception that the dominant economies have little or no interest in the majority of the world’s people.
Even so, it is just possible that the current crisis will be seen to necessitate a serious reconsideration of how the world economy has evolved in the past three decades. In essence, the nature of the globalised free market is being called into question amidst demands for considerable reforms. The reason for this may well be the manner in which the free market has allowed the current crisis of liquidity and confidence to develop in the wealthy economies, rather than that the free market has increased socio-economic divisions. The extent to which the reforms will be instituted will depend to some extent on the depth and duration of the current crisis but at the time of writing (early October) there are indications that it could well be severe and prolonged.
What could come out of this might be reforms that not only respond to the crisis in the western banking system but also address the deeper global inequalities that have developed in recent years. For that to happen there will need to be a degree of political wisdom on the part of some national governments, accompanied by visionary proposals by intergovernmental agencies, such as some of the specialised agencies of the United Nations. There are notable past examples of this, not least the Prebisch Plan on trade and development in 1963 that prompted UNCTAD’s early work, the UN Environment Programme’s work on ozone depletion in the mid-1980s and recent intergovernmental work on climate change.
However, there is little prospect of effective change if it is left solely to governments and inter-governmental agencies. The richer states will look to their own predicaments, and their influence in intergovernmental organisations may limit new proposals. What is essential is the sustained action of nongovernmental organisations as part of a wider civil society. Responding to the current crisis can either be a process limited to the narrow domestic concerns of the most powerful states or it can be seen as an opportunity for reform of the world’s economic system that will benefit the majority world. The timescale is the next two to five years, the likely duration of the current crisis, and the stakes are high.
Link til pdf-filen.
Oxford Research Group’s International Security Monthly Briefings focus primarily on issues such as the conflicts in Iraq, Afghanistan and Pakistan, the evolution of western counter-terrorism policies and the development of the al-Qaida movement. On occasions they also cover matters such as energy security, climate change and world food prospects. In view of the serious financial situation that has developed in recent months, this briefing provides an initial analysis of the possible impact of the crisis on security.
This is undertaken in the context of ORG’s work on sustainable security which, in turn, is predicated on an underlying analysis of the security issues that are likely to be most prominent in the next two to three decades. This assesses that there are four main trends that are particularly salient.
Firstly, global socio-economic divisions are widening, with most of the benefits of the past three decades of economic growth being concentrated in the hands of a trans-global elite community of about 1.2 billion people, mainly in the countries of the Atlantic community and the West Pacific, but with elite communities in the tens of millions in countries such as China, India and Brazil. Improvements in education, literacy and communications in recent decades have increased the awareness of many marginalised people of this unjust distribution of wealth. In extreme circumstances this can lead to the rise of violent and extreme social movements such as the Naxalites in India.
Secondly, climate change is expected to have profound effects on that majority of the world’s population living in the tropical and sub-tropical regions but without the economic resources to respond to severe storms, rising sea levels and drastic changes in rainfall distribution. Increased migration and social and political unrest are likely consequences.
Thirdly, resource competition, especially over energy resources in the Persian Gulf region and elsewhere, will, on present trends, be an increasing source of tension and conflict.
Lastly, the strong tendency of powerful elites to maintain security, by military force if necessary, is expected to be counter-productive, as has already been seen by many of the consequences of the war on terror.
Countering such trends involves a fundamental commitment to emancipation and socio-economic justice. This includes fair trade, debt cancellation, assistance for sustainable development, a radical cut in carbon emissions, rapidly increased use of renewable energy resources and the development of conflict prevention and conflict resolution policies that avoid the use of force (see Beyond Terror).
The Financial Crisis and Historical Experience
The current crisis has three main characteristics:
* It is global. While most emphasis was initially on the sub-prime market in the United States, the crisis has spread rapidly through the UK and across Europe, has resulted in a 60% fall in the Shanghai stock market in a year, steep stock market falls across much of Latin America and bank crises in Australia and New Zealand.
* It has initially been a crisis of liquidity and confidence in the financial sector rather than a decline in industrial and retail activities, but it is expected to have a substantial effect on industrial and commercial output as sources of investment finance diminish.
* It is likely to last at least two years, with several more years for recovery.
Prior to the sub-prime issue, the international economy was already affected by rapid oil price rises and a more general bull market of rising prices for primary commodities. One early effect was a substantial increase in food prices that had a particular impact on poorer communities across the world (see the May 2008 briefing, Food Poverty and Security).
The 2008 crisis is not directly comparable to the 1929 Wall Street crash, which was not truly global, nor to the 1987 stock market problems in Europe nor even the widespread Asian downturn of the 1990s, even though these had some global ramifications. The only comparable previous global crisis was that of 1973-74. Then, unilateral moves by Arab oil producers during the Yom Kippur/Ramadan War of October 1973 precipitated a remarkable 450% increase in oil prices within ten months, resulting in an unusual combination of economic stagnation and inflation. A parallel issue was a rapid increase food prices.
The worst excesses of the food crisis were averted partly by a decline in food prices because of the onset of the recession, together with some emergency aid coming from some of the newly-rich oil producers. The experience of stagflation in industrial countries resulted less in a move towards mixed economies with a higher level of state planning, and more to the development of free-market ideas, not least in the form of what was later termed “Reaganomics”.
The 25 years from 1980 saw the rapid development of free market globalisation that stimulated substantial economic growth but with a notable lack of socio-economic justice as wealth-poverty divisions widened. Towards the end of the 2000s, the combination of oil price rises and economic overextension, especially in sub-prime markets, resulted in a transnational banking crisis.
Impacts on Poorer Communities
Some aspects of the current crisis will have relatively little impact on poorer communities. For example, oil prices are unlikely to maintain their current levels as demand falls due to a decline in economic activity. It would be possible for oil producers to act together to maintain higher prices but this is unlikely for two reasons. One is that the Organisation of Petroleum Exporting Countries (OPEC) does not have sufficient political unity to exert control over the market, unlike the 1973-74 period. The second is that sovereign wealth funds and other investment vehicles of some oil-rich states depend on buoyant stock markets in North America, Europe and East Asia. Maintaining very high oil prices would therefore tend to damage such investments.
Lower oil prices will be of some help to poorer countries struggling to meet the higher costs of their oil imports. Furthermore, the oil price decline is also likely to have some impact on food prices, resulting in price decreases that will be of some help to the poorest communities.
These, though, are among the few aspects of the current economic environment that might have some limited advantage for poorer people. In almost every other respect the outcome is less positive. For example, weak economies in major countries that normally attract migrant labour mean that remittances from labourers to their home countries will diminish as jobs become scarcer and wages decline. Such remittances are not just important across South and Southeast Asia but are also important for several Latin American economies. Furthermore, increases in unemployment in countries that are destinations for migrant workers will lead to a reaction against such workers, as has been seen recently in South Africa. This can readily extend to increased support for far-right political parties.
Another early consequence of an economic downturn will be a decline in international tourism and travel. Whatever the damaging impact that tourism can have on poorer communities, it is still the case that there is some monetary transfer involved, and some poorer states depend heavily in such earnings.
More importantly, a decline in economic activity will have a substantial impact on commodity prices, affecting the export earnings for poorer countries for a wide range of commodities including copper, tin, coffee, tea, sugar, cotton and hardwoods. Even now, many southern countries depend on such commodity exports for the substantial majority of all their export earnings. It is here that previous experience is particularly relevant to the current crisis and its effects on the majority world.
A New International Economic Order?
In the early 1970s, a substantial increase in commodity prices put the economies of most industrialised countries under some strain, especially as they were also experiencing the oil price rises. The UN Conference on Trade and Development (UNCTAD) had already been attempting to bring a degree of planning into world commodity markets, encouraging individual commodity agreements for products such as coffee and tin that were designed to provide stability along with some slow but steady increases in prices. Such agreements were seen as helping to alter the terms of trade between third world and industrialised states in a manner that would greatly improve the development prospects of the former.
