Walden Bello, Foreig Policy in Focus, September 26, 2008.
Many on Wall Street and the rest of us are still digesting the momentous events of the last 10 days. Between one and three trillion dollars worth of financial assets have evaporated. Wall Street has been effectively nationalized. The Federal Reserve and the Treasury Department are making all the major strategic decisions in the financial sector and, with the rescue of the American International Group (AIG), the U.S. government now runs the world’s biggest insurance company. At $700 billion, the biggest bailout since the Great Depression is being desperately cobbled together to save the global financial system.
The usual explanations no longer suffice. Extraordinary events demand extraordinary explanations. But first…
Is the worst over?
No. If anything is clear from the contradictory moves of the last week — allowing Lehman Brothers to collapse while taking over AIG, and engineering Bank of America’s takeover of Merrill Lynch — there’s no strategy to deal with the crisis, just tactical responses. It’s like the fire department’s response to a conflagration.
The $700 billion buyout of banks’ bad mortgaged-backed securities is mainly a desperate effort to shore up confidence in the system, preventing the erosion of trust in the banks and other financial institutions and avoiding a massive bank run such as the one that triggered the Great Depression of 1929.
Did greed cause the collapse of global capitalism’s nerve center?
Good old-fashioned greed certainly played a part. This is what Klaus Schwab, the organizer of the World Economic Forum, the yearly global elite jamboree in the Swiss Alps, meant when he said in an interview earlier this year: “We have to pay for the sins of the past.”
Was this a case of Wall Street outsmarting itself?
Definitely. Financial speculators outsmarted themselves by creating more and more complex financial contracts like derivatives that would securitize and make money from all forms of risk — including such exotic futures instruments as “credit default swaps” that enable investors to bet on the odds that the banks’ own corporate borrowers would not be able to pay their debts! This is the unregulated multi-trillion dollar trade that brought down AIG.
On December 17, 2005, when International Financing Review (IFR) announced its 2005 Annual Awards — one of the securities industry's most prestigious awards programs — it had this to say: "[Lehman Brothers] not only maintained its overall market presence, but also led the charge into the preferred space by...developing new products and tailoring transactions to fit borrowers' needs…Lehman Brothers is the most innovative in the preferred space, just doing things you won't see elsewhere."
Was it lack of regulation?
Yes. Everyone acknowledges by now that Wall Street’s capacity to innovate and turn out more and more sophisticated financial instruments had run far ahead of government’s regulatory capability. This wasn’t because the government was incapable of regulating but because the dominant neoliberal, laissez-faire attitude prevented government from devising effective regulatory mechanisms.
But isn’t there something more that is happening?
We’re seeing the intensification of one of the central crises or contradictions of global capitalism: the crisis of overproduction, also known as overaccumulation or overcapacity.
In other words, capitalism has a tendency to build up tremendous productive capacity that outruns the population’s capacity to consume owing to social inequalities that limit popular purchasing power, thus eroding profitability.
But what does the crisis of overproduction have to do with recent events?
Plenty. But to understand the connections, we must go back in time to the so-called Golden Age of Contemporary Capitalism, the period from 1945 to 1975.
This was a time of rapid growth both in the center economies and in the underdeveloped economies — one that was partly triggered by the massive reconstruction of Europe and East Asia after the devastation of World War II, and partly by the new socio-economic arrangements institutionalized under the new Keynesian state. Key among the latter were strong state controls over market activity, aggressive use of fiscal and monetary policy to minimize inflation and recession, and a regime of relatively high wages to stimulate and maintain demand.
So what went wrong?
This period of high growth came to an end in the mid-1970s, when the center economies were seized by stagflation, meaning the coexistence of low growth with high inflation, which wasn’t supposed to happen under neoclassical economics.
Stagflation, however, was but a symptom of a deeper cause: the reconstruction of Germany and Japan and the rapid growth of industrializing economies like Brazil, Taiwan, and South Korea added tremendous new productive capacity and increased global competition. Meanwhile social inequality within countries and between countries globally limited the growth of purchasing power and demand, thus eroding profitability. The massive increase in the price of oil aggravated this trend in the 1970s.
How did capitalism try to solve the crisis of overproduction?
Capital tried three escape routes from the conundrum of overproduction: neoliberal restructuring, globalization, and financialization.
What was neoliberal restructuring all about?
Neoliberal restructuring took the form of Reaganism and Thatcherism in the North and structural adjustment in the South. The aim was to invigorate capital accumulation, and this was to be done by 1) removing state constraints on the growth, use, and flow of capital and wealth; and 2) redistributing income from the poor and middle classes to the rich on the theory that the rich would then be motivated to invest and reignite economic growth.
This formula redistributed income to the rich and gutted the incomes of the poor and middle classes. It thus restricted demand while not necessarily inducing the rich to invest more in production.
In fact, neoliberal restructuring, which was generalized in the North and South during the 1980s and 1990s, had a poor record in terms of growth: global growth averaged 1.1% in the 1990s and 1.4% in the 1980s, whereas it averaged 3.5% in the 1960s and 2.4% in the 1970s, when state interventionist policies were dominant. Neoliberal restructuring couldn’t shake off stagnation.
How was globalization a response to the crisis?
The second escape route global capital took to counter stagnation was “extensive accumulation” or globalization. This was the rapid integration of semi-capitalist, non-capitalist, or precapitalist areas into the global market economy. Rosa Luxemburg, the famous German revolutionary economist, saw this long ago as necessary to shore up the rate of profit in the metropolitan economies: by gaining access to cheap labor, by gaining new, albeit limited, markets, by gaining new sources of cheap agricultural and raw material products, and by bringing into being new areas for investment in infrastructure. Integration is accomplished via trade liberalization, removing barriers to the mobility of global capital and abolishing barriers to foreign investment.
China is, of course, the most prominent case of a non-capitalist area that was integrated into the global capitalist economy over the last 25 years.
To counter their declining profits, many Fortune 500 corporations have moved a significant part of their operations to China to take advantage of the so-called “China Price” — the cost advantage of China’s seemingly inexhaustible cheap labor. By the middle of the first decade of the 21st century, roughly 40-50% of the profits of U.S. corporations were derived from their operations and sales abroad, especially China.
Why didn’t globalization surmount the crisis?
This escape route from stagnation has exacerbated the problem of overproduction because it adds to productive capacity. A tremendous amount of manufacturing capacity has been added in China over the last 25 years, and this has had a depressing effect on prices and profits. Not surprisingly, by around 1997, the profits of U.S. corporations stopped growing. According to one index, the profit rate of the Fortune 500 went from 7.15% in 1960-69 to 5.3% in 1980-90 to 2.29% in 1990-99 to 1.32% in 2000-2002.
What about financialization?
Given the limited gains in countering the depressive impact of overproduction via neoliberal restructuring and globalization, the third escape route became very critical for maintaining and raising profitability: financialization.
In the ideal world of neoclassical economics, the financial system is the mechanism by which the savers or those with surplus funds are joined with the entrepreneurs who have need of their funds to invest in production. In the real world of late capitalism, with investment in industry and agriculture yielding low profits owing to overcapacity, large amounts of surplus funds are circulating and being invested and reinvested in the financial sector. The financial sector has thus turned on itself.
The result is an increased bifurcation between a hyperactive financial economy and a stagnant real economy. As one financial executive notes, “there has been an increasing disconnect between the real and financial economies in the last few years. The real economy has grown…but nothing like that of the financial economy — until it imploded.”
What this observer doesn’t tell us is that the disconnect between the real and the financial economy isn’t accidental. The financial economy has exploded precisely to make up for the stagnation owing to overproduction of the real economy.
What were the problems with financialization as an escape route?
The problem with investing in financial sector operations is that it is tantamount to squeezing value out of already created value. It may create profit, yes, but it doesn’t create new value. Only industry, agricultural, trade, and services create new value. Because profit is not based on value that is created, investment operations become very volatile and the prices of stocks, bonds, and other forms of investment can depart very radically from their real value. For instance, in the 1990s, prices of stock in Internet startups skyrocketed, driven mainly by upwardly spiraling financial valuations rooted in theoretical expectations of future profitability. Share prices crashed in 2000 and 2001 when this strategy got completely out of hand. Profits then depend on taking advantage of upward price departures from the value of commodities, then selling before reality enforces a “correction.” Corrections are really a return to more realistic values. The radical rise of asset prices far beyond any credible value is what what fosters financial bubbles.
Why is financialization so volatile?
With profitability depending on speculative coups, it’s not surprising that the finance sector lurches from one bubble to another, or from one speculative mania to another.
And because it’s driven by speculative mania, finance-driven capitalism has experienced scores of financial crises since capital markets were deregulated and liberalized in the 1980s.
Prior to the current Wall Street meltdown, the most explosive of these were the string of emerging markets crises and the U.S.tech stock bubble’s implosion in 2000 and 2001. The emerging markets crises primarily included the Mexican financial crisis of 1994-95, the Asian financial crisis of 1997-1998, the Russian financial crisis in 1998, and the Argentine financial collapse that occurred in 2001 and 2002, but they also rocked other countries including Brazil and Turkey.
One of President Bill Clinton’s Treasury Secretaries, Wall Streeter Robert Rubin, predicted five years ago that “future financial crises are almost surely inevitable and could be even more severe.”
How do bubbles form, grow, and burst?
Let’s first use the Asian financial crisis of 1997-98, as an example. First, capital account and financial liberalization took place Thailand and other countries at the urging of the International Monetary Fund (IMF) and the U.S. Treasury Department. Then came the entry of foreign funds seeking quick and high returns, meaning they went to real estate and the stock market. This overinvestment made stock and real estate prices fall, leading to the panicked withdrawal of funds. In 1997, $100 billion fled the East Asian economies over the course of just a few weeks.
That capital flight led to an IMF bailout of foreign speculators. The resulting collapse of the real economy produced a recession throughout East Asia in 1998. Despite massive destabilization, international financial institutions opposed efforts to impose both national and global regulation of financial system on ideological grounds.
What about the current bubble? How did it form?
The current Wall Street collapse has its roots in the technology-stock bubble of the late 1990s, when the price of the stocks of Internet startups skyrocketed, then collapsed in 2000 and 2001, resulting in the loss of $7 trillion worth of assets and the recession of 2001-2002.
The Fed’s loose money policies under Alan Greenspan encouraged the technology bubble. When it collapsed into a recession, Greenspan, to try to counter a long recession, cut the prime rate to a 45-year low of one percent in June 2003 and kept it there for over a year. This had the effect of encouraging another bubble — in real estate.
As early as 2002, progressive economists such as Dean Baker of the Center for Economic Policy Research were warning about the real estate bubble and the predictable severity of its impending collapse. However, as late as 2005, then-Council of Economic Adviser Chairman and now Federal Reserve Board Chairman Ben Bernanke attributed the rise in U.S. housing prices to “strong economic fundamentals” instead of speculative activity. Is it any wonder that he was caught completely off guard when the subprime mortgage crisis broke in the summer of 2007?
And how did it grow?
According to investor and philanthropist George Soros: “Mortgage institutions encouraged mortgage holders to refinance their mortgages and withdraw their excess equity. They lowered their lending standards and introduced new products, such as adjustable mortgages (ARMs), ‘interest-only’ mortgages, and promotional teaser rates.” All this encouraged speculation in residential housing units. House prices started to rise in double-digit rates. This served to reinforce speculation, and the rise in house prices made the owners feel rich; the result was a consumption boom that has sustained the economy in recent years.”
The subprime mortgage crisis wasn’t a case of supply outrunning real demand. The “demand” was largely fabricated by speculative mania on the part of developers and financiers that wanted to make great profits from their access to foreign money that has flooded the United States in the last decade. Big-ticket mortgages were aggressively sold to millions who could not normally afford them by offering low “teaser” interest rates that would later be readjusted to jack up payments from the new homeowners.
But how could subprime mortgages going sour turn into such a big problem?
Because these assets were then “securitized” with other assets into complex derivative products called “collateralized debt obligations” (CDOs). The mortgage originators worked with different layers of middlemen who understated risk so as to offload them as quickly as possible to other banks and institutional investors. These institutions in turn offloaded these securities onto other banks and foreign financial institutions.
When the interest rates were raised on the subprime loans, adjustable mortgage, and other housing loans, the game was up. There are about six million subprime mortgages outstanding, 40% of which will likely go into default in the next two years, Soros estimates.
And five million more defaults from adjustable rate mortgages and other “flexible loans” will occur over the next several years. These securities, the value of which run into the trillions of dollars, have already been injected, like virus, into the global financial system.
But how could Wall Street titans collapse like a house of cards?
For Lehman Brothers, Merrill Lynch, Fannie Mae, Freddie Mac, and Bear Stearns, the losses represented by these toxic securities simply overwhelmed their reserves and brought them down. And more are likely to fall once their books — since lots of these holdings are recorded “off the balance sheet” — are corrected to reflect their actual holdings.
And many others will join them as other speculative operations such as credit cards and different varieties of risk insurance seize up. The American International Group (AIG) was felled by its massive exposure in the unregulated area of credit default swaps, derivatives that make it possible for investors to bet on the possibility that companies will default on repaying loans. According to Soros, such bets on credit defaults now make up a $45 trillion market that is entirely unregulated. It amounts to more than five times the total of the U.S. government bond market. The huge size of the assets that could go bad if AIG collapsed made Washington change its mind and intervene after it let Lehman Brothers collapse.
What’s going to happen now?
There will be more bankruptcies and government takeovers. Wall Street’s collapse will deepen and prolong the U.S. recession. This recession will translate into an Asian recession. After all, China’s main foreign market is the United States, and China in turn imports raw materials and intermediate goods that it uses for its U.S. exports from Japan, Korea, and Southeast Asia. Globalization has made “decoupling” impossible. The United States, China, and East Asia in general are like three prisoners bound together in a chain-gang.
In a nutshell…?
The Wall Street meltdown is not only due to greed and to the lack of government regulation of a hyperactive sector. This collapse stems ultimately from the crisis of overproduction that has plagued global capitalism since the mid-1970s.
The financialization of investment activity has been one of the escape routes from stagnation, the other two being neoliberal restructuring and globalization. With neoliberal restructuring and globalization providing limited relief, financialization became attractive as a mechanism to shore up profitability. But financialization has proven to be a dangerous road. It has led to speculative bubbles that produce temporary prosperity for a few but ultimately end up in corporate collapse and in recession in the real economy.
The key questions now are: How deep and long will this recession be? Does the U.S. economy need another speculative bubble to drag itself out of this recession? And if it does, where will the next bubble form? Some people say the military-industrial complex or the “disaster capitalism complex” that Naomi Klein writes about will be the next bubble. But that’s another story.
søndag den 5. oktober 2008
lørdag den 4. oktober 2008
US Military spending relative to other countries
The United States and its close allies are responsible for approximately two-thirds of all military spending on Earth (of which, in turn, the U.S. is responsible for the majority), and spend 57 times more than the seven so-called "rogue" nations combined (Cuba, Iran, Iraq, Libya, North Korea, Sudan and Syria). Military spending accounts for more than half of the United States' federal discretionary spending, which is all of the U.S. government's money not spoken for by pre-existing obligations.
