progressives against obama

The Ponzi Paradigm

2008-12-24T06:51:00.000-08:00

December 23, 2008
And God Created Bernie...
The Ponzi Paradigm

By MICHAEL HUDSON

Last week the Good Lord evidently realized that not enough people had been reading Hyman Minsky’s explanation of how financial cycles end in Ponzi schemes – the stage in which banks keep the boom going by lending their customers the money to pay interest and thus avoid default. So He sent Bernie Madoff to dominate the news for a week and give the mass media an opportunity to familiarize newspaper readers and TV watchers with just how Ponzi schemes work. What Mr. Madoff did was, in a nutshell, what the economy as a whole has been doing under the moniker “wealth creation.”

If the media were able to wait until as late in the financial collapse as last week to provide helpful diagrams about how Ponzi schemes need to keep on growing exponentially, it is simply because bad foreign financial news is not deemed newsworthy in North America. But Europe has been having its own run-throughs, headed by Spain – which by no coincidence is now experiencing the biggest real estate bust outside of the post-Soviet economies.

The best case study occurred two years ago. On May 9, 2006, Spanish police raided 21 homes and offices of Afinsa Fienes Tangibles SA, the world’s largest postage-stamp dealer, and rival firm, Forum Filatélico. They charged eleven men with running a $6.4 billion pyramid scheme that (and Afinsa)took in some 343,000 investors – 1 per cent of Spain’s entire population, making the fraud one of the largest in Spanish history.

An economy either is in trouble or has lost its sense of balance when investors shy away from tangible capital formation in favor of buying postage stamps and similar collectibles. Unlike machinery and technology, stamps do not produce real goods and services. They have long since been printed and sold by the government, and will never be used actually to mail letters. However, stamps have shown themselves to be a great vehicle to attract savers who think that buying them can produce an exponential earnings growth – or more technically, “capital” gains, if we can stretch economic terminology far enough to call a stamp collection “capital.”

If value resulted merely from scarcity, then postage stamps, coins and master paintings all would seem to increase almost automatically over time, just like most land does. But these trophies of wealth do not promote rising production, consumption or living standards. As stamps do not earn money by employing labor to produce goods and services, their price gains are neither profit nor capital gains as classically understood. They are what economists call a windfall.

The Spanish postage-stamp scheme seems to have taken off in 2003, the year in which Spain’s free-market conservative government deregulated public insurance and oversight for non-financial investment funds. Afinsa Group bought two-thirds control of the New Jersey stamp and coin auction house Greg Manning and merged it with the Spanish auctioneer Auctentia to create Escala as the world’s third largest auction house (after Sotheby’s and Christie’s). Escala moved its operations to New York City and listed its stock on the Nasdaq over-the-counter market. Despite the stock market’s lethargic trend, the company’s earnings showed such rapid growth that in just three years its share price soared from under $5 to $35, tripling in 2005 alone.

Afinsa’s purchases accounted for 70 per cent of Escala’s profits, thanks largely to the fact that as its Spanish parent’s sole supplier, Escala marked up its stamps by a reported 1,150 per cent, out of all proportion to the usual 25 per cent. Afinsa thus was carrying stamps for which it paid 58 million euros on its books at €723 million, over ten times their catalog values – which are fictitiously high in any case, being published mainly for the benefit of stamp dealers to give their customers the idea that they are getting a good buy. But as Forum Filatélico’s chairman, Francisco Briones, explained to a reporter from London’s Financial Times: “It was ‘normal’ to charge clients such inflated prices because of the services provided . . . including the custody and conservation of stamps.”

Afinsa paid its stamp investors an annual rate of 6 to 10 per cent interest, beating most competing yields as the global financial bubble was pushing interest rates steadily downward. (Spanish government bonds paid only 3.5 per cent.) To build up trust, Afinsa gave its clients post-dated checks for the gains that were promised. It also promised to buy back the stamps it sold, at the original price. This gave an appearance of liquidity to the normally illiquid market in stamps, fine arts and other collectibles, where 25 per cent commissions to auction houses are normal. These ploys convinced the majority to simply re-invest the money to buy yet more stamps, which the company held in its offices ostensibly for safekeeping and preservation.

Money poured in, giving stock-market investors in Escala much higher returns than the stamp-buying customers nominally were receiving. As one news report remarked, why buy stamps and coins when you can invest in companies dealing in them? But within a week of the arrests, Escala’s stock plunged below $4 a share.

The denouement came shortly after Lloyd’s of London withdrew from a €1.2 billion policy to insure Afinsa’s stamps. One of its experts noticed that if $6 billion really had been invested, it would have bought up all the investment-grade stamps in the world many times over. The fact that stamp prices did not reflect any such extraordinary buying implied that few bona fide stamp transactions occurred at all, and there had been a massive over-billing.

As matters turned out, most of Afinsa’s stamps had no investment value. This explained why there were no receipts for transactions with Escala. The police found €10 million in €500 banknotes (worth about $650 each at the exchange rate of $1.30 per euro) by breaking open a newly plastered wall at the Madrid home of Afinsa’s main stamp supplier, Francisco Guijarro. What they could not find were any receipts for the stamps that he allegedly bought. And despite the remarkably high markups charged for curating the stamp collection, it was rife with phonies, as Lloyd’s had suspected. Concluding that the bills Senor Guijarro had sent to Afinsa were just a cover for a money laundering operation, the prosecutors charged the family members and officers who controlled Afinsa with embezzlement, money laundering, tax evasion, fraudulent bankruptcy, breach of trust and forgery.

The arrests recalled memories of a more famous U.S. fraud involving postage stamps some 86 years earlier, in 1920, by Charles Ponzi – the man who bequeathed his name to history in the form of Ponzi pyramid scheme. He is reported to have arrived in Boston in 1903 with only $2.50. Not speaking much English, he took menial jobs. Fired as a waiter for shortchanging customers, he moved up to Montreal and became an assistant teller in an Italian immigrant bank. It grew rapidly by paying double the normal 3 per cent rate of interest on savings accounts, but failed when its real estate loans began to go bad. The bank’s attempt to give the impression of solvency seems to have given Ponzi the idea of paying interest out of new deposit inflows rather than actual earnings. As long as clients felt they were receiving interest regularly, they tended to be calm about the principal balance.

Ponzi was sent to a Canadian prison for forgery, and then was jailed in Atlanta for trying to smuggle Italian immigrants into the United States. After his release he moved back to Boston and got a job selling business catalogs. A Spanish customer sent him a postal reply coupon, which allowed its holder to buy stamps in foreign countries for return mail rather than using domestic currency to buy a stamp.

Prices for these coupons were long out of date, having been set in 1907 by the International Postal Union. World War I drastically shifted exchange rates, enabling buyers to pay a small amount in Britain – or even less in Germany with its depreciated currency – and obtain a return stamp order that was good in the United States.

The markup on these tiny postal orders was large. An American penny could buy foreign stamp orders that could be converted into six cents in U.S. stamps, for a 500 per cent profit. The problem was that it would take a truckload of such postal orders to make serious money. A million-dollar investment would involve a hundred million penny coupons – which then would have to be converted into stamps and sold in competition with the U.S. Post Office, presumably at a discount, mainly in immigrant neighborhoods.

Focusing on the principle of arbitrage rather than such laborious implementation, Ponzi explained that he could make a 400 per cent gain after expenses. He promised that investors could double their money in 90 days, pretending to take due account of the costs and shipping time from Europe to America. When his Securities Exchange Company paid early investors the high returns he had described, they spread the word to others. Ponzi’s inflow of funds rose from $5,000 in February 1920 to $30,000 in March, and $420,000 by May. By July an estimated $250,000 a day was flowing into his firm, mainly from small investors who let their book credits build up rather than taking out their money. Some people put their life savings into the plan, and even borrowed against their homes.

Ponzi spent most of the money on himself, buying a mansion and bringing his mother over from Italy. The financial reporter Clarence Barron (publisher of Barron’s) noted that if he really had invested the money as he told his investors he had done, Ponzi would have had to purchase 160 million postal reply coupons. Yet the post office reported that few were being bought at home or abroad, and only 27,000 were circulating in the United States.

Federal agents raided Ponzi’s offices in August, and did not find any postal reply coupons, just as Spanish police did not find investment-grade postage stamps in the scheme’s 2006 replay. Ponzi was sentenced to prison yet again, but jumped bail and tried to make some quick money selling Florida real estate. He soon was recaptured, and was deported back to Italy upon his release in 1934.

What Ponzi sold was hope, pandering to peoples’ unrealistic desire to believe that a new way to make easy gains had been discovered, with no visible upper limit as to how long gains can persist in excess of the economy’s own rate of growth. It is a measure of how much harder it is to make returns in today’s world – and hence, how little hope needs to be excited – that whereas Ponzi promised to double his investors’ money every three months, the Spanish stamp scheme paid only a 6 to 10 per cent annual return. Neither fraud actually made any trading gains or profits, but simply paid investors out of new money coming in from fresh players. New inflows were treated as earnings. That’s how pyramid schemes work.

It was almost as if the Spanish operators had read one of the biographies of Ponzi that began to appear as observers noticed the common denominators between the global financial bubble of the 1990s and earlier bubbles. These bubbles provide a classic contrast between the real wealth of nations and what the business press these days calls “wealth creation” that simply takes the form of rising asset prices – “capital gains,” most of which are land-price gains.

No doubt stamp collectors would have viewed the bidding up of stamp prices as wealth creation if it actually had occurred. But all it would have achieved was to inflate the price of old stamps, much as the world’s growing ranks of billionaires were bidding up prices for master paintings and modern art, designer furniture and beachfront homes. If all the economy’s savings went into Rembrandts and Picassos, their price obviously would soar, just as putting $6 billion into postage stamps would have established higher plateau levels for stamp prices.

The flow of funds into any category of assets bid up their prices. This is true most of all for land, one of the most universal economic needs and conspicuous-consumption status measures. But does this really “create wealth”? Do market prices reflect use values, living standards and the progress of civilization?

The requisite characteristic for such price gains is indeed scarcity, but not so much that there is not enough for large numbers of buyers to make a market. If psychological utility is the key, “scarcity” has value only as a compulsive acquisitive character – wealth addiction. It means having what other people lack, with connotations of denial. Most money in search of mere scarcity is not going into trophies of the nouveau riches, but into the world’s most abundant yet also most universal scarce resource: land. Nature is not making any more of it. Yet everyone needs land to live on, making it the object of personal and business saving par excellence. Even in today’s postindustrial economies, land and its subsoil wealth represent the largest components of national balance sheets.

But inasmuch as land cannot be manufactured, savings cannot increase its supply by active investment. This poses a traumatizing problem for economists. National income statistics count any money spent that is not consumed as saving. Following John Maynard Keynes, they define saving as equal to investment. This sows the seeds of confusion with regard to the character and preconditions of economic growth. Can we really call it “wealth creation” when society directs its savings merely into speculation rather than into building up productive powers or living standards?

Classical economists vacillated over treating land as a factor of production or as a legal property right to extract a tollbooth around a given site and levy an access charge much like a user-tax. A factor of production contributes to production and income as more income is invested in it. A rent-yielding property reduces the economy’s flow of income. In the latter case land is part of the institutional property system, not the technologically based production sector of the economy.

What is beyond dispute is that real estate is highly political at the local level. Urban development tends to be shaped by insider dealing and public infrastructure spending to increase local property prices and lobbying to obtain low tax appraisals. It is axiomatic that the more economically powerful a source of wealth becomes, the greater its political power to lobby for special tax advantages. At the national level, real estate uses part of its revenue to back politicians who give it a widening wedge of special income-tax favoritism.

In the financial sphere, every bubble has been led by governments. Bubbles need to be orchestrated by opinion makers, topped by public officials giving a patina of confidence. The “madness of crowds” is a euphemism designed to divert blame away from governments onto the public. In the United States, Alan Greenspan played the role of public bubblemeister similar to that which Walpole had played in England’s South Sea bubble and John Law in France’s Mississippi bubble nearly three centuries ago, in the 1710s.

Today’s balance sheets confuse bubble wealth with real capital formation. “Investment” has become whatever accountants say they are. So have asset and debt values, given today’s leeway for financial fiction. The practice of “marking to market” permits accountants to project hypothetical gains at astronomical rates of interest, or trivializing by discounting, applying purely mathematical functions that have lost all connection to realistic rates of growth. The result is that the financial sector itself has become decoupled from the “real” economy.

The tragedy of our time is that saving today is being diverted in ways that are decoupled from real capital formation, but merely add to the economy’s debt and property overhead.

Suppose that Ponzi actually had bought International Postal Orders, and that the Spanish stamp companies actually had invested $6 billion in rare philatelic items and coins, driving up their price to create paper gains for the investors. To whom would they sell, in order to take their gains? (This is the proverbial “greater fool” problem.) More to the point, how positive would have been the broad economic effect of such asset-price inflation?

The recent stock market and real estate bubbles are much like pyramid schemes in the sense that what is bidding up stock and property prices is an exponential inflow of new money from pension plans and mutual funds (for shares) and bank credit (for real estate). Venture capitalists are “cashing out” while corporate managers exercise their stock options.

Suppose that mortgage-packaging companies are honest in their appraisals of current price trends. The real estate bubble is nonetheless speculative and postindustrial. The analogy is found when financial managers endorse government policies that encourage the inflation of price for stocks and bonds, stamps and coins, Rembrandts and modern art by claiming that this creates wealth and hence, by definition, pulls living standards and culture onward and upward.

What is wrong with this picture? For starters, it fails to define value as distinct from price, windfall and capital gains as distinct from earned income. It also neglects the fact that market prices rise and fall, but the debts remain in place. And when debts cannot be paid, savings are wiped out.

On May 9, 2006, the price of Escala shares fell by half as news of the police raids spread. By Friday its stock was down almost 90 per cent. On Monday it jumped by 50 per cent, from $4.34 at Thursday’s close to $9.45 a share. Hedge funds were making and losing money hand over fist, dwarfing the gains and losses made from stamp trading. A veritable market in crime, punishment and beating the rap was in play.

What does this have to do with true capital formation? Individuals are getting rich while the economy is polarizing between creditors and debtors, property owners and rent-payers. Unproductive investment occurs when it takes the form of windfall “capital” gains, and when it involves going into debt for real estate, stocks or bonds, or “collectibles.” Unproductive credit occurs when commercial banks make loans that merely finance the purchase of property, companies or financial securities already in place.

Two centuries ago, French followers of Count Henry St. Simon outlined an industrial system that was to be based mainly on equity financing (stocks) rather than debt (bonds and bank loans). Their idea was to make industrial banking a kind of mutual fund, so that claims for payment (and hence, the value of savings) would rise and fall to reflect the economy’s earning power. The industrial banking that developed largely in Germany and central Europe differed from the short-term Anglo-American collateral-based trade credit and mortgage lending. But since World War I, global financial practices have been more extractive than productive.

The consequence has been that debts on the economy-wide level have grown more rapidly than the ability to pay. Instead of reducing this debt overhead by earning their way out of debt, economies have sought to inflate their way out of debt. However, the mode of inflation is not the familiar rise in consumer prices, much less wage inflation. Rather, it is asset-price inflation, emanating largely from the United States. Since the gold-exchange standard gave way to the paper dollar standard in 1971, the U.S. economy has become unique in being able to create credit – and foreign debt – without constraint. The result has been an unparalleled growth in debt relative to income, production and wages. This “debt pollution” has been likened to environmental pollution.

We have entered an era in which financial markets resemble the stamp-buying funds. Governments have replaced industrial growth with purely financial wealth creation in the form of a real estate and stock market bubble. This has turned the economic universe upside-down relative to what the classical writers expected to result from the technological progress unleashed by the Industrial Revolution and its parallel agricultural, commercial and financial revolutions. Property and credit have become costs instead of a benefit, institutional forms of rent- and interest-extracting overhead rather than helpful inputs.

Michael Hudson is a former Wall Street economist. A Distinguished Research Professor at University of Missouri, Kansas City (UMKC), he is the author of many books, including Super Imperialism: The Economic Strategy of American Empire (new ed., Pluto Press, 2002) He can be reached via his website, mh@michael-hudson.com

See Wikipedia, “Charles Ponzi,” based mainly on Mitchell Zuckoff, Ponzi's Scheme: The True Story of a Financial Legend (Random House: New York, 2005).

http://www.counterpunch.org/hudson12232008.html

A Historic Moment: The Election of the Greatest Con-Man in Recent History

2008-12-08T12:49:00.000-08:00

A Historic Moment: The Election of the Greatest Con-Man in Recent History

by James Petras / December 8th, 2008

I have a vision of Americans in their 80’s being wheeled to their offices and factories having lost their legs in imperial wars and their pensions to Wall Street speculators and with bitter memories of voting for a President who promised change, prosperity and peace and then appointed financial swindlers and war mongers.

– an itinerant Minister 2008

Introduction

The entire political spectrum ranging from the ‘libertarian’ left, through the progressive editors of the Nation to the entire far right neo-con/Zionist war party and free market Berkeley/Chicago/Harvard academics, with a single voice, hailed the election of Barack Obama as a ‘historic moment’, a ‘turning point in American history and other such histrionics. For reasons completely foreign to the emotional ejaculations of his boosters, it is a historic moment: witness the abysmal gap between his ‘populist’ campaign demagoguery and his long-standing and deepening carnal relations with the most retrograde political figures, power brokers and billionaire real estate and financial backers.

What was evident from even a cursory analysis of his key campaign advisers and public commitments to Wall Street speculators, civilian militarists, zealous Zionists and corporate lawyers was hidden from the electorate by Obama’s people friendly imagery and smooth, eloquent deliverance of a message of ‘hope’. He effectively gained the confidence, dollars and votes of tens of millions of voters by promising ‘change’ (implying higher taxes for the rich, ending the Iraq war and national health care reform) when in fact his campaign advisers (and subsequent strategic appointments) pointed to a continuation of the economic and military policies of the Bush Administration.

Within 3 weeks of his election he appointed all the political dregs who brought on the unending wars of the past two decades, the economic policy makers responsible for the financial crash and the deepening recession castigating tens of millions of Americans today and for the foreseeable future. We can affirm that the election of Obama does indeed mark a historic moment in American history: The victory of the greatest con man and his accomplices and backers in recent history.

He spoke to the workers and worked for their financial overlords.

He flashed his color to minorities while obliterating any mention of their socio-economic grievances.

He promised peace in the Middle East to the majority of young Americans and slavishly swears undying allegiance to the War Party of American Zionists serving a foreign colonial power (Israel).

Obama, on a bigger stage, is the perfect incarnation of Melville’s Confidence Man. He catches your eye while he picks your pocket. He gives thanks as he packs you off to fight wars in the Middle East on behalf of a foreign country. He solemnly mouths vacuous pieties while he empties your Social Security funds to bail out the arch financiers who swindled your pension investments. He appoints and praises the architects of collapsed pyramid schemes to high office while promising you that better days are ahead.

Yes, indeed, “our greatest intellectual critics”, our ‘libertarian’ leftists and academic anarchists, used their 5-figure speaking engagements as platforms to promote the con man’s candidacy: They described the con man’s political pitch as “meeting the deeply felt needs of our people”. They praised the con man when he spoke of ‘change’ and ‘turning the country around’ 180 degrees. Indeed, Obama went one step further: he turned 360 degrees, bringing us back to the policies and policy makers who were the architects of our current political-economic disaster.

The Con Man’s Self-Opiated Progressive Camp Followers

The contrast between Obama’s campaign rhetoric and his political activities was clear, public and evident to any but the mesmerized masses and the self-opiated ‘progressives’ who concocted arguments in his favor. Indeed, even after Obama’s election and after he appointed every Clintonite-Wall Street shill into all the top economic policy positions, and Clinton’s and Bush’s architects of prolonged imperial wars (Secretary of State Hillary Clinton and Secretary of Defense Robert Gates), the ‘progressive true believers’ found reasons to dog along with the charade. Many progressives argued that Obama’s appointments of war mongers and swindlers was a ‘ploy’ to gain time now in order to move ‘left’ later.

Never ones to publicly admit their ‘historic’ errors, the same progressives turned to writing ‘open letters to the President’ pleading the ‘cause of the people’. Their epistles, of course, may succeed in passing through the shredder in the Office of the White House Chief of Staff, Rahm Emanuel.

The conjurer who spoke of ‘change’ now speaks of ‘experience’ in appointing to every key and minor position the same political hacks who rotate seamlessly between Wall Street and Washington, the Fed and Academia. Instead of ‘change’ there is the utmost continuity of policy makers, policies and above all ever deepening ties between militarists, Wall Street and the Obama appointments. True believer-progressives, facing their total debacle, grab for any straw. Forced to admit that all of Obama’s appointments represent the dregs of the bloody and corrupt past, they hope and pray that ‘current dire circumstances’ may force these unrepentant warmongers and life long supporters of finance capital to become supporters and advocates of a revived Keynesian welfare state.

On the contrary, Obama and each and everyone of his foreign policy appointments to the Pentagon, State and Justice Departments, Intelligence and Security agencies are calling for vast increases in military spending, troop commitments and domestic militarization to recover the lost fortunes of a declining empire. Obama and his appointees plan to vigorously pursue Clinton-Bush’s global war against national resistance movements in the Middle East. His most intimate and trusted ‘Israel-First’ advisers have targeted Iran, Syria, Afghanistan, Pakistan, Somalia, Sudan, Palestine and Iraq.

Obama’s Economic Con Game

Then there is the contrast between the trillions Obama will shower on the financial swindlers (and any other ‘too big to fail’ private capitalist enterprise) and his zero compensation for the 100 million heads of families swindled of $5 trillion dollars in savings and pensions by his cohort appointees and bailout beneficiaries. Not a cent is allocated for the long term unemployed. Not a single household threatened with eviction will be bailed out.

Obama is the trademark name of a network of confidence people. They are a well-organized gang of prominent political operative, money raisers, mass media hustlers, real estate moguls and academic pimps. They are joined and abetted by the elected officials and hacks of the Democratic Party. Like the virtuoso performer, Obama projected the image and followed the script. But the funding and the entire ‘populist’ show was constructed by the hard-nosed, hard-line free marketeers, Jewish and Gentile ‘Israel Firsters’, Washington war mongers and a host of multi-millionaire ‘trade union’ bureaucrats.

The electoral scam served several purposes above and beyond merely propelling a dozen strategic con artists into high office and the White House. First and foremost, the Obama con-gang deflected the rage and anger of tens of millions of economically skewered and war drained Americans from turning their hostility against a discredited presidency, congress and the grotesque one-party two factions political system and into direct action or at least toward a new political movement.

Secondly, the Obama image provided a temporary cover for the return and continuity of all that was so detested by the American people – the arrogant untouchable swindlers, growing unemployment and economic uncertainty, the loss of life savings and homes and the endless, ever-expanding imperial wars.

Featuring Paul Volker, ‘Larry’ Summers, Robert Gates, the Clintons, Geithner, Holder and General (‘You drink your kool-aid while I sit on Boeings’ Board of Directors’) Jim Jones USMC, Obama treats us to a re-run of military surges and war crimes, Wall Street banditry, Abu Ghraib, AIPAC hustlers and all the sundry old crap. Our Harvard-minted Gunga Din purports to speak for all the colonial subjects but acts in the interest of the empire, its financial vampires, its war criminals and its Middle East leaches from the Land of the Chosen.

The Two Faces of Obama

Like the Janus face found on the coins of the early Roman Republic, Obama and his intimate cronies cynically joked about ‘which is the real face of Barack’, conscious of the con-job they were perpetrating during the campaign. In reality, there is only one face – a very committed, very consequential and very up front Obama, who demonstrated in every single one of his appointments the face of an empire builder.

Obama is an open militarist, intent by every means possible to re-construct a tattered US empire. The President-Elect is an unabashed Wall Street Firster – one who has placed the recuperation of the biggest banks and investment houses as his highest priority. Obama’s nominees for all the top economic positions (Treasury, Chief White House economic advisers) are eminently qualified, (with long-term service to the financial oligarchy), to pursue Obama’s pro-Wall Street agenda. There is not a single member of his economic team, down to the lowest level of appointees, who represents or has defended the interests of the wage or salaried classes (or for that matter the large and small manufacturers from the devastated ‘productive’ industrial economy).

The Obama propagandists claim his appointments reflect his preference for ‘experience’ – which is true: his team members have plenty of ‘experience’ through their long and lucrative careers maximizing profits, buyouts and speculation favoring the financial sector. Obama does not want to have any young, untested appointees who have no long established records of serving Big Finance, whose interests are too central to Obama’s deepest and most strongly held core beliefs. He wanted reliable economic functionaries who recognize that re-financing billionaire financiers is the central task of his regime. The appointments of the Summers, Rubins, Geithners and Volkers fit perfectly with his ideology: They are the best choices to pursue his economic goals.

Critics of these nominations write of the ‘failures’ of these economists and their role in ‘bringing about the collapse of the financial system’. These critics fail to recognize that it is not their ‘failures’, which are the relevant criteria, but their unwavering commitment to the interests of Wall Street and their willingness to demand trillions of dollars more from US taxpayers to bolster their colleagues on Wall Street.

Under Clinton and Bush, in the run up to the financial collapse, they facilitated (‘deregulated’) the practice of swindling one hundred million Americans of trillions in private savings and pension funds. In the current crisis period with Obama they are just the right people to swindle the US Treasury of trillions of dollars in bailout funds to refinance their fellow oligarchs. The White President (Bush) leaves steaming financial turds all over the White House rugs and Wall Street summons the ‘historic’ Negro President Obama to organize the cleanup crew to scoop them out of public view.

Obama, the Militarist, Outdoes His Predecessor

What makes Obama a much more audacious militarist and Wall Streeter than Bush is that he intends to pursue military policies, which have already greatly harmed the US people with appointed officials who have already been discredited in the context of failed imperial wars and with a domestic economy in collapse. While Bush launched his wars after the US public had their accustomed peace shattered by an orchestrated fear-mongering after 9/11, Obama intends to launch his escalation of military spending in the context of a generalized public disenchantment with the ongoing wars, with monumental fiscal deficits, bloated military budgets and after 100,000 US soldiers have been killed, wounded or psychologically destroyed.

Obama’s appointments of Clinton, General Jim Jones, dual Israeli citizen Rahm Emanuel and super-Zionist Dennis Ross, among others, fit perfectly with his imperial-militarist agenda of escalating military aggression. His short list of intelligence candidates, likewise, fits perfectly with his all-out effort to “regain US world leadership” (reconstruct US imperial networks). All the media blather about Obama’s efforts at ‘bipartisanship’, ‘experience’ and ‘competence’ obscures the most fundamental questions: The specific nominees chosen from both parties are totally committed to military-driven empire-building. All are in favor of “a new effort to renew America’s standing in the world” (read ‘America’s imperial dominance in the world’), as Obama’s Secretary of State-to-be, Hillary Clinton, declared. General James Jones, Obama’s choice for National Security Advisor, presided over US military operations during the entire Abu Ghraib/Guantanemo period. He was a fervent supporter of the ‘troop surge’ in Iraq and is a powerful advocate for a huge increase in military spending, the expansion of the military by over 100,000 troops and the expanded militarization of American domestic society (not to mention his personal financial ties to the military industrial complex). Robert Gates, continuing as Obama’s Secretary of Defense, is a staunch supporter of unilateral, unlimited and universal imperial warfare. As the number of US-allied countries with troops in Iraq declines from 35 to only 5 by January 1, 2009 and even the Iraqi puppet regime calls for a withdrawal of all US troops by 2012, Gates, the intransigent, insists on a permanent military presence.

The issue of ‘experience’ revolves around two questions: (a) experience related to what past political practices? (b) experience relevant to pursue what future policies? All the nominees’ past experiences are related to imperial wars, colonial conquests and the construction of client states. Hiliary Clinton’s ‘experience’ was through her support for the bombing of Yugoslavia and the Nato invasion of Kosova, her promotion of the Kosovo Liberation Army (KLA), an internationally recognized terrorist-criminal organization as well as the unrelenting bombings of Iraq in the 1990s, Bush’s criminal invasion of Iraq in 2003, Israel’s murderous bombing of civilian centers in Lebanon…and now full-throated calls for the ‘total obliteration of Iran’. Clinton, Gates and Jones have never in their mature political careers proposed the peaceful settlement of disputes with any adversary of the US or Israel. In other words, their vaunted ‘experience’ is based solely on their one-dimensional militarist approach to foreign relations.

‘Competence’, as an attribute again depends on the issue of ‘competence to do what’? In general terms, ‘The Three’ (Clinton, Gates and Jones), have demonstrated the greatest incompetence in extricating the US from prolonged, costly and lost colonial wars. They lack the minimum capacity to recognize that military-driven empire-building in the context of independent states is no longer feasible, that its costs can ruin an imperial economy and that prolonged wars erode their legitimacy in the eyes of their citizens.

Even within the framework of imperial geo-political strategic thinking, their positions exhibit the most dense incompetence: They blindly back a small, highly militarized and ideologically fanatical colonial state (Israel) against 1.5 billion Muslims living in oil and mineral resource-rich nations with lucrative markets and investment potential and situated in the strategic center of the world. They promote total wars against whole populations, as is occurring in Afghanistan, Iraq and Somalia and, which, by all historical experience, cannot be won. They are truly ‘Masters of Defeat’.

The point of the matter is that Obama appointed the ‘Big Three’ for their experience, competence and bipartisan support in the pursuit of imperial wars. He overlooked their glaring failures, their gross violations of the basic norms of civilization (of the human rights of tens of millions civilians in sovereign nations) because of their willingness to pursue the illusions of a US-dominated new world order.

Conclusion

Nothing speaks to Obama’s deep and abiding commitment to become the savior of the US empire as clearly as his willingness to appoint to the highest position of policy making the most mediocre failed politicians and generals merely because of their demonstrated willingness to pursue the course of military-driven empire building even in the midst of a collapsing domestic economy and ever more impoverished and drained citizenry.

Just as Obama’s electoral campaign and subsequent victory will go into the annals as the political con-job of the new millennium, his economic and political appointments will mark another ‘historic’ moment: The nomination of corrupt and failed speculators and warmongers. Let us join the inaugural celebration of our ‘First Afro-American’ Imperial President, who wins by con and rules by guns!