By early 1974 the wild fluctuations in commodity markets were so marked that industrialised countries such as the US, UK, France and Japan were ready to accept the need for international market planning, and a Declaration on a New International Economic Order was agreed at a special session of the UN General Assembly in April 1974. The core of this proposal was the Integrated Programme for Commodities (IPC) which would bring in a series of linked commodity agreements backed by a Common Fund to finance the setting up of the necessary commodity buffer stocks. At the time many development economists believed that the IPC could provide a really valuable boost to the development prospects of many poorer countries, helping to bring in a new era of fair trade. However, that it was even proposed was mainly due to the temporary problems being faced by the world’s wealthy economies.
In the event, the increase in oil prices resulted in a decrease in industrial activity, a fall in primary commodity prices and, almost immediately, a general loss of interest in the IPC by the major industrial powers. What was eventually established, later in the 1970s, was a pale shadow of the original programme, and this had little impact as the era of the free market unfolded in the 1980s. The loss of that programme is a reminder that, in times of economic downturn, the prospects for poorer communities rarely loom large in the recovery policies of the world’s wealthy states.
Such behaviour has reached almost grotesque proportions in the current crisis, with wealthy states willing to commit more than a trillion dollars to rescue their own banking system in crisis. These are financial outlays that are enormous when compared with those that are being committed to achieving the United Nations Millennium Development Goals.
Responding to the Current Crisis
Although the current crisis does not have direct historical parallels, the marked tendency will therefore be for the most powerful economies to engage primarily in responding to their own problems. Much of this will be at the level of individual states, such as recent US Government intervention in the mortgage and insurance markets and numerous interventions across Europe. There is also likely to be some degree of cooperation between the more wealthy states of the North Atlantic community, drawn mainly from the members of the OECD.
Previous experience indicates that the emphasis will be almost entirely on domestic concerns rather than the wider global community. While this might provide some relief among the poorer sectors of the populations of wealthy states, it will do nothing to help the much larger numbers of impoverished people of the majority world. Moreover, further action to limit third world debt is unlikely and there will almost certainly be pressure on aid budgets. Even key issues such as climate change and the risk of resource conflict are likely to slip down the political agenda.
The implications of this are serious, in that any hindrance to facilitating sustainable development across the countries of the South will increase human insecurity and suffering. Furthermore, any limitation in addressing the urgent issue of climate change will just add to the problems of the South as the damaging effects of climate change increase their impact. Some of the most fragile of the world’s economies, from much of Africa through to Southwest Asia, will suffer most from economic recession and the impact of climate change. More generally, the bitterness that already exists across continents will be reinforced by a perception that the dominant economies have little or no interest in the majority of the world’s people.
Even so, it is just possible that the current crisis will be seen to necessitate a serious reconsideration of how the world economy has evolved in the past three decades. In essence, the nature of the globalised free market is being called into question amidst demands for considerable reforms. The reason for this may well be the manner in which the free market has allowed the current crisis of liquidity and confidence to develop in the wealthy economies, rather than that the free market has increased socio-economic divisions. The extent to which the reforms will be instituted will depend to some extent on the depth and duration of the current crisis but at the time of writing (early October) there are indications that it could well be severe and prolonged.
What could come out of this might be reforms that not only respond to the crisis in the western banking system but also address the deeper global inequalities that have developed in recent years. For that to happen there will need to be a degree of political wisdom on the part of some national governments, accompanied by visionary proposals by intergovernmental agencies, such as some of the specialised agencies of the United Nations. There are notable past examples of this, not least the Prebisch Plan on trade and development in 1963 that prompted UNCTAD’s early work, the UN Environment Programme’s work on ozone depletion in the mid-1980s and recent intergovernmental work on climate change.
However, there is little prospect of effective change if it is left solely to governments and inter-governmental agencies. The richer states will look to their own predicaments, and their influence in intergovernmental organisations may limit new proposals. What is essential is the sustained action of nongovernmental organisations as part of a wider civil society. Responding to the current crisis can either be a process limited to the narrow domestic concerns of the most powerful states or it can be seen as an opportunity for reform of the world’s economic system that will benefit the majority world. The timescale is the next two to five years, the likely duration of the current crisis, and the stakes are high.
Link til pdf-filen.
The global economic crisis: An historic opportunity for transformation
An initial response from individuals, social movements and non-governmental organisations in support of a transitional programme for radical economic transformation Beijing, 15 October 2008
Preamble
Taking advantage of the opportunity of so many people from movements gathering in Beijing during the Asia-Europe People’s Forum, the Transnational Institute and Focus on the Global South convened informal nightly meetings between 13 and 15 October 2008. We took stock of the meaning of the unfolding global economic crisis and the opportunity it presents for us to put into the public domain some of the inspiring and feasible alternatives many of us have been working on for decades. This statement represents the collective outcome of our Beijing nights. We, the initial signatories, mean this to be a contribution towards efforts to formulate proposals around which our movements can organise as the basis for a radically different kind of political and economic order. Please sign on to this statement by adding your name in the comments section.
The Crisis
The global financial system is unravelling at great speed. This is happening in the midst of a multiplicity of crises in relation to food, climate and energy. It severely weakens the power of the US and the EU, and the global institutions they dominate, particularly the International Monetary Fund, the World Bank and the World Trade Organisation. Not only is the legitimacy of the neo-liberal paradigm in question, but the very future of capitalism itself.
Such is the chaos in the global financial system that Northern governments have resorted to measures progressive movements have advocated for years, such as nationalisation of banks. These moves are intended, however, as short-term stabilisation measures and once the storm clears, they are likely to return the banks to the private sector. We have a short window of opportunity to mobilise so that they are not.
The challenge and the opportunity
We are entering uncharted terrain with this conjuncture of profound crises – the fall out from the financial crisis will be severe. People are being thrown into a deep sense of insecurity; misery and hardship will increase for many poorer people everywhere. We should not cede this moment to fascist, right wing populist, xenophobic groups, who will surely try to take advantage of people’s fear and anger for reactionary ends.
Powerful movements against neo-liberalism have been built over many decades. This will grow as critical coverage of the crisis enlightens more people, who are already angry at public funds being diverted to pay for problems they are not responsible for creating, and already concerned about the ecological crisis and rising prices – especially of food and energy. The movements will grow further as recession starts to bite and economies start sinking into depression.
There is a new openness to alternatives. To capture people’s attention and support, they must be practical and immediately feasible. We have convincing alternatives that are already underway, and we have many other good ideas attempted in the past, but defeated. Our alternatives put the well-being of people and the planet at their centre. For this, democratic control over financial and economic institutions are required. This is the “red thread” connecting up the proposals presented below.
Proposals for debate, elaboration and action
Finance
* Introduce full-scale socialisation of banks, not just nationalisation of bad assets.
* Create people-based banking institutions and strengthen existing popular forms of lending based on mutuality and solidarity.
* Institutionalise full transparency within the financial system through the opening of the books to the public, to be facilitated by citizen and worker organisations.
* Introduce parliamentary and citizens’ oversight of the existing banking system
* Apply social ( including labour conditions) and environmental criteria to all lending, including for business purposes
* Prioritise lending, at minimum rates of interest, to meet social and environmental needs and to expand the already growing social economy
* Overhaul central banks in line with democratically determined social, environmental and expansionary (to counter the recession) objectives, and make them publicly accountable institutions.
* Safeguard migrant remittances to their families and introduce legislation to restrict charges and taxes on transfers
Taxation
* Close all tax havens
* End tax breaks for fossil fuel and nuclear energy companies
* Apply stringent progressive tax systems
* Introduce a global taxation system to prevent transfer pricing and tax evasion
* Introduce a levy on nationalised bank profits with which to establish citizen investment funds (see below)
* Impose stringent progressive carbon taxes on those with the biggest carbon footprints
* Adopt controls, such as Tobin taxes, on the movements of speculative capital
* Re-introduce tariffs and duties on imports of luxury goods and other goods already produced locally as a means of increasing the state’s fiscal base, as well as a means to support local production and thereby reduce carbon emissions globally
Public Spending and Investment
* Radically reduce military spending
* Redirect government spending from bailing out bankers to guaranteeing basic incomes and social security, and providing universally accessible basic social services such as housing, water, electricity, health, education, child care, and access to the internet and other public communications facilities.