"Of all the enemies to public liberty war is, perhaps, the most to be dreaded because it comprises and develops the germ of every other. War is the parent of armies; from these proceed debts and taxes … known instruments for bringing the many under the domination of the few.… No nation could preserve its freedom in the midst of continual warfare." James Madison, Political Observations, 1795
The Wall Street Mega Bailout: Bad News for the World's Hungry
by Annie Shattuck and Eric Holt-Giménez [Food First/Institute for Food and Development Policy]
Rising food prices are proving deadly for the world's poor. Reeling under a combination of speculation, high oil prices, agrofuels and a weak dollar, one in every six people on earth are going hungry this year. Fully half the world is now at risk of hunger and malnutrition. The current financial crisis that threatens to spread globally can only mean disaster for the world's poor. The crisis is not limited to the developing world. In the United States food stamp enrollment is at an all time high. The 35 million people living below the poverty line-now joined by the 50 million near-poor are turning to the nation's food banks in record numbers. There, pickings are getting slimmer, as food programs strain under a combination of high food prices and shrinking donations.
Unfortunately, the unprecedented $700 billion Wall Street bailout will do nothing to alleviate this festering disaster-in fact, it may make things worse. How? The bailout will increase the U.S.'s national debt to over $11 trillion, calling into question the very creditworthiness of the U.S. Treasury. Debt and uncertainty will further drive down the value of the dollar. A weak dollar means high food prices to consumers because when the dollar decreases in value it takes more dollars to buy the same quantity of food. Though a low dollar might initially stimulate exports, a falling dollar will send food prices steadily upwards. Food prices have already increased 127% since the dollar began to lose value in 2001. The conservative CATO Institute estimates that up to 55% of this year's increase in rice prices was caused by the falling dollar alone.
If the bailout goes through, the poor will pay for Wall Street's greed with empty bellies. There is no consensus among economists that the bail out will fix the financial crisis. If it fails, we will be hit twice: once with rising costs for basic needs like food, heating and transportation, and again with job losses and less economic opportunity.
The massive cash transfer to Wall Street is likely just the beginning of more taxpayer bloodletting. Regardless, simply granting banks billions in corporate welfare doesn't begin to address the root causes of the food or the financial crises. In the long run, the bail out will do nothing to limit the role of index investors in commodities, nothing to reduce food or finance monopolies, and nothing to stabilize the rising prices of food and fuel currently squeezing poor and working families. A bailout is simply what it sounds like: an emergency measure with no attempt at reform.
The FAO estimates it will take $30 billion a year to eliminate global hunger. For the price of the bailout, we could make sure no one on earth goes hungry for the next 23 years. We could re-build food systems as engines for local economic growth. Instead of exacerbating global hunger, for $700 billion dollars we could fully fund the millennium development goals to eradicate global poverty, the root cause of hunger.
Decades of free market fundamentalism has left food systems around the world in tatters and our financial systems poised on the edge of disaster. Instead of throwing money at a system in crisis, we need to use the crisis as an opportunity to fundamentally restructure both food and finance. We need to re-regulate the financial services industry, re-establish national grain reserves, and use anti-trust legislation to break up the power of the oligopolies holding us hostage. Instead of considering a $700 billion dollar gift to financiers, Congress needs to jettison the laissez-faire policies that let Wall Street spin out of control in the first place.
Rising food prices are proving deadly for the world's poor. Reeling under a combination of speculation, high oil prices, agrofuels and a weak dollar, one in every six people on earth are going hungry this year. Fully half the world is now at risk of hunger and malnutrition. The current financial crisis that threatens to spread globally can only mean disaster for the world's poor. The crisis is not limited to the developing world. In the United States food stamp enrollment is at an all time high. The 35 million people living below the poverty line-now joined by the 50 million near-poor are turning to the nation's food banks in record numbers. There, pickings are getting slimmer, as food programs strain under a combination of high food prices and shrinking donations.
Unfortunately, the unprecedented $700 billion Wall Street bailout will do nothing to alleviate this festering disaster-in fact, it may make things worse. How? The bailout will increase the U.S.'s national debt to over $11 trillion, calling into question the very creditworthiness of the U.S. Treasury. Debt and uncertainty will further drive down the value of the dollar. A weak dollar means high food prices to consumers because when the dollar decreases in value it takes more dollars to buy the same quantity of food. Though a low dollar might initially stimulate exports, a falling dollar will send food prices steadily upwards. Food prices have already increased 127% since the dollar began to lose value in 2001. The conservative CATO Institute estimates that up to 55% of this year's increase in rice prices was caused by the falling dollar alone.
If the bailout goes through, the poor will pay for Wall Street's greed with empty bellies. There is no consensus among economists that the bail out will fix the financial crisis. If it fails, we will be hit twice: once with rising costs for basic needs like food, heating and transportation, and again with job losses and less economic opportunity.
The massive cash transfer to Wall Street is likely just the beginning of more taxpayer bloodletting. Regardless, simply granting banks billions in corporate welfare doesn't begin to address the root causes of the food or the financial crises. In the long run, the bail out will do nothing to limit the role of index investors in commodities, nothing to reduce food or finance monopolies, and nothing to stabilize the rising prices of food and fuel currently squeezing poor and working families. A bailout is simply what it sounds like: an emergency measure with no attempt at reform.
The FAO estimates it will take $30 billion a year to eliminate global hunger. For the price of the bailout, we could make sure no one on earth goes hungry for the next 23 years. We could re-build food systems as engines for local economic growth. Instead of exacerbating global hunger, for $700 billion dollars we could fully fund the millennium development goals to eradicate global poverty, the root cause of hunger.
Decades of free market fundamentalism has left food systems around the world in tatters and our financial systems poised on the edge of disaster. Instead of throwing money at a system in crisis, we need to use the crisis as an opportunity to fundamentally restructure both food and finance. We need to re-regulate the financial services industry, re-establish national grain reserves, and use anti-trust legislation to break up the power of the oligopolies holding us hostage. Instead of considering a $700 billion dollar gift to financiers, Congress needs to jettison the laissez-faire policies that let Wall Street spin out of control in the first place.
Adam Smith i Wealth of Nations.
“The proposal of any new law or regulation of commerce which comes from this order [profit takers], ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but most suspicious attention. It comes from an order of men, whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it.”
Financial Bailout: America's Own Kleptocracy
The largest transformation of America's Financial System since the Great Depression
Global Research, September 20, 2008
By Michael Hudson
[Michael Hudosn is President of The Institute for the Study of Long-Term Economic Trends (ISLET), a Wall Street Financial Analyst, Distinguished Research Professor of Economics at the University of Missouri, Kansas City and author of Super-Imperialism: The Economic Strategy of American Empire (1972 and 2003) and of The Myth of Aid (1971).]
Nobody expected industrial capitalism to end up like this. Nobody even saw it evolving in this direction. I'm afraid this failing is not unusual among futurists: The natural tendency is to think about how economies can best grow and evolve, not how it can be untracked. But an unforeseen road always seems to appear, and there goes society goes off on a tangent.
What a two weeks!
On Sunday, September 7, the Treasury took on the $5.3 trillion mortgage exposure of Fannie Mae and Freddie Mac, whose heads already had been removed for accounting fraud.
On Monday, September 15, Lehman Brothers went bankrupt, when prospective Wall Street buyers couldn't gain any sense of reality from its financial books. On Wednesday the Federal Reserve agreed to make good for at least $85 billion in the just-pretend "insured" winnings owed to financial gamblers who bet on computer-driven trades in junk mortgages and bought counter-party coverage from the A.I.G. (the American International Group, whose head Maurice Greenberg already had been removed a few years back for accounting fraud).
But it is Friday, September 19, that will go down as a turning point in American history. The White House committed at least half a trillion dollars more to re-inflate real estate prices in an attempt to support the market value junk mortgages - mortgages issued far beyond the ability of debtors to pay and far above the going market price of the collateral being pledged.
These billions of dollars were devoted to keeping a dream alive - the accounting fictions written down by companies that had entered an unreal world based on false accounting that nearly everyone in the financial sector knew to be fake. But they played along with buying and selling packaged mortgage junk because that was where the money was. As Charles Prince of Citibank put it, "As long as they're playing music, you have to get up and dance." Even after markets collapsed, fund managers who steered clear were blamed for not playing the game while it was going. I have friends on Wall Street who were fired for not matching the returns that their compatriots were making. And the biggest returns were to be made in trading in the economy's largest financial asset - mortgage debt. The mortgages packaged, owned or guaranteed by Fannie and Freddie alone exceeded the entire U.S. national debt - the cumulative deficits run up by the American Government since the nation won the Revolutionary War!
This gives an idea of just how large the bailout has been - and where the government's (or at least the Republicans') priorities lie! Instead of waking up the economy to reality, the government has thrown all its resources to promote the unreal dream that debts can be paid - if not by the debtors themselves, then by the government - "taxpayers," as the euphemism goes.
Overnight, the U.S. Treasury and Federal Reserve have radically changed the character of American capitalism. It is nothing less than a coup d'Etat for the class that FDR called "banksters." What has happened in the past two weeks threatens to change the coming century - irreversibly, if they can get away with it. This is the largest and most inequitable transfer of wealth since the land giveaways to the railroad barons during the Civil War era.
Even so, there seems little sign that it even may end the free-market patter talk by financial insiders who have managed to avert public oversight by appointing non-regulators to the major regulatory agencies - and thus created the mess that Treasury Secretary Henry Paulson now says threatens the bank deposits and jobs of all Americans. What he really means, of course, are simply the largest Republican campaign contributors (and to be fair, also the largest contributors to Democratic candidates on key financial committees).
A kleptocratic class has taken over the economy to replace industrial capitalism. Franklin Roosevelt's term "banksters" says it all in a nutshell. The economy has been captured - by an alien power, but not the usual suspects. Not socialism, workers or "big government," nor by industrial monopolists or even by the great banking families. Certainly not by Freemasons and Illuminati. (It would be wonderful if there were indeed some group operating with centuries of wisdom behind them, so at least someone at least had a plan.) Rather, the banksters have made a compact with an alien power -not Communists, Russians, Asians or Arabs. Not humans at all. The group's cadre is a new breed of machine. It may sound like the Terminator movies, but computerized Machines have indeed taken over the world - at least, the White House's world.
Here is how they did it. A.I.G. wrote insurance policies of all sorts of that people and businesses need: home and property insurance, livestock insurance, even aircraft leasing. These highly profitable businesses were not the problem. (They therefore will probably be sold off to pay the company's bad gambles.) A.I.G.'s downfall came from the $450 billion - almost half a trillion - dollars it was on the hook for as a result of guaranteeing hedge-fund counterparty insurance. In other words, if two parties played the zero-sum game of betting against each other as to whether the dollar would rise or fall against sterling or the euro, or if they insured a mortgage portfolio of junk mortgages to make sure that they would get paid, they would pay a teeny tiny commission to A.I.G. for a policy promising to pay if, say, the $11 trillion U.S. mortgage market should "stumble" or if losers placing trillions of dollars in bets on foreign exchange derivatives, stock or bond derivatives should somehow find themselves in a position that so many Las Vegas patrons are in, and be unable to come up with the cash to cover their losses.
A.I.G. collected billions of dollars on such policies. And thanks to the fact that insurance companies are a Milton Friedman paradise - not regulated by the Federal Reserve or any other nation-wide agency, and hence able to get the proverbial free lunch without government oversight - writing such policies was done by computer printouts, and the company collected massive fees and commissions without putting in much capital of its own. This is what is called "self-regulation." It is how the Invisible Hand is supposed to work.
It turned out, inevitably, that some of the financial institutions that made billion-dollar gambles - usually in the form of a thousand million-dollar gambles in the course of a few minutes or so, to be precise - couldn't pay up. These gambles all occur in microseconds, at strokes of a keyboard almost without human interference. In that sense it is not unlike alien pod people taking over. But in this case they are robot-like machines, hence the analogy I drew above with the Terminators.
Their sudden rise to dominance is as unforeseen as an invasion from Mars. The nearest analogy is the invasion of the Harvard Boys, World Bank and U.S.A.I.D. to Russia and other post-Soviet economies after the Soviet Union was dissolved, pressing free-market giveaways to create national kleptocracies. It should be a worrying sign to Americans that these kleptocrats have become the Founding Fortunes of their respective countries. We should bear in mind Aristotle's observation that democracy is the political stage immediately preceding oligarchy.
The financial machines that placed the trades that bankrupted A.I.G. were programmed by financial managers to act with the speed of light in conducting electronic trades often lasting only a few seconds each, millions of times a day. Only a machine could calculate mathematical probabilities factored in regarding the squiggles up and down of interest rates, exchange rates and stock and bonds prices - and prices for packaged mortgages. And the latter packages increasingly took the form of junk mortgages, pretending to be payable debts but in reality empty flak.
The machines employed by hedge funds in particular have given a new meaning to Casino Capitalism. That was long applied to speculators playing the stock market. It meant making cross bets, lose some and win some - and getting the government to bail out the non-payers. The twist in the past two weeks' turmoil is that the winners cannot collect on their bets unless the government pays the debts that the losers are unable to cover with their own money.
One would have thought that this requires some degree of control over the government. The activity probably never should have been licensed. In fact, it never was licensed, and hence nor regulated. But there seemed to be a good reason: Investors in hedge funds had to sign a paper saying that they were rich enough to afford to lose their money on this financial gambling. Your average mom and pop investors were not permitted to participate. Despite the high rewards that millions of tiny trades generated, they were deemed too risky for the uninitiated lacking trust funds to play with.
A hedge fund does not make money by producing goods and services. It does not advance funds to buy real assets or even lend money. It borrows huge sums to leverage its bet with nearly free credit. Its managers are not industrial engineers but mathematicians who program computers to make cross-bets or "straddles" on which way interest rates, currency exchange rates, stock or bond prices may move - or the prices for packaged bank mortgages. The packaged loans may be sound or they may be junk. It doesn't matter. All that matters is making money in a marketplace where most trades last only a few seconds. What creates the gains is the price fibrillation - volatility.
This kind of transaction may make fortunes, but it is not "wealth creation" in the form that most people recognize. Before the Black-Scholes mathematical formula for calculating the value of hedge bets, this kind of put and call option was too costly to provide much profit to anyone except the brokerage houses. But the combination of powerful computers and the "innovation" of almost free credit and free access to the financial gambling tables has made possible a frenetic back-and-forth maneuvering.
So why has the Treasury found it necessary to enter this picture at all? Why should these gamblers be bailed out, if they had enough to lose without having to become public wards by going on welfare? Hedge fund trading was limited to the very rich, for investment banks and other institutional investors. But it became one of the easiest ways to make money, loaning funds at interest for people to pay out of their computer-driven cross-trades. And almost as fast as it was made, this revenue was paid out in commissions, salaries and annual bonuses reminiscent of America's Gilded Age in the years prior to World War I - years before the income tax was introduced in 1913. The remarkable thing about all this money was that its recipients didn't even have to pay normal income tax on it. The government let them call it "capital gains," which meant that the money was taxed at only a fraction of the rate that incomes were taxed.
The pretense, of course, is that all this frenetic trading creates real "capital." It certainly does not do so in the classical 19th-century concept of capital. The term has been decoupled from producing goods and services, hiring wage labor or from financing innovation. It is as much "capital" as the right to conduct a lottery and collect the winnings from the hopes of the losers. But then, casinos from Las Vegas to riverboats have become a major "growth industry," muddying the language of capital, growth and wealth itself.
For the gaming tables to be closed and the money paid out, the losers must be bailed out - Fannie Mae, Freddie Mac, A.I.G. and who knows what to come? This is the only way to solve the problem of how companies that already have paid out their revenue to their managers and stockholders instead of putting it in reserves are to collect their winnings from insolvent debtors and insurance companies. These losers also have paid out their income to their financial managers and insiders (along with the usual patriotic contributions to the political candidates on the key committees in charge of deciding the nation's financial structuring).