James Petras, a former Professor of Sociology at Binghamton University, New York, owns a 50-year membership in the class struggle, is an adviser to the landless and jobless in Brazil and Argentina, and is co-author of Globalization Unmasked (Zed Books). Petras’ forthcoming book, Zionism, Militarism and the Decline of US Power, is due from Clarity Press, Atlanta, in August 2008. He can be reached at: jpetras@binghamton.edu. Read other articles by James, or visit James's website.

http://www.dissidentvoice.org/2008/12/a-historic-moment-the-election-of-the-greatest-con-man-in-recent-history/

Wall Street, Not the Auto Industry Obama's Favoritism

2008-12-08T12:39:00.000-08:00

December 8, 2008
Wall Street, Not the Auto Industry
Obama's Favoritism

By MICHAEL HUDSON

There is a strange double standard in President-elect Obama’s largesse with the public purse when it comes to Wall Street’s banks and insurance companies as compared to his more exacting stance toward bailing out the U.S. auto industry. In his December 7, 2008 interview with Meet the Press he set conditions for an auto industry bailout, but said nothing about setting similar conditions for the financial sector. His words regarding Detroit could just as well have been directed at Wall Street. But they were not.

“I think that the Big Three U.S. automakers have made repeated strategic mistakes. They have not managed that industry the way they should have. … What we have to do is to provide them with assistance, but that assistance is conditioned on them making significant adjustments. They’re going to have to restructure, and all their stakeholders are going to have to restructure. Labor, management, shareholders, creditors – everybody’s going to recognize that they have–they do not have a sustainable business model right now. And if they expect taxpayers to help in that adjustment process, then they can’t keep on putting off the kinds of changes that they, frankly, should have made 20 or 30 years ago.”

Later in the interview he repeated this position:

… if taxpayer money is at stake … we want to make sure that it is conditioned on a auto industry emerging at the end of the process that actually works, that actually functions. ... But I’m also concerned that we don’t put 10 or 20 or 30 or whatever billion dollars into an industry, and then, six months to a year later, they come back hat in hand and say, “Give me more.” Taxpayers, I think, are fed up.

Fair enough. But isn’t this just what Wall Street is asking for? Isn’t it coming back for the remaining $350 billion unallocated under the Treasury plan approved by Congress (and endorsed by President-elect Obama) in October, while the Federal Reserve continues to provide “cash for trash” to banks and insurance companies at a rate now approaching $2 trillion?

One may ask why Wall Street’s leading offenders – Hank Greenberg of A.I.G., Charles Prince at Citibank – were bailed out as if saving them was saving “the economy” itself, while only the auto executives were told not to pay themselves such exorbitant salaries and bonuses. If the auto industry has a “bad engineering” problem for which it is being held responsible, why aren’t the banks, A.I.G. and their enablers – hedge funds on the other side of the deals that the smart boys won and the careless boys let them win – not being held to a similar standard?

The explanation seems to be that the auto executives didn’t have a cabinet official like Secretary Paulson working on their behalf to represent their special interests as being in the interest of the economy as a whole. On their own, they were not in a position to bring the economy crashing down around them if they did not get what they wanted. Only Wall Street is in a position to wreck the economy by plunging it into bankruptcy. It is this power that enables it to represent its interests as being that of the economy at large, and hence deserving protection that no other sector receives, certainly not labor.

What is important to understand is that the bad-loan problem is concentrated at the top layer (the 15 per cent or so wealthiest banks), the big Wall Street conglomerates created after the Clinton Administration co-conspired with the Republicans in repealing Glass-Steagall and letting banks form non-bank conglomerates. The bailouts do not end up with these banks or with A.I.G. itself, but with their counterparties on the winning side of bets made against the banks and A.I.G. who now want to collect from financial institutions that can’t pay. It’s like gamblers in a casino that’s gone broke, asking the government to bail them out or “the system” will collapse.

What is this system that Congress and Mr. Obama are rushing so strenuously to rescue? Essentially, bank officers and A.I.G. insurance salesmen behaved like casino dealers who did not mind losing as long as they got a paycheck enabling them to live very, very well.

Not all casinos go broke, and the vast majority of U.S. banks and insurance companies avoided making big gambles. The bailout has little to do with them. And it has little to do with “the economy.” It has to do with crooked mortgage brokers working for crooked banks who corrupted the political process with their campaign contributions, to make losing bets against clever financial gamblers who borrowed huge enough sums at interest from these banks to leverage their bets that the banks now hold to let investment bankers and commercial bankers become the highest paid individuals in human history. But should one say that this unique historical event really is “the economy”? Or is it an excrescence? Would the economy be better off WITHOUT these bank and A.I.G. debts being “made whole”?

Mr. Obama explained that his administration’s solution to the bad debt problem will be for the banks to “earn their way out of debt” to the U.S. Government by loading down American homeowners, households and industry with so much MORE debt that the interest charges will rebuild bank balance sheets. What the banks are selling, in short, is debt. This may be thought of as financial pollution. The banks are to make money by pumping debt pollution into the economy.

Is it not hypocritical for Mr. Obama to criticize the auto companies for producing gas guzzlers that pollute the physical environment, without criticizing the big Wall Street campaign contributors for doing the same to the economic environment? “I’ve had my team have conversations with these folks to see how can you keep the automakers’ feet to the fire in making the changes that are necessary,” Mr. Obama explained to Tom Brokaw, “some people have said let’s just send them through a bankruptcy process. Well, even as large a company as GM, in ordinary times, might be able to go through a Chapter 11 bankruptcy, restructure, and still keep their business operations going. When you are seeing this kind of collapse at the same time as you’ve got the financial system as shaky as, as it is, that means that we’re going to have to figure out ways to put the pressure on the way a bankruptcy court would, demand accountability, demand serious changes.”

Mr. Obama finished up by saying that “we have to put an end to is the head-in-the-sand approach … And what we still see are executive compensation packages for the auto industry that are out of line compared to their competitors,” adding that “it’s not unique to the auto industry. We have seen that across the board. Certainly, we saw it on Wall Street.”

But he does not seem to understand what the problem is. Turning explicitly to the financial crisis, Mr. Obama said, “you, you had a huge amount of debt, a huge amount of other people’s money that was being lent, and speculation was taking place on–based on these home mortgages. And if we can strengthen those assets, then that will strengthen the financial system as a whole.”

What is wrong with this picture? First of all, the banks were NOT lending out “other peoples’ money.” This is a myth promoted by Wall Street’s academic lobby, the University of Chicago “monetarist” school. Banks create credit – that is, interest-bearing debt – freely, whenever they can get a borrower to sign a promissory note. The loan creates a deposit (“saving,” “other peoples’ money”). That is the financial reality. Banking is a public monopoly able to create and monetize credit. This monopoly is granted in order to create a financial system that is supposed to finance capital investment in economic growth.

But if banks had done this, they would not have the bad-debt problem stemming from options gambles and fraudulent real estate loans by their immensely profitable mortgage-brokerage subsidiaries and their enormously remunerative predatory legal offices drawing up predatory mortgage contracts. Capital investment today is financed by industrial companies out of retained earnings – if they are able to retain much after paying the junk-bond holders who have borrowed money from banks to take them over and carve them up, not increase their long-term capital investment, research and development.

What is needed is to restructure the financial system so that it does what its lobbyists and academic shills pretend that it does: promote economic growth rather than merely loan the economy down with debt as a means to extract interest charges.

Mr. Obama’s second part of his sentence recommending reform proposes to do just the opposite. He has thrown his support fully behind Treasury Secretary Henry Paulson, by pretending that the way to revive the economy and banks it to inflate a debt-fueled real estate boom once again. Prospective home buyers are supposed to go even further into debt in order to provide the banks with enough extra interest charges to earn the money to become solvent again. (They are as deep in negative equity as the subprime mortgage debtors they and their affiliates have victimized.) When Mr. Obama speaks of “strengthen[ing] those assets,” namely, homes and office buildings, “then that will strengthen the financial system as a whole.”

But it will weaken the economy, leaving it even more debt-strapped.

Michael Hudson is a former Wall Street economist. A Distinguished Research Professor at University of Missouri, Kansas City (UMKC), he is the author of many books, including Super Imperialism: The Economic Strategy of American Empire (new ed., Pluto Press, 2002) He can be reached via his website, mh@michael-hudson.com

http://www.counterpunch.org/hudson12082008.html

Neoliberalism and Bottom-Line Morality

2008-12-05T06:59:00.000-08:00

Neoliberalism and Bottom-Line Morality

Notes on Greenspan, Rubin, and the Party of Davos

December, 01 2008 By Edward S. Herman

From the Reagan era onward I have been impressed with how regularly liberal and left-leaning economists I knew, who went to work in industry and finance, very soon became pro-business, anti-labor, and politically right wing. I think that what got to them was not only the impact of association with businesspeople, but the fact that business profitability became central to their own performance. As business economists, wage increases would seem bad—as encroaching on that profitability and threatening inflation and business growth (and stock prices). Tough environmental rules would also hamper profitability; their relaxation by law or friendly (non-)enforcement would enhance it. It was therefore easy to slide into what we may call "bottom-line morality," with positions on key issues dictated by prospective bottom line effects, but of course rationalized with an ideology that made this all benevolent—in the long run—and made these bottom-line moralists into Good Samaritans as they collected their fat salaries and bonuses while the vast majority waited for trickle-down. (On the fraudulence of this ideology, see David Harvey, A Brief History of Neoliberalism, and Ha-Joon Chang, Bad Samaritans.)

With the steady increase in business's economic and political power over the past 30 years and the parallel decline of organized labor, neoliberal (market-can-do-it-all) ideology has become even more firmly entrenched in establishment thought and practice. The novelist Ayn Rand, most famously the author of Atlas Shrugged, was an extreme proponent of individualist, free enterprise, anti-government ideology, and it is no coincidence that one of her cult admirers and associates, Alan Greenspan, became a leading member of the policy-making elite in the 1980s and into 2006.

Greenspan's "Superlatively Moral System"

Greenspan contributed three chapters to Rand's 1966 book Capitalism: The Unknown Ideal, all of them reflecting her—and Greenspan's—ultra laissez-faire ideology. In one, Greenspan castigates antitrust law and practice as not merely harmful, but with the "hidden intent" of injuring the "productive and efficient members of our society." In another, he claims that all government regulation represented "force and fraud" as the means of consumer protection, whereas it is "profit-seeking which is the unexcelled protector of the consumer." He argues that the market system itself is a "superlatively moral system that the welfare statists propose to improve upon by means of preventive law, snooping bureaucrats, and the chronic goad of fear."

Greenspan contributed to the workings of this "superlatively moral system" at the micro-level back in 1985, writing to the savings and loan authorities on behalf of Charles Keating, head of Lincoln Savings and Loan. In that letter the authorities were urged to exempt Keating from restrictions on risky loans, given his exceptional character and the soundness of his operation, with "no foreseeable risk to the Federal Savings and Loan Corporation." Greenspan was a paid consultant to Lincoln, which failed in 1989 at enormous expense to the FSLIC and taxpayer. Keating ended up in prison. This is the same Charles Keating with whom John McCain had a close relationship and on whose behalf McCain also did some lobbying. Neither Greenspan nor McCain suffered significant damage from this relationship and, despite his extremist ideology, Greenspan became a powerful figure in the U.S. political economy, leading the Fed for many years (1987-2006) and through two major bubbles that he did nothing to constrain.

One important manifestation of Greenspan's world view can be seen in his congressional testimony of July 22, 1997, where he explained that inflation was not increasing despite the lowering unemployment rate because of "a heightened sense of job insecurity," which he described elsewhere as reflecting the "traumatized worker," helpful in keeping wages down. He didn't suggest that job insecurity and the traumatization of workers involved any immoral "goad of fear" or had any negative implications for welfare.

Actually, in this regard Greenspan's view wasn't much different from that of a great many mainstream economists, who were slow to recognize greater job insecurity as a key factor altering the unemployment/inflation relationship, and who were not troubled when they did recognize it. Liberal economist Janet Yellen, co-author with Alan Blinder of a book on the 1990s entitled The Fabulous Decade, told the Federal Reserve Open Market Committee in 1996 that "while the labor market is tight, job insecurity is alive and well. Real wage aspirations seem modest, and the bargaining power of workers is surprisingly low" (quoted in Robert Pollin's Contours of Descent). Robert Pollin points out that Yellen and Blinder didn't let this interfere with their conclusion that the 1990s were "fabulous." Apparently these economists, like Clinton, don't really "feel pain" as long as only workers suffer.

In fact, they are all a throwback to 17th and 18th century mercantilists who, according to historian Edgar S. Furniss, argued that "high wages would prove destructive of national well-being because they would reduce England's competing power by raising production costs. The prevalent doctrine held that wages should be kept at the level of the cost of physical subsistence. Hence the apparent anomaly of the laborer's position: whereas his theoretical social importance was large, his actual economic reward was miserably small.... [Under mercantilism] the dominant class will attempt to bind the burdens upon the shoulders of those groups whose political power is too slight to defend them from exploitation and will find justification for its policies in the plea of national necessity" (Furniss, Position of the Laborer in a System of Nationalism, 1920). Does this ancient view on how burdens should be distributed have some possible application to the bailouts now being put in place to deal with the current financial crisis?

Getting back to Greenspan morality, it is clear from both his Ayn Rand contributions and his writings and public pronouncements of the past 20 years that he views untrammeled capitalism as a "superlatively moral system" not because of businesspeople's benevolence but because market operations in business's self-interest will protect consumers—business will not take on undue risk because that would eventually harm their own welfare. Regulation is thus unnecessary and positively damaging by its arbitrariness and bureaucratic bungling. Greenspan fought long and strenuously for across-the-board deregulation, and against the regulation of derivatives as they grew rapidly in the 1990s, even arguing in 2004 that the innovations like derivatives had contributed to a new stability in the financial system: "Not only have individual financial actors become less vulnerable to shocks from underlying risk factors, but also the financial system as a whole has become more resilient." Such a misunderstanding of reality by a man with great experience and access to the research resources of the Fed can only be understood as a result of the intellectual-ideological bubble within which he worked.

Now that the financial system has collapsed and its leaders have demanded and gotten a huge bailout, what does Greenspan say? Apart from an admitted bafflement, he has stated that business has been too greedy and behaved dishonorably. He is "distressed at how far we [sic] have let concerns for reputation slip in recent years." But this is hogwash. It was rational profit-making that was supposed to control risk, not honorable behavior. Also, if the actual behavior was systemic, and greed can overcome honorable behavior, the Greenspan model has failed on its own terms. But beyond that it was idiotic, as it has long been known that the force of competition, the pressure (and fiduciary obligation) for profits, and regular business myopia in buoyant markets, have repeatedly produced unsustainable excesses. Greenspan's moral model reflects straightforward ideology and bottom line morality. It is also part of a class war perspective where, as noted, labor (and the majority) are viewed in the mercantilist tradition—as a cost to be contained, not as a very large group whose welfare we are trying to maximize. It also helped cause him to misperceive economic reality and make a major and disastrous economic forecasting error.

Greenspan, Rubin, Summers, et al

Both the New York Times and Washington Post had substantial articles on Greenspan's heavy responsibility for the ongoing crisis, in a way beating a dead horse after both papers had treated him with great deference as "the Oracle" for many years (Peter Goodman, "The Reckoning: Taking a Closer Look at a Greenspan Legacy," NYT, Oct. 9, 2008; Anthony Faiola, Ellen Nakashima, and Jill Drew, "What Went Wrong," WP, October 15, 2008). The articles feature the struggle for and against derivatives regulation in the 1990s, with Brooksley E. Born, the head of the Commodity Futures Trading Commission (CFTC) as the pro-regulation protagonist and heroine, and Greenspan as principal villain.

But both articles also call attention to the support given Greenspan in his anti-regulation fight with Born by the leading financial officials of the Clinton administration: Robert Rubin, Larry Summers, and Arthur Levitt, Jr., the first two heading the U.S. Treasury, Levitt the SEC. Rubin looks particularly disingenuous in these articles, claiming to have favored regulating derivatives in 1998, but believing that this was politically unfeasible because of industry opposition and because "there was no potential for mobilizing public opinion." The Times article then paraphrases a former CFTC official that "the political climate would have been different had Mr. Rubin called for regulation."

It should also be recognized that Rubin and Summers are no slouches when it comes to supporting the bailout of fat-cat investors. In his superb book The Global Class War, Jeff Faux features the fact that the corporate establishment which dominates both U.S. political parties is part of the "Party of Davos," that gets together periodically at lush facilities in Davos, Switzerland to party, hob-nob, and plan in the interest of the global business elite. The book focuses heavily on the character and passage of the North American Free Trade Agreement (NAFTA) and then the immediately following Mexican crisis and bailout. NAFTA was a corporate project, strongly opposed by a great majority of Democratic Party voters and by a majority of Democratic legislators. But with Robert Rubin's urging, Clinton put passage of this legislation ahead of health care reform, put a huge political effort into getting it passed, and thereby set the stage for both the failure of health care reform and the Democratic Party's political debacle in 1994. Of course the business community appreciated Clinton's service and here and elsewhere he justified their earlier vetting of his candidacy, organized by Rubin himself.

Rubin had a serious conflict of interest in pushing NAFTA and the subsequent bailout of investors in Mexican securities. He had been a high-ranking official of Goldman Sachs, which did substantial Mexican business, and he had—and even continued to maintain—a number of Mexican clients. NAFTA served only the Party of Davos in the United States and a tiny elite of wealthy people who dominated a famously corrupt political system in Mexico. It was opposed by a U.S. majority and by aware and uncorrupted Mexicans; in Mexico the majority would eventually be seriously damaged by this instrument of the global class war. Its central feature was privileging foreign investors in Mexico, providing also for the gradual elimination of tariffs on agricultural goods and therefore for economic disaster for several million Mexican farmers and their families. (One of Clinton's most notable lies was his claim that NAFTA would serve to slow down Mexican immigration into the United States by spurring investment and development in Mexico.)

The analogy with the current U.S. crisis and bailout is more dramatic when we consider the Mexican crisis of 1994-1995. Shortly after the enactment of NAFTA in 1994, the Mexican government, which for political reasons had tried to peg the peso, suffered a crisis of investor confidence and an unsustainable drain on its foreign reserves. As economist David Felix described it, in the Fall of 1994 "Mexican tesobono holders began cashing in and exiting to dollars [this bond was payable in pesos but with pesos indexed to the dollar], followed belatedly by foreign holders, who were still stuck with $29 billion worth of tesobonos when in December 1994 the Mexican central bank, its dollar reserves nearly exhausted, let the exchange rate float and helplessly watched it sink. The U.S. Treasury and IMF hastily cobbled together a $51 billion bailout fund, and required the Mexican government to use over half to pay off the $29 billion tesobonos with dollars. Since the government's contractual obligation to tesobono holders was merely to pay them more pesos when the peso price of dollars rose, the bailout obligation amounted to a forced ex post rewriting of the contract with tesobono holders to save them from taking a bath" ("Why International Capital Mobility Should be Curbed, and How It Could Be Done," ICTFU, Dec. 2001).

In his chapter "Alan, Larry, and Bob Save the Privileged," Faux describes how in 1994 Greenspan, Summers, and Rubin helped create a climate of fear, telling Congress that "the entire world was now at risk." Governor George W. Bush of Texas was lauded by Rubin for "instinctively grasping what was at stake" and giving public support to the bailout. Rubin even "called Gingrich, who called Greenspan who called Rush Limbaugh to promote the bailout to the rightwing listeners of his radio show." In fact, the sales claims for the bailout were phony and the IMF financial contribution to the bailout was illegal. Mexico didn't suffer any "debt crisis" as it was only obligated to provide pesos, not dollars—the payment of dollars was forced on the Mexican government by U.S. officials, who persuaded the U.S. media that the dollar payments were required by the tesobono contracts. U.S. officials told this lie and required this payment of Mexico, not only to help U.S. investors, but also to dissuade Mexico from resorting to capital controls, which they could have done in accord with IMF rules, but which would have set a pattern in violation of the neoliberal principles being enforced on the Third World by the United States and IMF. Article 6 of the IMF Articles of Agreement not only would have allowed Mexican capital controls, it prohibits IMF emergency funding to facilitate capital flight—violated in this case in accord with U.S. demands and higher neoliberal principles (or rather interests).

Faux points out that the bailout money "was not used to rejuvenate the Mexican economy. It did not underwrite job creation for the unemployed or debt relief for the bankrupted small businesspeople or aid to hospitals and schools that were suddenly broke. It was used to make whole the Wall Street holders of tesobonos, who had originally bought the risky Mexican bonds because Salinas was giving them a high yield." Instead of capital controls Rubin and Summers insisted on budget reductions and "reform" of the Mexican financial system, which was followed by and resulted in the "steepest economic crash since the Great Depression." The Mexican middle class "was decimated" by the forced contraction and Mexican taxpayers eventually being forced to pay the bills for the bailout. Rubin claimed that this was all because "Mexico...had made a serious policy mistake." But Faux points out that "Mexico" didn't do this, but rather Salinas and his successor Zedillo, "both of whom 'Alan, Larry and Bob' had promoted to the American Congress as honest, competent reformers who had to be supported with NAFTA, even if it meant thousands of American losing their jobs."

Faux also points out that as part of NAFTA, and in the wake of the Mexican forced contraction and budget crisis, privatization of Mexican public assets was accelerated, and local oligarchs and foreign banks (and customers of Goldman Sachs) could now buy up assets at bargain prices. So the Party of Davos and its local comprador allies did very well at the same time as ordinary Mexicans were put through the wringer. As Faux says, "The NAFTA financial model—liberalization of trade and finance leading to a speculative bubble, a subsequent crash, and the protection of investors from the consequences of their own actions—was repeated in various forms in the 1990s throughout the global markets in Thailand, Brazil, Bolivia, South Korea, Indonesia, Russia and Argentina."

That was written in 2006. Now that the NAFTA financial model has hit home in the United States itself, we can see how the Party of Davos, with Goldman Sachs once again in the lead, is doing its darndest to continue to socialize risks for investors and pass off costs to ordinary citizens. And with Bob Rubin and Larry Summers waiting in the wings, the Democrats swallowing the latest bailouts, and Wall Street still funding the Party generously, we may have more of the same in a new Democratic administration.

http://www.zmag.org/zmag/viewArticle/19835

The Obama Letdown

2008-11-26T08:02:00.000-08:00

The Neo-Yeltsin Administration?

The Obama Letdown

By MICHAEL HUDSON

Reality had to raise its ugly head. Barack Obama was elected with overwhelming approval to inaugurate an era of change. And at his November 25 press conference, he said that his decisive victory gave him a mandate to change the direction in which America is moving. But his recent economic and foreign policy appointments make it clear that when he chose “change” as his campaign slogan, he was NOT referring to the financial, insurance and real estate (FIRE) sectors, nor to foreign policy. These are where the vested interests concentrate their wealth and power. And change already has been accelerating here. Unfortunately, its direction has been for the top 1% of America’s population to raise their share of in the returns to wealth from 37% ten years ago to 57% five years ago and an estimated nearly 70% today.

The change that Mr. Obama is talking about is largely marginal to this wealth, not touching its economic substance – or its direction. No doubt he will bring about a welcome change in race relations, environmental regulations, and a more civil rule of law. And he probably will give wage earners an income-tax break (thereby enabling them to keep on paying their bank debts, incidentally). As for the rich, they prefer not to earn income in the first place. Taxes need to be paid on income, so they take their returns in the form of capital gains. And simply avoiding losses is the order of the day in the present meltdown.

Where losses cannot be avoided, the government will bail out the rich on their financial investments, but not wage earners on their debts. On that Friday night last October when Mr. Obama and Mr. McCain held their final debate, Mr. Obama was fully on board with the bailouts. And this week’s appointment of the “Yeltsin” team who sponsored Russia’s privatization giveaways in the mid-1990s – Larry Summers and his protégés from the Clinton’s notorious Robert Rubin regime – shows that he knows his place when it comes to the proper relationship between a
political candidate and his major backers. It is to protect the vested interests first of all, while focusing voters’ attention on policies whose main appeal is their ability to distract attention from the fact that no real change is being made at the economic core and its power relationships.

This is not what most people hoped for. But their hopes were so strong that it was easier to indulge in happy dreams and put one’s faith in a prince than to look at the systemic problems that need to be restructured in order for real change to occur. Individuals do not determine who owes what to whom, who is employed by whom or what laws govern their work and investment. Institutional economic and political structures are the key. And somehow the focus has been on the politics of personalities, not on the economic forces at work.

This is as true abroad as it is in the United States. Two weeks ago I was at an economic meeting on “financialization” in Germany. Most of the attendees with whom I spoke expressed the hope – indeed, almost a smug conviction – that Obama would be like Gorbachev in Russia: a man who saw the need for deep structural change but chose to bide his time, seeming to “play the game” with the protective coloration of going along, but then introducing a revolutionary reform program once in office.

Instead, after resembling President Carter by running a brilliant presidential primary campaign to win the nomination (will a similarly disappointing administration be about to come?), Obama is looking more like Boris Yeltsin – a political umbrella for the kleptocrats to whom the public domain and decades of public wealth were given with no quid pro quo.

Obama’s ties with the Yeltsin administration are as direct as could be. He has appointed as his economic advisors the same anti-labor, pro-financial team that brought the kleptocrats to power in Russia in the mid-1990s. His advisor Robert Rubin has managed to put his protégés in key Obama administration posts: Larry Sommers, who as head of the World Bank forced privatization at give-away prices to kleptocrats; Gaithner of the New York Fed; and a monetarist economist from Berkeley, as right-wing a university as Chicago. These are the protective guard-dogs of America’s vested interests.

If you are a billionaire, your first concern is simply to preserve your wealth, to avoid having to take a loss in the value of your financial claims on the economy – claims for repayment of loans and investment, as well as interest and dividends, and enough capital gains to compensate for the price inflation that erodes the spending power of more lowly income-earners.

This year has changed the typical fate of financial wealth in the face of bursting financial bubbles. Traditionally, business booms culminate in a wave of bankruptcies that wipe out bad debts – and the savings that have been invested on the “asset” side of the balance sheet. This year has changed all that. The bad debts are being kept on the books – but transferred from the banks to the federal government, mainly the Federal Reserve and Treasury. The bank bailouts have aimed not so much to protect the banks themselves, but to enable them to pay off on the bad bets they made vis-à-vis the nation’s hedge funds and other institutional investors in the derivatives market.

To participate in a hedge fund, one needs to prove that one can afford to lose their money and not be much the worse off for it in terms of actual living conditions. So the $306 billion in federal guarantees of the junk mortgage packages sold by Citibank, and the $135 billion bailout of the insurance contracts written by A.I.G. to protect swap contracts from loss, could have been avoided without much impact on the “real” economy.

In fact, writing down these financial claims ON the economy would have paved the way for writing down its debt burden. If the subprime and other mortgage debts had been permitted to decline to the neighborhood of 22 cents on a dollar they were trading for, this would have made it possible to write down debts to match the price at which mortgage holders had bought these loans for. But the financial overhead of American wealth “saved” in the form of creditor claims on indebted homeowners, industrial companies and junk-insurance companies such as A.I.G. has been protected against erosion by this year’s federal bailout program.

Bloomberg has added up these programs and finds that they $7.7 trillion dollars – nearly half an entire year’s GDP. By acting to support the market for bad-mortgage loans (but not for real estate itself), the seemingly endless series of Paulson bailouts seeks to be to keep today’s debt overhead intact rather than writing it down. Service charges on this indebtedness will divert peoples’ income from consumption to paying creditors. It will help financial investors, not labor or industry. It will keep the cost of living and doing business high, preventing the U.S. economy from working its way out of debt by becoming competitive once again.

With all these trillions of dollars of bailing out the wealthy, one might easily forget to ask what is being left out. For one thing, the government’s Pension Benefit Guarantee Corp, whose $25 billion deficit is not bailed out. This year, underfunded corporate pension plans are supposed to “catch up” to full funding so as to protect the PBGC, in accordance with a law passed by Congress two years ago. If underfunded plans don’t meet the scheduled 92% coverage for this year, they have to bring their set-asides fully up to the 100% funding level. The stock market plunge has dashed their hopes to do this. The result will be to force many industrial companies into a financial bind.

On the auto front, the Bush Administration has brought pressure to force the big three Detroit companies into bankruptcy as a way to annul their defined-benefit pension plans – with no plans at all bail out money owed to labor by restoring the PBGC to solvency. State and local pension plans are almost entirely unfunded, and are at even more risk as their tax revenues plunge and property tax payments are stopped on housing and commercial buildings that have foreclosed.

And speaking of state and local finances, what role is local government to play in Mr. Obama’s promise to rebuild infrastructure, headed by transportation? Given their strapped position, one is hearing a surge of Wall Street plans to spend enormous sums. Whereas Obama’s economic team made fortunes for Russian kleptocrats by giving them public-sector assets already in place, their American counterparts are going to have to get rich by actually building new projects. In such cases the benefits are as large as the total amount of money being spent – but not in the way that most people understand at first glance. Construction contracts for new public transport systems, bridges and roads and urban or rural modernization may be entirely honest and provided at a fair cost. But it is a byproduct of such investment that it creates an amount that is of equal or often even greater magnitude in the form of rent-of-location – that is, vast windfall gains for well-located real estate.

This is where Mr. Obama’s Chicago political experience comes in so handy. It is in fact a game tailor-made for his team. Hundreds of millions of dollars were made in gentrifying Chicago’s notorious but conveniently centrally located public housing for low-income families. The developments sponsored by Mr. Obama’s mentors, the Pritzker family, the University of Chicago and assorted real estate reverends opened up vast new land sites, with public support to boot. (The house where I grew up in Hyde Park-Kenwood, a block or so from Mr. Obama’s house, was torn down along with the rest of the entire block as part of Mayor Daley’s urban renewal program in the late 1950s – after the University’s block busters had run down the neighborhood, then panicked the whites into selling to the blacks at extortionate price markups and mortgage rate premiums, then tearing down the houses into which the blacks had moved. It’s an old real estate game that one learns quickly in Chicago politics.) As Thorstein Veblen noted, any American city’s politics is best understood by viewing it as a real estate development.

The gains from providing better transport infrastructure typically are so large that transportation investment could be self-financing by taxing these property gains – recapturing the added rental value in the form of property windfall taxes. London’s tube extension to Canary Wharf, for example, cost the city £8 billion – but increased real estate values along the route by some £13 billion. The city could have financed the entire project by issuing bonds that would have been repaid out of taxes levied on the windfall gains created by this public expenditure.

Likewise in New York City, the transport authority has just announced that subway and bus fares will be jacked up (adding no less than $10 to the monthly commute card) and services cut back sharply. Mayor Bloomberg has just stopped work on the 2nd Avenue subway, its completion will add at least as much to upper East Side property values as the subway costs itself. The city thus could finance its construction not by issuing bonds to be paid off by city and state taxpayers in combination with user fees paid as fares. Taxpayers wouldn’t have to pay, and riders could enjoy subsidized fares simply by taxing the real estate owners.