* Use citizen funds (see above) to support very poor communities
* Ensure that people at risk of losing their homes due to defaults on mortgages caused by the crisis are offered renegotiated terms of payment
* Stop privatisations of public services
* Establish public enterprises under the control of parliaments, local communities and/or workers to increase employment
* Improve the performance of public enterprises through democratising management - encourage public service managers, staff, unions and consumer organisations to collaborate to this end
* Introduce participatory budgeting over public finances at all feasible levels
* Invest massively in improved energy efficiency, low carbon emitting public transport, renewable energy and environmental repair
* Control or subsidise the prices of basic commodities
International Trade and Finance
* Introduce a permanent global ban on short-selling of stock and shares
* Ban on trade in derivatives
* Ban all speculation on staple food commodities
* Cancel the debt of all developing countries – debt is mounting as the crisis causes the value of Southern currencies to fall
* Support the United Nations call to be involved in discussions about how the to resolve the crisis, which is going to have a much bigger impact on Southern economies than is currently being acknowledged
* Phase out the World Bank, International Monetary Fund, and World Trade Organisation
* Phase out the US dollar as the international reserve currency
* Establish a people’s inquiry into the mechanisms necessary for a just international monetary system.
* Ensure aid transfers do not fall as a result of the crisis
* Abolish tied aid
* Abolish neo-liberal aid conditionalities
* Phase out the paradigm of export-led development, and refocus sustainable development on production for the local and regional market
* Introduce incentives for products produced for sale closest to the local market
* Cancel all negotiations for bilateral free trade and economic partnership agreements
* Promote regional economic co-operation arrangements, such as UNASUR, the Bolivarian Alternative for the Americas (ALBA), the Trade Treaty of the Peoples and others, that encourage genuine development and an end to poverty.
Environment
* Introduce a global system of compensation for countries which do not exploit fossil fuel reserves in the global interests of limiting effects on the climate, such as Ecuador has proposed.
* Pay reparations to Southern countries for the ecological destruction wrought by the North to assist peoples of the South to deal with climate change and other environmental crises.
* Strictly implement the “precautionary principle” of the UN Declaration on the Right to Development as a condition for all developmental and environmental projects.
* End lending for projects under the Kyoto Protocol’s “Clean Development Mechanism” that are environmentally destructive, such as monoculture plantations of eucalyptus, soya and palm oil.
* Stop the development of carbon trading and other environmentally counter-productive techno-fixes, such as carbon capture and sequestration, agrofuels, nuclear power and ‘clean coal’ technology.
* Adopt strategies to radically reduce consumption in the rich countries, while promoting sustainable development in poorer countries
* Introduce democratic management of all international funding mechanisms for climate change mitigation, with strong participation from Southern countries and civil society.
Agriculture and Industry
* Phase out the pernicious paradigm of industry-led development, where the rural sector is squeezed to provide the resources necessary to support industrialisation and urbanisation
* Promote agricultural strategies aimed at achieving food security, food sovereignty and sustainable farming.
* Promote land reforms and other measures which support small holder agriculture and sustain peasant and indigenous communities
* Stop the spread of socially and environmentally destructive mono-cultural enterprises.
* Stop labour law reforms aimed at extending hours of work and making it easier for employers to fire or retrench workers
* Secure jobs through outlawing precarious low paid work
* Guarantee equal pay for equal work for women – as a basic principle and to help counter the coming recession by increasing workers’ capacity to consume.
* Protect the rights of migrant workers in the event of job losses, ensuring their safe return to and reintegration into their home countries. For those who cannot return, there should be no forced return, their security should be guaranteed, and they should be provided with employment or a basic minimum income.
Conclusion
These are all practical, common sense proposals. Some are initiatives already underway and demonstrably feasible. Their successes need to be publicised and popularised so as to inspire reproduction. Others are unlikely to be implemented on their objective merits alone. Political will is required. By implication, therefore, every proposal is a call to action.
We have written what we see as a living document to be developed and enriched by us all. Please sign on to this statement at the bottom of the page.
A future occasion to come together to work on the actions needed to make these ideas and others a reality will be the World Social Forum in Belem, Brazil at the end of January 2009.
We have the experience and the ideas - let’s meet the challenge of the present ruling disorder and keep the momentum towards an alternative rolling!!
Preamble
Taking advantage of the opportunity of so many people from movements gathering in Beijing during the Asia-Europe People’s Forum, the Transnational Institute and Focus on the Global South convened informal nightly meetings between 13 and 15 October 2008. We took stock of the meaning of the unfolding global economic crisis and the opportunity it presents for us to put into the public domain some of the inspiring and feasible alternatives many of us have been working on for decades. This statement represents the collective outcome of our Beijing nights. We, the initial signatories, mean this to be a contribution towards efforts to formulate proposals around which our movements can organise as the basis for a radically different kind of political and economic order. Please sign on to this statement by adding your name in the comments section.
The Crisis
The global financial system is unravelling at great speed. This is happening in the midst of a multiplicity of crises in relation to food, climate and energy. It severely weakens the power of the US and the EU, and the global institutions they dominate, particularly the International Monetary Fund, the World Bank and the World Trade Organisation. Not only is the legitimacy of the neo-liberal paradigm in question, but the very future of capitalism itself.
Such is the chaos in the global financial system that Northern governments have resorted to measures progressive movements have advocated for years, such as nationalisation of banks. These moves are intended, however, as short-term stabilisation measures and once the storm clears, they are likely to return the banks to the private sector. We have a short window of opportunity to mobilise so that they are not.
The challenge and the opportunity
We are entering uncharted terrain with this conjuncture of profound crises – the fall out from the financial crisis will be severe. People are being thrown into a deep sense of insecurity; misery and hardship will increase for many poorer people everywhere. We should not cede this moment to fascist, right wing populist, xenophobic groups, who will surely try to take advantage of people’s fear and anger for reactionary ends.
Powerful movements against neo-liberalism have been built over many decades. This will grow as critical coverage of the crisis enlightens more people, who are already angry at public funds being diverted to pay for problems they are not responsible for creating, and already concerned about the ecological crisis and rising prices – especially of food and energy. The movements will grow further as recession starts to bite and economies start sinking into depression.
There is a new openness to alternatives. To capture people’s attention and support, they must be practical and immediately feasible. We have convincing alternatives that are already underway, and we have many other good ideas attempted in the past, but defeated. Our alternatives put the well-being of people and the planet at their centre. For this, democratic control over financial and economic institutions are required. This is the “red thread” connecting up the proposals presented below.
Proposals for debate, elaboration and action
Finance
* Introduce full-scale socialisation of banks, not just nationalisation of bad assets.
* Create people-based banking institutions and strengthen existing popular forms of lending based on mutuality and solidarity.
* Institutionalise full transparency within the financial system through the opening of the books to the public, to be facilitated by citizen and worker organisations.
* Introduce parliamentary and citizens’ oversight of the existing banking system
* Apply social ( including labour conditions) and environmental criteria to all lending, including for business purposes
* Prioritise lending, at minimum rates of interest, to meet social and environmental needs and to expand the already growing social economy
* Overhaul central banks in line with democratically determined social, environmental and expansionary (to counter the recession) objectives, and make them publicly accountable institutions.
* Safeguard migrant remittances to their families and introduce legislation to restrict charges and taxes on transfers
Taxation
* Close all tax havens
* End tax breaks for fossil fuel and nuclear energy companies
* Apply stringent progressive tax systems
* Introduce a global taxation system to prevent transfer pricing and tax evasion
* Introduce a levy on nationalised bank profits with which to establish citizen investment funds (see below)
* Impose stringent progressive carbon taxes on those with the biggest carbon footprints
* Adopt controls, such as Tobin taxes, on the movements of speculative capital
* Re-introduce tariffs and duties on imports of luxury goods and other goods already produced locally as a means of increasing the state’s fiscal base, as well as a means to support local production and thereby reduce carbon emissions globally
Public Spending and Investment
* Radically reduce military spending
* Redirect government spending from bailing out bankers to guaranteeing basic incomes and social security, and providing universally accessible basic social services such as housing, water, electricity, health, education, child care, and access to the internet and other public communications facilities.