This has to be orchestrated well in advance. It is necessary to buy politicians and give them a plausible cover story (or at least a well-crafted set of poll-tested euphemisms) to explain to voters just why it was in the public interest to bail out gamblers. Good rhetoric is needed to explain why the government should let them go into a casino and let them keep all their winnings while using public funds to make good on the losses of their counterparties.
What happened on September 18-19 took years of preparation, capped by a faux ideology crafted by public-relations think tanks to be broadcast under emergency conditions to panic Congress - and voters - right before the presidential election. This seems to be our September election surprise. Under staged crisis conditions, Pres. Bush and Treasury Secretary Paulson are now calling for the country to come together in a War on Defaulting Homeowners. This is said to be the only hope to "save the system." (What system is this? Not industrial capitalism, or even banking as we know it.) The largest transformation of America's financial system since the Great Depression has been compressed into just two weeks, starting with the doubling of America's national debt on September 7 with the nationalization of Fannie Mae and Freddie Mac. (My computer's spellchecker will not permit me to use the euphemism "conservatorship" that Mr. Paulson applied to bailing out the Fannie Mae and Freddie Mac fraudsters.)
Economic theory used to explain that profits and interest were a return for calculated risk. But today, the name of the game is capital gains and computerized gambling on the direction of interest rates, foreign currencies and stock prices - and when bad bets are made, bailouts are the calculated economic return for campaign contributions. But this is not supposed to be the time to talk of such things. "We must act now to protect our nation's economic health from serious risk," intoned Pres. Bush on September 19. What he meant was that the White House must make the Republican Party's largest group of campaign contributors whole - Wall Street, that is - by bailing out their bad gambles. "There will be ample opportunity to debate the origins of this problem. Now is the time to solve it." In other words, don't make this an election issue. "In our nation's history there have been moments that require us to come together across party lines to address major challenges. This is such a moment." Right before the presidential election! The same guff was heard earlier on Friday morning from Sec. Paulson: "Our economic health requires that we work together for prompt, bipartisan action." The broadcasters said that half a trillion dollars was discussed for this day's maneuverings.
Much of the blame should go to the Clinton Administration for leading the call to repeal Glass-Steagall in 1999, letting the banks merge with casinos. Or rather, the casinos have absorbed the banks. That is what has put the savings of Americans at risk.
But does this really mean that the only solution is to re-inflate the real estate market? The Paulson-Bernanke plan is to enable the banks to sell off the homes of five million home mortgage debtors faced with default or foreclosure this year! Homeowners with "exploding adjustable-rate mortgages" will lose their homes, but the Fed will pump enough credit into the mortgage-lending agencies to enable new buyers to go deeply enough into debt to take the junk mortgages off the hands of the gamblers who presently own them. Time for another financial and real estate bubble to bail out the junk mortgage lenders and packagers.
America has entered into a new war - a War to Save Computerized Derivative Traders. Like the Iraq war, it is based largely on fictions and entered into under seeming emergency conditions - to which the solution has little relation to the underlying cause of the problems. On financial security grounds the government is to make good on the collateralized debt obligations packaged (CDOs) that Warren Buffett has called "weapons of mass financial destruction."
Hardly by surprise, this giveaway of public money is being handled by the same group that warned the country so piously about weapons of mass destruction in Iraq. Pres. Bush and Treasury Secretary Paulson have piously announced that this is no time for partisan disagreements over this shift of public policy to favor creditors rather than debtors. There is no time to make the biggest bailout in election history an election issue. Not an appropriate time to debate whether it is a good thing to re-inflate housing prices to a level that will continue to oblige new home buyers to go so deeply into debt that they must pay some 40 percent of their take-home pay on housing.
Remember when President Bush and Alan Greenspan informed the American people that there was no money left to pay Social Security (not to mention Medicare) because at some future date (a decade from now? 20 years? 40 years?) the system might run a deficit of what now seems to be merely a trivial trillion dollars spread over many, many years. The moral was that if we can't figure out how to pay, let's plow the program under right now.
Mr. Bush and Greenspan did have a helpful solution, of course. The Treasury could turn Social Security and medical insurance money over to Bear Stearns, Lehman Brothers and their brethren to invest at the "magic of compound interest."
What would have happened to U.S. Social Security had this been done? Perhaps we should view the past two weeks' events as having assigned to Wall Street gamblers all the money that has been set aside since the Greenspan Commission in 1983 shifted the tax burden onto FICA wage withholding. It is not retirees who are being rescued, but the Wall Street investors who signed papers saying that they could afford to lose their money. The Republican slogan this November should be "Gambling insurance, not health insurance."
This is not how the much-vaunted Road to Serfdom was mapped out to be. Frederick Hayek and his Chicago Boys insisted that serfdom would come from government planning and regulation. This view turned upside down the classical and Progressive Era reformers who depicted government as acting as society's brain, its steering mechanism to shape markets - and free them from income without playing a necessary role in production.
The theory of democracy rested on the assumption that voters would act in their self-interest. Market reformers made a kindred happy assumption that consumers, savers and investors would promote economic growth by acting with full knowledge and understanding of the dynamics at work. But the Invisible Hand turned out to be accounting fraud, junk mortgage lending, insider dealing and a failure to relate the soaring debt overhead to the ability of debtors to pay - all of this mess seemingly legitimized by computerized trading models, and now blessed by the Treasury.
Global Research, September 20, 2008
By Michael Hudson
[Michael Hudosn is President of The Institute for the Study of Long-Term Economic Trends (ISLET), a Wall Street Financial Analyst, Distinguished Research Professor of Economics at the University of Missouri, Kansas City and author of Super-Imperialism: The Economic Strategy of American Empire (1972 and 2003) and of The Myth of Aid (1971).]
Nobody expected industrial capitalism to end up like this. Nobody even saw it evolving in this direction. I'm afraid this failing is not unusual among futurists: The natural tendency is to think about how economies can best grow and evolve, not how it can be untracked. But an unforeseen road always seems to appear, and there goes society goes off on a tangent.
What a two weeks!
On Sunday, September 7, the Treasury took on the $5.3 trillion mortgage exposure of Fannie Mae and Freddie Mac, whose heads already had been removed for accounting fraud.
On Monday, September 15, Lehman Brothers went bankrupt, when prospective Wall Street buyers couldn't gain any sense of reality from its financial books. On Wednesday the Federal Reserve agreed to make good for at least $85 billion in the just-pretend "insured" winnings owed to financial gamblers who bet on computer-driven trades in junk mortgages and bought counter-party coverage from the A.I.G. (the American International Group, whose head Maurice Greenberg already had been removed a few years back for accounting fraud).
But it is Friday, September 19, that will go down as a turning point in American history. The White House committed at least half a trillion dollars more to re-inflate real estate prices in an attempt to support the market value junk mortgages - mortgages issued far beyond the ability of debtors to pay and far above the going market price of the collateral being pledged.
These billions of dollars were devoted to keeping a dream alive - the accounting fictions written down by companies that had entered an unreal world based on false accounting that nearly everyone in the financial sector knew to be fake. But they played along with buying and selling packaged mortgage junk because that was where the money was. As Charles Prince of Citibank put it, "As long as they're playing music, you have to get up and dance." Even after markets collapsed, fund managers who steered clear were blamed for not playing the game while it was going. I have friends on Wall Street who were fired for not matching the returns that their compatriots were making. And the biggest returns were to be made in trading in the economy's largest financial asset - mortgage debt. The mortgages packaged, owned or guaranteed by Fannie and Freddie alone exceeded the entire U.S. national debt - the cumulative deficits run up by the American Government since the nation won the Revolutionary War!
This gives an idea of just how large the bailout has been - and where the government's (or at least the Republicans') priorities lie! Instead of waking up the economy to reality, the government has thrown all its resources to promote the unreal dream that debts can be paid - if not by the debtors themselves, then by the government - "taxpayers," as the euphemism goes.
Overnight, the U.S. Treasury and Federal Reserve have radically changed the character of American capitalism. It is nothing less than a coup d'Etat for the class that FDR called "banksters." What has happened in the past two weeks threatens to change the coming century - irreversibly, if they can get away with it. This is the largest and most inequitable transfer of wealth since the land giveaways to the railroad barons during the Civil War era.
Even so, there seems little sign that it even may end the free-market patter talk by financial insiders who have managed to avert public oversight by appointing non-regulators to the major regulatory agencies - and thus created the mess that Treasury Secretary Henry Paulson now says threatens the bank deposits and jobs of all Americans. What he really means, of course, are simply the largest Republican campaign contributors (and to be fair, also the largest contributors to Democratic candidates on key financial committees).
A kleptocratic class has taken over the economy to replace industrial capitalism. Franklin Roosevelt's term "banksters" says it all in a nutshell. The economy has been captured - by an alien power, but not the usual suspects. Not socialism, workers or "big government," nor by industrial monopolists or even by the great banking families. Certainly not by Freemasons and Illuminati. (It would be wonderful if there were indeed some group operating with centuries of wisdom behind them, so at least someone at least had a plan.) Rather, the banksters have made a compact with an alien power -not Communists, Russians, Asians or Arabs. Not humans at all. The group's cadre is a new breed of machine. It may sound like the Terminator movies, but computerized Machines have indeed taken over the world - at least, the White House's world.
Here is how they did it. A.I.G. wrote insurance policies of all sorts of that people and businesses need: home and property insurance, livestock insurance, even aircraft leasing. These highly profitable businesses were not the problem. (They therefore will probably be sold off to pay the company's bad gambles.) A.I.G.'s downfall came from the $450 billion - almost half a trillion - dollars it was on the hook for as a result of guaranteeing hedge-fund counterparty insurance. In other words, if two parties played the zero-sum game of betting against each other as to whether the dollar would rise or fall against sterling or the euro, or if they insured a mortgage portfolio of junk mortgages to make sure that they would get paid, they would pay a teeny tiny commission to A.I.G. for a policy promising to pay if, say, the $11 trillion U.S. mortgage market should "stumble" or if losers placing trillions of dollars in bets on foreign exchange derivatives, stock or bond derivatives should somehow find themselves in a position that so many Las Vegas patrons are in, and be unable to come up with the cash to cover their losses.
A.I.G. collected billions of dollars on such policies. And thanks to the fact that insurance companies are a Milton Friedman paradise - not regulated by the Federal Reserve or any other nation-wide agency, and hence able to get the proverbial free lunch without government oversight - writing such policies was done by computer printouts, and the company collected massive fees and commissions without putting in much capital of its own. This is what is called "self-regulation." It is how the Invisible Hand is supposed to work.
It turned out, inevitably, that some of the financial institutions that made billion-dollar gambles - usually in the form of a thousand million-dollar gambles in the course of a few minutes or so, to be precise - couldn't pay up. These gambles all occur in microseconds, at strokes of a keyboard almost without human interference. In that sense it is not unlike alien pod people taking over. But in this case they are robot-like machines, hence the analogy I drew above with the Terminators.
Their sudden rise to dominance is as unforeseen as an invasion from Mars. The nearest analogy is the invasion of the Harvard Boys, World Bank and U.S.A.I.D. to Russia and other post-Soviet economies after the Soviet Union was dissolved, pressing free-market giveaways to create national kleptocracies. It should be a worrying sign to Americans that these kleptocrats have become the Founding Fortunes of their respective countries. We should bear in mind Aristotle's observation that democracy is the political stage immediately preceding oligarchy.
The financial machines that placed the trades that bankrupted A.I.G. were programmed by financial managers to act with the speed of light in conducting electronic trades often lasting only a few seconds each, millions of times a day. Only a machine could calculate mathematical probabilities factored in regarding the squiggles up and down of interest rates, exchange rates and stock and bonds prices - and prices for packaged mortgages. And the latter packages increasingly took the form of junk mortgages, pretending to be payable debts but in reality empty flak.
The machines employed by hedge funds in particular have given a new meaning to Casino Capitalism. That was long applied to speculators playing the stock market. It meant making cross bets, lose some and win some - and getting the government to bail out the non-payers. The twist in the past two weeks' turmoil is that the winners cannot collect on their bets unless the government pays the debts that the losers are unable to cover with their own money.
One would have thought that this requires some degree of control over the government. The activity probably never should have been licensed. In fact, it never was licensed, and hence nor regulated. But there seemed to be a good reason: Investors in hedge funds had to sign a paper saying that they were rich enough to afford to lose their money on this financial gambling. Your average mom and pop investors were not permitted to participate. Despite the high rewards that millions of tiny trades generated, they were deemed too risky for the uninitiated lacking trust funds to play with.
A hedge fund does not make money by producing goods and services. It does not advance funds to buy real assets or even lend money. It borrows huge sums to leverage its bet with nearly free credit. Its managers are not industrial engineers but mathematicians who program computers to make cross-bets or "straddles" on which way interest rates, currency exchange rates, stock or bond prices may move - or the prices for packaged bank mortgages. The packaged loans may be sound or they may be junk. It doesn't matter. All that matters is making money in a marketplace where most trades last only a few seconds. What creates the gains is the price fibrillation - volatility.
This kind of transaction may make fortunes, but it is not "wealth creation" in the form that most people recognize. Before the Black-Scholes mathematical formula for calculating the value of hedge bets, this kind of put and call option was too costly to provide much profit to anyone except the brokerage houses. But the combination of powerful computers and the "innovation" of almost free credit and free access to the financial gambling tables has made possible a frenetic back-and-forth maneuvering.
So why has the Treasury found it necessary to enter this picture at all? Why should these gamblers be bailed out, if they had enough to lose without having to become public wards by going on welfare? Hedge fund trading was limited to the very rich, for investment banks and other institutional investors. But it became one of the easiest ways to make money, loaning funds at interest for people to pay out of their computer-driven cross-trades. And almost as fast as it was made, this revenue was paid out in commissions, salaries and annual bonuses reminiscent of America's Gilded Age in the years prior to World War I - years before the income tax was introduced in 1913. The remarkable thing about all this money was that its recipients didn't even have to pay normal income tax on it. The government let them call it "capital gains," which meant that the money was taxed at only a fraction of the rate that incomes were taxed.
The pretense, of course, is that all this frenetic trading creates real "capital." It certainly does not do so in the classical 19th-century concept of capital. The term has been decoupled from producing goods and services, hiring wage labor or from financing innovation. It is as much "capital" as the right to conduct a lottery and collect the winnings from the hopes of the losers. But then, casinos from Las Vegas to riverboats have become a major "growth industry," muddying the language of capital, growth and wealth itself.
For the gaming tables to be closed and the money paid out, the losers must be bailed out - Fannie Mae, Freddie Mac, A.I.G. and who knows what to come? This is the only way to solve the problem of how companies that already have paid out their revenue to their managers and stockholders instead of putting it in reserves are to collect their winnings from insolvent debtors and insurance companies. These losers also have paid out their income to their financial managers and insiders (along with the usual patriotic contributions to the political candidates on the key committees in charge of deciding the nation's financial structuring).
This has to be orchestrated well in advance. It is necessary to buy politicians and give them a plausible cover story (or at least a well-crafted set of poll-tested euphemisms) to explain to voters just why it was in the public interest to bail out gamblers. Good rhetoric is needed to explain why the government should let them go into a casino and let them keep all their winnings while using public funds to make good on the losses of their counterparties.