But I see no prospect of this being done. Real estate is still the name of the game, because it remains the largest asset category in every economy today just as much as under feudalism. The difference from feudalism is that whereas landlords received the rental value of their lands in centuries past, today’s property owners acquire ownership not by military conquest (the Norman invasion of 1066 in England’s case) but by borrowing from the banks. To a mortgage banker, a commercial developer or real estate company is a prime customer, the bulwark of bank balance sheets. It is hard to imagine a new American infrastructure program not turning into a new well of real estate gains for the FIRE sector. Real estate owners on favorably situated sites will sell out to buyers-on-credit, creating a vast new and profitable loan market for banks. The debt spiral will continue upward.

The fact that state and local budgets are too burdened to afford infrastructure spending themselves will lead to it being privatized from the outset. Probably London’s notorious public-private partnerships (a Labour Party refinement more Thatcherite than even Margaret Thatcher herself could have got away with) probably will become the basic model. Users will pay higher fees rather than enjoying the subsidized or free access typical in public infrastructure spending during the Progressive Era. The main purpose of public enterprise back then was to keep prices down for basic services, thus lowering the cost of living and doing business in America. But today, infrastructure spending will be just one more item adding to America’s debt overhead to make its economy even less competitive with foreign ones than it is.

The moral is, next time a candidate promises change, ask him to say just what changes he has in mind. During the Presidential debates, only Dennis Kucinich came out and said each specific law that he had put before Congress to implement each change he promised. But most of the public didn’t want to know the details – they simply liked hearing the word “change.”

Here are some purely fiscal and financial changes that a future presidential candidate might propose – changes that I don’t expect to be hearing any more about during the next four years. Just to get the discussion going, why shouldn’t these merely marginal changes within the existing system be implemented right now by a presidential candidate who is still bragging about his “mandate for change”:

* Regarding fiscal policy, re-introduce the estate tax, along with (at the very least) the Clinton era’s progressive-tax schedule.

* Tax capital gains at the same rate as wages and profits, rather than at half the rate; and make these taxes be paid at the point of sale of real estate or other assets, not deferred ad infinitum if the gains simply are invested in yet more wealth.

* Require a cost-benefit analysis of any publicly backed infrastructure spending so as to recapture all “external economies” (such as windfall real estate price gains) as the first line of financing such investment.

* Tax corporate borrowing that is used merely to pay stock dividends or buy back one’s own stock at least at 50%.

* Close the practice of offshore tax avoidance, and bring criminal cases against accounting firms abetting this practice.

* Only let a building be depreciated once, not repeatedly as a tax writeoff.

* Refocus state and local taxation on the property tax, remembering that whatever the tax collector relinquishes is simply “freed” to be paid to the banks as interest.

* In the sphere of bad-debt banking, when a government agency takes over a bank or company that has negative net worth, the stockholders must be wiped out as their stock has lost all market value. Bondholders must stand in line behind the government in case of insolvency.

* Write down mortgage debts to the ability of property owners to pay and/or the present market value. Banks that have made loans to these borrowers must take responsibility for their decision that the owners could afford to pay. Even better, apply New York State’s existing Fraudulent Conveyance law, and simply annul loans that are beyond the ability of debtors to pay.

None of this involves real structural change. It is simply more economically efficient under existing laws and practices – something like actually enforcing environmental law, anti-fraud and anti-crime laws, and the original intent of our tax legislation. It is a small step back toward the Progressive Era a century ago – the era that set America on the path of prosperity that made the 20th century the American century.

Michael Hudson is a former Wall Street economist. A Distinguished Research Professor at University of Missouri, Kansas City (UMKC), he is the author of many books, including Super Imperialism: The Economic Strategy of American Empire (new ed., Pluto Press, 2002) He can be reached via his website, mh@michael-hudson.com

http://www.counterpunch.org/hudson11262008.html

Obama’s “left” cheerleaders and the right-wing transition

2008-11-25T09:35:00.001-08:00

Obama’s “left” cheerleaders and the right-wing transition

22 November 2008

The increasingly right-wing character of the transition being organized in preparation for President-Elect Barack Obama's inauguration in January has elicited expressions of concern from the middle-class "left." This milieu, whose views are reflected in publications like the Nation magazine, played a significant role during the election campaign in promoting Obama's candidacy and the Democratic Party as vehicles for fundamental political and social change.

The past ten days have served to expose the real content of Obama's "change you can believe in." First came the appointment of Rahm Emanuel, the right-wing Democratic congressman and millionaire investment banker, as chief of staff. No sooner was he tapped for the post than Emanuel pledged to the Wall Street Journal that the Obama White House would "stand up to" the strengthened Democratic majorities in Congress.

Then came news that the transition teams at the Pentagon and CIA were headed, respectively, by supporters of the Iraq war and CIA veterans who were complicit in policies of torture and extraordinary rendition as well as in fabricating the phony intelligence used to promote the war against Iraq.

On Friday, persistent reports that Obama has tapped Senator Hillary Clinton whom he pilloried on the campaign trail for her vote in favor of the Iraq invasion, for his secretary of state, and that he intends to retain Robert Gates, the champion of the "surge" in Iraq, as defense secretary, were joined by reports that he will shortly announce his choice of New York Federal Reserve President Timothy Geithner for treasury secretary. The news that one of the key architects of the government bailout of the banks will head Obama's Treasury Department sent stock prices on Wall Street soaring.

These developments, combined with the coterie of bankers and Washington insiders that is heading Obama's transition, and the army of ex-Clinton-officials-turned-corporate-lobbyists who are trooping back into official Washington, are providing a preview of the administration that will take office just two months from now.

What is taking shape is a government that represents continuity with the last eight years far more than change. Its personnel and the policies with which they are identified spell a continuation of wars of aggression abroad and domestic policies that defend the interests of America's financial elite at the expense of the broad mass of working people.

The conditions are being created in which illusions fostered by Obama's rhetoric about "hope" and "change" will be dashed and a period of tumultuous struggles, driven by the economic crisis, will inevitably arise.

Of course, there are illusions and there are illusions. Millions of American working people went to the polls November 4 and voted for Obama with the aim of putting an end to two criminal wars and to express their anger over policies at home that have led to unprecedented social inequality and the deepest economic crisis since the Great Depression.

Then there are those who make a political profession out of deluding themselves and fostering illusions among others in order to support the Democratic Party and the profit system which it defends. This is the political specialty of the Nation, which has long been a central organ of left liberalism in America.

Its columnists are finding the job of peddling illusions in Obama more difficult in light of the appointments and statements surrounding the transition, and are expressing concern. At the heart of their worries is the fact that Obama is moving sharply and openly to the right even as the crisis gripping American capitalism is creating conditions for a sharp turn to the left among American working people, students and youth.

Nation columnist Tom Engelhardt makes the observation in a piece published Wednesday that, given the appointments thus far, "you might be forgiven for concluding that Hillary Clinton had been elected president in 2008." He cites a Politico.com article reporting that "thirty one of the 47 people thus far named to transition or staff posts have ties to the Clinton administration, including all but one of the members of his [Obama's] Transition Advisory Board."

Nonetheless, Engelhardt goes on to describe Obama himself as "nothing short of a breath of fresh air" and voices the "hope that, as the good times roll (or even in bad times) for Democrats, he keeps his equilibrium amid the usual Washington consensual pressures."

Similarly, Robert Scheer, the former Los Angeles Times columnist who writes for the Nation, voices concerns over the role of Obama advisor Zbigniew Brzezinski in setting policies pointing toward escalating confrontation with Russia. "It is disquieting in the extreme that some of his [Obama's] closest advisers are inveterate hawks with a history of needlessly provoking tension with the Russians during the Cold War days," writes Scheer. He goes on to express anxiety over the reported offer to keep Gates, a former Brzezinski aide who has supported a hard line against Russia, as Pentagon chief.

"I know, Obama is not yet in office," writes Scheer. "I voted for him with enthusiasm in part because he does seem to have transcended the preoccupations of the cold war. But as a buyer, I have to beware of those unrepentant Democratic hawks now hovering."

The essential conception expressed in both columns is the same: that in the aftermath of the election, the "progressive" Obama is in danger of falling under the sway of right-wing aides and advisers, shifting him off the path of "change."

This is nonsense. Obama's entire candidacy was crafted by these "advisers" as a means of effecting tactical changes in the pursuit of US imperialist interests while masking the right-wing character of the political agenda that they now intend to foist upon the American people.

To anyone who paid serious attention to what Obama was saying and doing in the course of the election campaign—his vote to expand domestic spying and grant immunity to the telecoms, his statements threatening war against Iran and Pakistan and vowing undying fealty to Israel, his admission that his Iraq withdrawal plan would leave a "residual force" of tens of thousands of troops in the country, while its pace would be set by commanders on the ground, and his support for the $700 billion Wall Street bailout—the character of the transition should hardly come as a surprise.

The thrust of the political campaign being waged by the likes of the Nation is to subordinate any emerging struggles by American working people to the incoming Obama presidency.

This is spelled out by another long-time Nation columnist, Frances Fox Piven, in a November 13 article entitled, "Obama Needs a Protest Movement." While hailing Obama's victory at the polls as a "rightful cause for jubilation," Piven takes a somewhat more clear-eyed approach to the president-elect's character.

"Let's face it: Barack Obama is not a visionary or even a movement leader," she writes. Rather, she describes him as a "skillful politician" who "has to conciliate ... in realms dominated by big-money contributors from Wall Street, powerful business lobbyists and a Congress that includes conservative Blue Dog and Wall Street-oriented Democrats." It's not Obama's fault, she adds, "It's simply the way it is."

One could not ask for a clearer statement of the prostration of these not-so-left liberal circles before the corporate-controlled two-party system.

Piven suggests that, Obama's limitations notwithstanding, popular expectations of change upon his taking office can create conditions for "authentic bottom-up reform."

She goes on to draw a parallel between Obama's election and that of Franklin Delano Roosevelt in 1932, making the point that FDR took office based upon a conventional, conservative Democratic Party program. Referring to the mass strike movements and social struggles of the 1930s, however, she argues that "the rise of protest movements forced the new president and the Democratic Congress to become bold reformers." Protest, she suggests, can produce similar results from Obama.

There are two obvious problems with this argument. The first is that the objective position of American capitalism is far weaker than it was in the 1930s, when Washington remained a creditor nation, enjoying trade surpluses, while US manufacturing dominated the global markets. It was from this position of relative strength that Roosevelt was able to grant limited reforms in the face of such mass, and at times semi-insurrectionary struggles as the Toledo Autolite strike, the Minneapolis general strike and the San Francisco general strike in 1934 and the subsequent sit-down strikes in the auto industry.

The present crisis is the outcome of the protracted decline of American capitalism, which is massively indebted, has seen a decades-long decimation of its manufacturing base and whose financial system has become the destructive engine of a deepening worldwide slump. There is no modern New Deal forthcoming from an Obama administration.

Moreover, the one implemented by Roosevelt more than 70 years ago failed to overcome the Depression. That was achieved only through a second world war that annihilated millions of people. With the political assistance of the trade union bureaucracy and the Stalinist Communist Party, however, the Roosevelt administration did succeed in staving off the threat of socialist revolution.

That period holds stark lessons for the coming struggles of the American and international working class. Unless working people are able to advance their own, socialist alternative to capitalism, the "solution" to the present crisis will be found along similar lines of a re-division of the world market through mass slaughter.

This is what makes the politics of the Nation and similar political tendencies so pernicious. The struggle against war and deepening attacks on social conditions can be advanced only through a decisive break with the Democratic Party and the political illusions promoted by tendencies such as the Nation.

Not by mere protest and pressure, but only by building its own political party, armed with a socialist program aimed at uniting workers in a common international struggle against capitalism, can the working class advance its own progressive solution to the catastrophe that the unfolding capitalist crisis threatens to unleash upon humanity.

Bill Van Auken

http://www.wsws.org/articles/2008/nov2008/pers-n22.shtml

The Undiagnosed “Cancer” that Has Killed Capitalism

2008-11-23T10:37:00.000-08:00

The Undiagnosed “Cancer” that Has Killed Capitalism

by Doug Page / November 22nd, 2008

In the 1920s, Henry Ford perceived a fundamental flaw in capitalism and when he suddenly started paying his auto workers the then extremely generous sum of $5 per day. A unilateral raise of this magnitude was shocking at that time. Ford did this so that his employees would have enough money to buy his Fords. Ford had recognized a fundamental fatal defect of capitalism:

Capitalist Employers throughout the capitalist market can not pay their employees enough so that employees are able to purchase all of the products that capitalism can produce and still make a profit. Without profit there can be no capitalism.

Think about this. If we have an economic system, capitalism, where almost all humans are employees, who, if not employees, will purchase capitalism’s products? Hunters and gatherers? Self employed farmers? What group in society has cash to purchase what capitalism produces? Are there enough money lenders and capitalist employers with enough profit and earned interest to purchase all of the production? Experience now clearly demonstrates that there are not. These sources have far more money than they have needs so their wealth simply is held in multiple dwellings, jet airplanes and other luxuries, investments, loans, and cash. This is not a left-right problem, nor a conservative- liberal ideological problem. It is simply a fact. It is an inevitable, unavoidable result of the core dynamic of capitalism. That core dynamic is:

A person with money hires a person with little or no money for the lowest possible wage to earn as much profit as possible for the person who already has money.

It is this profit generating dynamic over decades of time and repeated by hundreds of employers that has created the immense disparity of wealth and power between the top 1% of our nation and the 95% of us at the bottom. This top 1% has as much wealth and income as the bottom 95% of us. The purchasing power of the bottom 95% of us would be vastly enhanced if the wealth of the top 1% was spread more equitably among us all. The fatal defect of capitalism would be bridged. We employees could then purchase all of the products that our labor produced. The fact of the almost unimaginable wealth of the top 1% is little known and is largely suppressed by the capitalist media. The capitalist media ridicules as “class warfare” any thoughts we may have about the injustice and pain we experience because of this disparity of wealth.

So we have many millions of persons on the planet who have legitimate needs, and these same persons are willing and anxious to work. Why cannot our work meet our needs? There are insufficient jobs because employers cannot hire all of us and still make a profit. Capitalism gives us only one way to meet our needs. We must go to work for somebody who can make a profit on our labor. This fundamental flaw of capitalism perceived by Henry Ford is now causing our capitalism to implode, to destroy itself. Henry Ford was unique among the planet’s employers in perceiving this flaw and acting to correct it within his own company.

So why do not all employers follow Ford’s example? One reason is that the competition by those employers who continued to pay the lowest possible wage would quickly drive the generous employer out of business. Another reason is the simple greed by capitalists to get as much profit as they can as quickly as they can. Employers as a group would have to act together cooperatively and all of them would have to pay enough wages so that employees could buy capitalism’s products. However even if all employers cooperated and paid high wages, capitalism would implode sooner or later because of the large sums drawn out by private employers in the form of profits, CEO compensation, and dividends, and the large sums drawn out by private money lenders for interest on the money loaned for the production process. It is interesting to note that the very successful Mondragon Co-ops of Basque Spain have sustained themselves and expanded over the last 40 years in part because the workers are the owners and they limit the pay of the top managers ordinarily to no more than 3 times the pay of the production workers. The Mondragon Co-ops also have their own Co-op bank to supply their credit.

Capitalism can thus produce far more than can be sold at a profit. Capitalists curtail production to avoid loss of profit. If there is no profit to be made, there can be no capitalism. There remain millions of people with legitimate needs who are anxious to work, but there is no work, because there is no profit to be made. For example, the world wide auto industry has the capacity to produce far more cars than can be sold at a profit. This defect of capitalism existed long before the current mortgage bubble and crisis. Auto plants around the world were operating at less than full capacity because there was not a demand by buyers for all of the cars that could be produced. We have some human needs, for example health care that simply cannot be adequately met by capitalists and still make a profit. If there is no profit to be made, capitalists will simply not provide health care.

This fundamental defect of capitalism that has caused it to implode is a truth that is totally suppressed in our capitalist culture. We do not learn of this truth in Econ 1 or even in Econ 101. We do not learn of this truth from our capitalist media.

Given this truth, and the culture wide failure to diagnose the problem we must look at the false solution that capitalists select for us.

Secretary Paulson, Fed Chairman Bernanke and our elected Democratic leaders identify the problem as a “credit crisis,” or a “liquidity crisis,” and they propose that we employees tax ourselves so as to pay billions of dollars to the bankrupt Wall Street investment banks in the hope that they will again extend credit to employers and liberal credit cards to consumers. They seek to supply the credit to enable capitalists to seek profit making opportunities. (The fact that the Wall Street investment banks have not chosen to use the gifts of our tax money for this purpose so far, while criminal, is irrelevant to the larger problem.) That larger but totally ignored problem is Henry Ford’s 1920s problem. That problem is that there is insufficient sustainable demand for all capitalists can produce at a profit. Human wants are insatiable, and if we humans had the money to buy, credit would flow like a quickly melting glacier. The proposed solution does nothing to provide jobs and wages, and nothing therefore to create demand for capitalism’s products. If we were not so scared, we consumer employees could borrow more money for a short time and thus be able to buy products, but this could not go on very long. Most of us are already maxed out on credit. Sooner or later we have to pay the borrowed money back.

Wall Street and our Democratic elected officials are vainly trying to rejuvenate a dead system. Lending or giving the dead system more money simply does not solve the fatal defect. The fatal defect is neither diagnosed nor dealt with. The truth is hidden behind a culture wide taboo so that it cannot be discussed in the main stream.

The solutions so far advanced seek only to create profit making opportunities for capitalists. These solutions ignore capitalism’s fatal defect. They do absolutely nothing to correct the fatal defect. Capitalism cannot solve the dilemma identified by John Steinbeck in his 1939 book, Grapes of Wrath: “there is work to do, and people to do it, but them two cannot get together, and there is food to eat and people to eat it, but them two cannot get together either.” Even Franklin Roosevelt failed to diagnose this fatal flaw of capitalism in his New Deal when he sought to save capitalism with its profit making opportunities while providing temporary “band-aid” type remedies for those who had no work.

We human being can work together to meet our needs, on a small scale by simply bartering. We can meet our sustainable needs on a larger community scale with Mondragon Co-ops, and on a nation wide scale by causing our government to act solely in our interest to be our lending bank at little or no interest, to supply co-ops, small businesses, partnerships, and self employment, and as our employer of last resort. We can no longer afford profit making employers and money lenders who siphon off the increase in value that our work creates. Because of this fatal defect, our capitalism can be thought of as a huge tornado which having sucked us dry, then dies itself. Or it can be thought of as a cancer that kills those of us who are its workers and consumers, and having killed its host, and then dies itself.

http://www.dissidentvoice.org/2008/11/the-undiagnosed-%e2%80%9ccancer%e2%80%9d-that-has-killed-capitalism/

"Brand Obama," "Brand Usa," And "The Audacity Of Marketing": Some Candid Reflections at Advertising Age

2008-11-19T09:39:00.000-08:00

"Brand Obama," "Brand Usa," And "The Audacity Of Marketing": Some Candid Reflections at Advertising Age

November 19, 2008 By Paul Street

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The election and nomination process is the brand re-launch of the year. Brand USA. It's just fantastic.

-- David Brain. CEO of the global public relations firm Edelman Europe, Middle East and Africa

The last eight years broke faith in Brand America, and people want that faith restored.

-- Carolyn Carter, London-based president and CEO of the global public relations firm Grey Group Europe, Middle East, and Africa

To my campaign manager David Plouffe, my chief strategist David Axelrod, and the best campaign team ever assembled in the history of politics - you made this happen, and I am forever grateful.

-- Barack Obama, Victory Speech, November 4, 2008

Twenty-three years ago the clever anti-television writer Neil Postman dissected the authoritarian nightmare that is modern political advertising in the United States. The television commercial, Postman noted, is the antithesis of rational popular consideration, which leading early philosophers of western economic and political life took to be the desirable and enlightened essences of "capitalism" and "democracy."

"Its principle theorists, even its most prosperous practitioners," Postman observed, "believed capitalism to be based on the idea that both buyer and seller are sufficiently mature, well-informed, and reasonable to engage in transactions of mutual self-interest...The theory states, in part, that competition in the marketplace requires that the buyer not only knows what is good for him but also what is good. If the seller produces nothing of value, as determined by a rational marketplace, then he loses out. It is the assumption of rationality among buyers that spurs competitors to become winners, and winners to keep on winning. Where it is assumed that a buyer is unable to make rational decisions," Postman elaborated, "laws are passed to invalidate transactions, as, for example, those which prohibit children from making contracts. In America, there even exists in law a requirement that sellers must tell the truth about their products, for if the buyer has no protection from false claims, rational decision-making is seriously impaired."

"The distance between rationality and advertising is now so wide," Postman argued, "that it is difficult to remember that there was once a connection between them. Today, on television commercials, propositions are as scarce as unattractive people."

The modern television commercial, Postman noted, makes "hash" out of the capitalist assumption of intelligent and informed consumer sovereignty. It undercuts the notion of rational claims, based on serious propositions and evidence. In the place of cogent language and logical discourse it substitutes evocative imagery and suggestive emotionalism.

When political success came to revolve largely around the same manipulative anti-enlightened methods prevalent in commodity advertising, Postman observed, the same sorry fate fell to "capitalist democracy's" assumption of rational and informed voters. Like the bamboozled commodity purchasers propagandized by radio and television ads, voters are subjects of persuasion through deception instead of through respectful and sensible communication. Candidate marketing makes hash out of the myth of voter sovereignty in "democratic" politics [1].

"A CASE STUDY IN AUDACIOUS MARKETING"

This is why you won't hear Barack Obama's progressive and educated supporters saying much about the interesting fact that Obama was recently selected by Association of National Advertisers (ANA) as the "Marketer of the Year." According to ANA trade journal Advertising Age two weeks before the presidential election, "Sen. Barack Obama has shown he's already won over the nation's brand builders."

Angus Macaulay, the vice president of Rodale Marketing Solutions, told Advertising Age that Obama's campaign was "something we can all learn from as marketers." AOL "Platform A" President Linda Clalirizio praised Obama for doing "a great job of going from a relative unknown to a household name to being a candidate for president." [2]

Six days after the election, Advertising Age heralded "Brand Obama" as a "case study in audacious marketing." The journal praised Obama's "messaging consistency" and "communications success," placing special emphasis on the Obama campaign's "boldness, that trait that happens to be the most important for anyone trying to build a brand now, in a chaotic time when many will be tempted to shelve innovation and creativity to take u defensive postures."

"And at same time Mr. Obama was building his brand with grand gestures," the journal added, "his campaign demonstrated an understanding of ground-level marketing strategies and tactics, everything from audience segmentation and database management to the creation and maintenance of online communities."[3]

"A MAN FOR ALL SEASONS"

"The result," Advertising Age exults, "was a brand that was big enough to be anything to anyone yet had an intimate-enough feel to inspire advocacy that raised funds at record-breaking, almost obscene levels..."

Quite right. Early in his campaign, Obama pretended to complain that he had become "a blank sheet on which people of vastly different political stripes project their own views." Reflecting on his apparent ability to win approval from people of wildly divergent perspectives, Obama claimed to worry that "everybody's projecting - particularly the way I came in - everybody's projecting their own views onto [me]."[4] The danger, he sensed, was that that some of his fans were going to become disappointed when they found out that he did not in fact represent an indefinite spectrum of viewpoints and interests and actually held positions many of them rejected. A related risk was that people would jump off "Senator Good Vibes'" ship of "Hope" once they realized that his real-world version of "change" and "unity" would mean some difficult decisions, choices, and sacrifices in accord with his underlying commitment to existing domestic and global disparities and institutions.

The irony behind Obama's reflection was that Obama and his media-savvy handlers deliberately and naturally pursued universal appeal in pursuit of victory under America's winner-take all electoral system, where corporate- and media-crafted candidate image tends to trump substantive policy positions and ideological identifications. As Rolling Stone political writer Matt Tabbai noted in a February 2007 article bearing the provocative title "Obama is the Best BS Artist Since Bill Clinton:"

"The Illinois Senator is the ultimate modern media creature...his entire political persona is an ingeniously crafted human cipher, a man without race, ideology, geographic allegiances, or, indeed, sharp edges of any kind. You can't run against him on the issues because you can't even find him on the ideological spectrum. Obama's ‘Man for all seasons' act is so perfect in its particulars that just about anyone can find a bit of himself somewhere in the candidate's background, whether in his genes or his upbringing...his strategy seems to be to appear as a sort of ideological Universalist, one who spends a great deal of rhetorical energy showing that he recognizes the validity of all points of view, and conversely emphasizes that when he does take hard positions on issues, he often does so reluctantly... His political ideal is basically a rehash of the Blair-Clinton ‘third way' deal, an amalgam of Kennedy, Reagan, Clinton and the New Deal; he is aiming for the middle of the middle of the middle." [5]

Acting in accord with the longstanding dance of America's Winner Take All politics, the media-savvy Obama Team cultivated his "blank sheet" appeal by tailoring Obama's message in flexible, chameleon-like accord with his own shifting audiences. Claiming to stand above "ideology" and partisan conflict, Obama bashed Wal-Mart and upheld the right to organize unions when talking to labor audiences but extolled free trade," "free markets," and entrepreneurial values when addressing "the business community." He invoked the legacy of the Civil Rights Movement when talking to black audiences but downplayed racial justice when speaking to white farmers and workers. He embraced capitalism's supposed virtues when talking to the rich and powerful but seemed stress its "drawbacks" when addressing the working class and poor. He told liberal and progressive primary voters that they could "joint the movement to end the war [on Iraq]" and shift U.S. policy towards peace and negotiation but made sure to tell The Council on Foreign Relations of his belief in the essential nobility of U.S. war aims and empire and of his desire to advance American global supremacy through gigantic military expenditures and a ready willingness to use force, unilaterally when "necessary," to "protect the American people and their vital interests." [6]

He suggested to progressive Iowa and New Hampshire voters that he was a populist outsider out to change the nation's corrupt, corporate-dominated culture but his campaign was staffed by and linked to Washington and corporate insiders. His current transition team is loaded with Washington political and policy veterans and his cabinet and administration more broadly will be packed with big players from the Bill Clinton regime. [7]

Hillary Clinton was a "polarizing insider" in Obama's campaign rhetoric. The President-Elect is courting her to be the next Secretary of State.

The campaign and candidate's conscious pursuit of "universalist" ideological hermaphroditism was strongly displayed in Obama's book The Audacity of Hope. Released in the fall of 2006, this bestselling marked the unofficial beginning of his presidential candidacy. In Steve Sailer's words, it "show[ed] his wordsmith's facility at eloquently restating the views of both his liberal supporters and his conservative opponents, leaving implicit the suggestion that all we require to resolve these wearying Washington disputes is to find a man who understands us - a reasonable man, a man very much like, say, Obama - and turn power over to him." [8]

At the same time, the Obama campaign clearly spent a considerable amount of time, money, and energy cultivating their candidate's pure celebrity. It relished and profited from his emergence as a "BaRockstar" - a mass-cultural as well as mass-political persona crafted around the vague and amorphous symbols of "Hope," "Change," and "Unity" to absorb the diverse and often confused aspirations and dreams of a mass constituency containing numerous and often contradictory values and positions.

"NOT BUSH": THE SELLING OF THE PRESIDENT

It worked, to say the least. As mainstream journalist Ryan Lizza recently noted in an interesting New Yorker reflection on "How Obama Won," Obama's media and campaign managers took the "tactical view" that "all that was wrong with the United States could be summarized in one word: Bush." Further:

"The clear alternative, then, was not so much a Democrat or a liberal as it was anyone who could credibly define himself as ‘not Bush.' [Obama's legendary media strategist David] Axelrod had a phrase he often used to describe this approach: America was looking for ‘the remedy, not the replica.' The appeal of this strategy was that, with only minor alterations, it could work in the primaries as well as in the general election, and that, in turn, allowed Obama to finesse the perpetual problem of Presidential politics: having one message to win over the a party's most ardent supporters and another when trying to capture independents and ‘up-for-grabs' voters - the voters who decide a general election." [9]

The key to success is deception and mushiness through mass marketing. Obama's media strategist David Axelrod and Obama's campaign manager David Plouffe performed masterfully well in blazing this path to victory.

The most genuinely accurate thing Obama said in his highly nationalist and propagandistic November 4th acceptance speech was that he owed his victory to Axelrod, Plouffe, and the rest of his top campaign staff. "You made this happen," Obama rightly told them, "and I am forever grateful." [9A]

Obama's handlers sold him as a "new" brand. They brilliantly advertised him as the "not Bush" just like Pepsi once expanded as the "not Coke" or like Burger King was once the up-and-coming "not McDonald's." They did it with the latest and best selling techniques.

"The 2008 Obama presidential run," noted Bruce Dixon in February of 2008,"may be the most slickly orchestrated marketing machine in history." [10] According to the campaign's financial report to the Federal Election Commission. Obama had by then spent $52 million on "media, strategy consultants, image-building, marketing research and telemarketing." As Pam Martens noted in early March of 2008:

"The money has gone to firms like GMMB, whose website says its "goal is to change minds and change hearts, win in the court of public opinion and win votes" using ‘the power of branding - with principles rooted in commercial marketing,' and Elevation Ltd., which targets the Hispanic population and has ‘a combined experience well over 50 years in developing and implementing advertising and marketing solutions for Fortune 500 companies, political candidates, government agencies.' Their client list includes the Department of Homeland Security. There's also the Birmingham, Alabama- based Parker Group which promises: ‘Valid research results are assured given our extensive experience with testing, scripting, skip logic, question rotation and quota control ... In-house list management and maintenance services encompass sophisticated geo-coding, mapping and scrubbing applications.' Is it any wonder America's brains are scrambled?" [11]

Besides contracting with sophisticated big client corporate marketing firms like GMMB and the Parker Group, the Obama operation grew its own considerable internal, sophisticated, and vertically integrated mass market research and sales capacities for identifying and seducing political consumers (voters) susceptible to "brand Obama." When ABC News anchorman Charles Gibson visited Obama's sprawling Chicago office seven days before the Ohio and Texas primaries, he observed the quiet hum of a corporate sales office. "The tone of the campaign headquarters," Gibson noted, was "strikingly serene." He observed "33,000 square feet of downtown Chicago office space and no one is sure exactly how many staff....The 20-somethings in the New Media department," Gibson said, "are responsible for everything from designing merchandise sold on the Web site to blogging to unloading videos and managing chat rooms." By Gibson's account, "the money flows through the computers, a steady infusion of cash in $10, $25, and $50 dollars. Obama's media maven Axlerod told Gibson, "It's strange that a computer terminal can make politics more intimate, but that's what happened." [12]

In Dixon's judgment, however, the Obama campaign's massive investment in selling their candidate was "not a good thing. Marketing," Dixon noted, "is not even distantly related to democracy or civil empowerment. Marketing is about creating emotional, even irrational bonds between your product and your target audience." [12A]

It's nothing new. Astute commentators since at least the Progressive Age (1890-1914) have noted that campaigns market U.S. candidates like they sell cars, candy, and toothpaste.