* Use citizen funds (see above) to support very poor communities
* Ensure that people at risk of losing their homes due to defaults on mortgages caused by the crisis are offered renegotiated terms of payment
* Stop privatisations of public services
* Establish public enterprises under the control of parliaments, local communities and/or workers to increase employment
* Improve the performance of public enterprises through democratising management - encourage public service managers, staff, unions and consumer organisations to collaborate to this end
* Introduce participatory budgeting over public finances at all feasible levels
* Invest massively in improved energy efficiency, low carbon emitting public transport, renewable energy and environmental repair
* Control or subsidise the prices of basic commodities
International Trade and Finance
* Introduce a permanent global ban on short-selling of stock and shares
* Ban on trade in derivatives
* Ban all speculation on staple food commodities
* Cancel the debt of all developing countries – debt is mounting as the crisis causes the value of Southern currencies to fall
* Support the United Nations call to be involved in discussions about how the to resolve the crisis, which is going to have a much bigger impact on Southern economies than is currently being acknowledged
* Phase out the World Bank, International Monetary Fund, and World Trade Organisation
* Phase out the US dollar as the international reserve currency
* Establish a people’s inquiry into the mechanisms necessary for a just international monetary system.
* Ensure aid transfers do not fall as a result of the crisis
* Abolish tied aid
* Abolish neo-liberal aid conditionalities
* Phase out the paradigm of export-led development, and refocus sustainable development on production for the local and regional market
* Introduce incentives for products produced for sale closest to the local market
* Cancel all negotiations for bilateral free trade and economic partnership agreements
* Promote regional economic co-operation arrangements, such as UNASUR, the Bolivarian Alternative for the Americas (ALBA), the Trade Treaty of the Peoples and others, that encourage genuine development and an end to poverty.
Environment
* Introduce a global system of compensation for countries which do not exploit fossil fuel reserves in the global interests of limiting effects on the climate, such as Ecuador has proposed.
* Pay reparations to Southern countries for the ecological destruction wrought by the North to assist peoples of the South to deal with climate change and other environmental crises.
* Strictly implement the “precautionary principle” of the UN Declaration on the Right to Development as a condition for all developmental and environmental projects.
* End lending for projects under the Kyoto Protocol’s “Clean Development Mechanism” that are environmentally destructive, such as monoculture plantations of eucalyptus, soya and palm oil.
* Stop the development of carbon trading and other environmentally counter-productive techno-fixes, such as carbon capture and sequestration, agrofuels, nuclear power and ‘clean coal’ technology.
* Adopt strategies to radically reduce consumption in the rich countries, while promoting sustainable development in poorer countries
* Introduce democratic management of all international funding mechanisms for climate change mitigation, with strong participation from Southern countries and civil society.
Agriculture and Industry
* Phase out the pernicious paradigm of industry-led development, where the rural sector is squeezed to provide the resources necessary to support industrialisation and urbanisation
* Promote agricultural strategies aimed at achieving food security, food sovereignty and sustainable farming.
* Promote land reforms and other measures which support small holder agriculture and sustain peasant and indigenous communities
* Stop the spread of socially and environmentally destructive mono-cultural enterprises.
* Stop labour law reforms aimed at extending hours of work and making it easier for employers to fire or retrench workers
* Secure jobs through outlawing precarious low paid work
* Guarantee equal pay for equal work for women – as a basic principle and to help counter the coming recession by increasing workers’ capacity to consume.
* Protect the rights of migrant workers in the event of job losses, ensuring their safe return to and reintegration into their home countries. For those who cannot return, there should be no forced return, their security should be guaranteed, and they should be provided with employment or a basic minimum income.
Conclusion
These are all practical, common sense proposals. Some are initiatives already underway and demonstrably feasible. Their successes need to be publicised and popularised so as to inspire reproduction. Others are unlikely to be implemented on their objective merits alone. Political will is required. By implication, therefore, every proposal is a call to action.
We have written what we see as a living document to be developed and enriched by us all. Please sign on to this statement at the bottom of the page.
A future occasion to come together to work on the actions needed to make these ideas and others a reality will be the World Social Forum in Belem, Brazil at the end of January 2009.
We have the experience and the ideas - let’s meet the challenge of the present ruling disorder and keep the momentum towards an alternative rolling!!
torsdag den 16. oktober 2008
10 Years of the Pinochet Principle by Philippe Sands
The arrest warrant served on the Chilean head of state in 1998 changed history and has implications for the US government now
On October 16 1998, a magistrate signed a warrant for the arrest of Senator Augusto Pinochet and changed the course of history. The former Chilean head of state was arrested a few hours later, at the request of a Spanish prosecutor who charged him with a raft of international crimes, some dating back to the early 1970s. Over the next 18 months, one dramatic development followed another. The House of Lords rendered three landmark judgments in the space of five months; home secretary Jack Straw defied expectations by giving a green light to the continuation of proceedings that could lead to Pinochet's removal to Madrid; Pinochet made a dramatic appearance in the dock at Belmarsh magistrate's court; and eventually Straw decided that Pinochet was too unhealthy to stand trial and he was returned to Chile in April 2000. For the rest of his life he was dogged by legal proceedings.
One central question lay at the heart of the whole affair: was a former head of state entitled to claim immunity before the English courts, where it was alleged that he had participated in crimes, in violation of international conventions, such as torture? This question had never before been decided. It pitted two competing views of international relations against each other: traditionalists argued that the maintenance of serene relations between states required the courts of one state to refrain from sitting in judgment over the highest officials of another; the modernists argued that no person was above the law where the most serious international crimes were involved, and that the system of human rights laws put in place after the second world war substituted a rule of immunity with a new rule against impunity.
In March 1999, the House of Lords came down strongly in favour of the modernist view. It did so carefully, and in a way that was both reasonable and sustainable. The majority ruled that Pinochet's loss of immunity arose not from some unstated general rule of international law, but rather from the terms of a treaty to which Britain, Chile and Spain were party - the 1984 convention outlawing torture - the terms of which were inconsistent with immunity for a former head of state. It is impossible to overstate the significance of that ruling, which reflected a new balance of global priorities, a shift in favour of principle over pragmatism. It has been followed by international indictments against other former heads of state - Slobodan Milosevic and Charles Taylor - and the coming into force of the international criminal court and possible proceedings against the serving president of Sudan. It has also given rise to criminal proceedings before national courts in other parts of the world. The Pinochet judgment has withstood the test of time. It has not been overruled in the court of international opinion, and it has not brought international relations to a grinding halt.
Nevertheless, it seems that Pinochet's case caused concerns at the highest levels of the Bush administration, as described in a revealing account by a former lawyer in the Bush administration, Jack Goldsmith. He describes how, during 2002, Henry Kissinger found himself on the sharp end of the Pinochet case. Reportedly livid, a rattled Kissinger complained to his old chum Donald Rumsfeld, who was already worrying about "lawfare" (the use of law to achieve operational objectives). Rumsfeld instructed the chief lawyer at the Pentagon, Jim Haynes, to address the problems posed by this "judicialisation of international politics". Haynes passed the assignment on to Goldsmith, whose memo reached the National Security Council, which also worried about the threat of foreign judges. According to Goldsmith, the NSC couldn't work out what to do about the problem.
We now know that while this was going on, Rumsfeld and Haynes and others at the Pentagon were secretly circumventing international laws like the Geneva conventions and the torture convention and removing international constraints on the interrogation of detainees at Guantánamo and in Iraq. Torture and other international crimes followed. So did the Abu Ghraib photos. Amid the welter of legal opinions received by the administration none, it seems, bothered to examine the consequences of the House of Lords judgment for senior US officials.