What happened on September 18-19 took years of preparation, capped by a faux ideology crafted by public-relations think tanks to be broadcast under emergency conditions to panic Congress - and voters - right before the presidential election. This seems to be our September election surprise. Under staged crisis conditions, Pres. Bush and Treasury Secretary Paulson are now calling for the country to come together in a War on Defaulting Homeowners. This is said to be the only hope to "save the system." (What system is this? Not industrial capitalism, or even banking as we know it.) The largest transformation of America's financial system since the Great Depression has been compressed into just two weeks, starting with the doubling of America's national debt on September 7 with the nationalization of Fannie Mae and Freddie Mac. (My computer's spellchecker will not permit me to use the euphemism "conservatorship" that Mr. Paulson applied to bailing out the Fannie Mae and Freddie Mac fraudsters.)
Economic theory used to explain that profits and interest were a return for calculated risk. But today, the name of the game is capital gains and computerized gambling on the direction of interest rates, foreign currencies and stock prices - and when bad bets are made, bailouts are the calculated economic return for campaign contributions. But this is not supposed to be the time to talk of such things. "We must act now to protect our nation's economic health from serious risk," intoned Pres. Bush on September 19. What he meant was that the White House must make the Republican Party's largest group of campaign contributors whole - Wall Street, that is - by bailing out their bad gambles. "There will be ample opportunity to debate the origins of this problem. Now is the time to solve it." In other words, don't make this an election issue. "In our nation's history there have been moments that require us to come together across party lines to address major challenges. This is such a moment." Right before the presidential election! The same guff was heard earlier on Friday morning from Sec. Paulson: "Our economic health requires that we work together for prompt, bipartisan action." The broadcasters said that half a trillion dollars was discussed for this day's maneuverings.
Much of the blame should go to the Clinton Administration for leading the call to repeal Glass-Steagall in 1999, letting the banks merge with casinos. Or rather, the casinos have absorbed the banks. That is what has put the savings of Americans at risk.
But does this really mean that the only solution is to re-inflate the real estate market? The Paulson-Bernanke plan is to enable the banks to sell off the homes of five million home mortgage debtors faced with default or foreclosure this year! Homeowners with "exploding adjustable-rate mortgages" will lose their homes, but the Fed will pump enough credit into the mortgage-lending agencies to enable new buyers to go deeply enough into debt to take the junk mortgages off the hands of the gamblers who presently own them. Time for another financial and real estate bubble to bail out the junk mortgage lenders and packagers.
America has entered into a new war - a War to Save Computerized Derivative Traders. Like the Iraq war, it is based largely on fictions and entered into under seeming emergency conditions - to which the solution has little relation to the underlying cause of the problems. On financial security grounds the government is to make good on the collateralized debt obligations packaged (CDOs) that Warren Buffett has called "weapons of mass financial destruction."
Hardly by surprise, this giveaway of public money is being handled by the same group that warned the country so piously about weapons of mass destruction in Iraq. Pres. Bush and Treasury Secretary Paulson have piously announced that this is no time for partisan disagreements over this shift of public policy to favor creditors rather than debtors. There is no time to make the biggest bailout in election history an election issue. Not an appropriate time to debate whether it is a good thing to re-inflate housing prices to a level that will continue to oblige new home buyers to go so deeply into debt that they must pay some 40 percent of their take-home pay on housing.
Remember when President Bush and Alan Greenspan informed the American people that there was no money left to pay Social Security (not to mention Medicare) because at some future date (a decade from now? 20 years? 40 years?) the system might run a deficit of what now seems to be merely a trivial trillion dollars spread over many, many years. The moral was that if we can't figure out how to pay, let's plow the program under right now.
Mr. Bush and Greenspan did have a helpful solution, of course. The Treasury could turn Social Security and medical insurance money over to Bear Stearns, Lehman Brothers and their brethren to invest at the "magic of compound interest."
What would have happened to U.S. Social Security had this been done? Perhaps we should view the past two weeks' events as having assigned to Wall Street gamblers all the money that has been set aside since the Greenspan Commission in 1983 shifted the tax burden onto FICA wage withholding. It is not retirees who are being rescued, but the Wall Street investors who signed papers saying that they could afford to lose their money. The Republican slogan this November should be "Gambling insurance, not health insurance."
This is not how the much-vaunted Road to Serfdom was mapped out to be. Frederick Hayek and his Chicago Boys insisted that serfdom would come from government planning and regulation. This view turned upside down the classical and Progressive Era reformers who depicted government as acting as society's brain, its steering mechanism to shape markets - and free them from income without playing a necessary role in production.
The theory of democracy rested on the assumption that voters would act in their self-interest. Market reformers made a kindred happy assumption that consumers, savers and investors would promote economic growth by acting with full knowledge and understanding of the dynamics at work. But the Invisible Hand turned out to be accounting fraud, junk mortgage lending, insider dealing and a failure to relate the soaring debt overhead to the ability of debtors to pay - all of this mess seemingly legitimized by computerized trading models, and now blessed by the Treasury.
The Financial Crisis: An Interview with George Soros
Judy Woodruff: You write in your new book, The New Paradigm for Financial Markets,[1] that "we are in the midst of a financial crisis the likes of which we haven't seen since the Great Depression." Was this crisis avoidable?
George Soros: I think it was, but it would have required recognition that the system, as it currently operates, is built on false premises. Unfortunately, we have an idea of market fundamentalism, which is now the dominant ideology, holding that markets are self-correcting; and this is false because it's generally the intervention of the authorities that saves the markets when they get into trouble. Since 1980, we have had about five or six crises: the international banking crisis in 1982, the bankruptcy of Continental Illinois in 1984, and the failure of Long-Term Capital Management in 1998, to name only three.
Each time, it's the authorities that bail out the market, or organize companies to do so. So the regulators have precedents they should be aware of. But somehow this idea that markets tend to equilibrium and that deviations are random has gained acceptance and all of these fancy instruments for investment have been built on them.
There are now, for example, complex forms of investment such as credit-default swaps that make it possible for investors to bet on the possibility that companies will default on repaying loans. Such bets on credit defaults now make up a $45 trillion market that is entirely unregulated. It amounts to more than five times the total of the US government bond market. The large potential risks of such investments are not being acknowledged.
Woodruff: How can so many smart people not realize this?
Soros: In my new book I put forward a general theory of reflexivity, emphasizing how important misconceptions are in shaping history. So it's not really unusual; it's just that we don't recognize the misconceptions.
Woodruff: Who could have? You said it would have been avoidable if people had understood what's wrong with the current system. Who should have recognized that?
Soros: The authorities, the regulators—the Federal Reserve and the Treasury—really failed to see what was happening. One Fed governor, Edward Gramlich, warned of a coming crisis in subprime mortgages in a speech published in 2004 and a book published in 2007, among other statements. So a number of people could see it coming. And somehow, the authorities didn't want to see it coming. So it came as a surprise.
Woodruff: The chairman of the Fed, Mr. Bernanke? His predecessor, Mr. Greenspan?
Soros: All of the above. But I don't hold them personally responsible because you have a whole establishment involved. The economics profession has developed theories of "random walks" and "rational expectations" that are supposed to account for market movements. That's what you learn in college. Now, when you come into the market, you tend to forget it because you realize that that's not how the markets work. But nevertheless, it's in some way the basis of your thinking.
Woodruff: How much worse do you anticipate things will get?
Soros: Well, you see, as my theory argues, you can't make any unconditional predictions because it very much depends on how the authorities are going to respond now to the situation. But the situation is definitely much worse than is currently recognized. You have had a general disruption of the financial markets, much more pervasive than any we have had so far. And on top of it, you have the housing crisis, which is likely to get a lot worse than currently anticipated because markets do overshoot. They overshot on the upside and now they are going to overshoot on the downside.
Woodruff: You say the housing crisis is going to get much worse. Do you anticipate something like the government setting up an agency or a trust corporation to buy these mortgages?
Soros: I'm sure that it will be necessary to arrest the decline because the decline, I think, will be much faster and much deeper than currently anticipated. In February, the rate of decline in housing prices was 25 percent per annum, so it's accelerating. Now, foreclosures are going to add to the supply of housing a very large number of properties because the annual rate of new houses built is about 600,000. There are about six million subprime mortgages outstanding, 40 percent of which will likely go into default in the next two years. And then you have the adjustable-rate mortgages and other flexible loans.
Problems with such adjustable-rate mortgages are going to be of about the same magnitude as with subprime mortgages. So you'll have maybe five million more defaults facing you over the next several years. Now, it takes time before a foreclosure actually is completed. So right now you have perhaps no more than 10,000 to 20,000 houses coming into the supply on the market. But that's going to build up. So the idea that somehow in the second half of this year the economy is going to improve I find totally unbelievable.
Woodruff: So how long will this last?
Soros: Well, it depends on when the authorities wake up, because you need to reduce the number of foreclosures. You need to keep as many people as possible in their houses so that they don't come onto the market. You need to arrest the decline in house prices, but you also need to prevent human suffering and social disruption because it's going to be very, very severe. Certain communities are already hurting and it's going to get a lot worse. So action will have to be taken, but I don't think it's going to happen during this administration.
Woodruff: You said the Federal Reserve had to step in to engineer the buyout by J.P. Morgan of Bear Stearns to prevent a much bigger catastrophe. You've also said that to do this, the Fed had to take on considerable risk. Is this an unhealthy amount of risk that the Fed has taken on?
Soros: This is their job, whether unhealthy or not; I don't think it's actually so severe. But that is their job, to save the system when it is in danger. However, because that is their job, it ought to be their job also to prevent asset bubbles from developing. And that task has not been recognized. Greenspan once spoke about the "irrational exuberance" of the market. It had a bad echo and he stopped talking about it. And it's generally accepted that the Fed tries to control core inflation, but not asset prices. I think that control of asset prices has to be an objective in order to prevent asset bubbles because they are so frequent.
Woodruff: And that's more than what the Fed is doing.
Soros: It's more than what it's doing now. You have to recognize that just controlling money doesn't control credit. You see, money and credit don't go hand in hand. The monetarist doctrine doesn't stand up. So you have to take into account the willingness to lend. And if it's too great—if borrowers can obtain large loans on the basis of inadequate security—you really have to introduce margin requirements for such borrowing and try to discourage it.
Woodruff: When you talk about currency you have more than a little expertise. You were described as the man who broke the Bank of England back in the 1990s. But what is your sense of where the dollar is going? We've seen it declining. Do you think the central banks are going to have to step in?
Soros: Well, we are close to a tipping point where, in my view, the willingness of banks and countries to hold dollars is definitely impaired. But there is no suitable alternative so central banks are diversifying into other currencies; but there is a general flight from these currencies. So the countries with big surpluses—Abu Dhabi, China, Norway, and Saudi Arabia, for example—have all set up sovereign wealth funds, state-owned investment funds held by central banks that aim to diversify their assets from monetary assets to real assets. That's one of the major developments currently and those sovereign wealth funds are growing. They're already equal in size to all of the hedge funds in the world combined. Of course, they don't use their capital as intensively as hedge funds, but they are going to grow to about five times the size of hedge funds in the next twenty years.
Woodruff: How low do you think the dollar will go?
Soros: Well, that I don't know. I can see the trend, but I don't know its extent, and I don't know when something might happen to turn it around. Once the economy stabilizes, probably the overshoot on the currencies would also be corrected.
Woodruff: Few people know more about hedge funds than you do. You've been enormously successful with your own hedge fund. Should hedge funds be more regulated by Washington?
Soros: I think hedge funds should be regulated like everything else. In other words, you have to control leverage—credit obtained for investment purposes—somewhere. Excessive use of leverage is at the bottom of this problem. And there have been hedge funds that have been using leverage excessively and some of those have gone broke. The amount of leverage that people are allowed to use has to be regulated. I think it's best done through the banks. In other words, the banks' reserve requirements—the amounts of money they are obliged to hold—should be tailored to the riskiness of their customers. So investment funds that use a lot of leverage ought to be seen as very risky; and therefore they would not get the amount of leverage they seek because the banks wouldn't give it to them.
Woodruff: New regulation, though: Could that impede the ability of hedge funds to be the big players that they have been in these markets?
Soros: Yes, I think that there has been excessive use of credit and it does have to be limited. So we are now in a period of very rapid deleveraging and I think that in the future we ought not to allow leverage to be used to the extent that it has been in the past.
Woodruff: You write, "We are at the end of an era." When this current credit crisis ends, will the US still be, no doubt about it, the world superpower when it comes to the economy?
Soros: Not at all. This is now in question. And you now have entered a period of really considerable uncertainty and turmoil because of the general flight from currencies, which manifests itself in the commodities bubble that has developed. The price of gold hasn't yet gone as high as it might. So what comes out of this turmoil is very open to question. I think that you will have to somehow reconstruct the global financial architecture because you have recognized that, in effect, the economic weight has changed considerably among the different countries. China has become much more important and also India, and so on. What kind of system will evolve from this is, I think, a very open question.
Woodruff: What about China? How much of an economic competitor could it end up being?
Soros: Well, China is rising. It's been the main beneficiary of globalization. Their currency is significantly undervalued and for various reasons they have to allow it to appreciate, recently at a rate of 10 percent. And it's been accelerating now to 15, 20 percent, which makes the situation more difficult for the Fed because you now have the prospect of core inflation in the US accelerating because if our imports coming from China go up in price by 15 percent, it will come through in core inflation. The price of goods at Wal-Mart is rising and will probably continue to rise and then accelerate.
Woodruff: So while people are thinking that goods are cheaper from China, you're saying the prices go up. It affects so many things that we buy in this country. What of Russia and how its economy is doing?
Soros: Basically, the country is benefiting from the high price of oil, but, at the same time, it is reestablishing a very authoritarian regime where the rights of investors are not respected. Now it is British Petroleum that is being chased out. So you invest at your own risk. I've done it and I'm not going to do it again.
Woodruff: So what you see in Russia tells us that political freedom and economic freedom are separable after all?
Soros: Well, the lack of political freedom also impinges on the rights of shareholders. So it's not a suitable area for investing exactly because you don't have the rule of law. China is improving a great deal. The rule of law is getting stronger in China, even though you don't have democracy.
Woodruff: The most attractive emerging market?
Soros: At this time, the outlook for India is also very good.
Woodruff: Let me mention two other points because they are so much on the minds of our leaders today. One is fighting the war on terror. Should the next president be prepared to sit down with the leaders of organizations like Hamas, like Hezbollah, countries like Iran?
Soros: Absolutely. I wrote another book arguing that the entire idea of a "war on terror" is a misleading concept that has got this country off on the wrong track.[2] It is responsible for our invading Iraq under the wrong pretenses and for a decline of our political influence and military power that has no precedent.
Woodruff: Where do you see the "war on terror" ten years down the road?
Soros: I hope that we will put it behind us. If you think in terms of human security and you say that the role of governments is to make the people secure, then it leads you to a completely different line of action. And even in Iraq, the surge, which was quite successful militarily, tried to provide protection for civilians, instead of just chasing terrorists whom we couldn't find after breaking into houses and terrifying the people. Concern for human security, making us feel safe and making the people in other countries feel safe: I think that would get you to a totally different line of action.
Woodruff: Bringing us back to this country in the midst of this economic credit crisis that you write about and that you've been describing, we are also in the middle of a presidential election. You endorsed Barack Obama the day he announced. Why him rather than your home state senator, Senator Clinton?
Soros: Well, I have very high regard for Hillary Clinton, but I think Obama has the charisma and the vision to radically reorient America in the world. And that is what we need because I'm afraid we have gotten off the right track and we need to have a greater discontinuity than Hillary Clinton would bring.
Woodruff: You have no concern that he lacks the experience to lead in this dangerous time that we live in?