But as Lizza suggests, the problem has origins prior to the corporate and mass consumerist age. "By 1840," distinguished American historian Eric Foner has noted, "the mass democratic politics of the Age of Jackson had absorbed the logic of the marketplace. Selling candidates and their images was as important as the positions for which they stood."[13]

The two-party political system that emerged from the U.S. Republic's blueprint does not encourage the development of parties with clear ideological and policy differences or strong relationships between voter choices and citizens' actual positions on key policy issues. It leads rival candidates to blur their policy and ideological distinctions in the quest to win those all-important voters in the middle, focusing instead on personal qualities rather than hard policy and ideological differences. [14]

This harsh reality, combined with the almost complete absence of serious left political choices and furthered by the corporate and visual-imaginary takeover of much of the U.S. electoral process in the 20th century, goes a long way towards explaining why substantive policy issues tend to be badly downplayed in U.S. campaigns. It also explains much of the desperation and myopia that leads many ostensibly progressive voters and activists to back corporate-imperial candidates guaranteed to betray populist and peaceful promises "upon the assumption of power." [15]

CHE GUOBAMA: REBRANDING AMERICA WITH "A CLEAN SLATE"

Before he could be in a position to be sold (brilliantly) on the mass American electoral market, of course, Obama first needed to sell himself to the national political and business elite that controls much of the political action behind the scenes. That sales job did not involve deceptive one- or two-message commercials and slogans. It was about candid, up-close meetings in which the candidate made it clear that he posed no substantive challenge to dominant domestic and imperial structures and doctrines. That earlier marketing project, ably recounted by Ken Silverstein and David Mendell [16], took place in late 2003 and 2004 and made possible the first great rolling out of Brand Obama during the senator's instantly famous keynote address to the Democratic National Convention in late July of 2004.[17] It has continued behind the scenes ever since, with Obama continually reassuring his many big-money sponsors and corporate media enthusiasts that he is not some sort of starry-eyed idealist about to seriously question the interrelated hierarchies and ideologies of corporate-managed state capitalism, empire, and inequality.

The basic Obama message to the nation's ruling class - NOT advertised to the electorate - is that he is safe to concentrated power centers even if occasional populist-sounding slivers make their way into the construction of "Brand Obama." More than that, the campaign's message to the elite has included the promise that Obama will wrap reigning institutions and dogma in fake-progressive rebel's clothing and help repair the damage done to the United States' global public relations image by the vicious and clumsy post-9/11 excesses of the brazenly imperial Cheney-Bush gang.

Consistent with that hope, Advertising Age hails President-Elect Obama for producing "An Instant Overhaul for Tainted Brand America." The journal quotes David Brain, CEO of the global public relations firm Edelman Europe, Middle East and Africa, on how "the election and nomination process is the brand relaunch of the year. Brand USA. It's just fantastic." [18]

Nick Ragone has an interesting resume. He is both "a presidential historian" and the senior VP of client development at the leading global advertising firm Omnicom Group's Ketchum. "We've put a new face on [America] and that face happens to be African-American," Ragone told Advertising Age. "It takes a lot of the hubris and arrogance of the last eight years and starts to put it in the rearview mirror for us." [19]

Rigone might want to review Orwell's dystopian novel Nineteen Eighty Four on the deletion of unpleasant history - sent "down the memory hole" - by totalitarian communication authorities. "Rearview mirror" is code language for Orwellian revisionism.

Then there's the interesting commentary of Harvard Business School professor John Quelch. Quelch is a former "WWP Group" (a global advertising firm) board member and the co-author of a recent book with an oxymoronic title: "Greater Good: How Good Marketing Makes for Better Democracy."

According to Welch, echoing Orwell, "The election result zero-bases the image of the United States worldwide. We have a clean slate with which to work," Welch told Advertising Age. "Let us hope the opportunity is not squandered the way it was after 9/11." [20]

According to Carolyn Carter, the London-based president and CEO and Grey Group Europe, Middle East and Africa (creator of the popular teeth-rotting "Coke Zero" ad campaign for Northern Europe), "The last eight years broke faith in Brand America, and people want that faith restored." [21]

Enter the openly imperial Obama, who is "almost like Che Guevera, in a good way," according to Foreign Policy magazine's web editor Blake Hounshell. "He has icon status," Hounshell explains, "with the all the art around the world of his face." The difference, of course, is that Che boldly inspired radical challenges to the American Empire but Obama inspires captivation with the corporate-imperial U.S. and its supposed self-reinvention as a land of progressive democracy and endless possibility. According to Scott Kronick, global marketing firm "Ogilvy PR's" Beijing-based president, Obama's triumph "send a strong message to the world that despite what many people believe and feel...America can be very open, democratic, and progressive."[22]

"EXPECTATION CALIBRATION AND EXPECTATION MANAGEMENT"

It's not all good for the masters of American Empire and Inequality, however. The Obama-based "rebranding of America" in the wake of the long proto-fascistic, arch-plutocratic, and messianic-militarist Cheney-Bush nightmare comes with heightened popular product expectations at home and abroad. The risks and likelihood of disappointment and betrayal are high. Many American and other world citizens can be counted on to take "Brand Obama" and the refurbished "Brand USA" and give them meanings that do not accord very well with the U.S. power elite's agenda. Rising and betrayed expectations are the stuff of actual social revolutions (something rather different than marketing revolutions), as the left historian Barrington Moore once argued. For these and other reasons, Obama will be relying heavily on his marketing and public relations experts to keep the bewildered citizenry's hopes and dreams properly constrained and downsized. Popular thought coordination through mass marketing will be important to the governance period as well as the election phase of the Obama ascendancy. As Obama's early and excessively candid foreign policy advisor and Harvard ally Samantha Power told the power-worshipping public affairs talk-show host Charlie Rose last February, "Expectation calibration and expectation management is essential at home and internationally."[23].

Chilling words but they signify nothing new in the long history of the dark science of "Taking the Risk out of [American] Democracy". [24]

Paul Street is a writer and activist in Iowa City. He is the author of

Empire and Inequality: America and the World Since 9/11 (Boulder, CO: Paradigm, 2004); Segregated Schools: Educational Apartheid in the Post-Civil Rights Era (New York: Routledge, 2005); Racial Oppression in the Global Metropolis (New York, 2007), and most recently Barack Obama and the Future of American Politics (Boulder, CO: Paradigm, September 2008), which can be ordered at http://www.paradigmpublishers.com/Books/BookDetail.aspx?productID=186987.

Paul can be reached at paulstreet99@yahoo.com.

NOTES

1. Neil Postman, Amusing Ourselves to Death: Public Discourse in the Age of Show Business (New York: Penguin, 1985), 126-132.

2. "Obama Wins...Ad Age's Marketer of the Year," Advertising Age (October 17, 2008), read at http://adage.com/print?article_id=131810

3. "Barack Obama and the Audacity of Marketing," Advertising Age (November 10, 2008), read at http://adage.com/print?article_id=132351

4. As quoted in David Mendell, Obama: From Promise to Power (New York: HarperCollins, 2007), 12, 310.

5. Matt Tabai, "Obama is the Best BS Artist Since Bill Clinton," RollingStone.com. posted on AlterNet (February 14, 2007), read online at http://www.alternet.org/story/48051.

6. For many details and sources, see Paul Street, Barack Obama and the Future of American Politics (Boulderm CO: Paradigm, 2008), 1-163.

7. For a useful summary of Obama administration insiders, see Stephen Lendman, "Obama Mania," ZNet (November 17, 2008).

8. Steve Sailer,"Obama's Identity Crisis," The American Conservative (March 26, 2007).

9. Ryan Lizza, "Battle Plans: How Obama Won," The New Yorker (November 15, 2008).

9A. Barack Obama, "Remarks on Election Night," read at www.barackobama.com/2008/11/04/remarks_of_presidentelect_bara.php. For reflections on Obama's speech as a form of system-legitimizing propaganda, see Paul Street, "Barack Obama: Empire's New Clothes," Black Agenda Report (November 12, 2008), read at http://www.blackagendareport.com/index.php?option=com_content&task=view&id=879&Itemid=1

10. Bruce Dixon, "Holding Barack Obama Accountable," Dissident Voice (February 15, 2008), read at www.dissidentvoice.org/2008/02/holding-barack-obama-accountable/

11. Pam Martens, "The Obama Bubble: Why Wall Street Needs a Presidential Brand," Black Agenda Report, March 5, 2008.

12. ABC News, "Backstage at Barack Obama's Headquarters," February 28, 2008.

12A Dixon, "Holding Barack Obama Accountable." I would argue (somewhat differently from Dixon) that the mass-marketing of candidates is in fact intimately related to democracy in that it is a natural effort on the part of concentrated power to pervert and subvert it.

13. Eric Foner, Give Me Liberty! An American History, volume 1 (New York: WW Norton, 2005), 377.

14. G. William Domhoff, Who Rules America? Power, Politics, and Social Change (New York: McGraw Hill, 2006), 139.

15. Edward S. Herman, "Democratic Betrayal," Z Magazine (January 2007).

16. Ken Silverstein, "Barack Obama, Inc.: The Birth of a Washington Machine," Harper's (November 2006); Mendell, Obama, 248-49.

17. A very conservative speech by the way. See Paul Street "Keynote Reflections," (Featured Article), ZNet Magazine (July 29th, 2004), available online at http://www.zmag.org/content/showarticle.cfm?SectionID=41&ItemID=5951.

18. "An Instant Overhaul for Tainted Brand America," Advertising Age (November 10, 2008), read at http://adage.com/print?article_id=132352

19. Quoted approvingly in "An Instant Overhaul."

20. Quoted approvingly in "An Instant Overhaul."

21. Quoted approvingly in "An Instant Overhaul."

22. Quoted approvingly in "An Instant Overhaul."

23. The Charlie Rose Show, PBS, February 21, 2008. See www.charlierose.com/shows/2008/02/21/2/a-conversation-with-samantha-power

(accessed March 1, 2008). For some dark reflections on Charlie and Samantha's chat, see Paul Street, "‘Calibrating' HOPE in the Effort to ‘Patrol the Commons': Samantha Power and the Hidden Imperial Reality of Barack Obama," ZNet (February 26, 2008), read at www.zcommunications.org/znet/viewArticle/16640. Thanks to David Peterson for alerting me to the Power comment.

24. To steal the title of Alex Carey's important book: Taking the Risk Out of Democracy: Corporate Propaganda versus Freedom and Liberty (Urbana, IL" University of Illinois Press, 1997). "The twentieth century," Carey noted, "has been characterized by three developments of great importance: the growth of democracy, the growth of corporate power, and the growth of corporate propaganda as a means of protecting corporate power against democracy."

AGAINST DIVERSITY

2008-11-10T07:41:00.000-08:00

WALTER BENN MICHAELS

AGAINST DIVERSITY

The importance of race and gender in the current us presidential campaign has, of course, been a function of the salience of racism and sexism—which is to say, discrimination—in American society; a fact that was emphasized by post-primary stories like the New York Times’s ‘Age Becomes the New Race and Gender’.1 It is no doubt difficult to see ageism as a precise equivalent—after all, part of what is wrong with racism and sexism is that they supposedly perpetuate false stereotypes whereas, as someone who has just turned 60, I can attest that a certain number of the stereotypes that constitute ageism are true. But the very implausibility of the idea that the main problem with being old is the prejudice against your infirmities, rather than the infirmities themselves, suggests just how powerful discrimination has become as the model of injustice in America; and so how central overcoming it is to our model of justice.

From this standpoint, the contest between Obama and Clinton was a triumph, displaying, as it did, both the great strides made toward the goal of overcoming racism and sexism, and the great distance still to go towards that goal. It made it possible, in other words, to conceive of America as a society headed in the right direction but with a long road to travel. The attraction of this vision—not only to Americans but around the world—is obvious. The problem is that it is false. The us today is certainly a less discriminatory society than it was before the Civil Rights movement and the rise of feminism; but it is not a more just, open and equal society. On the contrary: it is no more just, it is less open and it is much less equal.

In 1947—seven years before the Supreme Court decision in Brown v. Board of Education, sixteen years before the publication of Betty Friedan’s The Feminine Mystique—the top fifth of American wage-earners made 43 per cent of the money earned in the us. Today that same quintile gets 50.5 per cent. In 1947, the bottom fifth of wage-earners got 5 per cent of total income; today it gets 3.4 per cent. After half a century of anti-racism and feminism, the us today is a less equal society than was the racist, sexist society of Jim Crow. Furthermore, virtually all the growth in inequality has taken place since the passage of the Civil Rights Act of 1965—which means not only that the successes of the struggle against discrimination have failed to alleviate inequality, but that they have been compatible with a radical expansion of it. Indeed, they have helped to enable the increasing gulf between rich and poor.

Why? Because it is exploitation, not discrimination, that is the primary producer of inequality today. It is neoliberalism, not racism or sexism (or homophobia or ageism) that creates the inequalities that matter most in American society; racism and sexism are just sorting devices. In fact, one of the great discoveries of neoliberalism is that they are not very efficient sorting devices, economically speaking. If, for example, you are looking to promote someone as Head of Sales in your company and you are choosing between a straight white male and a black lesbian, and the latter is in fact a better salesperson than the former, racism, sexism and homophobia may tell you to choose the straight white male but capitalism tells you to go with the black lesbian. Which is to say that, even though some capitalists may be racist, sexist and homophobic, capitalism itself is not.

This is also why the real (albeit very partial) victories over racism and sexism represented by the Clinton and Obama campaigns are not victories over neoliberalism but victories for neoliberalism: victories for a commitment to justice that has no argument with inequality as long as its beneficiaries are as racially and sexually diverse as its victims. That is the meaning of phrases like the ‘glass ceiling’ and of every statistic showing how women make less than men or African-Americans less than whites. It is not that the statistics are false; it is that making these markers the privileged object of grievance entails thinking that, if only more women could crash through the glass ceiling and earn the kind of money rich men make, or if only blacks were as well paid as whites, America would be closer to a just society.

It is the increasing gap between rich and poor that constitutes the inequality, and rearranging the race and gender of those who succeed leaves that gap untouched. In actually existing neoliberalism, blacks and women are still disproportionately represented both in the bottom quintile—too many—and in the top quintile—too few—of American incomes. In the neoliberal utopia that the Obama campaign embodies, blacks would be 13.2 per cent of the (numerous) poor and 13.2 per cent of the (far fewer) rich; women would be 50.3 per cent of both. For neoliberals, what makes this a utopia is that discrimination would play no role in administering the inequality; what makes the utopia neoliberal is that the inequality would remain intact.

Worse: it is not just that the inequality remains intact but also—since it is no longer produced by discrimination—that it gets legitimated. Apparently American liberals feel a lot better about a world in which the top 20 per cent are getting richer at the expense of everyone else, as long as that top 20 per cent includes a proportionate number of women and African-Americans. In this respect, the ability of the Obama campaign to make us feel pretty good about ourselves while at the same time leaving our wealth untouched, is striking—as emblematized in his tax proposals which are designed to ask more of the ‘well-off’, but not of ‘the middle class’. Who are the well-off? ‘I generally define well-off’, says Obama’s website, ‘as people who are making $250,000 a year or more’. Which means that people making, say, $225,000 (who are in the 97th percentile of American incomes) are middle class; and that they deserve to be taxed in the same way as those in the 50th percentile, making $49,000. The headline of the website on which this appears is ‘I’m Asking You to Believe’. But asking the 40 per cent of Americans who live on under $42,000 to believe that they belong to the same middle class as the approximately 15 per cent who make $100,000–$250,000 may be asking too much. It is, however, what the Democratic Party has been asking them to believe for the last twenty years. Economic inequality did not grow as fast under the Clinton Administrations as it did under both the Bushes, but it grew. In 1992, when Clinton was elected, the bottom quintile made 3.8 per cent, the top quintile 46.9 per cent of all money earned; in 2000, at the end of his second term, the bottom quintile made 3.6 per cent, the top quintile 49.8 per cent.

The point, then, is that the nomination of Obama is great news for American liberals, who love equality when it comes to race and gender, but are not so keen when it comes to money. Liberals are the people who believe that American universities and colleges have become more open because, although they are increasingly and almost exclusively populated by rich kids, more of these today are rich kids of colour. (Obama’s popularity on college campuses is no accident—he is diversity’s pin-up.) And having helped keep the poor out of college and thus made sure they remain poor, liberals are now eager to point out that white voters with only a high-school education (the very people who do not go to Harvard) are disproportionately sceptical of Obama; they are happy to deplore the ignorant racism of people whom they have kept ignorant, and whose racism they have thus enforced. The Obama candidacy is great news, in other words, for a liberalism that is every bit as elitist as its conservative critics say—although not, of course, quite as elitist as the conservative critics themselves.

There is a real difference between Obama and McCain. But it is the difference between a neoliberalism of the centre and a neoliberalism of the right. Whoever wins, American inequality will be left essentially untouched. It is important to remember just how great that inequality is. A standard measure of economic inequality is through the Gini coefficient, where 0 represents perfect equality (everybody makes the same), and 1 perfect inequality (one person makes everything). The Gini coefficient for the us in 2006 was 0.470 (back in 1968 it was 0.386). That of Germany today is 0.283, that of France, 0.327. Americans still love to talk about the American Dream—as, in fact, do Europeans. But the Dream has never been less of a reality than it is today. Not just because inequality is so high, but also because social mobility is so low; indeed, lower than in both France and Germany. Anyone born poor in Chicago has a better chance of achieving the American Dream by learning German and moving to Berlin than by staying at home.

Whether debates about race and gender in American politics involve self-congratulation, for all the progress the us has made, or self-flagellation over the journey still to go, or for that matter arguing over whether racism or sexism is worse, the main point is that the debate itself is essentially empty. Of course discrimination is wrong: no one in mainstream American politics today will defend it, and no neoliberal who understands the entailments of neoliberalism will do so either. But it is not discrimination that has produced the almost unprecedented levels of inequality Americans face today; it is capitalism.

Put that way, however, it is clear that the characterization of the race–gender debate as ‘empty’ needs to be qualified. For the answer to the question, ‘Why do American liberals carry on about racism and sexism when they should be carrying on about capitalism?’, is pretty obvious: they carry on about racism and sexism in order to avoid doing so about capitalism. Either because they genuinely do think that inequality is fine as long as it is not a function of discrimination (in which case, they are neoliberals of the right). Or because they think that fighting against racial and sexual inequality is at least a step in the direction of real equality (in which case, they are neoliberals of the left). Given these options, perhaps the neoliberals of the right are in a stronger position—the economic history of the last thirty years suggests that diversified elites do even better than undiversified ones. But of course, these are not the only possible choices.

Vote independent or boycott the elections

2008-11-03T14:30:00.000-08:00

Vote independent or boycott the elections
By Reza Fiyouzat
Online Journal Contributing Writer

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How long shall we allow the system to kick us in the head, take our money, insult us after taking our money, and still expect us to participate in its frauds? With every passing year, the differences between the two ruling political parties in the U.S. diminish further, and their outlook, conduct and even advertising campaigns merge so much so that their members can be mistaken one for the other.

By now it must be clear that the ‘two-party’ system is not only no such thing, it is corrupt to the bone.

It should be instructive to recount some major points of Obama’s record, but since much of that has been done by far more qualified people, it should suffice to point to what’s presented by Matt Gonzalez, in his piece, What Do They Have to Do to Lose Your Vote?, in which we find all that is needed to persuade any whose illusions regarding Obama are still unshaken. If, after reading that, you still vote for Obama, then you deserve everything Obama throws at you once in office, and it is you who have no right to complain.

Despite all that is recounted by Matt Gonzalez, and is known by the left, a good section of the American left is still agonizing over whether or not to vote for this ‘lesser’ evil! Some qualify this support with: “But, don’t have any illusions!” Anybody who supports, even qualified twenty-fold, the notion of voting for a Democratic Party candidate, is already filled with illusions. Such recommendations coming from the ‘left’ are stunningly amusing if it weren’t so infuriating to hear such talk always certified with tons of qualifications, which in turn make the recommendations not just absurd, but highly irresponsible.

Most progressives voting for Obama do so out of their partial blindness regarding the crimes of the American state; they see all the crimes commissioned and executed by the Republicans, but if a Democrat vote-getting team ransacked their very neighborhoods, doing drive-bys at high noon, with ‘Vote Democrat’ signs on their SUVs, they would most likely not see it. If a Democratic candidate is not too pretty, their answer is simple: it is a vote against Republicans. When pushed for something more positive, more substantial, lacking anything to offer, they argue that Obama-Biden ticket is less scary than McCain-Palin, and so we must make sure they get elected.

The other point they make is that a vote for Obama is a slap in the face of racism. To think that one is fighting racism while voting for a candidate that upholds every racist element of the structures of imperialism is to venture into political oblivion.

Such arguments can only come from people who do nothing whatsoever to change the really existing political life of the U.S. in between presidential elections. But, of course, every four years they must express some political recommendation of sorts, and out of desperate frustration, due to seeing the political field as only what the system presents (i.e., due to the fact that they do not act as subjective agencies), they can only decide which system-provided choice is less harmful. This is the gist of their dilemma.

So long as the left in the U.S. does not create its own independent institutions, so long as there is no institutional alternative that can channel people’s grievances, and so long as there is no political party representing the working classes along a socialist outlook, the current balance of forces will continue to work increasingly against the working people and those interested in a more just society, and no matter how learned we might be, we will end up supporting the ‘lesser’ of the two evil parties dominating the people; in other words, supporting the imperial system.

What to do then? For starters, a good half of the eligible voters have been conducting a de facto boycott of the presidential elections, since they instinctively and correctly realize that the two ruling parties do not represent them. So, why not join them?

The only thing that can transform ‘apathy’ into an actual political force is to organize the non-voters, and we can only do so by addressing their (which is ours, too) concerns. A boycott of the elections should be done with the purpose of announcing to the non-voting public that another way is possible, and must be sought and created to bring about political change. This other way must engage them, the non-voting population, with a strategic vision, while making a serious effort to build a real party of opposition.

This, in turn, requires a genuine opposition party-building effort. The Populists in the 19th century did not agonize over whether or not to vote for the lesser evils of their days. They built their own party. Granted, by the end of the 19th century, the Democrats had pretty much swallowed them whole by adopting key elements of their platform reflecting their social demands, while watering them down, and blunting their force. But, the organizing spirit of the Populists is something to learn from. The lesson: Build your own party! Oppose both ruling parties consistently.

Within the context of building a real opposition party, then, a boycott as a tactical move makes political sense. It would bring coherence and political direction to the energies not wasted in the electoral fraud (yet sitting still); it potentially gives a voice to the energies not burned in the electoral game presented by the system as an opiate (to paraphrase Max Kantar). But, simply not voting by itself (i.e., without an announced boycott) is also useless.

In lieu of a disclaimer, I must say that I respect anybody who votes for Nader or McKinney (Amee Chew makes a great case for supporting McKinney in her October 29 Counterpunch piece), as a way of registering their opposition to the ‘two party’ monopoly. I have argued in previous articles that, IF you think by voting you can bring change, then know that the only change worth voting for is the kind presented in the platforms of the independent candidates. Also, voting for independent candidates as a way of registering your support for people who are actually addressing our problems is a way of getting a real tally of how many people actually oppose the establishment candidates and support real change.

My argument for a boycott addresses a different sub-set of the population affected by this system, whether we vote or not. The point here is that regardless of the outcome of these elections, which is the continuation of the empire and its deep-rooted corruptions, we need to look past the elections and think how to build a long-term strategy for a real movement for fundamental change. This must include addressing those who do not vote.

People who do not vote are not participating for very good reasons. However, in the absence of a loud boycott, their non-participation gets interpreted as ‘conceding’ or ‘apathy.’ My point here is that, NO, this is not apathy. In fact it makes perfect logical sense, and it is far more honest than participating in fraudulent elections that only reproduce illusions about America, the ‘world’s greatest democracy’; illusions that only buttress the imperial system.

I come from the so-called Third World, in which boycotting elections is a political tool the masses, and the parties that stand with them, employ with good effect. Imran Khan’s party (Insaf) in Pakistan, for example, boycotted the last elections there, and it was an organized message sent to the establishment that the rulers would not get a stamp of approval from the real opposition. This, far from recreating ‘apathy’ or ‘conceding’ the elections, actually makes governments nervous. In Iran, for another example, you are required to take your birth certificate with you when you vote, so the authorities can stamp it, so they can see who has not participated, so they can do unto you what they will, should you have to deal with the authorities at some point.

So, boycott is actually a very powerful political tool, because it gives political voice to those who refuse to participate. Simply sitting at home and not announcing that you are boycotting is a different matter. Boycott is a political move, with a long-term vision in mind.

The American people are fed a huge lie every four years that their voices can make a difference. Really? It didn’t make a jot of difference in 2006, when people, out of pure illusion, voted into the Congress a majority of Democrats with the hope that they would bring the war of occupation in Iraq to a speedy end. As George Carlin would have said, people might as well have wished on a rabbit’s foot!

It didn’t make any difference when a huge majority of the American people kept yelling down the jammed congressional telephone lines, and over-stuffed Congressional email inboxes with, “Don’t give my money away to those scum sucking swine!” The people’s ‘representatives’ stole people’s money anyway and handed it over to the banksters in broad daylight!

So, to repeat, what’s the point of voting for establishment people? Except becoming demoralized, such behavior has no other effect.

If influential people on the left, or even political parties on the left, such as the Communist Party, had spent the last 30 years of their collective lives, using their influence and authority, building truly oppositional parties, maybe for the past two presidential elections they wouldn’t have to recommend voting for such a corrupt bunch of people, and instead could recommend voting for a truly oppositional party that really channeled people’s grievances, with some (even if symbolic) presence in the legislature.

So, instead of wringing our hands over whether or not to vote for an evil, which is only a tiny bit less so, let us recognize the necessity of building a truly oppositional party. The first step in that direction is to either vote for independent candidates or conduct a boycott of these elections with the declaration that voting is bunk until real political alternatives representing people’s needs are built. Don’t waste your vote, and don’t encourage the establishment bastards.

http://onlinejournal.com/artman/publish/article_3943.shtml

Effectiveness of AIG's $143 Billion Rescue Questioned

2008-11-03T11:29:00.000-08:00

By Carol D. Leonnig

Washington Post Staff Writer
Monday, November 3, 2008; Page A18

A number of financial experts now fear that the federal government's $143 billion attempt to rescue troubled insurance giant American International Group may not work, and some argue that company shareholders and taxpayers would have been better served by a bankruptcy filing.

The Treasury Department leapt to keep AIG from going bankrupt on Sept. 16, and in the past seven weeks, AIG has drawn down $90 billion in federal bailout loans. But some key AIG players argue that bankruptcy would have offered more structure and greater protections during a time of intense market volatility.

AIG declined to comment on the matter.

Echoing some other experts, Ann Rutledge, a credit derivatives expert and founding principal of R&R Consulting, said she is not sure how badly the financial system would have been rocked if the government had let AIG file for bankruptcy protection. But she fears that the government is papering over the problem with a quick fix that was not well planned.

"What we see now are a lot of games by the government to keep these institutions going with a lot of cash," she said. "This is to fill holes in companies' balance sheets, and they're trying to hold at bay the charges that our financial system is insolvent."

The deal that the Treasury and the Federal Reserve Bank of New York pressed upon AIG was intended to stop any domino effect of financial institutions falling because of their business ties to AIG. The rescue allowed AIG to provide cash to huge banks and other players who had invested in rapidly souring mortgages insured by the company.

Early this year, investors had begun privately demanding that AIG pay off its billion-dollar guarantees. But in mid-September, when the demands for cash reached a public crescendo, AIG had to admit that it didn't have enough cash on hand to meet the obligations.

In the first weeks of its federal rescue, AIG has used the loan money to post collateral demanded by these firms, sources close to those deals say.

"No one else benefits," former AIG chief executive and major shareholder Maurice R. "Hank" Greenberg wrote to AIG's current chief executive on Thursday. "Unless there is immediate change to the structure of the Federal loan, the American taxpayer will likely suffer a significant financial loss."

Another concern is that in this depressed market, AIG, and the taxpayers that now own 80 percent of the company, will lose coming and going.

The company may be forced to borrow additional federal funds for rising payouts to counterparties. Neither the government nor AIG is releasing information about the specific amounts paid to individual firms, but numerous credit experts say that the value of those mortgage assets is probably declining every week. That means AIG has to pay a higher price as part of its guarantees.

The company also may be forced to sell many more assets at low, fire-sale prices. As part of its loan deal, AIG was to sell some assets -- valued at $1 trillion before the crisis -- to raise cash to pay off the loan.

AIG's Financial Products division is the primary villain in the company's free-fall. It made tens of billions of disastrously bad bets on mortgage investments but may not have carefully hedged those bets or properly estimated its risk. The company's rapid burn of $90 billion also suggests that it grossly undervalued its obligations to counterparties in a worst-case scenario.

In February, internal notes show, board members discussed a growing dispute between AIG Financial Products and Goldman Sachs about the value of those assets when Goldman called for AIG to post collateral. AIG's chief financial officer warned of "Goldman's acknowledged desire to obtain as much cash as possible." But AIG's external accountants warned that it was they who alerted management to the dispute, not AIG Financial Products, and that the division was not properly considering the market in its pricing.

Rutledge warns that because there has been no public disclosure of AIG's payments to counterparties, it is impossible to know whether the pricing it is using now is proper.

The Federal Reserve and its advisers have acknowledged privately that things are not going according to plan.

As AIG has rapidly eaten through the loan money, the Fed has twice expanded its original $85 billion bailout -- which itself was the largest government bailout of a private company in U.S. history. Earlier last month, the Fed reluctantly gave AIG $38 billion more in credit for securities lending to try to keep the firm from drawing down its first Fed loan too quickly.

Then on Thursday, the Fed agreed to let AIG borrow $20 billion from a larger commercial paper bailout fund it had set up days earlier for all institutions that lend money to each other.