The legacy of the arrest warrant signed in Hampstead 10 years today, is the Pinochet principle, that no one is above the law. It may one day come to haunt the very people who sought to set it aside. If, that is, they ever dare to set foot outside the United States.
© Guardian News and Media Limited 2008
On October 16 1998, a magistrate signed a warrant for the arrest of Senator Augusto Pinochet and changed the course of history. The former Chilean head of state was arrested a few hours later, at the request of a Spanish prosecutor who charged him with a raft of international crimes, some dating back to the early 1970s. Over the next 18 months, one dramatic development followed another. The House of Lords rendered three landmark judgments in the space of five months; home secretary Jack Straw defied expectations by giving a green light to the continuation of proceedings that could lead to Pinochet's removal to Madrid; Pinochet made a dramatic appearance in the dock at Belmarsh magistrate's court; and eventually Straw decided that Pinochet was too unhealthy to stand trial and he was returned to Chile in April 2000. For the rest of his life he was dogged by legal proceedings.
One central question lay at the heart of the whole affair: was a former head of state entitled to claim immunity before the English courts, where it was alleged that he had participated in crimes, in violation of international conventions, such as torture? This question had never before been decided. It pitted two competing views of international relations against each other: traditionalists argued that the maintenance of serene relations between states required the courts of one state to refrain from sitting in judgment over the highest officials of another; the modernists argued that no person was above the law where the most serious international crimes were involved, and that the system of human rights laws put in place after the second world war substituted a rule of immunity with a new rule against impunity.
In March 1999, the House of Lords came down strongly in favour of the modernist view. It did so carefully, and in a way that was both reasonable and sustainable. The majority ruled that Pinochet's loss of immunity arose not from some unstated general rule of international law, but rather from the terms of a treaty to which Britain, Chile and Spain were party - the 1984 convention outlawing torture - the terms of which were inconsistent with immunity for a former head of state. It is impossible to overstate the significance of that ruling, which reflected a new balance of global priorities, a shift in favour of principle over pragmatism. It has been followed by international indictments against other former heads of state - Slobodan Milosevic and Charles Taylor - and the coming into force of the international criminal court and possible proceedings against the serving president of Sudan. It has also given rise to criminal proceedings before national courts in other parts of the world. The Pinochet judgment has withstood the test of time. It has not been overruled in the court of international opinion, and it has not brought international relations to a grinding halt.
Nevertheless, it seems that Pinochet's case caused concerns at the highest levels of the Bush administration, as described in a revealing account by a former lawyer in the Bush administration, Jack Goldsmith. He describes how, during 2002, Henry Kissinger found himself on the sharp end of the Pinochet case. Reportedly livid, a rattled Kissinger complained to his old chum Donald Rumsfeld, who was already worrying about "lawfare" (the use of law to achieve operational objectives). Rumsfeld instructed the chief lawyer at the Pentagon, Jim Haynes, to address the problems posed by this "judicialisation of international politics". Haynes passed the assignment on to Goldsmith, whose memo reached the National Security Council, which also worried about the threat of foreign judges. According to Goldsmith, the NSC couldn't work out what to do about the problem.
We now know that while this was going on, Rumsfeld and Haynes and others at the Pentagon were secretly circumventing international laws like the Geneva conventions and the torture convention and removing international constraints on the interrogation of detainees at Guantánamo and in Iraq. Torture and other international crimes followed. So did the Abu Ghraib photos. Amid the welter of legal opinions received by the administration none, it seems, bothered to examine the consequences of the House of Lords judgment for senior US officials.
The legacy of the arrest warrant signed in Hampstead 10 years today, is the Pinochet principle, that no one is above the law. It may one day come to haunt the very people who sought to set it aside. If, that is, they ever dare to set foot outside the United States.
© Guardian News and Media Limited 2008
Additional Thoughts on the Bailout
"We hang the petty thieves and appoint the great ones to public office" - Aesop
By Paul Craig Roberts.
Just as the Bush regime’s wars have been used to pour billions of dollars into the pockets of its military-security donor base, the Paulson bailout looks like a Bush regime scheme to incur $700 billion in new public debt in order to transfer the money into the coffers of its financial donor base. The US taxpayers will be left with the interest payments in perpetuity (or inflation if the Fed monetizes the debt), and the number of Wall Street billionaires will grow. As for the US and European governments’ purchases of bank shares, that is just a cover for funneling public money into private hands.
The explanations that have been given for the crisis and its bailout are opaque. The US Treasury estimates that as few as 7% of the mortgages are bad. Why then do the US, UK, Germany, and France need to pour more than $2.1 trillion of public money into private financial institutions?
If, as the government tells us, the crisis stems from subprime mortgage defaults reducing the interest payments to the holders of mortgage backed securities, thus driving down their values and threatening the solvency of the institutions that hold them, why isn’t the bailout money used to address the problem at its source? If the bailout money was used to refinance troubled mortgages and to pay off foreclosed mortgages, the mortgage backed securities would be made whole, and it would be unnecessary to pour huge sums of public money into banks. Instead, the bailout money is being used to inject capital into financial institutions and to purchase from them troubled financial instruments.
It is a strange solution that does not address the problem. As the US economy sinks deeper into recession, the mortgage defaults will rise. Thus, the problem will intensify, necessitating the purchase of yet more troubled instruments.
If credit card debt has also been securitized and sold as investments, as the economy worsens defaults on credit card debt will be a replay of the mortgage defaults. How much debt can the Treasury bail out before its own credit rating sinks?
The contribution of credit default swaps to the financial crisis has not been made clear. These swaps are bets that a designated financial instrument will fail. In exchange for “premium” payments, the seller of a swap protects the buyer of the swap from default by, for example, a company’s bond that the swap buyer might not even own. If these swaps are also securitized and sold as investments, more nebulous assets appear on balance sheets.
Normally, if you and I make a bet, and I welsh on the bet, it doesn’t threaten your solvency. If we place bets with a bookie and the odds go against the bookie, the bookie will fail, as apparently happened to AIG, necessitating an $85 billion bailout of the insurance company, and to Bear Stearns resulting in the demise of the investment bank.
Credit default swaps are a form of unregulated insurance. One danger of the swaps is that they allow speculators to purchase protection against a company defaulting on its bonds, without the speculators having to own the company’s bonds. Speculators can then short the company’s stock, driving down its price and raising questions about the viability of the company’s bonds. This raises the value of the speculators’ swaps which can be sold to holders of the company’s bonds. By ruining a company’s prospects, the speculators make money.
Another danger is that swaps encourage investors to purchase riskier, higher-yielding instruments in the belief that the instruments are insured, but the sellers of swaps have not reserved against them.
Double-counting of assets is also possible if a bank purchases a company’s bonds, for example, then purchases credit default swaps on the bonds, and lists both as assets on its balance sheet.
The $85 billion Treasury bailout of AIG is small compared to the $700 billion for the banks, and the emphasis has been on banks, not insurance companies. According to news reports, the sums associated with credit default swaps are far larger than the subprime mortgage derivatives. Have the swaps yet to become major players in the crisis?
The behavior of the stock market does not necessarily tell us anything about the bailout. The financial crisis disrupted lending and thus comprised a threat to non-financial firms. This threat would reflect in the stock market. However, the stock market is also predicting a recession and declining earnings. Thus, people sell stocks hoping to get out before share prices adjust to the new lower earnings.
The bailout package is a result of panic and threats, not of analysis and understanding. Neither Congress nor the public knows the full story. If the problem is the mortgages, why does the bailout leave the mortgages unaddressed and focus instead on pouring vast amount of public money into private financial institutions?
The purpose of regulation is to restrain greed and to prevent leveraged speculation from threatening the wider society. Congress needs to restore financial regulation, not reward those who caused the crisis.
By Paul Craig Roberts.