Soros: I think that he has shown himself to be a really unusual person. And I think this emphasis on experience is way overdone because he will have exactly the same advisers available as Hillary Clinton, and it will be a matter of judgment whom he chooses. And actually, he is more likely to bring in new blood, which is what we need.
Woodruff: Recently, Senator Obama has endorsed some of the things we've been talking about: greater financial regulation, having for example the Federal Housing Administration insure unaffordable mortgages against default. Do you think this goes far enough, what he's talking about? Did he talk with you at all?
Soros: No, I've had absolutely no contact with him or any of the Democratic leadership on this issue. Now that my book is out, maybe I will in the future. But these are my ideas and they are not responsible for them.
Woodruff: From what you know about what he's saying about the housing crisis, do you think he goes far enough?
Soros: No, nothing right now goes far enough and Representative Barney Frank, who really understands the issues, is not pushing that far because, in order to get bipartisan support, you can't. So if you want something done, you have to set your sights lower. And that is what he has done and I think he is getting a few things through. But they are not enough.
Woodruff: A larger question on the campaign—you gave, I believe, something like $23 million in 2004 to various Democratic efforts: MoveOn.org and candidates. Far less than that so far this year—why the change?
Soros: Well, because I think that was a unique time when not having President Bush reelected would have made the situation of this country and of the world much better. I think now it's less important. And, in any case, I don't feel terribly comfortable being a partisan person because I look forward to being critical of the next Democratic administration.
Woodruff: What of your book and the philosophy that comes of it?
Soros: In human affairs, as distinguished from natural science, I argue that our understanding is imperfect. And our imperfect understanding introduces an element of uncertainty that's not there in natural phenomena. So therefore you can't predict human affairs in the same way as you can natural phenomena. And we have to come to terms with the implication of our own misunderstandings, that it's very hard to make decisions when you know you may be wrong. You have to learn to recognize that we in fact may be wrong. And, even worse than that, it's almost inevitable that all of our constructs will have some kind of a flaw in them. So when it comes to currencies, no currency system is perfect.
So you have to recognize that all of our constructions are imperfect. We have to improve them. But just because something is imperfect, the opposite is not perfect. So because of the failures of socialism, communism, we have come to believe in market fundamentalism, that markets are perfect; everything will be taken care of by markets. And markets are not perfect. And this time we have to recognize that, because we are facing a very serious economic disruption.
Now, we should not go back to a very highly regulated economy because the regulators are imperfect. They're only human and what is worse, they are bureaucratic. So you have to find the right kind of balance between allowing the markets to do their work, while recognizing that they are imperfect. You need authorities that keep the market under scrutiny and some degree of control. That's the message that I'm trying to get across.
George Soros: I think it was, but it would have required recognition that the system, as it currently operates, is built on false premises. Unfortunately, we have an idea of market fundamentalism, which is now the dominant ideology, holding that markets are self-correcting; and this is false because it's generally the intervention of the authorities that saves the markets when they get into trouble. Since 1980, we have had about five or six crises: the international banking crisis in 1982, the bankruptcy of Continental Illinois in 1984, and the failure of Long-Term Capital Management in 1998, to name only three.
Each time, it's the authorities that bail out the market, or organize companies to do so. So the regulators have precedents they should be aware of. But somehow this idea that markets tend to equilibrium and that deviations are random has gained acceptance and all of these fancy instruments for investment have been built on them.
There are now, for example, complex forms of investment such as credit-default swaps that make it possible for investors to bet on the possibility that companies will default on repaying loans. Such bets on credit defaults now make up a $45 trillion market that is entirely unregulated. It amounts to more than five times the total of the US government bond market. The large potential risks of such investments are not being acknowledged.
Woodruff: How can so many smart people not realize this?
Soros: In my new book I put forward a general theory of reflexivity, emphasizing how important misconceptions are in shaping history. So it's not really unusual; it's just that we don't recognize the misconceptions.
Woodruff: Who could have? You said it would have been avoidable if people had understood what's wrong with the current system. Who should have recognized that?
Soros: The authorities, the regulators—the Federal Reserve and the Treasury—really failed to see what was happening. One Fed governor, Edward Gramlich, warned of a coming crisis in subprime mortgages in a speech published in 2004 and a book published in 2007, among other statements. So a number of people could see it coming. And somehow, the authorities didn't want to see it coming. So it came as a surprise.
Woodruff: The chairman of the Fed, Mr. Bernanke? His predecessor, Mr. Greenspan?
Soros: All of the above. But I don't hold them personally responsible because you have a whole establishment involved. The economics profession has developed theories of "random walks" and "rational expectations" that are supposed to account for market movements. That's what you learn in college. Now, when you come into the market, you tend to forget it because you realize that that's not how the markets work. But nevertheless, it's in some way the basis of your thinking.
Woodruff: How much worse do you anticipate things will get?
Soros: Well, you see, as my theory argues, you can't make any unconditional predictions because it very much depends on how the authorities are going to respond now to the situation. But the situation is definitely much worse than is currently recognized. You have had a general disruption of the financial markets, much more pervasive than any we have had so far. And on top of it, you have the housing crisis, which is likely to get a lot worse than currently anticipated because markets do overshoot. They overshot on the upside and now they are going to overshoot on the downside.
Woodruff: You say the housing crisis is going to get much worse. Do you anticipate something like the government setting up an agency or a trust corporation to buy these mortgages?
Soros: I'm sure that it will be necessary to arrest the decline because the decline, I think, will be much faster and much deeper than currently anticipated. In February, the rate of decline in housing prices was 25 percent per annum, so it's accelerating. Now, foreclosures are going to add to the supply of housing a very large number of properties because the annual rate of new houses built is about 600,000. There are about six million subprime mortgages outstanding, 40 percent of which will likely go into default in the next two years. And then you have the adjustable-rate mortgages and other flexible loans.
Problems with such adjustable-rate mortgages are going to be of about the same magnitude as with subprime mortgages. So you'll have maybe five million more defaults facing you over the next several years. Now, it takes time before a foreclosure actually is completed. So right now you have perhaps no more than 10,000 to 20,000 houses coming into the supply on the market. But that's going to build up. So the idea that somehow in the second half of this year the economy is going to improve I find totally unbelievable.
Woodruff: So how long will this last?
Soros: Well, it depends on when the authorities wake up, because you need to reduce the number of foreclosures. You need to keep as many people as possible in their houses so that they don't come onto the market. You need to arrest the decline in house prices, but you also need to prevent human suffering and social disruption because it's going to be very, very severe. Certain communities are already hurting and it's going to get a lot worse. So action will have to be taken, but I don't think it's going to happen during this administration.
Woodruff: You said the Federal Reserve had to step in to engineer the buyout by J.P. Morgan of Bear Stearns to prevent a much bigger catastrophe. You've also said that to do this, the Fed had to take on considerable risk. Is this an unhealthy amount of risk that the Fed has taken on?
Soros: This is their job, whether unhealthy or not; I don't think it's actually so severe. But that is their job, to save the system when it is in danger. However, because that is their job, it ought to be their job also to prevent asset bubbles from developing. And that task has not been recognized. Greenspan once spoke about the "irrational exuberance" of the market. It had a bad echo and he stopped talking about it. And it's generally accepted that the Fed tries to control core inflation, but not asset prices. I think that control of asset prices has to be an objective in order to prevent asset bubbles because they are so frequent.
Woodruff: And that's more than what the Fed is doing.
Soros: It's more than what it's doing now. You have to recognize that just controlling money doesn't control credit. You see, money and credit don't go hand in hand. The monetarist doctrine doesn't stand up. So you have to take into account the willingness to lend. And if it's too great—if borrowers can obtain large loans on the basis of inadequate security—you really have to introduce margin requirements for such borrowing and try to discourage it.
Woodruff: When you talk about currency you have more than a little expertise. You were described as the man who broke the Bank of England back in the 1990s. But what is your sense of where the dollar is going? We've seen it declining. Do you think the central banks are going to have to step in?
Soros: Well, we are close to a tipping point where, in my view, the willingness of banks and countries to hold dollars is definitely impaired. But there is no suitable alternative so central banks are diversifying into other currencies; but there is a general flight from these currencies. So the countries with big surpluses—Abu Dhabi, China, Norway, and Saudi Arabia, for example—have all set up sovereign wealth funds, state-owned investment funds held by central banks that aim to diversify their assets from monetary assets to real assets. That's one of the major developments currently and those sovereign wealth funds are growing. They're already equal in size to all of the hedge funds in the world combined. Of course, they don't use their capital as intensively as hedge funds, but they are going to grow to about five times the size of hedge funds in the next twenty years.
Woodruff: How low do you think the dollar will go?
Soros: Well, that I don't know. I can see the trend, but I don't know its extent, and I don't know when something might happen to turn it around. Once the economy stabilizes, probably the overshoot on the currencies would also be corrected.
Woodruff: Few people know more about hedge funds than you do. You've been enormously successful with your own hedge fund. Should hedge funds be more regulated by Washington?
Soros: I think hedge funds should be regulated like everything else. In other words, you have to control leverage—credit obtained for investment purposes—somewhere. Excessive use of leverage is at the bottom of this problem. And there have been hedge funds that have been using leverage excessively and some of those have gone broke. The amount of leverage that people are allowed to use has to be regulated. I think it's best done through the banks. In other words, the banks' reserve requirements—the amounts of money they are obliged to hold—should be tailored to the riskiness of their customers. So investment funds that use a lot of leverage ought to be seen as very risky; and therefore they would not get the amount of leverage they seek because the banks wouldn't give it to them.
Woodruff: New regulation, though: Could that impede the ability of hedge funds to be the big players that they have been in these markets?
Soros: Yes, I think that there has been excessive use of credit and it does have to be limited. So we are now in a period of very rapid deleveraging and I think that in the future we ought not to allow leverage to be used to the extent that it has been in the past.
Woodruff: You write, "We are at the end of an era." When this current credit crisis ends, will the US still be, no doubt about it, the world superpower when it comes to the economy?
Soros: Not at all. This is now in question. And you now have entered a period of really considerable uncertainty and turmoil because of the general flight from currencies, which manifests itself in the commodities bubble that has developed. The price of gold hasn't yet gone as high as it might. So what comes out of this turmoil is very open to question. I think that you will have to somehow reconstruct the global financial architecture because you have recognized that, in effect, the economic weight has changed considerably among the different countries. China has become much more important and also India, and so on. What kind of system will evolve from this is, I think, a very open question.
Woodruff: What about China? How much of an economic competitor could it end up being?
Soros: Well, China is rising. It's been the main beneficiary of globalization. Their currency is significantly undervalued and for various reasons they have to allow it to appreciate, recently at a rate of 10 percent. And it's been accelerating now to 15, 20 percent, which makes the situation more difficult for the Fed because you now have the prospect of core inflation in the US accelerating because if our imports coming from China go up in price by 15 percent, it will come through in core inflation. The price of goods at Wal-Mart is rising and will probably continue to rise and then accelerate.
Woodruff: So while people are thinking that goods are cheaper from China, you're saying the prices go up. It affects so many things that we buy in this country. What of Russia and how its economy is doing?
Soros: Basically, the country is benefiting from the high price of oil, but, at the same time, it is reestablishing a very authoritarian regime where the rights of investors are not respected. Now it is British Petroleum that is being chased out. So you invest at your own risk. I've done it and I'm not going to do it again.
Woodruff: So what you see in Russia tells us that political freedom and economic freedom are separable after all?
Soros: Well, the lack of political freedom also impinges on the rights of shareholders. So it's not a suitable area for investing exactly because you don't have the rule of law. China is improving a great deal. The rule of law is getting stronger in China, even though you don't have democracy.
Woodruff: The most attractive emerging market?
Soros: At this time, the outlook for India is also very good.
Woodruff: Let me mention two other points because they are so much on the minds of our leaders today. One is fighting the war on terror. Should the next president be prepared to sit down with the leaders of organizations like Hamas, like Hezbollah, countries like Iran?
Soros: Absolutely. I wrote another book arguing that the entire idea of a "war on terror" is a misleading concept that has got this country off on the wrong track.[2] It is responsible for our invading Iraq under the wrong pretenses and for a decline of our political influence and military power that has no precedent.
Woodruff: Where do you see the "war on terror" ten years down the road?
Soros: I hope that we will put it behind us. If you think in terms of human security and you say that the role of governments is to make the people secure, then it leads you to a completely different line of action. And even in Iraq, the surge, which was quite successful militarily, tried to provide protection for civilians, instead of just chasing terrorists whom we couldn't find after breaking into houses and terrifying the people. Concern for human security, making us feel safe and making the people in other countries feel safe: I think that would get you to a totally different line of action.
Woodruff: Bringing us back to this country in the midst of this economic credit crisis that you write about and that you've been describing, we are also in the middle of a presidential election. You endorsed Barack Obama the day he announced. Why him rather than your home state senator, Senator Clinton?
Soros: Well, I have very high regard for Hillary Clinton, but I think Obama has the charisma and the vision to radically reorient America in the world. And that is what we need because I'm afraid we have gotten off the right track and we need to have a greater discontinuity than Hillary Clinton would bring.
Woodruff: You have no concern that he lacks the experience to lead in this dangerous time that we live in?
Soros: I think that he has shown himself to be a really unusual person. And I think this emphasis on experience is way overdone because he will have exactly the same advisers available as Hillary Clinton, and it will be a matter of judgment whom he chooses. And actually, he is more likely to bring in new blood, which is what we need.
Woodruff: Recently, Senator Obama has endorsed some of the things we've been talking about: greater financial regulation, having for example the Federal Housing Administration insure unaffordable mortgages against default. Do you think this goes far enough, what he's talking about? Did he talk with you at all?
Soros: No, I've had absolutely no contact with him or any of the Democratic leadership on this issue. Now that my book is out, maybe I will in the future. But these are my ideas and they are not responsible for them.
Woodruff: From what you know about what he's saying about the housing crisis, do you think he goes far enough?
Soros: No, nothing right now goes far enough and Representative Barney Frank, who really understands the issues, is not pushing that far because, in order to get bipartisan support, you can't. So if you want something done, you have to set your sights lower. And that is what he has done and I think he is getting a few things through. But they are not enough.
Woodruff: A larger question on the campaign—you gave, I believe, something like $23 million in 2004 to various Democratic efforts: MoveOn.org and candidates. Far less than that so far this year—why the change?
Soros: Well, because I think that was a unique time when not having President Bush reelected would have made the situation of this country and of the world much better. I think now it's less important. And, in any case, I don't feel terribly comfortable being a partisan person because I look forward to being critical of the next Democratic administration.
Woodruff: What of your book and the philosophy that comes of it?
Soros: In human affairs, as distinguished from natural science, I argue that our understanding is imperfect. And our imperfect understanding introduces an element of uncertainty that's not there in natural phenomena. So therefore you can't predict human affairs in the same way as you can natural phenomena. And we have to come to terms with the implication of our own misunderstandings, that it's very hard to make decisions when you know you may be wrong. You have to learn to recognize that we in fact may be wrong. And, even worse than that, it's almost inevitable that all of our constructs will have some kind of a flaw in them. So when it comes to currencies, no currency system is perfect.
So you have to recognize that all of our constructions are imperfect. We have to improve them. But just because something is imperfect, the opposite is not perfect. So because of the failures of socialism, communism, we have come to believe in market fundamentalism, that markets are perfect; everything will be taken care of by markets. And markets are not perfect. And this time we have to recognize that, because we are facing a very serious economic disruption.
Now, we should not go back to a very highly regulated economy because the regulators are imperfect. They're only human and what is worse, they are bureaucratic. So you have to find the right kind of balance between allowing the markets to do their work, while recognizing that they are imperfect. You need authorities that keep the market under scrutiny and some degree of control. That's the message that I'm trying to get across.