If the company had filed for Chapter 11 bankruptcy protection, AIG could have frozen the crippling collateral calls, and shareholders would have had a chance at recovering some value from the company's 80 percent drop in stock price from earlier this year, said Lee Wolosky, a lawyer for AIG's largest shareholder, Starr International.

"AIG is nothing more than a pass-through being charged 14 percent interest," Wolosky said. "Company assets are eroding on a daily basis; asset sales have not begun and can only be at fire-sale prices in the current market. "

But David Schiff of Schiff's Insurance Observer said he could not see how bankruptcy would have been a better solution.

"The point isn't to save AIG; it's to save the U.S. financial system. I think they were afraid to find out who else goes under if you let AIG fail," he said. "But right now, no one knows if this is going to work."

http://www.washingtonpost.com/wp-dyn/content/article/2008/11/02/AR2008110202150.html?sub=new

The Bailout And The Innocent Bystander Fable

2008-11-03T11:21:00.000-08:00

By David Sirota

In my book, The Uprising, and in a series of blog posts and YouTube videos, I explored the Innocent Bystander Fable—the myth forwarded by congressional Democrats claiming that, despite being in the majority, they have absolutely no power to stop anything the federal government is doing. This fable was the reason most cited for congressional Democratic inaction on the Iraq War. Democrats told us they had no power to stop or even slow down the war, even though they had the legislative and filibuster power to stop funding the war.

Now, the Innocent Bystander Fable is making its debut on the issue of the Wall Street bailout. The Bush administration is handing over taxpayer cash to banks, and banks are subsequently refusing to lend more money - instead either using the money to pay out executive bonuses or to buy up smaller banks. That's utterly outrageous, yet in this Wall Street Journal story, we see Democrats already claiming they can do nothing about it:

House and Senate leadership aides say it would be difficult to pass any controversial legislation [reforming the bailout], citing the difficulty lawmakers had in passing the financial-rescue package in the first place, as well as the limited Democratic majority in the Senate. "There's not much we can do other than jawbone," Sen. Charles Schumer, D-N.Y., said in an interview earlier this week.

Read that again: Despite controlling Congress and therefore having the ability to amend or even repeal the bailout bill, Schumer expects the public to believe "there's not much we can do other than jawbone." Indeed - Chuck Schumer thinks Americans are stupid.

The good news on the bailout bill is that some other senior Democrats seem to be countering Schumer:

Senate Banking Committee Chairman Christopher Dodd (D-Conn.) offered a number of specific steps he is considering, including crafting a federal statute based on a New York state law that would allow the government to reclaim money from firms that accept federal funds but don't fulfill their commitments.

Current law would only allow the government, as a creditor, to take such a step if a company enters bankruptcy. Mr. Dodd said he wants to expand the government's right to address his concerns that companies may be using government funds to pay executives.

"We've got to make sure we deal with this," Mr. Dodd said, adding that he's tried lecturing firms "and it's not working."

Dodd's rhetoric stands in stark contrast to Democrats' near total unity in promoting the Innocent Bystander Fable on the Iraq War—and that's a good thing if it turns into substantive Banking Committee action. Additionally, because the bailout bill was so undemocratically structured to give czar-ish power to the Treasury Secretary, the next Treasury Secretary will have almost complete authority to reform the bailout him/herself. So there's a chance this bailout can be changed before it fully gives away 5 percent of our entire economy to Wall Street fat cats.

But make no mistake about it —Schumer is debuting the Innocent Bystander Fable on the issue of the bailout. And if Democrats retain control of Congress, we can expect that meme to become more prevalent. Caught between their financial industry donors and a public that hates the bailout, Democratic leaders will trot out this Trojan horse to explain away their corruption—claiming it isn't deliberate, but merely a product of their supposed powerlessness.

They aren't powerless, of course—they were the ones who originally provided the votes to pass the bailout. And if they had the votes to pass it—they sure as hell have the votes to amend it or repeal it.

http://www.ourfuture.org/blog-entry/2008114402/bailout-innocent-bystander-fable

Top Obama Adviser Has Long Ties to Neocons

2008-11-03T09:35:00.000-08:00

November 3, 2008

Top Obama Adviser Has Long Ties to Neocons

by Michael Flynn

With the 2008 presidential campaign at its end, pundits have begun to discuss in earnest what expected winner Barack Obama's administration might look like. An important piece of evidence is Obama's campaign team, which largely escaped the harsh scrutiny that his opponent's lobbyist-laden team received.

Because of Obama's relative inexperience on foreign policy, it is this part of his team that is getting much of the attention, and one adviser in particular – Dennis Ross, Bill Clinton's Mideast envoy whose record includes supporting the pro-Iraq War advocacy campaigns of the Project for the New American Century and serving as a consultant to the Washington Institute for Near East Policy (WINEP), a bastion of Israel-centric policy thinking in Washington.

Generally regarded as a political moderate who has the ear and respect of both Republicans and Democrats, Ross, a former Soviet specialist, reportedly has told friends and foreign officials that he hopes to nab a very senior post in an Obama administration, one that at least covers Iran policy, if not the entire Greater Middle East.

But Ross' record as a Mideast peacemaker during the Clinton years, longtime association with hawkish political factions, and track record promoting a hard line vis-à-vis Israel's Arab neighbors have spurred concern that he would be a less-than-ideal pick for a Middle East portfolio in an Obama administration, which many presume he will be offered.

As one Clinton official, asked about Ross' role in the Obama campaign, told Time magazine earlier this year, "If Obama wants to embody something new that can actually succeed, it's not just a break from [George W. Bush] Bush that he's going to need, but a break from Clinton."

Despite some successes as Clinton's envoy crafting agreements between Israel and its neighbors, Ross' efforts to negotiate an end to the Israeli-Palestinian conflict were a failure. In his writings, Ross has emphasized Palestinian intransigence – in particular, Yasser Arafat's – as being the cause for the failure, although he doesn't exempt Israel from blame.

Other participants in those negotiations have pointed their finger at Ross. In their book Negotiating Arab-Israeli Peace, Daniel Kurtzer, who is also an Obama adviser, and Scott Lasensky cite a number of anonymous officials who were critical of Ross.

Said one Arab negotiator, "The perception always was that Dennis [Ross] started from the Israeli bottom line, that he listened to what Israel wanted and then tried to sell it to the Arabs. … He was never looked at … as a trusted world figure or as an honest broker."

Likewise, a former Clinton administration representative told the authors, "By the end, the Palestinians didn't fully trust Dennis. … [T]hey thought he was tilted too much toward the Israelis."

Ross got his start in high-level policy-making working under Paul Wolfowitz in the Pentagon during the Carter administration. Wolfowitz – who is better known for his role pushing the Iraq War after the 9/11 terrorist attacks and for his controversial tenure as World Bank head – tasked Ross with helping draft a study assessing threats to U.S. interests in the Persian Gulf. The 1979 study, titled the "Limited Contingency Study," concluded that aside from the Soviet Union, a key threat to the region's oil fields was Iraq.

In his 2004 book the Rise of the Vulcans, James Mann writes that this study, the Pentagon's "first extensive examination of the need for the United States to defend the Persian Gulf," would go on to "play a groundbreaking role in changing American military policy toward the Persian Gulf over the coming decades."

When Wolfowitz was tapped to head the State Department's Policy Planning Staff after the election of Ronald Reagan, he included Ross in his team of assistants, which, according to Mann, would go on to become, over the next two decades, "the heart of a new neoconservative network within the foreign policy bureaucracy."

Other Wolfowitz team members from that time included I. Lewis Libby, a Washington lawyer who later became notorious as the disgraced former chief aide to Vice President Dick Cheney; James Roche, President George W. Bush's Air Force secretary who resigned after being implicated in the Boeing tanker leasing scandal; Zalmay Khalilzad, U.S. ambassador to the UN and post-invasion ambassador to Iraq; Alan Keyes, the perennial Republican presidential candidate; and Francis Fukuyama, the "end of history" theorist and erstwhile neoconservative ally who turned against the faction after the Iraq invasion.

Ross' close association with neoconservatives has deepened over the years, becoming especially pronounced in the wake of the 9/11 terrorist attacks. He supported the invasion of Iraq and, during the run-up to the 2008 presidential elections, repeatedly teamed up with writers from groups like the American Enterprise Institute (AEI) to craft hard-line policies toward Iran.

Ross served as the co-convener of WINEP's Presidential Task Force on the Future of U.S.-Israel Relations, which issued the June 2008 report "Strengthening the Partnership: How to Deepen U.S.-Israel Cooperation on the Iranian Nuclear Challenge." The report was signed by a number of former Democratic and Republican policymakers, as well as by several neoconservatives, including former CIA director James Woolsey and Vin Weber, a former Republican congressman who co-founded the rightist pressure group Empower America.

Interestingly, several other advisers to the Obama campaign added their names to the document – Anthony Lake, Susan Rice, and Richard Clarke.

Ross also helped produce the 2008 report "Meeting the Challenge: U.S. Policy Toward Iranian Nuclear Development," which was published by a study group convened by the Bipartisan Policy Center, a group led by several former legislators.

The lead drafter of the report was AEI's Michael Rubin, an outspoken proponent of U.S. military intervention in the Middle East. Other participants included hawkish arms control analyst Henry Sokolski; Michael Makovsky, a former aide to Douglas Feith; Stephen Rademaker, who worked under former UN Ambassador John Bolton in the State Department; and the neoconservative Hudson Institute director, Kenneth Weinstein.

The report argues that despite Iran's assurances to the contrary, its nuclear program aims to develop nuclear weapons and is thus a threat to "U.S. and global security, regional stability, and the international nonproliferation regime," a conclusion that stands in contrast to the CIA's November 2007 National Intelligence Estimate, which found that Iran had ceased its nuclear weapons program.

Like the WINEP study, the report argues that "Cold War deterrence" is not persuasive in the context of Iran's program, due in large measure to the "Islamic Republic's extremist ideology." Even a peaceful indigenous uranium enrichment program would place the entire Middle East region "under a cloud of ambiguity given uncertain Iranian capacities and intentions."

Among the report's proposals are undertaking a major military buildup in the Gulf; pressuring Russia to halt weapons assistance; and, if the U.S. agrees to hold direct talks with Tehran without insisting that the country first cease enrichment activities, setting a predetermined compliance deadline and be prepared to apply increasingly harsh repercussions if these are not met, leading ultimately to U.S. military strikes.

Calling the report a "roadmap to war," Inter Press Service's Jim Lobe writes, "In other words, if Tehran is not eventually prepared to permanently abandon its enrichment of uranium on its own soil – a position that is certain to be rejected by Iran ab initio – war becomes inevitable, and all intermediate steps, even including direct talks if the new president chooses to pursue them, will amount to going through the motions. … What is a top Obama adviser [Dennis Ross] doing signing on to it?"

(Inter Press Service)

http://www.antiwar.com/orig/flynn.php?articleid=13710

The Financial Crisis of 2008

2008-11-03T09:03:00.000-08:00

The Financial Crisis of 2008

Interviewed by Simone Bruno

October 13, 2008 By Noam Chomsky

I would like to talk about the current crisis. How is it that so many people could see it coming, but the people in charge of governments and economies didn't, or didn't prepare?

The basis for the crisis is predictable and it was in fact predicted. It is built into financial liberalization that there will be frequent and deep crises. In fact, since financial liberalization was instituted about thirty five years ago, there has been a trend of increasing regularity of crises and deeper crises, and the reasons are intrinsic and understood. They have to do fundamentally with well understood inefficiencies of markets. So, for example, if you and I make a transaction, say you sell me a car, we may make a good bargain for ourselves, but we don't take into account the effect on others. If I buy a car from you it increases the use of gas, it increases pollution, it increases congestion, and so on. But we don't count those effects. These are what are called by economists externalities, and are not counted into market calculations.

These externalities can be quite huge. In the case of financial institutions, they are particularly large. The task of a financial institution is to take risks. Now if it is a well managed financial institution, say Goldman Sachs, it will take into account risks to itself, but the crucial phrase here is to itself. It does not take into account systemic risks, risks to the whole system if Goldman Sachs takes a substantial loss. And what that means is that risks are underpriced. There are more risks taken than should be taken in an efficiently working system that was accounting for all the implications. More, this mispricing is simply built into the market system and the liberalization of finance.

The consequences of underpricing risks are that risks become more frequent, and, when there are failures the costs are higher than taken into account. Crises become more frequent and also rise in scale as the scope and range of financial transactions increases. Of course, all this is increased still further by the fanaticism of the market fundamentalists who dismantled the regulatory apparatus and permitted the creation of exotic and opaque financial instruments. It is a kind of irrational fundamentalism because it is clear that weakening regulatory mechanisms in a market system has a built-in risk of disastrous crisis. These are senseless acts except in that they are in the short-term interest of the masters of the economy and of the society. The financial corporations can and did make tremendous short term profits from pursuing extremely risky actions, including especially deregulation, which harm the general economy, but don't harm them, at least in the short term that guides planning.

You couldn't predict the exact moment at which there would be a severe crisis, and you couldn't predict the exact scale of the crisis, but that one would come was obvious. In fact, there have been serious and repeated crises during this period of increasing deregulation. It is just that they hadn't yet hit so hard at the center of wealth and power before, but have instead hit mostly the third world. So, again, the crises are predictable and predicted. There was a book, for example, ten years ago, by two very well respected international economists, John Eatwell and Lance Taylor - Global Finance at Risk - in which they ran through the pretty elementary logic of how financial liberalization underprices risk and therefore leads to regular systemic risks and failures, sometimes serious. They also outline ways of dealing with the problem, but those were ignored because decision makers in the corporate and political systems, which are about the same, were making short term gains for themselves.

Take the United States. It is a rich country, but for the majority of the population, a substantial majority, the last thirty years have probably been among the worst in American economic history. There have been no massive crises, large wars, depressions, etc. But, nevertheless, real wages have pretty much stagnated for the majority for thirty years. In the international economy the effect of financial liberalization has been quite harmful. You read in the press that the last thirty years, the thirty years of neoliberalsm, have shown the greatest escape from poverty in world history and tremendous growth and so on, and there is some truth to that, but what is missing is that the escape from poverty and the growth have taken place in countries which ignored the neoliberal rules. Countries that observed the neoliberal rules have suffered severely. So, there was great growth in East Asia, but they ignored the rules. In Latin America where they observed the rules rigorously, it was a disaster.

Joseph Stiglitz recently wrote in an article that the most recent crisis marks the end of neoliberalism and Chavez in a press conference said the crisis could be the end of capitalism. Which one is closer to the truth, do you think?

First, we should be clear about the fact that capitalism can't end because it never started. The system we live in should be called state capitalism, not just capitalism. So, take the United States. The economy relies very heavily on the state sector. There is a lot of agony now about socialization of the economy, but that is a bad joke. The advanced economy, high technology and so forth, has always relied extensively on the dynamic state sector of the economy. That's true of computers, the internet, aircraft, biotechnology, just about everywhere you look. MIT, where I am speaking to you, is a kind of funnel into which the public pours money and out of it comes the technology of the future which will be handed over to private power for profit. So what you have is a system of socialization of cost and risk and privatization of profit. And that's not just in the financial system. It is the whole advanced economy.

So, for the financial system it will probably turn out pretty much as Stiglitz describes. It is the end of a certain era of financial liberalization driven by market fundamentalism. The Wall Street Journal laments that Wall Street as we have known it is gone with the collapse of the investment banks. And there will be some steps toward regulation. So that's true. But the proposals that are being made, which are major and severe, nonetheless do not change the structure of the underlying basic institutions. There is no threat to state capitalism. Its core institutions will remain basically unchanged and even unshaken. They may rearrange themselves in various ways with some conglomerates taking over others and some even being semi-nationalized in a weak sense, without infringing much on private monopolization of decision making. Still, as things stand now, property relations and the distribution of power and wealth won't alter much though the era of neoliberalism operative for roughly thirty five years will surely be modified in a significant fashion.

Incidentally, no one knows how serious this crisis will become. Every day brings new surprises. Some economists are predicting real catastrophe. Others think that it can be patched together with modest disruption and a recession, likely worse in Europe than in the U.S. But no one knows.

Do you think we will see anything like the depression, with people out of working and cuing up in long lines for food. Do you think it is possible we could have that kind of situation in the U.S. and Europe? Would a big war then get economies back on track, or shock therapy or what?

Well, I don't think the situation is anything like the period of the great depression. There are some similarities to that era, yes. The 1920s were also a period of wild speculation and vast expansion of credit and borrowing, creating of tremendous concentration of wealth in a very small sector of the population, destruction of the labor movement. These are all similarities to today. But there are also many differences. There is a much more stable apparatus of control and regulation growing out of the New Deal and though it has been eroded, much of it is still there. And also by now there is an understanding that the kinds of policies that seemed extremely radical in the New Deal period are more or less normal. So, for example, yesterday in the presidential debate, John McCain, the right-wing candidate, proposed New Deal style measures to deal with the housing crisis, borrowed straight from the New Deal Homeowners Refinancing Act, though actually McCain borrowed it from Hilary Clinton who took it from the New Deal. That's the far right. So there is an understanding that the government must take a major role in running the economy and they have experience with doing it for the advanced sectors of the economy for fifty years.

A lot of what you read about this is just mythology. So, for example, you read that that Reagan's passionate belief in the miracle of markets is now under attack, Reagan being assigned the role of High Priest of faith in markets. In fact, Reagan was the most protectionist president in postwar American economic history. He increased protectionist barriers more than his predecessors combined. He called on the Pentagon to develop projects to train backward American managers in advanced Japanese methods of production. He carried out one of the biggest bank bailouts in American history, and formed a government-based conglomerate to try to revitalize the semiconductor industry. In fact, he was a believer in big government, intervening radically in the economy. By "Reagan" I mean his administration; what he believed about all of this, if anything, we don't really know, and it's not very important.

There is a tremendous amount of mythology to be dismantled here, including the talk about the great growth and escape from poverty which, as I said earlier, isn't false, but is missing the fact that it took place overwhelmingly in areas that ignored the neoliberal rules, while the areas that kept to the rules are the ones that suffered. The same holds in the U.S. To the extent that the neoliberal rules were applied, it was quite harmful to the majority of the population. So to talk about these matters, we first have to sweep away a lot of mythology and then, when we look, we see that a state capitalist economy that has, particularly since the Second World War, relied very heavily on the state sector, is now returning to reliance on the state sector to manage the collapsing financial system, its collapse being the predictable result of financial liberalization. The underlying institutional structure itself is being modified, but not in fundamental ways.

There is no indication right now that there will be anything like the crash of 1929.

So you don't think we are going toward a change of the world order?

Oh there are changes in world order, very significant ones and maybe this crisis will contribute to them. But they have been underway for some time. One of the greatest changes in world order you can see right now in Latin America. It is called the backyard of the United States and it's been supposed to be run by the U.S. for a long time. But that is changing. Just a few weeks ago, mid September, there was a very dramatic illustration of this. There was a meeting on September 15 of UNASUR, The Union of South American Republics, so that's all the South American governments meeting, including Colombia, the U.S.'s favorite. It took place in Santiago, Chile, another U.S. favorite. The meeting came out with a very strong declaration supporting Evo Morales in Bolivia and opposing the quasi-secessionist elements in Bolivia that are being supported by the United States.

There is a major struggle going on in Bolivia. The indigenous majority of the population for the first time in 500 years entered the political arena, carried through a very impressive democratic election, and took power. That of course horrified the United States government, which is strongly opposed to popular democracy unless it comes out the right way. And it particularly antagonized the traditional ruling groups, the minority elite which is mostly white and Europeanized, who had always run the country and of course don't want a democratic society in which control of resources and policy generally will be directed by the majority and towards its needs. So the elites are moving toward autonomy and maybe secession, and it is becoming quite violent, with the U.S. of course backing them. But the South American Republics took a strong stand in support of the indigenous-dominated democratic government. The statement was read by President Bachelet of Chile, who is a favorite of the West. Evo Morales responded by thanking the presidents for their support, while correctly pointing out that this was the first time in 500 years that Latin America had taken its fate into its own hands without the interference of Europe and particularly the United States. Well, that is a symbol of a very significant change that is underway, sometimes called the pink tide. It was so important that the U.S. press wouldn't report it. There is a sentence here and there in the press noting that something happened, but they are completely suppressing the content and significance of what happened.

Now that is part of a long term development in which South America is indeed beginning to overcome its tremendous internal problems and also its subordination to the West, for the most part, the United States. South America is also diversifying its relations with the world. Brazil has growing relations with South Africa and India, and particularly China, which is increasingly involved in investments and exchange with Latin American countries. These are extremely important developments and now it is beginning to spread to Central America. Honduras, for example, is the classic banana republic. It was the base camp for Reagan's terror wars perpetrated in the region and has been totally subordinated to the U.S. But Honduras recently joined ALBA, the Venezuelan-based "Bolivarian alternative." It is a small step, but nonetheless very significant.

Do you think these trends in South America like ALBA, UNASUR and the major events in Venezuela and Bolivia and the rest might be affected by an economic crisis of the dimension we are facing now?

Well, they will be affected by the crisis, but for the moment they are not as much affected as Europe and the United States. So, if you look at the stock market in Brazil, it collapsed very quickly, but Brazilian banks aren't failing. Similarly, in Asia the stock markets are declining sharply, but the banks are not being taken over by the government as is happening in England and the U.S. and much of Europe. These regions, South America and Asia, have been somewhat insulated from the ravages of the financial markets. What set off the current crisis was the subprime lending for assets built on sand, and these are held, of course in the United States, but apparently about half by European banks. Holding mortgage-based toxic assets has embroiled them in these events very quickly -- and they have housing crises of their own, particularly Britain and Spain. Asia and Latin America were much less exposed, having kept to much more cautious lending strategies, particularly since the neoliberal meltdown of 1997-8. In fact, a main Japanese bank, Mitsubishi UFG, has just bought a substantial part of Morgan Stanley, in the U.S. So it doesn't look, so far, as though Asia or Latin America will be affected nearly as severely as the U.S. and Europe.

Do you think there will be a big difference between Obama or McCain as President for things like the Free Trade Agreement and Plan Colombia, because here in Colombia, where I live, you can feel that the President and the establishment are kind of scared about an election of Obama. I know you feel Obama is like a blank slate, but still, do you feel there is a difference?

That's pretty much the case. Obama has presented himself as pretty much a blank slate. But there is no reason for the Colombian establishment to be scared of his election. Plan Colombia is Clinton's policy and there is every reason to expect that Obama will be another Clinton. He is pretty vague. He keeps appearances mostly empty, on purpose, but insofar as there are policies they look very much like centrist policies, like Clinton's, who fashioned Plan Colombia and militarized the conflict, and so on.

Sometimes I have the feeling that the two terms of Bush were in a context of the changing of the global order, trying to maintain power using force and in contrast Obama could be a way to have a kind and polite face to renegotiate the world order. Do you think this could be true?

Remember that the political spectrum in the United States is quite narrow. The U.S. is a business-run society, somewhat more than Europe. Basically, it is a one-party state, with a business party that has two factions, Democrats and Republicans. The factions are somewhat different, and sometimes the differences are significant. But the spectrum is quite narrow. The Bush administration, however, was way off the end of the spectrum, extreme radical nationalists, extreme believers in state power, in violence overseas, in big government spending, so far off the spectrum that they were harshly criticized right within the mainstream from early on.

Whoever comes into office is likely to move things back more towards the center of the spectrum, Obama probably more so. So I would expect in Obama's case something like a revival of the Clinton years, of course adapted to changing circumstances. In the case of McCain, however, it is quite hard to predict. He is a loose cannon. Nobody knows what he would do...

Yes he seems quite dangerous.

Very dangerous, especially in a country like the U.S. with so much power. This isn't Luxemburg, after all. McCain himself is extremely unpredictable. The vice Presidential candidate, Sarah Palin, comes from a radical extremist background (by world standards), for example creationism - you know, the world was created 10,000 years ago, etc. etc. If someone like that was running for high office in Luxemburg it would be comical. But when it happens in the richest and most powerful country in the world, it is dangerous.

Now that we are at the end of neoliberal globalization, is there a possibility of something really new, a good globalization?

I think the prospects are much better than they have been. Power is still incredibly concentrated, but there are changes with the international economy becoming more diverse and complex. The South is becoming more independent. But if you look at the U.S., even with all the damage Bush has done, it is still the biggest homogeneous economy, with the largest internal market, the strongest and technologically most advanced military force, with annual expenses comparable to the rest of the world combined, and an archipelago of military bases throughout the world. These are sources of continuity even though the neoliberal order is eroding both within the U.S. and Europe and internationally, as there is more and more opposition to it. So there are opportunities for real change, but how far they will go depends on people, what we are willing to undertake.

http://www.zcommunications.org/znet/viewArticle/19111

Paulson's Swindle Revealed

2008-11-03T08:58:00.000-08:00

Paulson's Swindle Revealed

November 03, 2008 By William Greider

The swindle of American taxpayers is proceeding more or less in broad daylight, as the unwitting voters are preoccupied with the national election. Treasury Secretary Hank Paulson agreed to invest $125 billion in the nine largest banks, including $10 billion for Goldman Sachs, his old firm. But, if you look more closely at Paulson's transaction, the taxpayers were taken for a ride--a very expensive ride. They paid $125 billion for bank stock that a private investor could purchase for $62.5 billion. That means half of the public's money was a straight-out gift to Wall Street, for which taxpayers got nothing in return.

These are dynamite facts that demand immediate action to halt the bailout deal and correct its giveaway terms. Stop payment on the Treasury checks before the bankers can cash them. Open an immediate Congressional investigation into how Paulson and his staff determined such a sweetheart deal for leading players in the financial sector and for their own former employer. Paulson's bailout staff is heavily populated with Goldman Sachs veterans and individuals from other Wall Street firms. Yet we do not know whether these financiers have fully divested their own Wall Street holdings. Were they perhaps enriching themselves as they engineered this generous distribution of public wealth to embattled private banks and their shareholders?

Leo W. Gerard, president of the United Steelworkers, raised these explosive questions in a stinging letter sent to Paulson this week. The union did what any private investor would do. Its finance experts vetted the terms of the bailout investment and calculated the real value of what Treasury bought with the public's money. In the case of Goldman Sachs, the analysis could conveniently rely on a comparable sale twenty days earlier. Billionaire Warren Buffett invested $5 billion in Goldman Sachs and bought the same types of securities--preferred stock and warrants to purchase common stock in the future. Only Buffett's preferred shares pay a 10 percent dividend, while the public gets only 5 percent. Dollar for dollar, Buffett "received at least seven and perhaps up to 14 times more warrants than Treasury did and his warrants have more favorable terms," Gerard pointed out.

"I am sure that someone at Treasury saw the terms of Buffett's investment," the union president wrote. "In fact, my suspicion is that you studied it pretty closely and knew exactly what you were doing. The 50-50 deal--50 percent invested and 50 percent as a gift--is quite consistent with the Republican version of spread- the-wealth-around philosophy."

[Gerard letter: http://www.usw.org/media_center/news_articles?id=0140]

The Steelworkers' close analysis was done by Ron W. Bloom, director of the union's corporate research and a Wall Street veteran himself who worked at Larzard Freres, the investment house. Bloom applied standard valuation techniques to establish the market price Buffett paid per share compared to Treasury's price. "The analysis is based on the assumption that Warren Buffett is an intelligent third party investor who paid no more for his investment than he had to," Bloom's report explained. "It also assumes that Gold Sachs' job is to protect its existing shareholders so that it extracted from Mr. Buffett the most that it could.... Further, it is assumed that Henry Paulson is likewise an intelligent man and that if he paid any more than Mr. Buffett--if he paid $1 for something for which Mr. Buffett would have paid 50 cents--that the difference is a gift from the taxpayers of the United States to the shareholders of Goldman Sachs."

The implications are staggering. Leo Gerard told Paulson: "If the result of our analysis is applied to the deals that you made at the other eight institutions--which on average most would view as being less well positioned than Goldman and therefore requiring an even greater rate of return--you paid a$125 billion for securities for which a disinterested party would have paid $62.5 billion. That means you gifted the other $62.5 billion to the shareholders of these nine institutions."

If the same rule of thumb is applied to Paulson's grand $700 billion bailout fund, Gerard said this will constitute a gift of $350 billion from the American taxpayers "to reward the institutions that have driven our nation and it now appears the whole world into its most serious economic crisis in 75 years."

Is anyone angry? Will anyone look into these very serious accusations? Congress is off campaigning. The financiers at Treasury probably assume any public outrage will be lost in the election returns. I hope they are mistaken.

_______

National affairs correspondent William Greider has been a political journalist for more than thirty-five years. A former Rolling Stone and Washington Post editor, he is the author of the national bestsellers One World, Ready or Not, Secrets of the Temple, Who Will Tell The People, The Soul of Capitalism (Simon & Schuster) and-- due out in February from Rodale--Come Home, America. more...

http://www.zmag.org/znet/viewArticle/19305

Current Economic Crisis Worse than the Great Depression

2008-11-03T06:59:00.000-08:00

Current Economic Crisis Worse than the Great Depression

by Dr_Krassimir_Petrov

he most extraordinary thing is that the mainstream media has never attempted to compare the current economic environment to the one preceding the Great Depression. In essence, it is assumed outright that the Great Depression can never possibly happen again, ever, thus obviating the need for such a comparison. I actually believe that the macroeconomic fundamentals today are much worse, so that we are in for a protracted period of economic depression – a depression much worse than the Great Depression, a depression that would likely be remembered in history as “The Second Great Depression” or The Greater Depression , as Doug Casey has called it so aptly. Here is why I believe that this is the case.