Just as the Bush regime’s wars have been used to pour billions of dollars into the pockets of its military-security donor base, the Paulson bailout looks like a Bush regime scheme to incur $700 billion in new public debt in order to transfer the money into the coffers of its financial donor base. The US taxpayers will be left with the interest payments in perpetuity (or inflation if the Fed monetizes the debt), and the number of Wall Street billionaires will grow. As for the US and European governments’ purchases of bank shares, that is just a cover for funneling public money into private hands.
The explanations that have been given for the crisis and its bailout are opaque. The US Treasury estimates that as few as 7% of the mortgages are bad. Why then do the US, UK, Germany, and France need to pour more than $2.1 trillion of public money into private financial institutions?
If, as the government tells us, the crisis stems from subprime mortgage defaults reducing the interest payments to the holders of mortgage backed securities, thus driving down their values and threatening the solvency of the institutions that hold them, why isn’t the bailout money used to address the problem at its source? If the bailout money was used to refinance troubled mortgages and to pay off foreclosed mortgages, the mortgage backed securities would be made whole, and it would be unnecessary to pour huge sums of public money into banks. Instead, the bailout money is being used to inject capital into financial institutions and to purchase from them troubled financial instruments.
It is a strange solution that does not address the problem. As the US economy sinks deeper into recession, the mortgage defaults will rise. Thus, the problem will intensify, necessitating the purchase of yet more troubled instruments.
If credit card debt has also been securitized and sold as investments, as the economy worsens defaults on credit card debt will be a replay of the mortgage defaults. How much debt can the Treasury bail out before its own credit rating sinks?
The contribution of credit default swaps to the financial crisis has not been made clear. These swaps are bets that a designated financial instrument will fail. In exchange for “premium” payments, the seller of a swap protects the buyer of the swap from default by, for example, a company’s bond that the swap buyer might not even own. If these swaps are also securitized and sold as investments, more nebulous assets appear on balance sheets.
Normally, if you and I make a bet, and I welsh on the bet, it doesn’t threaten your solvency. If we place bets with a bookie and the odds go against the bookie, the bookie will fail, as apparently happened to AIG, necessitating an $85 billion bailout of the insurance company, and to Bear Stearns resulting in the demise of the investment bank.
Credit default swaps are a form of unregulated insurance. One danger of the swaps is that they allow speculators to purchase protection against a company defaulting on its bonds, without the speculators having to own the company’s bonds. Speculators can then short the company’s stock, driving down its price and raising questions about the viability of the company’s bonds. This raises the value of the speculators’ swaps which can be sold to holders of the company’s bonds. By ruining a company’s prospects, the speculators make money.
Another danger is that swaps encourage investors to purchase riskier, higher-yielding instruments in the belief that the instruments are insured, but the sellers of swaps have not reserved against them.
Double-counting of assets is also possible if a bank purchases a company’s bonds, for example, then purchases credit default swaps on the bonds, and lists both as assets on its balance sheet.
The $85 billion Treasury bailout of AIG is small compared to the $700 billion for the banks, and the emphasis has been on banks, not insurance companies. According to news reports, the sums associated with credit default swaps are far larger than the subprime mortgage derivatives. Have the swaps yet to become major players in the crisis?
The behavior of the stock market does not necessarily tell us anything about the bailout. The financial crisis disrupted lending and thus comprised a threat to non-financial firms. This threat would reflect in the stock market. However, the stock market is also predicting a recession and declining earnings. Thus, people sell stocks hoping to get out before share prices adjust to the new lower earnings.
The bailout package is a result of panic and threats, not of analysis and understanding. Neither Congress nor the public knows the full story. If the problem is the mortgages, why does the bailout leave the mortgages unaddressed and focus instead on pouring vast amount of public money into private financial institutions?
The purpose of regulation is to restrain greed and to prevent leveraged speculation from threatening the wider society. Congress needs to restore financial regulation, not reward those who caused the crisis.
Grøn økonomi kan skabe millioner af job
FN præsenterer sit udspil til 'A New Green Deal' i næste uge
På onsdag i næste uge præsenterer FN's Miljøprogram, UNEP, med støtte fra den tyske og norske regering samt EU-Kommissionen en ambitiøs appel til verdens politiske ledere om at skifte kurs og arbejde for en New Green Deal, der kan afværge miljømæssige katastrofer og samtidig skabe nye arbejdspladser i stort tal, trænge fattigdommen tilbage og hjælpe den syge internationale økonomi på fode.
Appellen præsenteres i London ved fremlæggelsen af The Green Economy Initiative, der henter inspiration fra præsident Roosevelts New Deal-initiativ i 1930'ernes USA.
UNEP påpeger det uholdbare i den eksisterende globale økonomi, der er fordoblet gennem det seneste århundrede, men samtidig bærer ansvar for, at 60 pct. af de naturressourcer, der sikrer grundlaget for mad, drikkevand, energi og ren luft er blevet alvorligt undergravet.
På den baggrund vil UNEP appellere til de globale ledere om at sikre en omdirigering af økonomiske ressourcer bort fra den finansspekulation, der har drevet finansmarkedet til randen af nedsmeltning, og hen mod investeringer i bæredygtig jobskabelse og ny vækst.
Bag initiativet ligger rapporten The Economics of Ecosystem and Biodiversity, udarbejdet af formanden for Deutsche Banks Global Market Centre, Pavan Sukhdev.
"Vi forsøger at navigere i ukendte og turbulente farvande med et gammelt og defekt økonomisk kompas, og det påvirker vores evne til at forme en bæredygtig økonomi i harmoni med naturen," siger den tyske bankøkonom.
Hans pointe er, at dagens økonomi stort set mangler redskaber til at værdisætte de goder, planeten tilbyder i form af økosystemerne og naturens tjenesteydelser. Derfor håndteres de som gratis goder, og derfor overforbruges, udpines og ødelægges de. Ifølge Sukhdevs analyser betyder f.eks. rydningen af skove, at verden p.t. mister - hidtil ikke værdisatte - tjenester og goder på 2.500 milliarder dollar årligt, sammenligneligt med de ca. 3.000 mia., der er gået til verdens kriseramte finanssektor.
En grøn økonomi, der tilskriver naturen dens reelle værdi for menneskeheden, vil lede til anderledes økonomiske dispositioner, der sikrer denne naturkapitals opretholdelse og dermed fastholder grundlaget for varig og bæredygtig anvendelse og jobskabelse, påpeger Sukhdev.
"Før har det været muligt at fare kloden rundt og udnytte den som en mine, hvorfra vi hentede reserverne. Det er tydeligt, at det ikke går længere. Hvor det 20. århundrede var industriens tidsalder, må det 21. århundrede blive biologiens tidsalder, hvor vi omdefinerer, hvad velstand og økonomi betyder," siger UNEP-talsmand Nick Nuttall.
Millioner af jobs
I en anden rapport, udarbejdet for bl.a. UNEP og FN's arbejdstagerorganisation ILO, dokumenteres beskæftigelseseffekten ved at styre de globale investeringer i bæredygtig retning.
"Ændrede mønstre for ansættelser og investeringer som resultat af en indsats for at bremse klimaændringerne og disses effekter skaber allerede nye arbejdspladser i mange sektorer og økonomier og kan skabe millioner flere i både i- og u-lande," hedder det i rapporten Green Jobs: Towards decent work in a sustainable low-carbon world.
"Vedvarende energi skaber flere jobs end beskæftigelse i den fossile energisektor. Projekterede investeringer på 630 mia. dollar i 2030 vil føre til mindst 20 mio. nye job i den vedvarende energisektor (...) En global omstilling til energieffektive bygninger kan skabe millioner af arbejdspladser og samtidig gøre eksisterende jobs grønnere for mange af de 111 mio. mennesker, der allerede arbejder i byggesektoren," konkluderer rapporten.
Source URL: http://www.information.dk/168858
På onsdag i næste uge præsenterer FN's Miljøprogram, UNEP, med støtte fra den tyske og norske regering samt EU-Kommissionen en ambitiøs appel til verdens politiske ledere om at skifte kurs og arbejde for en New Green Deal, der kan afværge miljømæssige katastrofer og samtidig skabe nye arbejdspladser i stort tal, trænge fattigdommen tilbage og hjælpe den syge internationale økonomi på fode.