Massetab af Arbejdspladser.
NY TIMES: 159,000 Jobs Lost in September, the Worst Month in Five Years.
Report blames U.S. trade gap for 5.6 million lost jobs
WASHINGTON (Reuters) Thu Oct 2, 2008 7:03am EDT
The U.S. trade deficit in goods other than oil cost American workers 5.6 million jobs last year, with Michigan and South Carolina leading the list of hardest-hit states, a report issued on Thursday said.
"Elimination of the non-oil trade deficit could support millions of new jobs in export industries and contribute to the revitalization of U.S. manufacturing," Robert Scott, director of international programs for the partially labor-funded Economic Policy Institute, said in the report.
"Despite strong export growth over the past few years, that (non-oil) deficit still totaled $473 billion in 2007, only $48 billion less than its record peak in 2006," Scott said.
The report estimated Michigan lost 319,200 jobs in 2007 due to the non-oil trade gap, or 7.5 percent of its total employment. South Carolina was second with 121,000 job losses, or 6.2 percent of its work force, Scott said.
California, Texas and New York had bigger job losses, but with less impact on their total employment because of their larger populations, Scott said.
All 50 states and the District of Colombia had some jobs "lost or displaced" because of the trade deficit, he said.
The most important causes of the non-oil trade deficit are "currency manipulation and other unfair trade practices" by China and other countries, Scott said.
In an interview, Scott said the United States should impose a tariff on Chinese goods to level the playing field.
His findings contrast with those of the business-friendly Peterson Institute for International Economics, which has estimated the overall U.S. economy is approximately $1 trillion richer each year because of globalization.
The report also comes at a time when the Bush administration and many economists are crediting growing U.S. exports with keeping the U.S. economy afloat.
In the first seven months of 2008, exports increased by 18.3 percent to $1.1 trillion compared to the same period last year while imports rose 12.9 percent to $1.5 billion.
Trade has been an issue in the U.S. presidential campaign, with Democrat Barack Obama vowing to end tax breaks that encourage corporations to ship jobs overseas and promising to crack down on China's currency practices.
Republican John McCain has criticized Obama for opposing free trade pacts with South Korea and Colombia that the Bush administration wants Congress to pass.
The American economy lost 159,000 jobs in September, the worst month of retrenchment in five years, the government reported on Friday, amplifying fears that an already painful downturn had entered a more severe stage that could persist well into next year.
Employment has diminished for nine consecutive months, eliminating 760,000 jobs, according to the Labor Department’s report. And that does not count the traumatic events of recent weeks, as a string of Wall Street institutions collapsed, prompting the $700 billion emergency rescue package approved by Congress on Friday.
“It’s a dismal report, and the worst thing about it is that it does not reflect the recent seizure that we’ve seen in the credit markets,” said Michael T. Darda, chief economist at MKM Partners, a research and trading firm in Greenwich, Conn. “There’s really nothing good about this report at all. We’ve lost jobs in nearly every area of the economy, and this is going to get worse before it gets better because the credit markets have deteriorated basically on a daily basis for the last few weeks.”
Report blames U.S. trade gap for 5.6 million lost jobs
WASHINGTON (Reuters) Thu Oct 2, 2008 7:03am EDT
The U.S. trade deficit in goods other than oil cost American workers 5.6 million jobs last year, with Michigan and South Carolina leading the list of hardest-hit states, a report issued on Thursday said.
"Elimination of the non-oil trade deficit could support millions of new jobs in export industries and contribute to the revitalization of U.S. manufacturing," Robert Scott, director of international programs for the partially labor-funded Economic Policy Institute, said in the report.
"Despite strong export growth over the past few years, that (non-oil) deficit still totaled $473 billion in 2007, only $48 billion less than its record peak in 2006," Scott said.
The report estimated Michigan lost 319,200 jobs in 2007 due to the non-oil trade gap, or 7.5 percent of its total employment. South Carolina was second with 121,000 job losses, or 6.2 percent of its work force, Scott said.
California, Texas and New York had bigger job losses, but with less impact on their total employment because of their larger populations, Scott said.
All 50 states and the District of Colombia had some jobs "lost or displaced" because of the trade deficit, he said.
The most important causes of the non-oil trade deficit are "currency manipulation and other unfair trade practices" by China and other countries, Scott said.
In an interview, Scott said the United States should impose a tariff on Chinese goods to level the playing field.
His findings contrast with those of the business-friendly Peterson Institute for International Economics, which has estimated the overall U.S. economy is approximately $1 trillion richer each year because of globalization.
The report also comes at a time when the Bush administration and many economists are crediting growing U.S. exports with keeping the U.S. economy afloat.
In the first seven months of 2008, exports increased by 18.3 percent to $1.1 trillion compared to the same period last year while imports rose 12.9 percent to $1.5 billion.
Trade has been an issue in the U.S. presidential campaign, with Democrat Barack Obama vowing to end tax breaks that encourage corporations to ship jobs overseas and promising to crack down on China's currency practices.
Republican John McCain has criticized Obama for opposing free trade pacts with South Korea and Colombia that the Bush administration wants Congress to pass.
Bil-Industrien får $25 milliarder bailout-lån af staten.
US bailout, plug-in credit a boost for automakers
Fri Oct 3, 2008 6:41pm EDT
By John Crawley
WASHINGTON, Oct 3 (Reuters) - Automakers received another boost from Congress with passage on Friday of the $700 billion financial rescue bill that the industry hopes will revive car loans and help create a mass market for electric vehicles.
The legislation signed into law by President George W. Bush aims to buy bad debts from financial institutions to address a a credit crisis which has hit the slumping U.S. auto industry particularly hard.
"Congressional action couldn't come at a more critical time," General Motors Corp spokesman Greg Martin said. "We believe this bill will restore confidence in our financial markets and restore the flow of credit that in our business dealerships so heavily depend on."
A 26 percent drop in industrywide sales reported earlier this week was partly blamed on the inability of buyers to finance purchases. And GM's GMAC financing affiliate scrapped the sale of $2.7 billion in corporate loan commitments on Thursday in another sign that tight credit markets are hitting automakers.
Consumers use credit for more than 90 percent of all new vehicle purchases, according to industry figures, and the scarcity of auto loans was used repeatedly by congressional leaders in recent days to help sell the financial rescue package to reluctant lawmakers and skeptical constituents.
The financial bailout comes just days after the government made $25 billion in federal loans available to mainly struggling Detroit manufacturers to help them develop fuel saving technologies needed to meet sharply higher federal efficiency standards next decade.
The money is for retooling outdated plants and accelerating research and development. Better engine and transmission designs are quickly factoring into Detroit's plan, but GM, Ford Motor Co and Chrysler LLC are also racing foreign rivals to develop electric cars.
The financial bailout legislation included a consumer tax credit of between $2,500 and $7,500 for plug-in vehicles.
Industry experts say tax incentives have been an effective means to accelerate early consumer interest in new technologies. Tax breaks helped propel sales of the hybrid Prius made by Toyota Motor Corp.
Dave Cole, director of the Center for Automotive Research, said the plug-in technology is real and the innovation, in place. "But this stuff is expensive," he said.
Cole called the tax break a bridge to enable the vehicles to get started in the market without "horrifying costs to the consumer or the company."
GM hopes to roll out the Chevrolet Volt in 2010. The automaker has not announced a sticker price, but its chief executive has said it could top $30,000.
Toyota hopes to introduce a plug-in version of its Prius hybrid in late 2009 for fleet operators. There is no timetable for bringing it to the mass-market.
Ford is testing plug-in versions of its Escape SUV as part of an alliance with Edison International utility Southern California Edison. The test is expected to run for about three years.
Chrysler plans to launch an electric vehicle for North American customers in 2010.
Nissan Motor Co plans to start testing an all-new electric car being developed in Japan and aims for global sales of the still-unnamed battery-powered car by 2010.
Mitsubishi Motors Corp said this week it would begin testing an electric car in Europe next month, the i-MiEV hatchback.
Felix Kramer, founder of the California Cars Initiative, said the tax breaks are higher than either U.S. presidential candidate has proposed and could spur follow-on incentives for fuel-saving technologies.
The legislation also extended through 2010 the 30 percent tax credit for service stations to install natural gas and E85 ethanol blend pumps and extends the credit to electric vehicle recharging equipment.
Fri Oct 3, 2008 6:41pm EDT
By John Crawley
WASHINGTON, Oct 3 (Reuters) - Automakers received another boost from Congress with passage on Friday of the $700 billion financial rescue bill that the industry hopes will revive car loans and help create a mass market for electric vehicles.
The legislation signed into law by President George W. Bush aims to buy bad debts from financial institutions to address a a credit crisis which has hit the slumping U.S. auto industry particularly hard.
"Congressional action couldn't come at a more critical time," General Motors Corp spokesman Greg Martin said. "We believe this bill will restore confidence in our financial markets and restore the flow of credit that in our business dealerships so heavily depend on."
A 26 percent drop in industrywide sales reported earlier this week was partly blamed on the inability of buyers to finance purchases. And GM's GMAC financing affiliate scrapped the sale of $2.7 billion in corporate loan commitments on Thursday in another sign that tight credit markets are hitting automakers.
Consumers use credit for more than 90 percent of all new vehicle purchases, according to industry figures, and the scarcity of auto loans was used repeatedly by congressional leaders in recent days to help sell the financial rescue package to reluctant lawmakers and skeptical constituents.
The financial bailout comes just days after the government made $25 billion in federal loans available to mainly struggling Detroit manufacturers to help them develop fuel saving technologies needed to meet sharply higher federal efficiency standards next decade.
The money is for retooling outdated plants and accelerating research and development. Better engine and transmission designs are quickly factoring into Detroit's plan, but GM, Ford Motor Co and Chrysler LLC are also racing foreign rivals to develop electric cars.
The financial bailout legislation included a consumer tax credit of between $2,500 and $7,500 for plug-in vehicles.
Industry experts say tax incentives have been an effective means to accelerate early consumer interest in new technologies. Tax breaks helped propel sales of the hybrid Prius made by Toyota Motor Corp.
Dave Cole, director of the Center for Automotive Research, said the plug-in technology is real and the innovation, in place. "But this stuff is expensive," he said.
Cole called the tax break a bridge to enable the vehicles to get started in the market without "horrifying costs to the consumer or the company."
GM hopes to roll out the Chevrolet Volt in 2010. The automaker has not announced a sticker price, but its chief executive has said it could top $30,000.
Toyota hopes to introduce a plug-in version of its Prius hybrid in late 2009 for fleet operators. There is no timetable for bringing it to the mass-market.
Ford is testing plug-in versions of its Escape SUV as part of an alliance with Edison International utility Southern California Edison. The test is expected to run for about three years.
Chrysler plans to launch an electric vehicle for North American customers in 2010.
Nissan Motor Co plans to start testing an all-new electric car being developed in Japan and aims for global sales of the still-unnamed battery-powered car by 2010.
Mitsubishi Motors Corp said this week it would begin testing an electric car in Europe next month, the i-MiEV hatchback.
Felix Kramer, founder of the California Cars Initiative, said the tax breaks are higher than either U.S. presidential candidate has proposed and could spur follow-on incentives for fuel-saving technologies.
The legislation also extended through 2010 the 30 percent tax credit for service stations to install natural gas and E85 ethanol blend pumps and extends the credit to electric vehicle recharging equipment.
Irak-krigen -> Dollarens hegemoni på olie-markedet.
Følgende er et uddrag fra min artikel 'Fogh & Bush - Venner i Ilden.' som jeg finder interessant at perspektivere til, i lyset af kapiliberalismens $millard-bailout af Wall Street spekulanter for skattemidler, da denne krise også bør ses i lyset af den ekstremt omkostningstunge Irak-krig, og dennes årsag.
Uddrag:
Uddrag:
Olien og dollaren…
Efter Anden Verdenskrig lå store dele af den europæiske og japanske industri hen i ruiner, og produktionen befandt sig generelt på et lavt niveau. USA var den eneste af de store magter, som undslap krigens ødelæggelser, og den amerikanske industri var efter krigen højproduktiv, således at man under krigen tredoblede produktionen indenrigs.
Derudover flyttedes store mængder guld fra Europa til USA før og under anden verdenskrig grundet det økonomiske og politiske postyr på det europæiske kontinent. Efter Anden Verdenskrig var USA således indehaver af 80 pct. af verdens guld og man rådede samtidig over 40 pct. af verdens samlede produktionsapparat. En fast valutakurs etableredes kaldet gulddollar standarden, hvor guldet blev prissat til $35 pr. ounce.
Guld blev altså ækvivalent med dollaren, og den amerikanske valuta blev efterfølgende den internationale valutareservestandard. Derudover bør det nævnes, at præsident Franklin Delano Roosevelt i 1945 lavede en aftale med den saudi-arabiske Ibn Saud gående ud på, at man ville beskytte landet, mod at regimet kun handlede dets olie i dollars [15]. Disse to historiske forhold er meget væsentlige at have med, hvis man vil forstå, hvorfor den internationale oliehandel har været domineret af dollaren i adskillelige årtier, hvilket ses manifesteret i det faktum, at olie kun kan købes hos OPEC i dollars.
Denne dollar-dominans blev af Saddam Hussein truet, da han i september 2000 valgte at veksle sin dollarreserve til euros [16] med henblik på at handle den irakiske olie i denne valuta, og det blev efterfølgende af flere olie-producerende lande hævdet, at man havde lignende intentioner, hvilket for Irans vedkommende i dag ses manifesteret i landets for nyligt lancerede eurobaserede oliebørs.
Det amerikanske olieforbrug forventes fra officiel side, at stige med en tredjedel over de næste to årtier, mens produktionen indenrigs forventes at falde med 12 pct. i samme periode, hvorfor den amerikanske afhængighed af importeret olie er steget fra at udgøre en tredjedel af forsyningen i 1985 til i dag at udgøre mere end halvdelen, og det forventes ydermere at importeret olie vil udgøre to tredjedele af forsyningen i 2020. Selvom man har gjort, hvad man kan for at sikre forsyningsstabiliteten, blandt andet ved at handle olie med lande uden for OPEC, var OPEC (primært Saudi-Arabien) fortsat den største eksportør af olie til USA i 2002-2003 [17].
Præsident Bush og vicepræsident Dick Cheney var blot de første eksempler på administrations dybe forbindelser til energisektoren. Otte ministre samt den nationale sikkerhedsrådgiver blev senere hentet direkte i oliebranchen. Præsidenten udpegede to uger inde i hans embede vice-præsident Dick Cheney som overhoved for task forcet National Energy Policy Group, hvis formål var en vurdering af karakteren af den amerikanske forsyningssikkerhed.
Et faktum som næppe kan have undgået Cheney’s Task Force’s opmærksomhed er, at der i Det Kaspiske Hav og under den irakiske ørken potentielt er 433 milliarder tønder olie eller mere, og kontrol over denne olie er selvsagt ensbetydende med øget økonomisk og geopolitisk magt. Bemærkelsesværdigt er det derfor også, at dette Task Force allerede mange måneder inden den 11. september, undersøgte kort over irakiske oliefelter, tankerterminaler og olieudvinding. Disse kort er først langt senere blevet offentliggjort grundet at sagsanlæg mod regeringen vedrørende aktindsigt som borgerretsgruppen Judicial Watch måtte hele vejen til Højesteret for at vinde [18].