Duplicating Mistakes from the Great Depression

At its core, the environment of the 1990s, and the response of the Fed to the tech-telecom bust has created an economic environment that has encouraged the repetition of the very same mistakes that led to the Great Depression. Here is a concise summary of widely recognized mistakes of the 1920s, without going into the details, with obvious parallels in the current environment:

Asset Bubbles – first in the stock market during the 1990s, then in real estate during the 2000s, pretty much mirroring the stock and real estate market bubbles of the 1920s.
Securitization – although not in the very “ultra-modernistic” form and shape of the 2000s, with slicing and dicing of pools and tranches of seniority, it was widely recognized in the 1930s that securitization during the 20s drove the domino effect in the U.S. financial system during the Great Depression.
Excessive Leverage – just like in 2008 the topic du jour is “deleveraging”, so the unwinding of leverage during the 1930s was the driver of forced liquidations and financial pain. Of course, it was very clear back then that the root of the problem was not deleveraging per se, but the excessive leverage that took place prior to the deleveraging process. “Investment Pools” were then instrumental in both the securitization and excessive leverage, just like the Hedge Funds of today.
Corrupt Gatekeepers – we know well that the Enrons and Worldcoms were aided and abetted by the accounting firms – those same firms that were supposedly the Gatekeepers of the financial community, yet handsomely profited from the boom while neglecting their watchdog functions. In the current financial crisis, we also know that the rating agencies were also making hay during the boom. Very similar were the issues during the 1920s that led to the establishment of the SEC and other regulatory bodies to replace the malfunctioning “gatekeepers” at the time.
Financial Engineering – we are led to believe that financial engineering is a rather recent phenomenon that flourished during the New Age Finance Era of the last 15 years, yet financial engineering was prevalent in the 1920s with very clear goals: (1) to evade restrictive regulations, (2) to increase leverage, and (3) to remove liabilities from the books, all too familiar to all of us today.
Lagging Regulations – just like the regulatory environment lagged the events of the 1920s and regulations were introduced only after the Great Depression had obliterated the U.S. financial system, so we are yet to see new regulations addressing the causes of the current crisis. Understandably, regulations should have foreseen today's financial problems and should have been introduced before the crisis.
Market Ideology – back in the 1920s, just like in the last two decades, the market ideology of “laissez faire”, which Soros quite appropriately described as “Market Fundamentalism”, has swept the financial markets. Of course, the free market knows the best, but the reality is that the money market is not really free – when the Fed determines the cost of money (interest rates), and can fix this cost for as long as it wants, then all sorts of financial imbalances can be sustained without the discipline imposed by the market. This can lead to all sorts of problems that we actually have to face today.
Non-Transparency – back in the 1930s, it was widely recognized that businesses and especially financial institutions lacked transparency, which allowed for the accumulation of significant imbalances and abuses. Today, financial markets and institutions have intentionally compromised transparency in a number of ingenious, or better disingenuous, accounting trickeries and financial gimmicks, like off-balance-sheet entities (SIVs), hard-to-understand derivatives, and opaque instruments with mind-boggling complexity. Today CEOs and Chief Risk Officers of major financial institutions cannot figure out their own risk exposures. Originally, lack of transparency was designed to fool the markets; ironically, modern-day financial executives have gotten to the point of fooling themselves.

Worse than the Great Depression

So, why Worse Than The Great Depression ? What makes me believe that the current depression will be worse than the Great Depression? I present six of the most important fundamentals that are “baked in the cake” and that suggest of a Greater Depression .

Overvalued Real Estate. The real estate market has been driven by a number of innovations in real estate finance. Overvaluation in real estate implies overvaluation in real estate financial instruments; an implosion of real estate prices implies an implosion in those instruments. It is widely recognized by economists that the Case-Shiller Index is a good proxy for the prices of real estate. A widely-recognized chart from 1890 to 2007 tells the story. The chart makes it crystal clear that the current overvaluation of real estate in real terms grossly exceeds the one during the 1920s. The coming correction in real estate will be protracted and gut-wrenching, with an expected cumulative effect that is much worse than the Great Depression.
Total U.S. Credit. Credit makes leverage: the more credit in the financial system, the more leveraged it is. Today's total U.S. credit relative to GDP has surpassed significantly the levels preceding the Great Depression. Back then, the total amount of credit in the financial system almost reached an astonishing 250% of GDP. Using the same metric today, the debt level in the U.S. financial system surpassed 350% in 2008, while the level in 1982 was “only” 130%. As Charles Dumas from Lombard Street Research put it quite aptly, "we've had a 30-year leveraging up of America, ending in an unchecked orgy."

The chart below shows a dramatic buildup of debt (leverage) in the 1920s and a deleveraging from 1930 to 1945 (or 1952). Then it shows a consistent buildup of debt afterwards, with a dramatic rise since the 1990s, and surpassing in 2000 the previous peak in 1929. The chart shows the level of 299% at the end of 2005, but the level has already reached 350% by 2008.

Of course, leveraging, as already indicated above, must necessarily be followed by deleveraging.

The best way to think about leverage is to compare it with using drugs, while deleveraging is like detox. The problem is not that the detox is killing the patient who has abused drugs for years; what is really killing the patient is the drug abuse itself. However, one thing is clear – the patient must either go through a painful detox or die; the same applies for the financial system – it must either deleverage or implode.
Explosion of Derivatives. Derivatives have been likened by Warren Buffet to “financial weapons of mass destruction”. The notional amount of total derivatives, as well as “Value at Risk” (VaR), has skyrocketed in recent years with the potential to destabilize the financial system for decades. To put it more allegorically, derivatives hang like a sword of Damocles over the financial system.

A comparison with the 1920s is difficult to make. mostly Derivatives back then were extensively used, although not widely understood. Given that I am not aware of any statistics of derivatives for the period of the 1920s, a meaningful comparison based on hard data is admittedly impossible. Nevertheless, I would venture to make an intelligent guess that the size of modern-day derivatives is hundreds or even thousands of times larger relative to the size of the economy in comparison to the 1920s. Some of the latest reports indicate that the total notional value of derivatives outstanding surpasses one quadrillion dollars. To put this into perspective, this amounts to almost 100 times the GDP of the U.S. economy.

The chart below shows the explosion of derivatives in the U.S. banking system. You can see that in 1991 the notional value of the derivatives was about the size of the U.S. GDP. By 2006 the size has grown to about 10 times the GDP, vastly outgrowing the real economy.

The chart below shows an even more telling picture. It shows world GDP and world's notional value of derivatives. Again, while there is no direct comparison with the 1920s, it is clear that the overall level of derivatives has skyrocketed during the last two decades and presents risks that were simply not present at the onset of the Great Depression. The unwinding of these derivatives could only be compared with a nuclear explosion in the financial system.
Dow-Gold Ratio. The Dow-Gold ratio represents the most important ratio between the relative prices of financial assets and real assets. The Dow component represents the valuation of financial assets; the gold component – of real assets. When leverage in the financial system increases significantly, so does this ratio. A very high ratio is interpreted as an imbalance between financial and real assets – financial assets are grossly overvalued, while real assets are grossly undervalued. It also implies that a correction eventually will be necessary – either through deflation, which implies deleveraging and a collapsing stock market, or through inflation, which implies stagnant stock market for many years and steadily rising prices of real assets, commodities, and gold, usually associated with stagnant economy and typically resulting in stagflation. The first case—deflation—occurred during the 1930s, while the second case—stagflation—occurred during the 1970s.

The graph below illustrates the above concepts. The very high Dow-Gold Ratio in 1929 was followed by the Great Depression, while the higher level in 1966 was followed by the stagflationary 70s. It is evident from the chart the peak in 2000 surpassed the previous two peaks in 1929 and 1966, so this provides a reasonable expectation that the forthcoming return to “normalcy” will be more painful than the Great Depression, at least in terms of cumulative pain over the next 10-15 years.
Global Bubbles . It is impossible to make direct comparison with the 1920s, but today the global economy is rife with bubbles. Back then in the 1920s, the U.S. had its stock and real estate bubbles, while the European economies were struggling to rebuild from the devastations of WW1 that ended in 1919. I am personally not aware of any other bubbles during this period, although I welcome reader feedback on this topic.

Today the picture is very different. The U.S. economy had a stock market and real estate bubble that has surpassed its own during the 1920s. Colossal US current account deficits have fuelled extraordinary growth in global monetary reserves. As a result, Europe has real estate bubbles across the board, from the U.K. and Ireland, throughout the Mediterranean (Spain, France, Italy and Greece), to the entire Baltic region (Latvia, Lithuania, and Estonia) and the Balkans (Romaina and Bulgaria). Even worse, many Asian countries (China, Korea, etc.) also have their own stock and property bubbles, only with the exception of Japan, which is still in the process of recovering from its own during the 1980s. Thus, during the 1920s only the U.S. suffered from gross financial imbalances, while today the imbalances have engulfed the whole world – both developed and developing. It stands to reason that the unwinding of those global imbalances is likely to be more painful today than it was during the Great Depression due to both size and scope.
Collapsing Bretton Woods II. The global monetary system was on a quasi-gold standard during the 1920s. Back then dollars and pounds were convertible to gold, while all other currencies were convertible to dollars and pounds. An appropriate way to think about it is that of a precursor to the Bretton Woods from 1945-1971. What is important to understand is that while the system was fiat in nature, gold imposed significant limitations to credit expansion and leveraging.

Somewhat similar was the role of Bretton Woods that lasted from 1945 to 1971. The dollar was tied to gold, while all other fiat currencies were tied to the dollar. Just like the interwar period, gold imposed some limitations on credit and financial imbalances.

We now live in what has been termed Bretton Woods II. Essentially, this is a pure fiat dollar standard, where all currencies are convertible to dollars, either at fixed or floating exchange rates, while the dollar itself is convertible to “nothing”. Thus, the dollar has no limitations imposed to it by gold, so without the discipline of gold, the current global monetary system has accumulated significantly more imbalances than ever before in modern capitalism. These imbalances show up in the international monetary system as unsustainable trade deficits (and surpluses), skyrocketing official dollar reserves in some European and many Asian central banks, and the proliferation of Sovereign Wealth Funds; more generally, these imbalances result in a myriad of bubbles, overleveraging, and other maladjustments already discussed above.

Today Bretton Woods II is in the process of disintegration. The world is slowly but steadily losing its confidence in the dollar as the world reserve currency. A flight from the dollar is in progress and the collapse of the global monetary system is imminent. As Bretton Woods II disintegrates and a new system replaces it, the process of readjustment will be necessarily more painful than the respective process during the Great Depression.

A caution on terminology is necessary here. While the literature over the last 10-20 years has widely recognized the term “Bretton Woods II”, in September-October of 2008 the term was widely used by the media to describe a proposed international summit with the goal of reconstructing a new international monetary system designed from scratch, just like “Bretton Woods”. Instantly dubbed by the media “Bretton Woods II”, this term could be potentially very confusing as it could mean very different things to different people. The interested reader should consult Wikipedia's Bretton Woods II where both meanings are explained in detail.

Conclusion

Since August of 2007 we have witnessed the relentless escalation of the credit crisis: a steady constriction of credit markets, starting with subprime mortgage-backed securities, spreading to commercial paper, then to interbank credit, and then to CDOs, CLOs, jumbo mortgages, home equity lines of credit, LBOs and private equity markets, and then generally to the bond and securities markets.

While the media describes the problem as one of illiquidity and confidence, a more serious analysis indicates that boom-time credit has been employed unproductively and so losses must be incurred. In other words, scarce capital has been misallocated, poorly invested, and effectively wasted. No amount of monetary or fiscal policy can fix the errors of the past, just like no modern treatment can quickly restore to health a drug addict debilitated from a decade-long drug abuse.

Based on indicators like - (1) global real estate overvaluation, (2) indebtedness, (3) leverage, (4) outstanding derivatives, (5) global bubbles, and (6) the precariousness of the global monetary system, I would argue that the accumulated imbalances in the current period surpass significantly those preceding the Great Depression. I therefore conclude that the coming U.S. (and possibly) global depression will be of greater magnitude than the Great Depression of the 1930s. It likely suggests that we are entering a historic period that will likely be known as The Greater Depression .

Investor beware! Only gold can protect you from the ravages of another Depression!

By Dr Krassimir Petrov

Krassimir Petrov ( Krassimir_Petrov@hotmail.com ) has received his Ph. D. in economics from the Ohio State University and currently teaches Macroeconomics, International Finance, and Econometrics at the American University in Bulgaria. He is looking for a career in Dubai or the U. A. E.

http://www.marketoracle.co.uk/Article7099.html

Profiles in Cowardice and Corruption: Why McCain and Obama are United in Weakness on the Financial Crisis

2008-11-02T12:19:00.000-08:00

Profiles in Cowardice and Corruption: Why McCain and Obama are United in Weakness on the Financial Crisis.

by Paul Street

GOLDMAN SACHS SOCIALISM

The nation's financial system is in the middle of a colossal crisis caused by massive fraud, idiocy, and greed at the upper reaches of the banking, insurance, and real estate industries. The arch-plutocratic Bush administration and Federal Reserve propose to "solve" the crisis by orchestrating a massive taxpayer bailout granting stupendous rewards to the leading perpetrators. The Paulson-Bernanke plan to buy up $700 billion worth of bad, overpriced mortgage assets takes the venerable corporate principle of "socialism for the rich and capitalism for the poor" (privatization of reward and socialization of risk) to grotesque new levels.

Compensating gross business misconduct on a spectacular scale, it would be what former Wall Street economist Michael Hudson called "the largest and worst giveaway since a corrupt Congress gave land grants to the railroad barons a century and a half ago. If it goes through, it will shape the coming century by giving finance unprecedented power over debtors - homebuyers, industry, state and local government, and the federal governmentas well" [1]

As former presidential candidate and progressive Democrat Dennis Kucinich notes, "The double standard is stunning; their profits are their profits, but their losses are our losses." Further: "the same corporate interests that profited from the closing of U.S. factories, the movement of millions of jobs out of America, the off-shoring of profits, the out-sourcing of workers, the crushing of pension funds, the knocking down of wages, the cancellation of health care benefits, the sub-prime lending are now rushing to Washington to get money to protect themselves" [2].

On the front page of the New York Times today (I am writing on Thursday, September 25th), a reporter notes a grave concern among "many ordinary Americans" - that the profound difficulty involved in determining the real value of "troubled investments" could "result in the government's buying them for more than they will ever be worth, a step that would benefit financial institutions at taxpayers' expense." Times reporter Vikas Bajaj notes that "each one of these investments is tied to thousands of individual mortgages, and many of those loans are going bad as the housing market has worsened." Bajaj quotes a leading bond portfolio manager who reports that "we are not going to know what the right price is for years." [3]

But while precise valuation waits, it is a sure bet that the government's purchasing price will be well above fair market value. Asset inflation (along with asset-stripping) is what this latest late-capitalist boom and bust drama - the "mother of all bubbles" (Glen Ford) - is all about [4].

SUBSIDIZING "THE VERY PEOPLE WHO SOLD OUT MY COUNTRY"

Is it any wonder that the Bush administration's scheme to rescue predatory high finance at a price that could fund Society Security for four decades evokes widespread fear and loathing across the United States? Lawmakers of both parties have been releasing e-mail messages from their constituents decrying the proposed bailout. A typical message to Representative Jim McDermott (D-Washington) reads as follows: "I am hoping Congress can find the backbone to stand on their feet and not their knees before BIG BUSINESS." A representative e-mail to conservative Republican congressperson Candice Miller (R-Michigan) said this: "NO BAILOUT, I am a registered republican. I will vote and campaign hard against you if we have to subsidize the very people who have sold out MY COUNTRY." U.S. Senator Sherrod Brown (D-Ohio) reports 2,000 e-mails and calls that are "95 percent opposed" to the bailout. The reactionary Illinois congressman Ray LaHood (R-Illinois) says he has not seen such an outpouring of citizen rage since the Bill Clinton impeachment trial [5].

"NATIONAL LEADERS IN A TIME OF CRISIS"

How interesting that the supposed "populist" "maverick" John McCain and the alleged left "progressive" Barack Obama have taken a painfully cautious, wary, and vague approach to the epic financial meltdown and the Paulson-Bernake giveaway. These two would-be leaders of "We the People" have watched the historic financial debate with super-careful reserve. They have responded with few if any meaningful differences between them, consistent with the "post-ideological" Obama's request for the open economic ignoramus McCain to join him in issuing a joint statement and with McCain's call to suspend the first presidential debate so that "our national leaders" might "come together at a time of crisis."

Both candidates have called for "greater oversight," for "limits" on executive pay at bailed out firms, and for "ensuring that taxpayers benefit" from whatever emerges. Both have agreed to meet with Bush to forge a Wall Street "rescue bill" because, as both Obama and Bush declare - in Obama's word's yesterday, anticipating Bush's televised statement on the financial crisis last night - the "the risk of doing nothing is economic catastrophe" [6].

Neither of the two business party contenders has called for a moratorium on foreclosures or for writing down the mortgage debt of millions of families facing expropriation. Neither has demanded a public ownership stake in recused firms or the tough re-regulation, disciplining, and political (and campaign finance) neutralization of the finance, insurance, and real estate (FIRE) sector's owners and managers. Neither has called for transferring funds from the giant, bloated (but sacrosanct_ "defense" (Empire) budget to support current and would-be homeowners, renters, workers and to stabilize markets poisoned by junk mortgages and other related toxic financial instruments.

"National eeaders?" The only presidential candidates speaking forthrightly and urgently against the proposed Wall Street giveaway have been Ralph Nader, Cynthia McKinney, and Bob Barr. They are banned from the presidential debates, even as McCain threatens not to show up for the first one. They have been preemptively exiled from serious consideration in the corporate-crafted narrow-spectrum electoral extravaganza.

"GIVE US THE MONEY - RIGHT NOW - OR TAKE THE BLAME FOR WHAT FOLLOWS"

The two "mainstream" candidates' cowardly response to the latest spectacular state-capitalist financial fiasco is a result of six basic factors.

First, neither of them wants to be seen as sticking their foot in their mouth on a major but complex issue that changes from one day to the next in accord with shifting markets, polls, and political winds. This is a close race (absurdly enough given the transparent danger and idiocy of the McCain-Palin ticket and the Republican Party's recent record) and one mistaken comment could cost the election.

Second, while both candidates (even the painfully isolated McCain) are sharply aware (that many voters hate Bush's bailout, they also know that officeholders and candidates who oppose the plan risk blame if deepening economic calamity is seen to have resulted from "congressional inaction." As William Greider notes, "Wall Street has put a gun to the head of the politicians and said, ‘Give us the money - right now - or take the blame for what follows'"[7].

DEFECIT v. HOPE"

Third, the major hike in federal debt that is certain to result from a "rescue" plan does not fit well with either of the candidates' campaign promises. The giant public expenditures certain to occur in a likely Wall Street bailout works against McCain's call to extend Bush's tax cuts for the rich. They also challenge Obama's call for "middle class tax cuts" and his promise to increase public subsidies for health care, education, renewable energy, retirement savings, and other priorities. Obama is already talking scaling down some of his already tame "hope" agenda in response to the crisis.

BIPARITSAN COMPLICITY

Fourth, both candidates know that their own parties and key players in their campaigns were centrally involved in key policy moves that created the context for the current financial debacle. During the late 1990s, McCain's longtime ally, associate, and (until recently) economic adviser Phil Gramm was the leading Congressional force behind legislation that exempted numerous toxic financial instruments ("credit swaps," "over the counter derivatives," "credit defaults" and the like) from regulatory scrutiny. Gramm also led the way for the fateful undoing of basic federal (from the New Deal) firewalls between commercial banking, investment banking and the insurance industry [8].

The top Obama advisor and funder Robert Rubin was an even bigger agent of the fateful deregulation of the financial industry and the related drastic over-escalation of financial asset prices during the 1990s "Clinton boom." Under the guidance of the its Treasury Secretary Rubin - a former Goldman Sacs CEO and future Citigroup Chair - the neoliberal Clinton administration (described as "recognizably progressive" in Obama's 2006 campaign book The Audacity of Hope) refused to halt the path to ultimate disaster by taxing speculative financial transactions or by reducing reserve requirements for loans funding productive rather than speculative investments. As Lila Rajiva recently noted, Rubin "was responsible as much as anyone else for blocking regulation of the over-the-counter derivative trade and for consolidating the banks - misdeeds for which the rest of the financial industry is now paying." Rubin influenced Clinton to sign Gramm's deregulatory legislation, favored by Wall Street Republicans and Democrats alike[9].

Perversely enough, Rubin was one of the first to personally profit from the abolition of the separation between commercial and investment banking. Getting out of Dodge before the dot.com asset inflation bubble burst in 2002-2001, Rubin moved from Treasury to become co-director of Citigroup, a newly merged investment-commercial banking conglomerate [10].

WALL STREET SPONSORSHIP

Fifth, both McCain and Obama are deeply beholden to the very financial elites and Wall Street firms who created the current mess and who stand to gain from the Bush-Paulson-Bernanke proposal. Through August of 2008, McCain's top 20 contributors include: Merrill Lynch (#1 at $298,000); Citigroup (#2 at $209,000); Morgan Stanley (3 at $233,000); Goldman Sacs (4 at $208,000); Credit Suisse Group (8 at $150,000); UBSAG (10 at $140,000); PriceWaterhouseCooper (11 at $140,000); Bank of America (13 at $129,000); Wachovia (14 at $122,000); Lehman Bros (15 at $116,000), Bear Stearns (19 at $99,000), and Pinnacle West (20 at $98,000)

Of all the leading U.S. economic sectors, FIRE (finance, real estate, and insurance) is the top giver to McCain at $22,108,921 [11].

Obama's top 20 contributors include Goldman Sachs (#1 at $692,000), Citigroup (#3 at $449,000), JP Morgan Chase (#4 at $405,000), Lehman Bros. (#10 at $371,000), and Morgan Stanley (#16 at $319,000). Note that Goldman Sachs has given three times the amount to Obama it has contributed to McCain and that Citigroup's Obama giving more than doubles its investment in McCain. Obama's #16 contributor - the investment bank Morgan Stanley - gave Obama $20,000 more than McCain got from his top contributor (the investment banker and brokerage house Merrill Lynch).

FIRE is also Obama's top contributor, granting him $24,860,257, more than $2 million more that sector gave to McCain [12].

It is darkly interesting to note that the Obama campaign's finance chair, the Hyatt heress Penny Pritzker, was one of the leading originators of the toxic sub-prime mortgage instrument during the late 1990s, when she served on the board of the Superior Bank in Hinsdale, Illinois [13].

Also worth noting, Obama initially tried to hand his vice presidential nominee vetting process to Jim Johnson, a former CEO of mortgage lender Fannie Mae (recently re-nationalized in the wake of its financial collapse). Johnson was a top player in the meltdown of the financial system [14].

As the prolific author and Wall Street critic Kevin Phillips noted on the Public Broadcasting System's Bill Moyers Show last week, "But then, you've got Obama with Bob Rubin and he doesn't seem to have any problem with the hedge fund types. I mean, one of the Chicago people was a major financer of his. He gets a guy to pick his vice-president. Turns out to be somebody who was part of the Fannie and Freddie mess."

"So I don't exactly see Obama as this fellow riding in on a horse who represents all kinds of reformism. It's an important thing probably to have to change from the Republicans but I don't see that he is free of the ties to finance and Democratic Party financial types....."

When Moyers noted many Democrats' hopes that a new New Deal - involving tightened financial regulation among other progressive reforms - is in the offing under an Obama administration [15], Phillips responded with understandable skepticism, explaining that:

"there's several difficulties here. First of all, at this point, what you've got are the Democrats are the party right at this point that's getting most of the financial money. When Franklin D. Roosevelt won in 1932, we know he wasn't getting most of the financial money."

"The second thing is I don't think we're more than partway through. The Democrats think it's going to be another 1933, they get in there, they can do all the New Deal stuff. My feeling is that they're coming in halfway and they're going to have to make hard decisions that are going to eat the Democratic coalition like a bologna sandwich. They're going to start civil wars...."

Phillips added that McCain probably "osmossed ...much less sycophancy toward Wall Street and the money crowd" growing up in "a naval family" than what Obama would have "osmossed at Harvard Law School." (But Phillips also noted that McCain who is an economic idiot, as evidence by his willingness to be advised by the ridiculous Gramm)[16].

LOVING "THE MARKET"

The sixth and final factor is that both Obama and McCain are open enthusiasts of American so-called "free market capitalism." This shared ideological commitment to the profits systems is of course mandatory for "viable" presidential candidates under the rules of American "dollar democracy," the "best democracy that money can [and did] buy." It does not leave a lot of room for serious public confrontation with the privileges and dictates of capital, no matter how dysfunctional and dangerous masters of finance have become for the common good.

The supposed "radical leftist Obama" [17]identifies himself as a "pro-market" and "free trade" "guy," saying things like, "Look, I am a pro-growth, free-market guy. I love the market" [18]. But as Laurence Shoup recently noted in Z Magazine, Obama "fail[s] to note that the market loves and rewards those who already have money and power, not those lacking these advantages. To say that you ‘love the market' is akin to saying that you love the ruling class (the top 1 percent of the population that controls 20 percent of the country's wealth and nearly 40 percent of the country's wealth) and do not care about the great majority (the 60 percent of the population that controls only 25 percent of the income and 5 percent of the wealth). To say ‘I love the market' - at a time when the financial system is deflating because of decades of lies about how great unregulated markets are which fueled rampant speculation, phony valuations, and deceitful assurances - is to be deaf to the reality of powerful interests are protected by the government while everyone gets a lecture on personal responsibility. ‘Change we could believe in,' would involve confronting the perversity of market-driven capitalism...." [19]

Cowards, fools, whores, and defenders of unjust privilege and concentrated wealth do not make great popular leaders in times of crisis or stability. The cautious and conservative approach of the two dominant party presidential candidates to the current state-capitalist financial fiasco reminds us of the need, in John Pilger's words (on the back cover of my recent study of the Obama phenomenon) to "reveal power as it is, not as many of us wish it to be." It is also, to quote Adolph Reed, Jr. (also writing on the back of my new Obama book) a "bracing reminder that progressive agendas will not be advanced through vesting hopes and aspirations in candidate-centered politics, that there is no quick and easy substitute for the task of building a serious, institutionally grounded, working-class based political movement - from the bottom up and top down" [20].

Veteran radical ex-historian and activist Paul Street (paulstreet99@yahoo.com) is the author of Empire and Inequality (2004), Segregated Schools (2005), and Racial Oppression in the Global Metropolis (2007). His latest book (just released) is "Barack Obama and the Future of American Politics" (Boulder, CO: Paradigm Publishers, August 2008),order at

www.paradigmpublishers.com/Books/BookDetail.aspx?productID=186987

NOTES

1. Michael Hudson, "The Paulson-Bernanke Bank Bailout Plan," CounterPunch (September 22, 2008), read at http://www.counterpunch.org/hudson09222008.html

2. Dennis Kucinich, "Protecting the Public Interest in Any Economic Bailout" (September 23, 2008), read at www.Kucinich.us

3. Vikas Baja, "Rescue Plan's Basic Mystery: What's All This Stuff Worth?," New York Times, 25 September, 2008, p. A1.

4. Michael Hudson, "America's One Kleptpcracy," CounterPunch (September 20/21, 2008); Glen Ford, "Death Rattles of a Criminal Class," Black Agenda Report (September 24, 2008), read at www.blackagendarpeort.com

5. Sheryl Gay Stolberg, "Lawmakers' Constituents Make Their Bailout Views Loud and Clear," New York Times, 25 September 2008, p. A25.

6. Charles Babington, "Obama, McCain Cautiously Watch financial Debate," Associated Press (September 23, 2008); Gail Collins, "Bring On the Rubber Chickens," New York Times, 25 September 2008, A29; Elizabeth Bumiller and Jeff Zeleny, "McCain for Delay," New York Times, 25 September 2008, A1, A23.

7. William Grieder, "Goldman Sachs Socialism," The Nation (September 23, 2008), read at http://www.thenation.com/doc/20081006/greider2

8. Alexander Cockburn, "Is This the Stake Through Neoliberalism's Heart? It Should Be, But...", CounterPunch (September 20/21, 2008), read at http://www.counterpunch.org/cockburn09202008.html; Lila Rajiva, "Putting Lipstick on an AIG," CounterPunch (September 20,21, 2008), read at http://www.counterpunch.org/rajiva09202008.html.

9. Rajva, "Putting Lipstick on an AIG;" Cockburn, "Is This the Stake?;" Robert Pollin, Contours of Descent: U.S. Economic Fractures and the Landscape of Global Austerity (New York: Verso, 2003)

10. Pollin, Contours of Descent, p. 32.

11. Center for Responsive Politics, "John McCain (R): "Top Contributors" and "Sectors" (2008 election cycle through August 2008), view at http://www.opensecrets.org/pres08/contrib.php?cycle=2008&cid=N00006424. Here are the standard economic sectors used in the reporting of campaign finance data: Agribusiness; Finance, Insurance, and Real Estate (FIRE); Lawyers and Lobbyists; Health; Labor; Communications/Electronics; Transportation; "Defense;" Construction; Energy and Natural Resources; Misc. Business; Ideological/Single Issue.

12. Center for Responsive Politics, "Barack Obama (D): "Top Contributors" and "Sectors" (2008 election cycle through August 2008), view at http://www.opensecrets.org/pres08/contrib.php?cycle=2008&cid=N00009638.

13. "Truthteller," "REVEALED: Obama Finance Chairwoman Pritzker the Toxic Catalyst of the current Financial Crisis," No Quarter (September 22, 2008), read at http://noquarterusa.net/blog/2008/09/22/revealed-obama-finance-chairwoman-pritzker-the-toxic-catalyst-of-the-current-financial-crisis/

14. Johanna Neuman, "Barack Obama Advisor Jim Johnson Quits under Fire," Los Angeles Times, 12 June, 2008, read at http://articles.latimes.com/2008/jun/12/nation/na-johnson12

15. This is the fantasy behind a smart but silly book by the liberal economist and American Prospect editor Robert Kuttner: Obama's Challenge: America's Economic Crisis and the Power of a Transformative Presidency (White river Junction, VT: Chelsea Green, September 2008)

16.Kevin Phillips Interview by Bill Moyers, Bill Moyers Journal(September 19, 2008), read transcript at http://www.pbs.org/moyers/journal/09192008/transcript2.html

17. The ridiculous description of Obama advanced by the right-wing hit-man Jerome Corsi in his best-selling book "Obama Nation." For a (I hope) useful review of Corsi's preposterous neo-McCarthyite (and yet best-selling) account of Obama, see Paul Street, "The Madness of Jerome Corsi," ZNet (August 25, 2008), read at http://www.zcommunications.org/znet/viewArticle/18540.

18. Naomi Klein, "Obama's Chicgao Boys," The Nation (June 12, 2008), read at http://www.thenation.com/doc/20080630/klein.

See also Barack Obama, Barack Obama, The Audacity of Hope: Thoughts on Reclaiming the American Dream (New York: Crown, 2006),pp. 149-150; Paul Street, "Obama's Audacious Deference to Power," ZNet Magazine (January 24, 2007), read at http://www.zmag.org/content/showarticle.cfm?ItemID=11936.