Appellen præsenteres i London ved fremlæggelsen af The Green Economy Initiative, der henter inspiration fra præsident Roosevelts New Deal-initiativ i 1930'ernes USA.
UNEP påpeger det uholdbare i den eksisterende globale økonomi, der er fordoblet gennem det seneste århundrede, men samtidig bærer ansvar for, at 60 pct. af de naturressourcer, der sikrer grundlaget for mad, drikkevand, energi og ren luft er blevet alvorligt undergravet.
På den baggrund vil UNEP appellere til de globale ledere om at sikre en omdirigering af økonomiske ressourcer bort fra den finansspekulation, der har drevet finansmarkedet til randen af nedsmeltning, og hen mod investeringer i bæredygtig jobskabelse og ny vækst.
Bag initiativet ligger rapporten The Economics of Ecosystem and Biodiversity, udarbejdet af formanden for Deutsche Banks Global Market Centre, Pavan Sukhdev.
"Vi forsøger at navigere i ukendte og turbulente farvande med et gammelt og defekt økonomisk kompas, og det påvirker vores evne til at forme en bæredygtig økonomi i harmoni med naturen," siger den tyske bankøkonom.
Hans pointe er, at dagens økonomi stort set mangler redskaber til at værdisætte de goder, planeten tilbyder i form af økosystemerne og naturens tjenesteydelser. Derfor håndteres de som gratis goder, og derfor overforbruges, udpines og ødelægges de. Ifølge Sukhdevs analyser betyder f.eks. rydningen af skove, at verden p.t. mister - hidtil ikke værdisatte - tjenester og goder på 2.500 milliarder dollar årligt, sammenligneligt med de ca. 3.000 mia., der er gået til verdens kriseramte finanssektor.
En grøn økonomi, der tilskriver naturen dens reelle værdi for menneskeheden, vil lede til anderledes økonomiske dispositioner, der sikrer denne naturkapitals opretholdelse og dermed fastholder grundlaget for varig og bæredygtig anvendelse og jobskabelse, påpeger Sukhdev.
"Før har det været muligt at fare kloden rundt og udnytte den som en mine, hvorfra vi hentede reserverne. Det er tydeligt, at det ikke går længere. Hvor det 20. århundrede var industriens tidsalder, må det 21. århundrede blive biologiens tidsalder, hvor vi omdefinerer, hvad velstand og økonomi betyder," siger UNEP-talsmand Nick Nuttall.
Millioner af jobs
I en anden rapport, udarbejdet for bl.a. UNEP og FN's arbejdstagerorganisation ILO, dokumenteres beskæftigelseseffekten ved at styre de globale investeringer i bæredygtig retning.
"Ændrede mønstre for ansættelser og investeringer som resultat af en indsats for at bremse klimaændringerne og disses effekter skaber allerede nye arbejdspladser i mange sektorer og økonomier og kan skabe millioner flere i både i- og u-lande," hedder det i rapporten Green Jobs: Towards decent work in a sustainable low-carbon world.
"Vedvarende energi skaber flere jobs end beskæftigelse i den fossile energisektor. Projekterede investeringer på 630 mia. dollar i 2030 vil føre til mindst 20 mio. nye job i den vedvarende energisektor (...) En global omstilling til energieffektive bygninger kan skabe millioner af arbejdspladser og samtidig gøre eksisterende jobs grønnere for mange af de 111 mio. mennesker, der allerede arbejder i byggesektoren," konkluderer rapporten.
Source URL: http://www.information.dk/168858
ATTAC: Let's shut down the financial casino
ATTAC udfolder i denne pdf. fil deres tanker om finanskrisens årsag og medicinen md od den.
http://blog.tni.org/wp-content/uploads/2008/10/attac-finance-crisis-15_10_2008.pdf
http://blog.tni.org/wp-content/uploads/2008/10/attac-finance-crisis-15_10_2008.pdf
The Depression: A Long-Term View
Immanuel Wallerstein says that the belief that we are just in another cyclical swing and will soon bounce back hides the fact that three basic costs of capitalist production - personnel, inputs, and taxation - have steadily risen as a percentage of possible sales price, which makes it impossible to obtain the large profits from quasi-monopolized production that have always been the basis of significant capital accumulation.
“We can assert with confidence that the present system cannot survive. What we cannot predict is which new order will be chosen to replace it..This will not be a capitalist system but it may be far worse (even more polarizing and hierarchical) or much better (relatively democratic and relatively egalitarian) than such a system. The choice of a new system is the major worldwide political struggle of our times.”
The depression has started. Journalists are still coyly enquiring of economists whether or not we may be entering a mere recession. Don’t believe it for a minute. We are already at the beginning of a full-blown
worldwide depression with extensive unemployment almost everywhere. It may take the form of a classic nominal deflation, with all its negative consequences for ordinary people. Or it might take the form, a bit less likely, of a runaway inflation, which is simply another way in which values deflate, and which is even worse for ordinary people.
Of course everyone is asking what has triggered this depression. Is it the derivatives, which Warren Buffett called “financial weapons of mass destruction”? Or is it the subprime mortgages? Or is it oil speculators?
This is a blame game, and of no real importance. This is to concentrate on the dust, as Fernand Braudel called it, of short-term events. If we want to understand what is going on, we need to look at two other
temporalities, which are far more revealing. One is that of medium-term cyclical swings. And one is that of the long-term structural trends.The capitalist world-economy has had, for several hundred years at least, two major forms of cyclical swings. One is the so-called Kondratieff cycles that historically were 50-60 years in length. And the other is the hegemonic cycles which are much longer.
In terms of the hegemonic cycles, the United States was a rising contender for hegemony as of 1873, achieved full hegemonic dominance in 1945, and has been slowly declining since the 1970s. George W. Bush’s follies have transformed a slow decline into a precipitate one. And as of now, we are past any semblance of U.S. hegemony. We have entered, as normally happens, a multipolar world. The United States remains a strong power, perhaps still the strongest, but it will continue to decline relative to other powers in the decades to come. There is not much that anyone can do to change this.
The Kondratieff cycles have a different timing. The world came out of the last Kondratieff B-phase in 1945, and then had the strongest A-phase upturn in the history of the modern world-system. It reached its height
circa 1967-73, and started on its downturn. This B-phase has gone on much longer than previous B-phases and we are still in it.
The characteristics of a Kondratieff B-phase are well-known and match what the world-economy has been experiencing since the 1970s. Profit rates from productive activities go down, especially in those types of
production that have been most profitable. Consequently, capitalists who wish to make really high levels of profit turn to the financial arena, engaging in what is basically speculation. Productive activities, in order not to become too unprofitable, tend to move from core zones to other parts of the world-system, trading lower transactions costs for lower personnel costs. This is why jobs have been disappearing from Detroit, Essen, and Nagoya and factories have been expanding in China, India, and Brazil.
As for the speculative bubbles, some people always make a lot of money in them. But speculative bubbles always burst, sooner or later. If one asks why this Kondratieff B-phase has lasted so long, it is because the
powers that be - the U.S. Treasury and Federal Reserve Bank, the International Monetary Fund, and their collaborators in western Europe and Japan - have intervened in the market regularly and importantly - 1987 (stock market plunge), 1989 (savings-and-loan collapse), 1997 (East Asian financial fall), 1998 (Long Term Capital Management mismanagement), 2001-2002 (Enron) - to shore up the world-economy.
They learned the lessons of previous Kondratieff B-phases, and the powers that be thought they could beat the system. But there are intrinsic limits to doing this. And we have now reached them, as Henry Paulson and
Ben Bernanke are learning to their chagrin and probably amazement. This time, it will not be so easy, probably impossible, to avert the worst.