Cheney’s taskforce konkluderede, at efter »enhver vurdering vil mellemøstlige olieproducenter forblive centrale for sikkerheden i verden. Golfområdet vil være et primært fokus for USA’s internationale energipolitik«. [19]
Samtidig med dette blev Condeoleeza Rice’s National Security Council beordret, at det skulle støtte »gennemgangen af operationelle politikker rettet mod slyngelstater såsom Irak, samt handlinger vedrørende pågribelsen af nye og eksisterende olie og gasfelter«.
I statsministeriet etableredes et såkaldt policy-development initiativ, der blev døbt »The Future of Iraq«. I initiativets sidste rapport gjordes det klart at Irak »burde åbnes for internationale olieselskaber så hurtigt som muligt efter krigen ... landet bør etablere et forretningsklima som kan bidrage med at tiltrække investeringer i olie- og gasressourcer«. [20]
Disse forhold peger alle sammen hen imod, at Bush-administration var overordentlig interesseret i den irakiske olie lang tid før proklameringen og markedsføringen af den Globale Krig mod Terror, og selvom det fra officiel side gentagne gange er blevet hævdet, at angrebskrigen intet havde at gøre med olie, er der et interessant forhold, som indikerer det modsatte. I en artikel i Financial Times den 5. juni 2003 - altså allerede mindre end tre måneder efter krigens begyndelse – kunne man læse, at den irakiske olie igen handledes i dollars [21], til trods for at euroen i midten af 2003 havde en 13 pct. højere værdi end dollaren.
Krigens omfattende økonomiske omkostninger.
Ifølge det officielle organ US Census Bureau havnede yderligere 3,5 millioner amerikanere i fattigdom i perioden 2002-2006, hvilket i dag betyder, at rundt regnet 13 pct. af den amerikanske befolkning er fattige. Denne foruroligende stigning i fattigdom er specielt bemærkelsesværdig, når den ses i sammenhæng med de enorme omkostninger, som Irak-krigen har kostet de amerikanske skatteydere.
Fra officiel side vurderede man før Irak-krigen påbegyndtes, at krigen ville koste omtrent 60 milliarder dollars, men dette må i lyset af krigsomkostningerne på nuværende tidspunkt betegnes som en meget optimistisk vurdering. Joseph Stieglitz, en af USA’s ledende økonomer, som i 2000 modtog Nobelprisen i økonomi og som tidligere har været cheføkonom i Verdensbanken, har netop i en ny bog vurderet, at den egentlige pris for Irak-krigen oprinder i tre billioner (på amerikansk kaldet trillion) dollars, hvilket Stieglitz i et interview sendt på Democracy Now den 29. februar i år, selv kalder en forholdsvis konservativ vurdering.
Ifølge Stieglitz er der nemlig udover forsvarsministeriets budgetterede krigsomkostninger, endvidere en lang række omkostninger skjult i andre offentlige budgetter og hinsides disse. For eksempel vil udgifter til de økonomiske kompensationer til tilskadekomne krigsveteraner, samt udgifter til medicinsk behandling af disse, løbe op i mange hundrede milliarder dollars over de kommende årtier. Hinsides disse budgetmæssige omkostninger findes der derudover andre skjulte omkostninger for økonomien.
Således udgør invaliderede soldaters økonomiske godtgørelser kun en brøkdel af de invalideredes familier økonomiske tab i form af tabte indkomster, som soldaterne ellers kunnet have tjent. Derudover er der ifølge Stieglitz en lang række makroøkonomiske omkostninger, som har forvoldt en deprimering af økonomien, såsom det faktum at krigen har bidraget til stigningen i prisen på olie, hvilket betyder ekstraomkostninger til køb af importeret olie, og følgelig at disse penge ikke kan bruges andetsteds i økonomien. Derudover nævner Stieglitz det forhold, at krigen var fuldstændig finansieret for lånte penge, altså med andre ord, af det enorme amerikanske underskud [22].
Amerikansk Militærbase-imperialisme.
737 U.S. Military Bases = Global Empire
By Chalmers Johnson
The following is excerpted from Chalmers Johnson's new book, "NEMESIS: The Last Days of the American Republic " (Metropolitan Books).
Once upon a time, you could trace the spread of imperialism by counting up colonies. America's version of the colony is the military base; and by following the changing politics of global basing, one can learn much about our ever more all-encompassing imperial "footprint" and the militarism that grows with it.
It is not easy, however, to assess the size or exact value of our empire of bases. Official records available to the public on these subjects are misleading, although instructive. According to the Defense Department's annual inventories from 2002 to 2005 of real property it owns around the world, the Base Structure Report, there has been an immense churning in the numbers of installations.
The total of America's military bases in other people's countries in 2005, according to official sources, was 737. Reflecting massive deployments to Iraq and the pursuit of President Bush's strategy of preemptive war, the trend line for numbers of overseas bases continues to go up.
Interestingly enough, the thirty-eight large and medium-sized American facilities spread around the globe in 2005 -- mostly air and naval bases for our bombers and fleets -- almost exactly equals Britain's thirty-six naval bases and army garrisons at its imperial zenith in 1898. The Roman Empire at its height in 117 AD required thirty-seven major bases to police its realm from Britannia to Egypt, from Hispania to Armenia. Perhaps the optimum number of major citadels and fortresses for an imperialist aspiring to dominate the world is somewhere between thirty-five and forty.
Using data from fiscal year 2005, the Pentagon bureaucrats calculated that its overseas bases were worth at least $127 billion -- surely far too low a figure but still larger than the gross domestic products of most countries -- and an estimated $658.1 billion for all of them, foreign and domestic (a base's "worth" is based on a Department of Defense estimate of what it would cost to replace it). During fiscal 2005, the military high command deployed to our overseas bases some 196,975 uniformed personnel as well as an equal number of dependents and Department of Defense civilian officials, and employed an additional 81,425 locally hired foreigners.
The worldwide total of U.S. military personnel in 2005, including those based domestically, was 1,840,062 supported by an additional 473,306 Defense Department civil service employees and 203,328 local hires. Its overseas bases, according to the Pentagon, contained 32,327 barracks, hangars, hospitals, and other buildings, which it owns, and 16,527 more that it leased. The size of these holdings was recorded in the inventory as covering 687,347 acres overseas and 29,819,492 acres worldwide, making the Pentagon easily one of the world's largest landlords.
These numbers, although staggeringly big, do not begin to cover all the actual bases we occupy globally. The 2005 Base Structure Report fails, for instance, to mention any garrisons in Kosovo (or Serbia, of which Kosovo is still officially a province) -- even though it is the site of the huge Camp Bondsteel built in 1999 and maintained ever since by the KBR corporation (formerly known as Kellogg Brown & Root), a subsidiary of the Halliburton Corporation of Houston.
The report similarly omits bases in Afghanistan, Iraq (106 garrisons as of May 2005), Israel, Kyrgyzstan, Qatar, and Uzbekistan, even though the U.S. military has established colossal base structures in the Persian Gulf and Central Asian areas since 9/11. By way of excuse, a note in the preface says that "facilities provided by other nations at foreign locations" are not included, although this is not strictly true. The report does include twenty sites in Turkey, all owned by the Turkish government and used jointly with the Americans. The Pentagon continues to omit from its accounts most of the $5 billion worth of military and espionage installations in Britain, which have long been conveniently disguised as Royal Air Force bases. If there were an honest count, the actual size of our military empire would probably top 1,000 different bases overseas, but no one -- possibly not even the Pentagon -- knows the exact number for sure.
In some cases, foreign countries themselves have tried to keep their U.S. bases secret, fearing embarrassment if their collusion with American imperialism were revealed. In other instances, the Pentagon seems to want to play down the building of facilities aimed at dominating energy sources, or, in a related situation, retaining a network of bases that would keep Iraq under our hegemony regardless of the wishes of any future Iraqi government. The U.S. government tries not to divulge any information about the bases we use to eavesdrop on global communications, or our nuclear deployments, which, as William Arkin, an authority on the subject, writes, "[have] violated its treaty obligations. The U.S. was lying to many of its closest allies, even in NATO, about its nuclear designs. Tens of thousands of nuclear weapons, hundreds of bases, and dozens of ships and submarines existed in a special secret world of their own with no rational military or even 'deterrence' justification."
In Jordan, to take but one example, we have secretly deployed up to five thousand troops in bases on the Iraqi and Syrian borders. (Jordan has also cooperated with the CIA in torturing prisoners we deliver to them for "interrogation.") Nonetheless, Jordan continues to stress that it has no special arrangements with the United States, no bases, and no American military presence.
The country is formally sovereign but actually a satellite of the United States and has been so for at least the past ten years. Similarly, before our withdrawal from Saudi Arabia in 2003, we habitually denied that we maintained a fleet of enormous and easily observed B-52 bombers in Jeddah because that was what the Saudi government demanded. So long as military bureaucrats can continue to enforce a culture of secrecy to protect themselves, no one will know the true size of our baseworld, least of all the elected representatives of the American people.
In 2005, deployments at home and abroad were in a state of considerable flux. This was said to be caused both by a long overdue change in the strategy for maintaining our global dominance and by the closing of surplus bases at home. In reality, many of the changes seemed to be determined largely by the Bush administration's urge to punish nations and domestic states that had not supported its efforts in Iraq and to reward those that had. Thus, within the United States, bases were being relocated to the South, to states with cultures, as the Christian Science Monitor put it, "more tied to martial traditions" than the Northeast, the northern Middle West, or the Pacific Coast. According to a North Carolina businessman gloating over his new customers, "The military is going where it is wanted and valued most."
In part, the realignment revolved around the Pentagon's decision to bring home by 2007 or 2008 two army divisions from Germany -- the First Armored Division and the First Infantry Division -- and one brigade (3,500 men) of the Second Infantry Division from South Korea (which, in 2005, was officially rehoused at Fort Carson, Colorado). So long as the Iraq insurgency continues, the forces involved are mostly overseas and the facilities at home are not ready for them (nor is there enough money budgeted to get them ready).
Nonetheless, sooner or later, up to 70,000 troops and 100,000 family members will have to be accommodated within the United States. The attendant 2005 "base closings" in the United States are actually a base consolidation and enlargement program with tremendous infusions of money and customers going to a few selected hub areas. At the same time, what sounds like a retrenchment in the empire abroad is really proving to be an exponential growth in new types of bases -- without dependents and the amenities they would require -- in very remote areas where the U.S. military has never been before.
After the collapse of the Soviet Union in 1991, it was obvious to anyone who thought about it that the huge concentrations of American military might in Germany, Italy, Japan, and South Korea were no longer needed to meet possible military threats. There were not going to be future wars with the Soviet Union or any country connected to any of those places.
In 1991, the first Bush administration should have begun decommissioning or redeploying redundant forces; and, in fact, the Clinton administration did close some bases in Germany, such as those protecting the Fulda Gap, once envisioned as the likeliest route for a Soviet invasion of Western Europe. But nothing was really done in those years to plan for the strategic repositioning of the American military outside the United States.
By the end of the 1990s, the neoconservatives were developing their grandiose theories to promote overt imperialism by the "lone superpower" -- including preventive and preemptive unilateral military action, spreading democracy abroad at the point of a gun, obstructing the rise of any "near-peer" country or bloc of countries that might challenge U.S. military supremacy, and a vision of a "democratic" Middle East that would supply us with all the oil we wanted. A component of their grand design was a redeployment and streamlining of the military. The initial rationale was for a program of transformation that would turn the armed forces into a lighter, more agile, more high-tech military, which, it was imagined, would free up funds that could be invested in imperial policing.
What came to be known as "defense transformation" first began to be publicly bandied about during the 2000 presidential election campaign. Then 9/11 and the wars in Afghanistan and Iraq intervened. In August 2002, when the whole neocon program began to be put into action, it centered above all on a quick, easy war to incorporate Iraq into the empire. By this time, civilian leaders in the Pentagon had become dangerously overconfident because of what they perceived as America's military brilliance and invincibility as demonstrated in its 2001 campaign against the Taliban and al-Qaeda -- a strategy that involved reigniting the Afghan civil war through huge payoffs to Afghanistan's Northern Alliance warlords and the massive use of American airpower to support their advance on Kabul.
In August 2002, Secretary of Defense Donald Rumsfeld unveiled his "1-4-2-1 defense strategy" to replace the Clinton era's plan for having a military capable of fighting two wars -- in the Middle East and Northeast Asia -- simultaneously. Now, war planners were to prepare to defend the United States while building and assembling forces capable of "deterring aggression and coercion" in four "critical regions": Europe, Northeast Asia (South Korea and Japan), East Asia (the Taiwan Strait), and the Middle East, be able to defeat aggression in two of these regions simultaneously, and "win decisively" (in the sense of "regime change" and occupation) in one of those conflicts "at a time and place of our choosing."As the military analyst William M. Arkin commented, "[With] American military forces ... already stretched to the limit, the new strategy goes far beyond preparing for reactive contingencies and reads more like a plan for picking fights in new parts of the world."
A seemingly easy three-week victory over Saddam Hussein's forces in the spring of 2003 only reconfirmed these plans. The U.S. military was now thought to be so magnificent that it could accomplish any task assigned to it. The collapse of the Baathist regime in Baghdad also emboldened Secretary of Defense Rumsfeld to use "transformation" to penalize nations that had been, at best, lukewarm about America's unilateralism -- Germany, Saudi Arabia, South Korea, and Turkey -- and to reward those whose leaders had welcomed Operation Iraqi Freedom, including such old allies as Japan and Italy but also former communist countries such as Poland, Romania, and Bulgaria. The result was the Department of Defense's Integrated Global Presence and Basing Strategy, known informally as the "Global Posture Review."
President Bush first mentioned it in a statement on November 21, 2003, in which he pledged to "realign the global posture" of the United States. He reiterated the phrase and elaborated on it on August 16, 2004, in a speech to the annual convention of the Veterans of Foreign Wars in Cincinnati. Because Bush's Cincinnati address was part of the 2004 presidential election campaign, his comments were not taken very seriously at the time. While he did say that the United States would reduce its troop strength in Europe and Asia by 60,000 to 70,000, he assured his listeners that this would take a decade to accomplish -- well beyond his term in office -- and made a series of promises that sounded more like a reenlistment pitch than a statement of strategy.
"Over the coming decade, we'll deploy a more agile and more flexible force, which means that more of our troops will be stationed and deployed from here at home. We'll move some of our troops and capabilities to new locations, so they can surge quickly to deal with unexpected threats. ... It will reduce the stress on our troops and our military families. ... See, our service members will have more time on the home front, and more predictability and fewer moves over a career. Our military spouses will have fewer job changes, greater stability, more time for their kids and to spend with their families at home."
On September 23, 2004, however, Secretary Rumsfeld disclosed the first concrete details of the plan to the Senate Armed Services Committee. With characteristic grandiosity, he described it as "the biggest re-structuring of America's global forces since 1945." Quoting then undersecretary Douglas Feith, he added, "During the Cold War we had a strong sense that we knew where the major risks and fights were going to be, so we could deploy people right there. We're operating now [with] an entirely different concept. We need to be able to do [the] whole range of military operations, from combat to peacekeeping, anywhere in the world pretty quickly."
Though this may sound plausible enough, in basing terms it opens up a vast landscape of diplomatic and bureaucratic minefields that Rumsfeld's militarists surely underestimated. In order to expand into new areas, the Departments of State and Defense must negotiate with the host countries such things as Status of Forces Agreements, or SOFAs, which are discussed in detail in the next chapter. In addition, they must conclude many other required protocols, such as access rights for our aircraft and ships into foreign territory and airspace, and Article 98 Agreements. The latter refer to article 98 of the International Criminal Court's Rome Statute, which allows countries to exempt U.S. citizens on their territory from the ICC's jurisdiction.