19. See Laurence H. Shoup, "Obama and McCain March Rightward," Z Magazine (September 2008), p. 27.

20. Paul Street, Barack Obama and the Future of American Politics (Boulder, CO: Paradigm Publishers, 2008), back cover. I hope this book will be understood as useful left alternative to both the vicious right-wing neo-McCarthyiite-white-Christian-nationalist madness of Corsi's attack book ("Obama Nation") and the childish progressive hopefulness of Robert Kuttner's monograph and an earlier similarly immature (but much less serious and substantive) book by Obama's liberal former law student John Wilson: Barack Obama: This Improbable Quest (Boulder,CO: Paradigm Publishers, 2007).

http://www.zmag.org/znet/viewArticle/18930

Redistribute the Wealth? Yes, But Not What Obama Proposes

2008-11-02T12:16:00.000-08:00

Redistribute the Wealth? Yes, But Not What Obama Proposes

by Paul Street / October 29th, 2008

According to the “liberal” New York Times last Friday, John McCain’s fading chances of overtaking Barack Obama in the presidential election were increased to some degree by an “inopportune remark by Mr. Obama.” Obama’s bad statement was the “remark to [Joe] the plumber in Ohio who asked about [Obama’s] proposal to increase income tax rates on households making over $250,000 a year, in which Mr. Obama asserted that there was a need to ‘spread the wealth.’”

McCain, the Times reported, “seized on the response to reprise the he-will-raise-your-taxes attack that has historically had resonance in states like Florida, Iowa , and New Hampshire ” (A. Nagourney, “How McCain Hopes to Defy the Polls and Win,” NYT, 10-24-2008, A1, A19)

For the record, here’s exactly what Obama said to “Joe the Plumber” earlier this month:

“It’s not that I want to punish your success. I just want to make sure that everybody who is behind you, that they’ve got a chance for success too. My attitude is that if the economy’s good for folks from the bottom up, it’s gonna be good for everybody … I think when you spread the wealth around, it’s good for everybody.”

Obama as a “Socialist”

The Times understated the Republicans’ reactionary use of Obama’s comment. More than merely claiming that Obama is going to “raise taxes,” the Republican propaganda machine has been using the militantly centrist and “deeply conservative” Obama’s remark to bolster their preposterous neo-McCarthyite claim that he is a leftist proponent of wealth redistribution. Sarah Palin, Sean Hannity and other hard-right attack dogs have been suggesting that Obama’s comment reflects the likelihood that the junior senator from Illinois is “a socialist.”¹

McCain spokesman Michael Goldfarb tried to make a twofer out of Obama’s “inopportune remark.” Goldfarb used it to connect the absurd claim that the Democratic contender is a “leftist” to the equally ridiculous charge that Obama is an “appeaser” of official global enemies. “If Barack Obama’s goal as President is to ‘spread the wealth around,’” Goldfarb told FOX News, “perhaps his unconditional meetings with Hugo Chavez, Raul Castro, and Kim Jong-Il aren’t so crazy — if nothing else they can advise an Obama administration on economic policy.”

Rising Tide and Equality of Opportunity vs. Radical Redistribution and Equality of Condition

I have four comments from the real Left on Obama’s remark, its treatment in U.S. political culture, and the problem of inequality. First, contrary to the right-wing’s hysterics, calling for “spread[ing] the wealth around” is not the same as advocating the egalitarian redistribution of wealth. In the dominant Western state-capitalist ideology to which both McCain and Obama subscribe (no candidate who rejects that ideology can make a serious run at the U.S. presidency), “mainstream” (corporate-approved) policymakers have long contended that the solution to poverty and material insecurity is “economic growth” — expanding the pie instead of slicing it up in a more equitable fashion. “A rising tide,” the argument runs, “lifts all boats,” so that nobody has to worry about who has the biggest and most luxurious vessels. The claim is that political-economic managers can generate enough employment and income that peoples’ material needs can be met without social conflict over the “obsolete” problems of distribution.

When American capitalist elites and politicians talk about increasing equality, moreover, they only mean equality of opportunity, not equality of condition. For the authentic historical left, by contrast, meaningful “equality” involves outcomes, not just “opportunity.” It’s not just about granting everyone an identical chance to become fabulously rich or miserably poor in accord with their particular combination of talent, hard work, and luck.

Radicals believe that the massive socioeconomic disparities that scar American and global life today would be no less offensive and damaging if everyone at the top had risen to their positions from a mythical “level playing field.”” As Noam Chomsky noted in response to a questioner who characterized American inequality by using the metaphor of “two runners in a race: One begins at the starting line and other begins five feet from the finish line:”

“That’s a good analogy, but I don’t think it gets to the main point. It’s true that there’s nothing remotely like equality of opportunity in this country, but even if there were the system would still be intolerable. Suppose that you have two runners who start at exactly the same point, have the same sneakers, and so on. One finishes first and gets everything he wants: the other finishes second and starves to death.”²

Referring to himself as a “free market guy” and reminding elites and others that he “loves the market,”³ Obama does and advocates nothing that remotely questions the sincerity of this terrible paean to the profits system. His embrace of the federal bailout of elite U.S. financial firms (including many of his top contributors) is a recent example of his strict adherence to the heavily indoctrinated state-capitalist mindset of Harvard Law and his leading sponsor Goldman Sachs.

“I Meant ‘Spreading Around Opportunity’”

Obama has also consistently advanced a militantly bourgeois take on social inequality and mobility. After claiming that the U.S. is a “beacon of freedom and opportunity” for those who exhibit “hard work and perseverance,” his instantly famous 2004 Democratic Party keynote address praised Americans for believing that “with just a slight change in priorities, we can make sure that every child in America has a decent shot at life, and that the doors of opportunity remain open to all.” This theme was repeated in The Audacity of Hope.⁴

Picking up on this standard conservative perspective on the meaning of equality as equality of opportunity (not of condition), Obama had this to say in his own defense after the Republicans started making hay with Obama’s “inopportune remark” to “Joe the Plumber:”

The simple point I was trying to make was that even assuming he’s at a point that he wants to buy a business that he hopes will generate more than $250,000, the point I was making was that ten years or five years ago or even a year ago when he was making a lot less than that, he was having a tough time…We don’t mind people getting enormously wealthy because of their skills and talents and their drive. But we always want to make sure that playing field is such where everybody’s who’s got a good idea has a chance to succeed. Everybody’s got a chance to get financing. Everybody who works hard is able to raise a family. Everybody has an opportunity if they act responsibly to send their kids to college and retire with dignity and respect. And in that sense, that does involve us spreading around opportunity.⁵

Of course, anyone who seriously examines America’s candidate selection and election processes knows that the chances of a “radical redistributionist” making it to the cusp of the presidency are slim to none. Nobody promising to break up concentrated wealth and distribute resources equitably across the population is going to receive the corporate sponsorship and media approval required to make a viable bid for the presidency under American “market democracy.”⁶ Obama and his handlers are fully aware of this, we can be quite sure. They are in it to win it.

Inequality vs. Democracy

Third, it’s a damn shame Obama can’t call for equality even if he wants to. There’s a strong Western and American philosophical and political tradition — hardly just socialist — that can be cited in support of the redistribution of wealth. In Aristotle’s Politics, the foundation for much subsequent Western political theory (including that of the U.S. Founders), it was understood that a meaningful democracy would have to be fully participatory and directed toward the common good. That could not be attained, Aristotle argued, in the absence of relative social equality, including “moderate and sufficient property” for all (of course Athens denied participation and benefits to women and slaves).

Aristotle thought you couldn’t talk seriously about democracy in a society characterized by extremes of rich and poor. Great wealth inequality and democracy could not coexist because within a society because people with inordinate wealth possess superior resources to influence politics and policy in their own selfish interests.

If Aristotle was right, there are good reasons to “mind people getting enormously wealthy” — through whatever means (and most private wealth in primarily attributable to external social circumstances, not the individual agency of wealthy individuals) — in a society containing other citizens who are poor or merely less wealthy.

The notion that there is a core conflict between economic inequality and political democracy was shared by subsequent giants of Western thought and politics, including Adam Smith, Alexis de Tocqueville, Wilhelm von Humboldt, John Stuart Mill, Thomas Jefferson, and John Dewey — none of whom were socialists.⁷Six leading global financial firms (one recently closed) can be found among Obama’s top 15 contributors: Goldman Sachs (#2 at $743,000), Citigroup (#4 at $500,000), JP Morgan Chase (#6 at $478,000), UBSAG (#9 at $419,000), Lehman Bros (#10 at $392,000), and Morgan Stanley (#15 at $344,000). See www.opensecrets.org.⁸For more details and sources on the disconnect in American democracy, see Paul Street, “Americans’ Progressive Opinion vs. ‘The Shadow Cast on Society by Big Business’,” ZNet (May 15, 2008).

The nation’s “mainstream” (dominant and corporate) media is full of news and commentary fretting about the possible demise of — and the need to “rescue” — “capitalism”. It does not fret much about the need to save the poor and the working class. It says nothing about the need to move funds from the nation’s colossal and sacrosanct “defense” (Empire) budget to the meeting of social needs at home and abroad.

If we want to talk seriously about the existence of democracy in the US, we very much need to redistribute wealth in this country.

Capitalism vs. Democracy

Last but not least, as no leading “mainstream” corporate candidate or commentator can seriously acknowledge, there lurks behind all of this a fundamental conflict between (i) the social equality required for meaningful democracy and (ii) capitalism. Twelve years ago, the liberal economist Lester Thurow noted that “democracy and capitalism have very different beliefs about the proper distribution of power. One believes in a completely equal distribution of political power, ‘one man [sic] one vote,’ while the other believes that it is the duty of the economically fit to drive the unfit out of business and into extinction. ‘Survival of the fittest’ and inequalities in purchasing power are what capitalist efficiency is all about. Individual profit comes first and firms become efficient to be rich. To put it in its starkest form, capitalism is perfectly compatible with slavery. Democracy is not.” (Thurow, The Future of Capitalism, New York, 1996)

In a similar vein, onetime Chicago Tribune economics correspondent R.C. Longworth, also no radical, noted a decade ago that the “struggle of democracy and capitalism” is “at the heart” of “debate over the global economy. In theory,” Longworth claims, “they are meant to go together, indeed to be inseparable. But democracy’s priorities are equality before the law, the right of each citizen to govern the decisions that govern his or her life, the creation of a civilization based on fairness and equity. Capitalism’s priorities are inequality of return, profit for the suppliers of capital, efficiency of production and distribution, the bottom line” (Longworth, Global Squeeze ,Chicago, 1998).

Here’s how Webster’s Unabridged Second Edition defines capitalism: “the economic system in which all or most of the means of production and distribution are privately owned and operated for profit, originally under fully competitive conditions: it has generally been characterized by a tendency toward a greater concentration of wealth and, in its later phase, by the growth of great corporations. . . ”

Great corporations, like The New York Times, the leftmost “mainstream” newspaper in a national political and media culture so reactionary that top “liberal” journalists find it “inopportune” for a candidate to be heard advocating a bit more economic opportunity for people below the opulent pinnacles of the nation’s steep class hierarchy. A political culture so reactionary that a stridently bourgeois corporate candidate risks being accused of the supposed crime of being a dangerous “radical” for daring to advocate a slightly more egalitarian version of capitalism.

Don’t just take it from an actual radical like me. Take it from Aristotle and Jefferson: we need a significant redistribution of wealth if we want like democracy in the United States .

And take it from Webster’s: that’s going to mean breaking with capitalism, the real disease (by the way) behind the financial symptoms and the related plutocratic policy responses that have developed over the last six weeks.

These are harsh realities that can never be acknowledged by the ruling US media and propaganda system. Perhaps we can turn to these urgent issues in a serious way when the confetti of the current quadrennial electoral extravaganza clears and the cold facts of life under American state-capitalist Empire and Inequality comes into clearer focus.

1. For a careful portrait of Obama as “deeply conservative,” see Larissa MacFarquhar, “The Conciliator: Where is Barack Obama Coming From?” The New Yorker, May 7, 2007. See also Ryan Lizza, “Making It: How Chicago Shaped Obama,” The New Yorker, July 21, 2008; Paul Street, Barack Obama and the Future of American Politics ( Boulder, CO; Paradigm, 2008). For reflections on the Republican campaign and public relations structure as neo-McCarthyist, see Paul Street, “Proto-Fascism in the United States: Campaign Reflections,” ZNet (October 17, 2008); Paul Street , “The Madness of Jerome Corsi,” ZNet (August 25, 2008). [↩]
Noam Chomsky, The Common Good (Berkeley: Odonian, 1998), pp. 9-10.
The true Left has never sought merely a more superficially equal — fair start but unequal finish — rat race.

“Our Greatest Asset”: Capitalism

Second, the heavily corporate-sponsored Obama has given repeated evidence that his concept of “sharing the wealth does not go beyond the limited bourgeois notions of expanding the pie and equality of opportunity. Listen (for one example among many) to the following revealing passage from Obama’s relentlessly power-worshipful 2006 campaign book The Audacity of Hope:

Calvin Coolidge once said that ‘the chief business of the American people is business,’ and indeed, it would be hard to find a country on earth that’s been more consistently hospitable to the logic of the marketplace. Our Constitution places the ownership of private property at the very heart of our system of liberty. Our religious traditions celebrate the value of hard work and express the conviction that a virtuous life will result in material rewards. Rather than vilify the rich, we hold them up as role models…as Ted Turner famously said, in America money is how we keep score.”

The result of this business culture has been a prosperity that’s unmatched in human history. It takes a trip overseas to fully appreciate just how good Americans have it; even our poor take for granted goods and services –– electricity, clean water, indoor plumbing, telephones, televisions, and household appliances — that are still unattainable for most of the world. America may have been blessed with some of the planet’s best real estate, but clearly it’s not just our natural resources that account for our economic success. Our greatest asset has been our system of social organization, a system that for generations has encouraged constant innovation, individual initiative and efficient allocation of resources…our free market system.”3. Barack Obama, The Audacity of Hope: Thoughts on Reclaiming the American Dream (New York: Crown, 2006), pp. 149-150. The Audacity of Hope left it to left progressives — characterized by Obama and many of his elite supporters as insufficiently “realistic” and excessively “moral absolutist” carpers, “cranks,” and “zealots” — to observe some of the undesirable and less-than-“efficient” outcomes of America’s heavily state-protected “free market system” and “business culture.” Those results include the climate-warming contributions of a nation that constitutes five percent of the world’s population but contributes more than a quarter of the planet’s carbon emissions. Other notable effects include the generation of poverty for tens of millions of US children while executives atop “defense” firms like Boeing, Lockheed-Martin, and Raytheon rake in billions of taxpayer dollars for helping the United States maintain the deadly and criminal occupations of Iraq and Afghanistan. “The Audacity of Hope” left it to insufficiently “pragmatic” Left thinkers and activists to note the American System’s arguably wasteful and destructive allocation of more than a third of the nation’s wealth to the top 1 percent of the U.S. population and its systematic subordination of the common good to private profit. “Unreasonable” “radicals” were left to observe that business-ruled workplaces and labor markets steal “individual initiative” from millions of American workers subjected to the monotonous repetition of imbecilic and soul-crushing operations conducted for such increasingly unbearable stretches of time — at stagnating levels of material reward and security — that working people are increasingly unable to participate meaningfully in the great “democracy” Obama trumpets as the Founders’ great legacy. They were left also to “complain” about the fact that US social mobility rates are actually quite low in comparison to other leading industrialized states, indicating a relatively fixed class structure in what Obama considers “the magical place” called America. [↩]
4. As Laurence Shoup recently noted in Z Magazine, Obama’s declaration of “love” for the market “failed to note that the market loves and rewards those who already have money and power, not those lacking these advantages. To say that you ‘love the market’ is akin to saying that you love the ruling class (the top 1 percent of the population that controls 20 percent of the country’s wealth and nearly 40 percent of the country’s wealth) and do not care about the great majority (the 60 percent of the population that controls only 25 percent of the income and 5 percent of the wealth). To say ‘I love the market’ — at a time when the financial system is deflating because of decades of lies about how great unregulated markets are which fueled rampant speculation, phony valuations, and deceitful assurances — is to be deaf to the reality of powerful interests are protected by the government while everyone gets a lecture on personal responsibility. ‘Change we could believe in,’ would involve confronting the perversity of market-driven capitalism….” See Laurence H. Shoup, “Obama and McCain March Rightward,” Z Magazine (September 2008), p. 27. [↩]
Barack Obama, Democratic Convention Keynote Address: “Time to Reclaim America’s Promise” ( Boston, MA , July 27, 2004); Obama, The Audacity of Hope, p. 7. [↩]
Link. [↩]
Edward S. Herman, “How Market Democracy Keeps the Public and Populism at Bay,” ZNet Sustainer Commentary (August 13, 2007). [↩]
8. See Noam Chomsky, The Common Good, pp. 5-10; Noam Chomsky, Class Warfare (Monroe, ME: Common Courage, 1996), pp. 123-24; Noam Chomsky, Powers and Prospects: Reflections on Human Nature and the Social Order (Boston, MA: South End, 1996), pp. 72, 87-89, 93, 117-118; Noam Chomsky, Chomsky on Democracy and Education (New York: Routledge-Falmer, 2003). Even James Madison, who advocated a government that would “protect the minority of the opulent against the majority,” came to loathe the wealthy Few’s takeover of early American policy and opinion. By the 1790s, he denounced the “daring depravity of the times” as “the rising class of business people become ‘the tools and tyrants’ of government, overwhelming it with their force and benefiting from its gifts.”

Aristotle, Jefferson, and classic Western liberalism’s concerns about the crippling impact of concentrated wealth and economic disparity on popular governance are richly born out by current-day U.S. politics and policy. The top 1 percent controls 40 percent of U.S. wealth and 57 percent of claims on wealth (interest, dividends and the like), leaving the remaining 99 percent to fight it out for less than two–thirds of the nation’s net worth. The top 10 percent owns more than two-thirds of the nation’s wealth and a probably larger share of the nation’s politicians and policy makers.

Contrary to popular myth, America’s stark class structure is relatively immobile. The “American Dream” of rising from poverty to wealth is actually less attainable in the U.S. than in most other advanced capitalist states.

The “greatest democracy money can buy” (Greg Palast’s description of the U.S. political system) grants giant tax breaks to the already super-wealthy. It pays for a massive war and empire budget ($622 billion this year) that supports more than 730 military bases spread across nearly every nation on Earth and accounts for half the world’s military spending (all in the Orwellian name of “defense”). This is because the privileged American Few aren’t content to own a disproportionate share of US wealth. They and their imperial planners seek to control as much of the world’s treasure and resources (petroleum reserves in particular) as possible. At the same time, war, militarism, arms sales, and conquest are lucrative investments in and of themselves. The Pentagon budget is a giant public subsidy — a powerful mechanism of regular public wealth transfer to the high-tech corporate sector.

Americans are currently watching “their” government grant hundreds of billions of public dollars to the “unavoidable” bailout of parasitic Wall Street firms who engineered a financial meltdown that is helping trigger a deep recession that will throw millions out of work. By more than mere coincidence, many of us barely get by from one paycheck to the next. Evictions, foreclosures, bankruptcies and suicides are on the rise in the working, lower, and middle classes.

Tens of millions of U.S. citizens will stand in food lines each year. Many of those deeply disadvantaged Americans are part of the “working poor,” a group that “plays by the rules” and still can’t keep their heads above water in “the world’s richest nation.”

Meanwhile the current quadrennial corporate-crafted narrow-spectrum, personality-centered presidential election spectacle renders the nation’s more than 37 million officially poor nearly invisible. The candidates talk regularly about helping the middle class but do not speak seriously about rising mass poverty and the plight of the poor. Like the bloated “defense” (Empire) budget, the depth and degree of economic inequality is “off the table” of serious debate in dominant U.S. political and media culture.

The great “progressive” hope Obama’s top Wall Street backers [↩]
are granted tens of billions of dollars from the U.S. Treasury, but there is no serious or remotely equivalent bailout being planned for the non-affluent majority.
Meanwhile, working class sons and daughters are economically drafted into deadly service into bloody colonial wars of Terror on Iraq and Afghanistan — illegal and imperial wars that both business candidates will clearly maintain.

Both of the dominant two business parties and their leading candidates stand well to the big business- and Empire-friendly right of the popular U.S. majority on critical policy issues. [↩]

Paul Street (paulstreet99@yahoo.com) is a veteran radical historian and independent author, activist, researcher, and journalist in Iowa City, IA. He is the author of Empire and Inequality: America and the World Since 9/11 (Paradigm 2005); Segregated Schools: Educational Apartheid in the Post-Civil Rights Era (Routledge 2005): and Racial Oppression in the Global Metropolis (Rowman&Littlefied 2007). Street's new book Barack Obama and the Future of American Politics

http://www.dissidentvoice.org/2008/10/redistribute-the-wealth-yes-but-not-what-obama-proposes/

Marxism and the Economic Crises

2008-11-02T12:14:00.000-08:00

Marxism and the Economic Crises

by Rohini Hensman / October 30th, 2008

A Theory of Crisis

The credit system was relatively undeveloped in Marx’s time, and he would not have been familiar with hedge funds, mortgage-backed securities, collateralized debt obligations (CDOs), credit default swaps (CDSs), and all the other derivatives that are now part of the global financial system. However, he was familiar with generalized crises, and tried to explain financial turmoil in terms of what is now referred to as ‘the real economy’: i.e., a crisis in the accumulation of capital. In his view, such crises were inevitable in capitalism, because it is a system of production not for human need but for profit.

In Volume I of Capital, Marx divided capital into constant capital (machinery, raw materials, etc.), which transferred their value unchanged to the product, and variable capital, spent on labor-power. The latter, he argued, was the only creator of value greater than the value it possessed itself, i.e., of surplus value, and thus of profits. (He also referred to constant capital as ‘dead labor’ — objects that embodied past labor — and to variable capital as ‘living labor’, embodied in living workers.) He called the ratio between constant and variable capital the ‘organic composition of capital’. The competitive character of capitalism enhances the normal tendency in any society for the productivity of labor — i.e., the amount of means of production which one worker can handle — to grow, and under capitalism, this growth is reflected in an increase in the organic composition of capital. But, according to Marx in Volume 3 of Capital, the rate of profit — the ratio of surplus value to the total amount of capital, both constant and variable, required to produce it — would have a tendency to fall as the organic composition increases, because surplus value or profit is created only by living labor. Beyond a certain point, as Grossmann put it, there would be an underproduction of surplus value in relation to the amount of capital required for new investment, and this was what resulted in crises. People might be homeless while properties remained unsold, jobs would be lost while factories remained idle; businesses would go bankrupt and their assets would be taken over by others, leading to a centralization of capital.

In many ways, this resembles the scenario staring us in the face today, as more and more people recognize that this is not just a ‘financial crisis’ but also a crisis in the ‘real economy’. In Marx’s day, the crisis would end and the rate of profit would be restored only after a massive devaluation or destruction of capital, accompanied by large-scale unemployment and a fall in wages, had taken place. Do we have to go through all this?

Counteracting Tendencies and Other Mechanisms

While Marx thought that the tendency for the rate of profit to fall was inevitable, he also identified counteracting tendencies that could slow down or even halt or reverse this fall temporarily. Chief among these was foreign trade, which, by cheapening the supply of raw materials (oil, cotton, iron, etc.) would counteract the fall; similarly, foreign investments in countries where capitalism was less developed, the organic composition of capital was lower and the rate of profit consequently higher, would also boost the average rate of profit. Lenin took up this theme in his pamphlet on imperialism. Their argument suggests that globalization, which has vastly increased foreign trade as well as investment in developing countries, with their lower wage rates and lower overall organic composition of capital, should counteract a fall in the average rate of profit and prevent a crisis. Why has it not done so?

To answer this question, we have to look at possible causes of crisis that Marx examined less thoroughly than the tendency of the rate of profit to fall, or did not examine at all because they were not operative in his time. In Volume 2 of Capital, Marx draws up schemas for the social reproduction of capital, and they comprise only two departments of capital: one producing means of production, and the other producing means of consumption (goods and services) for workers. The products of both these departments re-enter production, either as infrastructure, machinery and raw materials, or as living labor working in production, and we could therefore refer to this as ‘socially useful production’. Although Marx looks only at capitalist production, it is worth pointing out here that even if it is the state that invests in electricity and railways or healthcare and education, and no profit is made on these investments, capitalism still benefits from them, because they provide it with cheaper and higher quality inputs.

But what about luxury production of items consumed by capitalists? These do not re-enter the process of production, and Marx opined that if there were to be a disproportionate diversion of resources into articles of this sort, the process of accumulation would suffer. Looked at another way, the surplus value is obviously not all re-invested; some part of it is used for capitalists’ consumption, and we could call the branch of capitalism producing these items Department III. The more surplus value is diverted into Department III, the less there will be for Departments I and II, resulting in a shortage of surplus value for accumulation.

Neoliberal policies result in this diversion. It has been pointed out by scholars like Jan Breman that it is a mistake to think that neoliberalism constitutes deregulation of the market; it is, rather, a regulation of the market in the interests of the owners of capital. The truth of this observation becomes obvious if we examine the issue of patents. From time immemorial, so-called ‘intellectual property’ was unregulated; the men and women who invented the wheel and agriculture made no money out of these inventions, despite the fact that all subsequent generations made use of them. It is only under capitalism that corporations rush to patent not only their own but also other people’s inventions and discoveries, so that, for example, pharmaceutical companies can make obscene profits by selling life-saving drugs at prices that condemn most patients who need them to death. This is an example of regulation in the interest of capitalist profits.

In other cases, regulations protecting workers and the public are abolished. From the 1980s onwards, an orgy of such deregulation took place, above all in the US, proceeding apace under all regimes, including the Clinton administration. For example, the Glass-Steagall Act, which was passed in 1933 amid the collapse of the banking system to segregate commercial banking (taking deposits and lending) from the much more risky business of investment banking (underwriting and selling stocks and bonds), and helped to halt the run on banks, was repealed in 1999. Alan Greenspan had been arguing for its repeal from 1987, and pursued the ‘securitization revolution’ vigorously under the Bush administration. This, as William Engdahl argues, is at the heart of the present financial crisis. By allowing the non-transparent spreading of risk — rather like sending bird-flu patients back home without telling them have got the virus — it allowed contagion to spread from infected to formerly healthy banks. And by allowing financial institutions to gamble with the money of non-gamblers, keeping the bulk of their winnings when they won but leaving the public with the bulk of their losses when they lost, it led to a much greater concentration of wealth in the hands of non-productive capitalists than ever before.

This is brought out graphically by the Oversight Committee’s hearings into the American International Group (AIG) bailout. In Chairman Waxman’s words:

There are obvious differences between Lehman and AIG. Lehman is an investment bank; AIG is an insurance company. Lehman fell because it placed highly leveraged bets in the subprime and real estate markets; AIG’s problems originate in complex derivatives called credit default swaps. But their stories are fundamentally the same. In each case, the companies and their executives grew rich by taking on excessive risk. In each case, the companies collapsed when these risks turned bad. And in each case, their executives are walking away with millions of dollars while taxpayers are stuck with billions of dollars in costs . . . Last month, the taxpayers bought out AIG in an $85 billion bailout. This was a direct result of the mistakes made by Mr. Cassano. Yet even today, he remains on the company payroll, receiving $1 million a month. The federal bailout occurred on September 16. Less than one week later, AIG held a week-long retreat for company executives at the exclusive St. Regis Resort in Monarch Beach, California . . . Invoices provided to the Committee show that AIG paid the resort over $440,000, including nearly $200,000 for rooms, over $150,000 for meals, and $23,000 in spa charges. Average Americans are suffering economically. They are losing their jobs, their homes, and their health insurance. Yet less than one week after the taxpayers rescued AIG, company executives could be found wining and dining at one of the most exclusive resorts in the nation.

No doubt the AIG executives provide employment to the hotel workers at the resorts they patronize, but this is at the cost of tens of thousands of jobs lost in industries engaged in socially useful production.

The Impact of Militarism

While Marx considered war to be detrimental to the working class, he did not see it as having a negative impact on capital. This is probably because in his day, war and militarism were needed to secure and keep colonies, which contributed to keeping up the rate of profit. Today, when global trade and investment are better carried out through negotiation than through military occupation, militarism is no longer a necessity for capitalism.

Luxemburg came close to suggesting that military production belongs in a third department, since it constitutes the production of neither means of production nor consumption goods and services. It is clear that military products do not re-enter production, and we could therefore put it, along with luxury production, in Department III. Subsequently, there was a debate among Marxists as to whether a ‘permanent arms economy’ stabilized capitalism, while a more mainstream belief in the positive contribution of ‘military Keynesianism’ gained ground.

It is true that in the short run, the market for military production guaranteed by the state can boost employment in a downturn, thus smoothing over business cycles. Yet, like luxury production, it does this by diverting resources from the production of means of production and consumption; executives of military production units and private security contractors like Blackwater may be minting money, but this money constitutes a deduction from socially useful production. Seymour Melman concluded that excessive military spending by the US decimated its manufacturing base, slowed economic growth and reduced employment. In the words of Chalmers Johnson, “Military industries crowd out the civilian economy and lead to severe economic weaknesses. Devotion to military Keynesianism is, in fact, a form of slow economic suicide.” This was reflected in the ballooning US national debt, more than $9 trillion by the end of 2007.

Large-scale military spending is a feature of many national budgets, but US expenditure on ‘national security’, according to Chalmers Johnson, amounts to over a trillion dollars per year: more than all other national defense budgets combined. Needless to say, none of the products of this expenditure return to production, so it is a massive drain on the economy. Worse still, the role of the US dollar as a world reserve currency means that huge dollar reserves of other countries — especially Asian countries, with China and Japan in the lead – are also funneled into US military expenditure. US ‘national security’, in other words, has been acting as a black hole sucking in surplus value from the whole world. The crisis, consequently, is a global one.

How Do We Get Out of It?

Some socialists have suggested that this is the end of capitalism, but the notion that the divided, confused and demoralized workers of the world are ready to take over and the run the world economy sounds highly unrealistic. To adapt a metaphor used by Marx, that would be like performing a Caesarian section to deliver a 16-week-old fetus: it simply would not survive. And until it develops sufficiently to be able to do so, we have to ensure the health of its capitalist mother. Fortunately, doing so in the current crisis does not involve sacrificing the interests of workers, since this crisis is caused not by a fall in the rate of profit but by excessive siphoning of surplus value into wasteful expenditure. What measures can we fight for through our civil society organizations?