In the past, once a depression wreaked its havoc, the world-economy picked up again, on the basis of innovations that could be quasi-monopolized for a while. So, when people say that the stock market
will rise again, this is what they are thinking will happen, this time as in the past, after all the damage has been done to the world’s populations. And maybe it will, in a few years or so.
There is however something new that may interfere with this nice cyclical pattern that has sustained the capitalist system for some 500 years. The structural trends may interfere with the cyclical patterns. The basic structural features of capitalism as a world-system operate by certain rules that can be drawn on a chart as a moving upward equilibrium. The problem, as with all structural equilibria of all systems, is that over time the curves tend to move far from equilibrium and it becomes impossible to bring them back to equilibrium.
What has made the system move so far from equilibrium? In very brief, it is because over 500 years the three basic costs of capitalist production - personnel, inputs, and taxation - have steadily risen as a percentage
of possible sales price, such that today they make it impossible to obtain the large profits from quasi-monopolized production that have been the basis of significant capital accumulation.
It is not because capitalism is failing at what it does best. It is precisely because it has been doing it so well that it has finally undermined the basis of future accumulation.
What happens when we reach such a point is that the system bifurcates (in the language of complexity studies). The immediate consequence is high chaotic turbulence, which our world-system is experiencing at the moment and will continue to experience for perhaps another 20-50 years. As everyone pushes in whatever direction they think immediately best for each of them, a new order will emerge out of the chaos along one of two alternate and very different paths.
We can assert with confidence that the present system cannot survive. What we cannot predict is which new order will be chosen to replace it, because it will be the result of an infinity of individual pressures. But sooner or later, a new system will be installed. This will not be a capitalist system but it may be far worse (even more polarizing and hierarchical) or much better (relatively democratic and relatively egalitarian) than such a system. The choice of a new system is the major worldwide political struggle of our times.
As for our immediate short-run ad interim prospects, it is clear what is happening everywhere. We have been moving into a protectionist world (forget about so-called globalization). We have been moving into a much
larger direct role of government in production. Even the United States and Great Britain are partially nationalizing the banks and the dying big industries. We are moving into populist government-led redistribution, which can take left-of-center social-democratic forms or far right authoritarian forms. And we are moving into acute social conflict within states, as everyone competes over the smaller pie. In the short-run, it is not, by and large, a pretty picture.
by Immanuel Wallerstein
“We can assert with confidence that the present system cannot survive. What we cannot predict is which new order will be chosen to replace it..This will not be a capitalist system but it may be far worse (even more polarizing and hierarchical) or much better (relatively democratic and relatively egalitarian) than such a system. The choice of a new system is the major worldwide political struggle of our times.”
The depression has started. Journalists are still coyly enquiring of economists whether or not we may be entering a mere recession. Don’t believe it for a minute. We are already at the beginning of a full-blown
worldwide depression with extensive unemployment almost everywhere. It may take the form of a classic nominal deflation, with all its negative consequences for ordinary people. Or it might take the form, a bit less likely, of a runaway inflation, which is simply another way in which values deflate, and which is even worse for ordinary people.
Of course everyone is asking what has triggered this depression. Is it the derivatives, which Warren Buffett called “financial weapons of mass destruction”? Or is it the subprime mortgages? Or is it oil speculators?
This is a blame game, and of no real importance. This is to concentrate on the dust, as Fernand Braudel called it, of short-term events. If we want to understand what is going on, we need to look at two other
temporalities, which are far more revealing. One is that of medium-term cyclical swings. And one is that of the long-term structural trends.The capitalist world-economy has had, for several hundred years at least, two major forms of cyclical swings. One is the so-called Kondratieff cycles that historically were 50-60 years in length. And the other is the hegemonic cycles which are much longer.
In terms of the hegemonic cycles, the United States was a rising contender for hegemony as of 1873, achieved full hegemonic dominance in 1945, and has been slowly declining since the 1970s. George W. Bush’s follies have transformed a slow decline into a precipitate one. And as of now, we are past any semblance of U.S. hegemony. We have entered, as normally happens, a multipolar world. The United States remains a strong power, perhaps still the strongest, but it will continue to decline relative to other powers in the decades to come. There is not much that anyone can do to change this.
The Kondratieff cycles have a different timing. The world came out of the last Kondratieff B-phase in 1945, and then had the strongest A-phase upturn in the history of the modern world-system. It reached its height
circa 1967-73, and started on its downturn. This B-phase has gone on much longer than previous B-phases and we are still in it.
The characteristics of a Kondratieff B-phase are well-known and match what the world-economy has been experiencing since the 1970s. Profit rates from productive activities go down, especially in those types of
production that have been most profitable. Consequently, capitalists who wish to make really high levels of profit turn to the financial arena, engaging in what is basically speculation. Productive activities, in order not to become too unprofitable, tend to move from core zones to other parts of the world-system, trading lower transactions costs for lower personnel costs. This is why jobs have been disappearing from Detroit, Essen, and Nagoya and factories have been expanding in China, India, and Brazil.
As for the speculative bubbles, some people always make a lot of money in them. But speculative bubbles always burst, sooner or later. If one asks why this Kondratieff B-phase has lasted so long, it is because the
powers that be - the U.S. Treasury and Federal Reserve Bank, the International Monetary Fund, and their collaborators in western Europe and Japan - have intervened in the market regularly and importantly - 1987 (stock market plunge), 1989 (savings-and-loan collapse), 1997 (East Asian financial fall), 1998 (Long Term Capital Management mismanagement), 2001-2002 (Enron) - to shore up the world-economy.
They learned the lessons of previous Kondratieff B-phases, and the powers that be thought they could beat the system. But there are intrinsic limits to doing this. And we have now reached them, as Henry Paulson and
Ben Bernanke are learning to their chagrin and probably amazement. This time, it will not be so easy, probably impossible, to avert the worst.
In the past, once a depression wreaked its havoc, the world-economy picked up again, on the basis of innovations that could be quasi-monopolized for a while. So, when people say that the stock market
will rise again, this is what they are thinking will happen, this time as in the past, after all the damage has been done to the world’s populations. And maybe it will, in a few years or so.
There is however something new that may interfere with this nice cyclical pattern that has sustained the capitalist system for some 500 years. The structural trends may interfere with the cyclical patterns. The basic structural features of capitalism as a world-system operate by certain rules that can be drawn on a chart as a moving upward equilibrium. The problem, as with all structural equilibria of all systems, is that over time the curves tend to move far from equilibrium and it becomes impossible to bring them back to equilibrium.
What has made the system move so far from equilibrium? In very brief, it is because over 500 years the three basic costs of capitalist production - personnel, inputs, and taxation - have steadily risen as a percentage
of possible sales price, such that today they make it impossible to obtain the large profits from quasi-monopolized production that have been the basis of significant capital accumulation.
It is not because capitalism is failing at what it does best. It is precisely because it has been doing it so well that it has finally undermined the basis of future accumulation.
What happens when we reach such a point is that the system bifurcates (in the language of complexity studies). The immediate consequence is high chaotic turbulence, which our world-system is experiencing at the moment and will continue to experience for perhaps another 20-50 years. As everyone pushes in whatever direction they think immediately best for each of them, a new order will emerge out of the chaos along one of two alternate and very different paths.
We can assert with confidence that the present system cannot survive. What we cannot predict is which new order will be chosen to replace it, because it will be the result of an infinity of individual pressures. But sooner or later, a new system will be installed. This will not be a capitalist system but it may be far worse (even more polarizing and hierarchical) or much better (relatively democratic and relatively egalitarian) than such a system. The choice of a new system is the major worldwide political struggle of our times.
As for our immediate short-run ad interim prospects, it is clear what is happening everywhere. We have been moving into a protectionist world (forget about so-called globalization). We have been moving into a much
larger direct role of government in production. Even the United States and Great Britain are partially nationalizing the banks and the dying big industries. We are moving into populist government-led redistribution, which can take left-of-center social-democratic forms or far right authoritarian forms. And we are moving into acute social conflict within states, as everyone competes over the smaller pie. In the short-run, it is not, by and large, a pretty picture.
by Immanuel Wallerstein
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