Such immunity agreements were congressionally mandated by the American Service-Members' Protection Act of 2002, even though the European Union holds that they are illegal. Still other necessary accords are acquisitions and cross-servicing agreements or ACSAs, which concern the supply and storage of jet fuel, ammunition, and so forth; terms of leases on real property; levels of bilateral political and economic aid to the United States (so-called host-nation support); training and exercise arrangements (Are night landings allowed? Live firing drills?); and environmental pollution liabilities.
When the United States is not present in a country as its conqueror or military savior, as it was in Germany, Japan, and Italy after World War II and in South Korea after the 1953 Korean War armistice, it is much more difficult to secure the kinds of agreements that allow the Pentagon to do anything it wants and that cause a host nation to pick up a large part of the costs of doing so. When not based on conquest, the structure of the American empire of bases comes to look exceedingly fragile.
An Internet Guide to United States Military Bases Around the World
Challenges to the Empire.
By Chalmers Johnson
The following is excerpted from Chalmers Johnson's new book, "NEMESIS: The Last Days of the American Republic " (Metropolitan Books).
Once upon a time, you could trace the spread of imperialism by counting up colonies. America's version of the colony is the military base; and by following the changing politics of global basing, one can learn much about our ever more all-encompassing imperial "footprint" and the militarism that grows with it.
It is not easy, however, to assess the size or exact value of our empire of bases. Official records available to the public on these subjects are misleading, although instructive. According to the Defense Department's annual inventories from 2002 to 2005 of real property it owns around the world, the Base Structure Report, there has been an immense churning in the numbers of installations.
The total of America's military bases in other people's countries in 2005, according to official sources, was 737. Reflecting massive deployments to Iraq and the pursuit of President Bush's strategy of preemptive war, the trend line for numbers of overseas bases continues to go up.
Interestingly enough, the thirty-eight large and medium-sized American facilities spread around the globe in 2005 -- mostly air and naval bases for our bombers and fleets -- almost exactly equals Britain's thirty-six naval bases and army garrisons at its imperial zenith in 1898. The Roman Empire at its height in 117 AD required thirty-seven major bases to police its realm from Britannia to Egypt, from Hispania to Armenia. Perhaps the optimum number of major citadels and fortresses for an imperialist aspiring to dominate the world is somewhere between thirty-five and forty.
Using data from fiscal year 2005, the Pentagon bureaucrats calculated that its overseas bases were worth at least $127 billion -- surely far too low a figure but still larger than the gross domestic products of most countries -- and an estimated $658.1 billion for all of them, foreign and domestic (a base's "worth" is based on a Department of Defense estimate of what it would cost to replace it). During fiscal 2005, the military high command deployed to our overseas bases some 196,975 uniformed personnel as well as an equal number of dependents and Department of Defense civilian officials, and employed an additional 81,425 locally hired foreigners.
The worldwide total of U.S. military personnel in 2005, including those based domestically, was 1,840,062 supported by an additional 473,306 Defense Department civil service employees and 203,328 local hires. Its overseas bases, according to the Pentagon, contained 32,327 barracks, hangars, hospitals, and other buildings, which it owns, and 16,527 more that it leased. The size of these holdings was recorded in the inventory as covering 687,347 acres overseas and 29,819,492 acres worldwide, making the Pentagon easily one of the world's largest landlords.
These numbers, although staggeringly big, do not begin to cover all the actual bases we occupy globally. The 2005 Base Structure Report fails, for instance, to mention any garrisons in Kosovo (or Serbia, of which Kosovo is still officially a province) -- even though it is the site of the huge Camp Bondsteel built in 1999 and maintained ever since by the KBR corporation (formerly known as Kellogg Brown & Root), a subsidiary of the Halliburton Corporation of Houston.
The report similarly omits bases in Afghanistan, Iraq (106 garrisons as of May 2005), Israel, Kyrgyzstan, Qatar, and Uzbekistan, even though the U.S. military has established colossal base structures in the Persian Gulf and Central Asian areas since 9/11. By way of excuse, a note in the preface says that "facilities provided by other nations at foreign locations" are not included, although this is not strictly true. The report does include twenty sites in Turkey, all owned by the Turkish government and used jointly with the Americans. The Pentagon continues to omit from its accounts most of the $5 billion worth of military and espionage installations in Britain, which have long been conveniently disguised as Royal Air Force bases. If there were an honest count, the actual size of our military empire would probably top 1,000 different bases overseas, but no one -- possibly not even the Pentagon -- knows the exact number for sure.
In some cases, foreign countries themselves have tried to keep their U.S. bases secret, fearing embarrassment if their collusion with American imperialism were revealed. In other instances, the Pentagon seems to want to play down the building of facilities aimed at dominating energy sources, or, in a related situation, retaining a network of bases that would keep Iraq under our hegemony regardless of the wishes of any future Iraqi government. The U.S. government tries not to divulge any information about the bases we use to eavesdrop on global communications, or our nuclear deployments, which, as William Arkin, an authority on the subject, writes, "[have] violated its treaty obligations. The U.S. was lying to many of its closest allies, even in NATO, about its nuclear designs. Tens of thousands of nuclear weapons, hundreds of bases, and dozens of ships and submarines existed in a special secret world of their own with no rational military or even 'deterrence' justification."
In Jordan, to take but one example, we have secretly deployed up to five thousand troops in bases on the Iraqi and Syrian borders. (Jordan has also cooperated with the CIA in torturing prisoners we deliver to them for "interrogation.") Nonetheless, Jordan continues to stress that it has no special arrangements with the United States, no bases, and no American military presence.
The country is formally sovereign but actually a satellite of the United States and has been so for at least the past ten years. Similarly, before our withdrawal from Saudi Arabia in 2003, we habitually denied that we maintained a fleet of enormous and easily observed B-52 bombers in Jeddah because that was what the Saudi government demanded. So long as military bureaucrats can continue to enforce a culture of secrecy to protect themselves, no one will know the true size of our baseworld, least of all the elected representatives of the American people.
In 2005, deployments at home and abroad were in a state of considerable flux. This was said to be caused both by a long overdue change in the strategy for maintaining our global dominance and by the closing of surplus bases at home. In reality, many of the changes seemed to be determined largely by the Bush administration's urge to punish nations and domestic states that had not supported its efforts in Iraq and to reward those that had. Thus, within the United States, bases were being relocated to the South, to states with cultures, as the Christian Science Monitor put it, "more tied to martial traditions" than the Northeast, the northern Middle West, or the Pacific Coast. According to a North Carolina businessman gloating over his new customers, "The military is going where it is wanted and valued most."
In part, the realignment revolved around the Pentagon's decision to bring home by 2007 or 2008 two army divisions from Germany -- the First Armored Division and the First Infantry Division -- and one brigade (3,500 men) of the Second Infantry Division from South Korea (which, in 2005, was officially rehoused at Fort Carson, Colorado). So long as the Iraq insurgency continues, the forces involved are mostly overseas and the facilities at home are not ready for them (nor is there enough money budgeted to get them ready).
Nonetheless, sooner or later, up to 70,000 troops and 100,000 family members will have to be accommodated within the United States. The attendant 2005 "base closings" in the United States are actually a base consolidation and enlargement program with tremendous infusions of money and customers going to a few selected hub areas. At the same time, what sounds like a retrenchment in the empire abroad is really proving to be an exponential growth in new types of bases -- without dependents and the amenities they would require -- in very remote areas where the U.S. military has never been before.
After the collapse of the Soviet Union in 1991, it was obvious to anyone who thought about it that the huge concentrations of American military might in Germany, Italy, Japan, and South Korea were no longer needed to meet possible military threats. There were not going to be future wars with the Soviet Union or any country connected to any of those places.
In 1991, the first Bush administration should have begun decommissioning or redeploying redundant forces; and, in fact, the Clinton administration did close some bases in Germany, such as those protecting the Fulda Gap, once envisioned as the likeliest route for a Soviet invasion of Western Europe. But nothing was really done in those years to plan for the strategic repositioning of the American military outside the United States.
By the end of the 1990s, the neoconservatives were developing their grandiose theories to promote overt imperialism by the "lone superpower" -- including preventive and preemptive unilateral military action, spreading democracy abroad at the point of a gun, obstructing the rise of any "near-peer" country or bloc of countries that might challenge U.S. military supremacy, and a vision of a "democratic" Middle East that would supply us with all the oil we wanted. A component of their grand design was a redeployment and streamlining of the military. The initial rationale was for a program of transformation that would turn the armed forces into a lighter, more agile, more high-tech military, which, it was imagined, would free up funds that could be invested in imperial policing.
What came to be known as "defense transformation" first began to be publicly bandied about during the 2000 presidential election campaign. Then 9/11 and the wars in Afghanistan and Iraq intervened. In August 2002, when the whole neocon program began to be put into action, it centered above all on a quick, easy war to incorporate Iraq into the empire. By this time, civilian leaders in the Pentagon had become dangerously overconfident because of what they perceived as America's military brilliance and invincibility as demonstrated in its 2001 campaign against the Taliban and al-Qaeda -- a strategy that involved reigniting the Afghan civil war through huge payoffs to Afghanistan's Northern Alliance warlords and the massive use of American airpower to support their advance on Kabul.
In August 2002, Secretary of Defense Donald Rumsfeld unveiled his "1-4-2-1 defense strategy" to replace the Clinton era's plan for having a military capable of fighting two wars -- in the Middle East and Northeast Asia -- simultaneously. Now, war planners were to prepare to defend the United States while building and assembling forces capable of "deterring aggression and coercion" in four "critical regions": Europe, Northeast Asia (South Korea and Japan), East Asia (the Taiwan Strait), and the Middle East, be able to defeat aggression in two of these regions simultaneously, and "win decisively" (in the sense of "regime change" and occupation) in one of those conflicts "at a time and place of our choosing."As the military analyst William M. Arkin commented, "[With] American military forces ... already stretched to the limit, the new strategy goes far beyond preparing for reactive contingencies and reads more like a plan for picking fights in new parts of the world."
A seemingly easy three-week victory over Saddam Hussein's forces in the spring of 2003 only reconfirmed these plans. The U.S. military was now thought to be so magnificent that it could accomplish any task assigned to it. The collapse of the Baathist regime in Baghdad also emboldened Secretary of Defense Rumsfeld to use "transformation" to penalize nations that had been, at best, lukewarm about America's unilateralism -- Germany, Saudi Arabia, South Korea, and Turkey -- and to reward those whose leaders had welcomed Operation Iraqi Freedom, including such old allies as Japan and Italy but also former communist countries such as Poland, Romania, and Bulgaria. The result was the Department of Defense's Integrated Global Presence and Basing Strategy, known informally as the "Global Posture Review."
President Bush first mentioned it in a statement on November 21, 2003, in which he pledged to "realign the global posture" of the United States. He reiterated the phrase and elaborated on it on August 16, 2004, in a speech to the annual convention of the Veterans of Foreign Wars in Cincinnati. Because Bush's Cincinnati address was part of the 2004 presidential election campaign, his comments were not taken very seriously at the time. While he did say that the United States would reduce its troop strength in Europe and Asia by 60,000 to 70,000, he assured his listeners that this would take a decade to accomplish -- well beyond his term in office -- and made a series of promises that sounded more like a reenlistment pitch than a statement of strategy.
"Over the coming decade, we'll deploy a more agile and more flexible force, which means that more of our troops will be stationed and deployed from here at home. We'll move some of our troops and capabilities to new locations, so they can surge quickly to deal with unexpected threats. ... It will reduce the stress on our troops and our military families. ... See, our service members will have more time on the home front, and more predictability and fewer moves over a career. Our military spouses will have fewer job changes, greater stability, more time for their kids and to spend with their families at home."
On September 23, 2004, however, Secretary Rumsfeld disclosed the first concrete details of the plan to the Senate Armed Services Committee. With characteristic grandiosity, he described it as "the biggest re-structuring of America's global forces since 1945." Quoting then undersecretary Douglas Feith, he added, "During the Cold War we had a strong sense that we knew where the major risks and fights were going to be, so we could deploy people right there. We're operating now [with] an entirely different concept. We need to be able to do [the] whole range of military operations, from combat to peacekeeping, anywhere in the world pretty quickly."
Though this may sound plausible enough, in basing terms it opens up a vast landscape of diplomatic and bureaucratic minefields that Rumsfeld's militarists surely underestimated. In order to expand into new areas, the Departments of State and Defense must negotiate with the host countries such things as Status of Forces Agreements, or SOFAs, which are discussed in detail in the next chapter. In addition, they must conclude many other required protocols, such as access rights for our aircraft and ships into foreign territory and airspace, and Article 98 Agreements. The latter refer to article 98 of the International Criminal Court's Rome Statute, which allows countries to exempt U.S. citizens on their territory from the ICC's jurisdiction.
Such immunity agreements were congressionally mandated by the American Service-Members' Protection Act of 2002, even though the European Union holds that they are illegal. Still other necessary accords are acquisitions and cross-servicing agreements or ACSAs, which concern the supply and storage of jet fuel, ammunition, and so forth; terms of leases on real property; levels of bilateral political and economic aid to the United States (so-called host-nation support); training and exercise arrangements (Are night landings allowed? Live firing drills?); and environmental pollution liabilities.
When the United States is not present in a country as its conqueror or military savior, as it was in Germany, Japan, and Italy after World War II and in South Korea after the 1953 Korean War armistice, it is much more difficult to secure the kinds of agreements that allow the Pentagon to do anything it wants and that cause a host nation to pick up a large part of the costs of doing so. When not based on conquest, the structure of the American empire of bases comes to look exceedingly fragile.
An Internet Guide to United States Military Bases Around the World
Challenges to the Empire.
fredag den 3. oktober 2008
torsdag den 2. oktober 2008
Mere om indkomstfordelingen i USA.
Rige Amerikaneres indkomster er steget.
I en op-ed for N.Y. Times i 2006 skriver økonomiprofessor ved Princeton University, Paul Krugman følgende:
http://select.nytimes.com/2006/09/15/opinion/15krugman.html?
I en op-ed for N.Y. Times i 2006 skriver økonomiprofessor ved Princeton University, Paul Krugman følgende:
Consider this: The United States economy is far richer and more productive than it was a generation ago. Statistics on economic growth aside, think of all the technological advances that have made workers more productive over the past generation. In 1973, there were no personal computers, let alone the Internet. Even fax machines were rare, expensive items, and there were no bar-code scanners at checkout counters. Freight containerization was still uncommon. The list goes on and on.
Yet in spite of all this technological progress, which has allowed the average American worker to produce much more, we’re not sure whether there was any rise in the typical worker’s pay. Only those at the upper end of the income distribution saw clear gains — gains that were enormous for the lucky few at the very top.
That’s why the debate over whether the middle class is a bit better off or a bit worse off now than a generation ago misses the point. What we should be debating is why technological and economic progress has done so little for most Americans, and what changes in government policies would spread the benefits of progress more widely. An effort to shore up middle-class health insurance, paid for by a rollback of recent tax cuts for the wealthiest Americans — something like the plan proposed by John Kerry two years ago, but more ambitious — would be a good place to start.
Instead, the people running our government are fixated on cutting tax rates for the wealthy even further. And their solution to Americans’ justified economic anxiety is a public relations campaign, an effort to convince middle-class families that their problems are a figment of their imagination.
http://select.nytimes.com/2006/09/15/opinion/15krugman.html?
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