A common and understandable response to the crisis is the call for protectionism and deglobalization, but this would remove the only countervailing factor sustaining the rate of profit, and worsen the crisis. Instead, multilateral agreements (rather than bilateral ones, where a stronger partner can bully the weaker one) should concentrate on establishing equitable terms on which international trade and investment can be conducted. It is neither realistic nor even desirable to abolish finance capital either; as Hilferding pointed out, it enables even people with small amounts of money to invest, and Marx himself saw it as a step towards social control over production. Currently, pension funds built on the savings of wage and salary earners are among the most important financial institutions, and could use their clout to ensure better regulation of financial markets. This might include banning predatory practices, ensuring maximum transparency, and much stronger regulation and oversight by public institutions whose personnel do not overlap in any way with the personnel of the financial institutions they are supposed to monitor. Progressive taxation would redirect production from exclusive resorts to socially useful products. Slightly different measures would have to be taken in different countries, depending on their specific circumstances; in Sri Lanka, for example, the political elite consumes a large chunk of the surplus, extracting more and more from the public through runaway inflation, and their power to do so should be curbed.

At the same time, there should be campaigns for defense budgets to be slashed; this would need to be accompanied by signing international treaties to ban the production of certain weapons (nuclear, chemical and biological weapons, land mines, etc.). Nationalist ideologies would need to be combated in all countries; in Sri Lanka, for example, politicians espousing Sinhala and Tamil nationalism, who drive a war that has devastated the economy, should be rejected decisively. The US, being the biggest military spender by far, would need the most sustained campaign to end its wars, dismantle its foreign bases, wind up covert operations and shrink its military-industrial complex; and until it has done so, other countries should refrain from accumulating foreign exchange reserves in US dollars, because that simply contributes to the destruction of the surplus value produced by their own hard-working people.

If these measures are taken, they would create massive funds for governments to invest in infrastructure (including water and energy conservation, flood prevention and renewable energy), and healthcare, education and child nutrition programs, thus increasing overall productivity and creating employment. Workers cooperatives should also be encouraged and assisted by the state. All this would reverse the fall in incomes and consumer demand. Social housing could help to eliminate homelessness. Many countries already have programs that could be expanded as well as adapted for other countries, such as the National Rural Employment Guarantee scheme in India , the bolsa familia in Brazil , the National Health Service in the UK , and workers’ cooperatives in several countries.

It is possible to get out of this recession without allowing it to become a depression if enough people press for decisive action along these lines. Eventually, another crisis will come along, of course: that is the nature of capitalism. But we can deal with that problem when we get to it!

References

Breman, Jan, 1995, “Labour, get lost: A Late-Capitalist Manifesto,” EPW, Vol.30 No.37, 16 September, pp.2294-2300.

Engdahl, F.William, 2008, “Financial Tsunami: The End of the World as We Knew It,” Global Research, 30 September.

Grossmann, Henryk, 1992, The Law of Accumulation and Breakdown of the Capitalist System, (tr. Jairus Banaji), Pluto Press, London.

Hilferding, Rudolph, 1981, Finance Capital - A Study of the Latest Phase of Capitalist Development, tr. Morris Watnick and Sam Gordon, Routledge and Kegan Paul, London.

Johnson, Chalmers, 2008, “Going Bankrupt: The US’s Greatest Threat,” Asia Times Online, 24 January.

Lenin, V.I., 1964, “Imperialism, the Highest Stage of Capitalism. A Popular Outline,” Collected Works Volume 22, Progress Publishers, Moscow , pp. 185-304.

Luxemburg, Rosa, 2003, The Accumulation of Capital (tr. Agnes Schwarzschild), Routledge, London.

Marx, Karl, 1976, Capital Volume 1 (tr. Ben Fowkes), Penguin Books, Harmondsworth

Marx, Karl, 1978, Capital Volume 2 (tr. David Fernbach), Penguin Books, Harmondsworth.

Marx, Karl, 1981, Capital Volume 3 (tr. David Fernbach), Penguin Books, Harmondsworth.

Melman, Seymour, 2001, After Capitalism: From Managerialism to Workplace Democracy, Alfred A Knopf, New York.

The Gavel, 2008, “Oversight Committee Holds Hearings on the Causes and Effects of the AIG Bailout,” 7 October.

Rohini Hensman is an an independent scholar, writer and activist based in India and Sri Lanka

http://www.dissidentvoice.org/2008/10/marxism-and-the-economic-crises/

Crisis Time for Wall Street's Creatures in Congress

2008-11-02T12:11:00.000-08:00

Crisis Time for Wall Street's Creatures in Congress

The Last Hold Up

By GLEN FORD

In their role as mercenaries in service of finance capital, three-fifths of Democrats joined one-third of Republicans in a (temporarily) failed heist of $700 billion of the people's funds - a nest-egg the public needs to hold onto to weather the unfolding collapse of the Lords of Capital. In the aftermath of Monday's bloody siege, it was difficult to tell who Wall Street guns-for-hire John McCain and Barack Obama hated most: each other, or the citizens who despite their outraged confusion had the presence of mind to bar the doors to the national treasury.

Understandably disoriented from having had to charge backwards - pretending to lead the people while simultaneously assaulting them - Obama peered across the field at the hastily-erected barricades that had broken Hank Paulson's Charge. "I'm confident we're going to get there," said the frustrated thief-enabler, "but it's going to be rocky."
To paraphrase Oscar Brown, Jr., "What you mean WE, Obama-man?"

The Illinois senator and his pretend-opponents in the other business party just had their colluding asses kicked by the most motley, disorganized crew imaginable: the American public, who bombarded their legislators with threats of retaliation in November if they bowed to Wall Street's extortionist demands.

Never has Republican-Democratic co-subservience to finance capital been on such naked display. But then, "We the People" have never before been witness to the terminal unraveling of late-stage global finance capital. When the New York Times features no less than three articles declaring the nation's investment bankers ready for burial, as did last Sunday's paper, it is time for the Democrats, especially, to find another paymaster.

Black Caucus Split

Obama's party is wedded to Wall Street. At the local level the Democrats have long been the party of "developers" - the money bags who shape urban policy to fit the needs of corporations. These gentrifiers are the "Renaissance Men" that insist black politicians earn their campaign and graft payments by helping to expel their own constituents from the cities, so as to make them more congenial to business. Betrayal starts at home. So it's not surprising to find Rep. Charles Rangel (NY), the corporate-loving Chairman of the House Ways and Means Committee, among the 18 members of the Congressional Black Caucus (CBC) to vote with the Bush-McCain-Obama Wall Street axis. Edolphus Towns (NY), Gregory Meeks (NY), and Artur Davis (AL) are also in their element, reeking as they do of corporate contributions. However, it is strange - and sad - to see Maxine Waters (CA), Gwen Moore (WI) and other relatively progressive members aligned with the rump end of the Black Caucus.

Among the slim, 21-member majority of the CBC that defied Speaker Nancy Pelosi's edicts, one finds more curious company. Voting alongside usually reliable progressives such as Barbara Lee (CA), John Conyers (MI), Donna Edwards (MD) and Bobby Scott (VA), are some of the Caucus's most rightwing members: William "Dollar Bill" Jefferson (LA) and David Scott (GA), once described as the "Worst Black Congressman" in the House. Panic makes strange bedfellows.
Virginia Rep. Bobby Scott summed up the "No" position: "There's no point in spending all this money on worthless assets" such as toxic mortgages. Detroit's Carolyn Cheeks Kilpatrick said of the Paulson plan, "This helps the banks in their book of mortgages. It doesn't help the little person who needs it."

These are eminently good reasons to resist the bipartisan, flag-waving, hyper-ventilating and increasingly ill-looking Wall Street mob, now regrouping for another bum-rush of the Congress. However, the anxious thieves are only a 12-vote switch away from consummating the Greatest Theft Ever. Pelosi's wing of the Business Party is confident they can assemble the blandishments and threats to do the trick.

The Last Hold-up

The criminal-minded and mortally wounded Lords of Capital believed, as Pam Martens has written, that they could "loot and collapse a 200-year old financial system and...be rewarded with a fresh $700 billion of public money to disperse among your cronies who aided and abetted in the collapse."

Or, as Mike Whitney puts it:

"...the $700 billion is just part of a massive ‘pump and dump' scheme engineered with the tacit approval of the US Treasury and the Federal Reserve. Once the banksters have offloaded their fraudulent securities and crappy paper on Uncle Sam, they will do whatever they need to do to pad the bottom line and drive their stocks up. That means they will shovel capital into hard assets, foreign currencies, gold, interest rate swaps, carry trade swindles, and Swiss bank accounts. The notion that they will recapitalize so they can provide loans to US consumers and businesses in a slumping economy is a pipedream."

Treasury Secretary Henry Paulson and his designated wrecking crew have but one objective: theft. Their own world is doomed - "The system is de-leveraging and nothing can stop it," says Whitney - so they are pulling off one last, mega-heist before it sinks beneath the waves.

The rest of us must fashion new institutions to perform the societal tasks that were purportedly the domain of the now-extinct investment bankers: to gather large amounts of capital for projects of social value - for example, a Marshall-type Plan for the cities, a nationwide infrastructure makeover, and fulfillment of the 70-year old federal commitment to provide truly affordable housing for everyone. And of course, jobs, jobs, jobs.

We have many other uses for that $700 billion - what Barack Obama called "our last bullet," although intending to make it a gift to mega-thieves - for instance, to provide relief to current and future homeowner (and rental) victims of the housing bubble that will take years to fully deflate, as prices (and rents) decrease to levels consistent with wages and other social factors.

In a perverse way, Henry Paulson and his co-conspirators have done the public a great favor. He has told us that, Yes, the federal government can come up with $700-plus billion, in an instant, if the health of the nation demands it. He has expanded the fiscal scope of the domestic political debate, so that it may encompass projects of transformational size. Never again can the corporate class speak of socially valuable projects being so large as to "break the bank" or the budget. Popular forces are now free to think large, too, without being ridiculed from the corporate Right.

The demise of finance capital's premiere institutions, and the brutal arrogance with which their servants moved to strip the commonweal of every squeezable drop of cash, has alerted vast sectors of the citizenry to the reality of capitalism-in-crisis in ways that no amount of Left agitation could have accomplished.

Technical public "ownership" of previously "private" institutions has been thrust upon us by the capitalists, themselves. But this is merely an opening for the great debates and struggles that must follow. Power does not devolve to "the people" by simple virtue of majority shares in failing institutions or even outright nationalization. And "the people" have no need of institutions that serve no purpose but as creatures of capital.

The second casualty of the current crisis, after the collapse of the financial sector, is surely the twin-party game of musical chairs that served to legitimize the rule of capital. The obscenity of a Democrat-Republican syndicate arrayed against the roaring, raging sentiments of citizens of all self-described political persuasions, cannot be erased from the collective national memory - even if congressional party leaders succeed in whipping their members into line, later this week.

When catastrophe hits, radicals must be ready. Recent events have proven Cynthia McKinney and Rosa Clemente to be amazingly prescient in their belief that the Green Party can be - I emphasize can be - a vehicle for presenting and popularizing a truly transformational program for social change. (See McKinney "The Financial Crisis: Seize the Time!" BAR September 24.) McKinney and Clemente always intended that the Green Party become a nexus for the roiling social currents set in motion by the decomposition of ruling class institutions. The Democratic and Republican Parties, creatures of capital, are decomposing in full view, as witnessed by the events of this week. As the crisis deepens, the parties will crack - at a pace dictated by the increasing frequency of convulsions.

When we are confronted with the surreal spectacle of John McCain and Barack Obama attempting to destroy each other even as they rush to deliver nearly a trillion dollars to the same master, while the people scream at both of them to "Stop!" - we know that "change" is coming. But not the kind the Democrats or Republicans anticipate.

Glen Ford is executive editor of Black Agenda Report, where this article also appears. He can be contacted at Glen.Ford@BlackAgendaReport.com.

http://www.counterpunch.org/ford10012008.html

From Enron to the Current Meltdown

2008-11-02T12:05:00.000-08:00

Why Are We Surprised?

From Enron to the Current Meltdown

By ROBERT BRYCE

The question that keeps coming to mind amidst the current financial meltdown is this: why is anyone surprised?

I take no pleasure in asking that question. Along with lots of other people, I’ve watched over the past few weeks as my modest stock holdings shrink into nearly meaningless positions.

But the question remains: given the myriad warnings that came via Enron – and the years-long neglect of any meaningful efforts to have serious policing of Wall Street – why are we surprised to find out that the financial engineers have robbed us blind? The warnings from the Enron meltdown could scarcely have been more clear. Indeed, two key lessons were obvious: financial regulators needed lots more funding, personnel and support; and derivatives markets that operate without proper regulatory oversight and reporting pave the way for financial engineers to privatize profits and socialize costs.

First, the lack of regulators. A key problem with today’s financial markets, as it was when Ken Lay and Jeff Skilling were piloting Enron into the dirt, is simple: we have too few cops patrolling Wall Street. That lack of oversight can most easily be understood by looking at the budget of America’s single most important financial regulator, the Securities and Exchange Commission.

In 2001, the SEC’s budget was $437.9 million. In March 2002, the General Accounting Office issued a report which said that the shortage of money and manpower at the SEC had forced the agency to “be selective in its enforcement activities and have lengthened the time required to complete certain enforcement investigations.” So what has happened since then? Precious little. Yes, the agency has a substantially larger budget today than it did during the Enron era. For 2008, its spending authority is $906 million. And for 2009, the agency’s budget is projected to increase slightly, to $913 million.

But here’s the number that defies explanation: this year, the number of enforcement personnel, the people who go after the financial engineers, is expected to decline. You read that right. Despite the trillion dollar meltdown now underway, the number of SEC enforcement personnel will decline from 1,209 in fiscal year 2008 to to 1,177 in 2009. In all, the SEC expects to have 3,771 employees for 2009.

How does that compare to other federal agencies? Well, for comparison, the Smithsonian Institution budget for 2009 includes funding for 4,324 employees. That’s not a slap at the Smithsonian. It houses a myriad of the nation’s most treasured objects. But the SEC actually guards the nation’s treasure. And yet, Congress treats it like a bastard stepchild. Congress currently doles out more than five times as much money for corn subsidies ($4.9 billion in 2006, the most recent year for which data is available) as it does for the SEC.

It’s not just about funding. It’s also about rigorous accountability for the regulators themselves. Over the past few weeks, it’s become obvious that the SEC was largely co-opted by the companies it was supposed to be regulating. On September 25, the agency’s Inspector General, David Kotz, issued a report which that it is “undisputable” that the SEC “failed to carry out its mission in its oversight of Bear Stearns” – the investment bank the collapsed earlier this year and was taken over by JP Morgan. The report said that the agency missed “numerous potential red flags” prior to the company’s collapse and failed to require the investment bank to rein in its risk taking. (The full text of the report is available at: http://www.sec.gov/about/oig/audit/2008/446-a.pdf.)

But what’s more telling, according to the report, is the lax approach the SEC had in its handling of what was known as the Consolidated Supervised Entity program, a system set up to oversee the biggest Wall Street firms. There were six holding companies in the program: Bear Stearns, Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers, Citigroup and JP Morgan. The report found that the SEC approved the inclusion of Bear Stearns in the program “prior to the completion of the inspection process.” Thus, the SEC agreed to regulate Bear Stearns before it even knew if the company was in compliance with the standards it was supposed to enforce.

Perhaps even more unsettling is a new report from Kotz, reported on this week by the New York Times and ABC News, which concludes that the top enforcement officials at the SEC quashed an investigation into possible insider trading at Pequot Capital Management, a big hedge fund. Kotz’s report sides with Gary J. Aguirre, a former SEC employee, who was fired in September 2005 after he tried to get testimony from John J. Mack, the current CEO of Morgan Stanley. Aguirre wanted to talk to Mack about the Pequot investigation. (In 2007, Mack’s compensation totaled $41.7 million even though Morgan Stanley’s earning fell by 57 percent.) Kotz’s report makes it clear that Aguirre was wrongly dismissed for being too vigilant in his investigation of Pequot and it says that the SEC gave “preferential treatment” to Mack during the investigation. It further recommends that the agency’s chief of enforcement, Linda Thomson, as well as two other top regulators at the agency, face “disciplinary and/or performance-based action” for their role in the tawdry affair.

This brings us to derivatives. Before it failed, Enron operated a huge – and almost completely unregulated -- derivatives exchange business. According to the Bank for International Settlements, the global derivatives market is now worth some $676.5 trillion. That’s $676,500,000,000,000. That’s a five-fold increase over the value of derivatives that were traded in 2003. Further, that $676.5 trillion is 51 times America’s current GDP.

In 2002, the world’s smartest investor (and my pick for president in 2008) Omaha billionaire Warren Buffett, issued his annual letter to the shareholders of Berkshire Hathaway. In it, he called derivatives “financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”

The most toxic element of the current market meltdown are credit derivatives, a financial instrument that was almost non-existent prior to 2000. And the growth of the credit derivatives business is due largely to one of John McCain’s pals, former Texas senator, Phil Gramm. In 2000, Gramm, who was then the chairman of the Senate Banking Committee, sponsored the Commodity Futures Modernization Act, a bill that was passed unanimously by the Senate on December 13, 2001. President Bill Clinton signed it into law eight days later. After it passed, Gramm hailed the measure, saying it “protects financial institutions from over-regulation.” He went on, saying it also “guarantees that the United States will maintain its global dominance of financial markets.”

Global dominance may be a worthy goal, but Gramm’s bill also contained a provision which Congressional aides referred to as the "Enron exemption.” This bit of legislative legerdemain made into law a regulatory exemption on derivatives contracts that was first rushed into place by the Commodity Futures Trading Commission in 1993 when that agency was chaired by Gramm’s wife, Wendy Gramm.

More than any other piece of legislation, the Commodity Futures Modernization Act paved the way for the financial engineers on Wall Street to buy and sell the infamous derivatives known as “credit default swaps” with virtually no oversight. According to one Washington, D.C.-based expert on derivatives who asked that his name and affiliation not be used, the bill that Gramm sponsored “led directly to the current meltdown. In 2000, the total value of the credit derivatives business was less than $1 trillion. By this year, the credit derivatives business was worth more than $60 trillion.”

Of course, few people listened when Buffett warned of the dangers of derivatives back in 2000. Indeed some of America’s most important financial players dismissed him out of hand. In September 2002, Federal Reserve Chairman Alan Greenspan, Treasury Secretary Paul O’Neill, Securities and Exchange Commission chairman Harvey Pitt and James Newsome, chairman of the Commodity Futures Trading Commission, sent a letter to a pair of U.S. Senators in which they declared that financial derivatives were not a danger. Instead, they said that derivatives “have been a major contributor to our economy’s ability to respond to the stresses and challenges of the last two years.” Further, they declared that a then-pending Senate proposal to regulate derivatives could increase “the vulnerability of our economy to potential future stresses.”

Back in 2002, in Pipe Dreams, my book on the Enron disaster, I wrote that reforms were needed to deal with derivatives. I quoted one financial analyst who called derivatives “Wall Street’s dirty secret.” And I recommended that “Derivatives dealers should be required to post agreed-upon amounts of capital to collateralize their trading positions” and that “the derivatives marketplace must be made more uniform, with policing by regulators who can establish price limits, listing requirements and other trading parameters.”

I’m not repeating that to brag or claim any special foresight. Lots of others were arguing for the same types of reforms.

Enron gave Congress and the Bush administration all of the rationales that were needed to justify proper regulation of the financial markets. Enron clearly showed the need for more cops – well paid cops who have the backing of their bosses – to patrol the corporate boardrooms and study corporate accounting practices. Enron’s bankruptcy also demonstrated the dangers of uncontrolled derivatives businesses. But those lessons were merrily ignored by Gramm, Greenspan and their cronies on Wall Street.

So I have to ask again: why are we surprised?

Robert Bryce is the author of Gusher of Lies: The Dangerous Delusions of "Energy Independence."

http://www.counterpunch.org/bryce10092008.html

Rescue for the Few, Debt Slavery for the Many

2008-11-02T12:03:00.000-08:00

Congress Should Bail Out of the Bailout

Rescue for the Few, Debt Slavery for the Many

By MICHAEL HUDSON

We are now entering the financial End Time. Bailout “Plan A” (buy the junk mortgages) has failed, “Plan B” (buy ersatz stocks in the banks to recapitalize them without wiping out current mismanagers) is fizzling, and the debts still can’t be paid. That is the reality Wall Street avoids confronting. “First they ignore you, then they denounce you, and then they say that they knew what you were saying all the time,” said Gandhi. The same might be said of today’s overhang of debts in excess of the economy’s ability to pay. First the policy makers pretend that they can be paid, then they denounce the pessimists as spreading panic, and then they say that of course students have been taught for four thousand years now how the “magic of compound interest” keeps on doubling and redoubling debts faster than the economy can squeeze out an economic surplus to pay.

What has ended is the idea that “the magic of compound interest” can make economies rich without having to work and without industry. I hope we have seen the end of derivatives formulae seeking to make money by playing in a zero-sum game. A debt overhang always ends either in foreclosure of the debtor’s property, or in a debt annulment to preserve the economy’s overall freedom and equity.

This means that the postmodern economy as we know it must end – either in financial polarization and debt peonage to a new oligarchic elite, or in a debt cancellation, a Jubilee Year to rescue society. But when the government says that it is reviewing “all” the options, this reality is not one of them. Treasury Secretary Henry Paulson’s first option was to buy packages of junk mortgages (collateralized debt obligations, CDOs) to save the wealthiest institutional investors from having to take a loss on their bad bets. When this was not enough, he came up with “Plan B,” to give money to banks. But whereas Britain and European countries talked of nationalizing banks or at least taking a controlling interest, Mr. Paulson gave in to his Wall Street cronies and promised that the government’s stock purchases would not be real. There would be no dilution of existing shareholders, and the government’s investment would be non-voting. To cap the giveaway to his cronies, Mr. Paulson even agreed not to ask executives to give up their golden parachutes, exorbitant annual bonuses or salaries.

Plan A (the $700 billion to buy mortgage-backed junk that the private sector will not buy) failed partly because it let financial institutions avoid putting a fair value on the debt packages they were selling. Instead of telling the truth about their financial position by marking assets to market prices), they can “mark to model,” Enron-style. We have seen the result: A solid week of plunging stock market prices. The public media call this a panic, but there is nothing irrational about it. Who in their right mind would buy securities or buy into a bank without knowing what the securities were worth? Faith in junk mathematical models has ended.

So we still await a public response to the problem of how to write down debts. Whose economic interest will have to give: that of debtors, as increasingly has been the case over the past eight centuries; or that of creditors, which have fought back to create a neoliberal economy controlled by the FIRE sector?

It is not too late to decide which road to take, but Wall Street bankers and creditors have taken the lead in positioning themselves. Seeing which way the political winds were blowing, they moved to empty out the Treasury before the November 3 elections much like medieval citizens fleeing a horde of Mongolian raiders under Genghis Khan. “We’re moving. Clean out the cupboards,” much as Lehman Brothers emptied out their foreign bank accounts in Britain and elsewhere just before declaring bankruptcy, taking what they could and steering it to their best friends.

The pretense was that a bailout was needed to restore confidence. But the ensuing week showed that the claims were false. It didn’t turn the stock market around as promised. The Dow Jones Industrial Average fell 2,200 points from Wednesday, October 1 through the following Friday October 10 – eight straight trading days, not even pausing for the usual zigzags. Friday’s plunge was 100 points a minute for the first seven minutes – a 690 point drop to under 8000. Each 100 points was more than a 1 percent drop, which was reflected on the NASDAQ. Nothing could withstand the pressure of so many Americans cashing in their mutual funds overnight and so many foreigners in earlier time zones putting in sell-at-market orders.

Short sellers made one of the largest and quickest fortunes ever, and then covered their positions by buying back the stocks they had pre-sold. This pushed prices up even into positive territory just before 10:30 AM when George Bush began to speak. Half the financial stocks showed gains – a sign that the Plunge Protection Team had jumped in. But Mr. Bush said nothing helpful and stocks went back into freefall, ending down another 128 points despite the upcoming weekend G7 meeting. There was no talk at all of reducing debt levels – only of giving more money to banks, insurance companies and other money managers, as if “pushing on a string” somehow would lead them to lend yet more to an already debt-ridden economy.

If Congress really wanted to restore confidence, here’s what it might have done: First, mark to market, not to model. Investors no longer believe America’s Enron-style accounting, debt rating agencies or monoline risk insurers. They don’t trust U.S. banks to be honest about their financial positions. They worry about the fraud charges brought by attorneys general in eleven states against predatory lenders such as Countrywide and Wachovia that Citibank, JPMorgan Chase and Bank of America were so eager to buy.

So is it too late for Congress to change its mind and repeal the giveaway? If the $700 billion handout didn’t stabilize the unsalvageable for small investors, pension funds and even the financial sector itself, what did it do?

What the Fed has been doing while the media have not been looking?

Let’s put the giveaway in perspective. While Senators and Congressmen subject to voters’ choice were debating $700 billion for the major Wall Street contributors to both parties (admittedly only for starters, Mr. Paulson explained), the Federal Reserve already had given even more, without any public discussion and without the major media noticing. Since Bear Stearns failed in March, the Federal Reserve has used the small print of its charter to go outside its normal customers (which are supposed to be commercial banks), to give investment banks, brokerage houses and now large corporations almost indiscriminately some $875 billion in “cash for trash” swaps. (The statistics are released each week in the Fed’s H41 report.) Like Aladdin offering new lamps for old, the Fed has exchanged Treasury securities for junk mortgages and other securities that brokerage houses and investment banks did not have time to pawn off onto OPEC, Asian sovereign wealth funds or other investors.

The press lauds Mr. Bernanke as “a student of the Great Depression.” If he were, he should know that what led to the 1929 collapse were harsh U.S. Government creditor policies toward its World War I Allied governments. This created a situation where the Federal Reserve had to provide easy credit to hold interest rates artificially low so as to encourage U.S. investors to lend to Britain and Germany, which would use these dollar inflows to pay their Inter-Ally arms and reparations debts. Mr. Bernanke’s predecessor, Alan Greenspan, promoted easy credit simply for ideological reasons, to enrich Wall Street by enabling it to sell more debt.

A student of the Great Depression would understand the conflicts of interest between retail commercial banking and wholesale investment banking and money management that led Congress to pass the Glass-Steagall Act in 1933 – conflicts unleashed once again when Pres. Clinton backed then-Fed Chairman Alan Greenspan and Republican leader (and McCain hero) Senator Phil Gramm in leading the repeal of this act, opening up the floodgates to today’s financial double-dealing that has cost the American economy so much.

If Mr. Bernanke does know this history, his behavior is simply that of an opportunistic student of the art of political self-advancement, toadying to Wall Street in campaigning for one last great rip-off before the Bush Administration goes out of business. The Fed has given Wall Street newly minted Treasury bonds, added to the national debt out of thin air. It has done this without feeling any need to rationalize it by drawing absurd public-relations pictures about how the government may “make a profit for taxpayers.”

The Fed Chairman is not elected democratically. He traditionally is designated by the Wall Street financial sector that the Fed is supposed to regulate, acting as its lobbyist for creditor interests – the top 10 percent of the population – against that of the indebted “bottom 90 percent.” This “independence of the central bank” is trumpeted as a hallmark of democracy. But it is undemocratic, precisely by being isolated from public control.

The Age of Oligarchy

Treasury Secretary Paulson has no such luxury. The Treasury is supposed to represent the national interest, not that of bankers – even though its head these days is drawn from Wall Street and acts as its lobbyist. Mr. Paulson presented his almost totalitarian giveaway gruffly to Congress on a take-it-or-leave it basis, announcing that if Congress did not save Wall Street from taking losses on its mountain of bad loans, the banks were willing to crash the economy out of spite. “Please don’t make us wreck the economy,” he said in effect. As Margaret Thatcher used to say while selling off the British government’s crown jewels in the 1980s, TINA: There is no alternative.

In making this bold threat Mr. Paulson behaved as arrogantly as Lehman’s CEO Richard Fuld did when he tried to bluff Korea and other prospective investors into paying the full, fictitiously high book value for his company. (His bluff failed and Lehman went bankrupt, wiping out its shareholders, including the employees and managers who held 30 percent of its stock.) There turned out to be an alternative after all. Responding to the loudest public condemnation in memory, Congress called Mr. Paulson’s bluff.

What made his $700 billion Troubled Asset Relief Program (TARP) so much more visible to the media than the Fed’s actions is that Congress is involved, and this is an election year. The level of deception and false argument is therefore enormous – along with a few tradeoffs and tax cuts to distract attention. Erstwhile Republican opponent Sen. Jeff Sessions of Alabama came right out and said that “This bill has been packaged with a lot of very popular things to give it even more momentum,” so that (as The New York Times explained), “instead of siding with a $700 billion bailout, lawmakers could now say they voted for increased protection for deposits at the neighborhood bank, income tax relief for middle-class taxpayers and aid for schools in rural areas where the federal government owns much of the land.”

Left behind while Wall Street’s believers in the rapture of free markets were swept up to heaven by “socialism for the rich” have been mortgage debtors, student-loan debtors, the Pension Benefit Guarantee Corporation (PBGC, some $25 billion short), the Federal Deposit Insurance Corporation (FDIC, about $40 billion short), as well as Social Security which, we are warned, may run up a trillion dollar deficit thirty or forty years down the line. Only the wealthiest have been beneficiaries, not voters, homeowners and other debtors.

Still, Congress was panicked into acting on Friday, October 3, because a week earlier, September 26, stocks fell 777 points after Congressmen responded to an unprecedented volume of voter protest against the bailout. “This sucker could go down,” Pres. Bush warned as Wall Street’s lobbyists blamed the market downturn to the failure of Congress to preserve the “monetary system,” and specifically the banks and insurance companies that already had lost their net worth and were plunging deeper into Negative Equity territory. Democratic leaders Barney Frank and House Speaker Nancy Pelosi said, in effect, “Look what you’ve done! You irresponsible politicians are grandstanding on principle, and wiping out peoples’ stock market savings and threatening their pension funds. If you don’t give Wall Street firms enough money to cover their losses so that everyone wins, they’ll kill the economy until they get their way.” Well, they didn’t quite say this, but that was basically their message. It certainly was Wall Street’s message: “Wall Street to Economy: Your money or your life.”

So Congress gave in. Democrats ran like lemmings to “save the economy.” Yet the stock market fell a few hundred points, and kept on plunging all week long, much worse and much faster than had occurred right after Congress had initially defeated the bill.

The “Reality Problem”

What did the “free market” theory underlying the giveaway leave out of account? For starters, “the monetary system” turns out to be a euphemism for the fortunes of financial gamblers using junk mathematics (the Merton-Scholes derivatives formula) based on junk economics (blessed with Nobel Prizes) to buy, speculate and even to insure junk mortgages, junk bonds and junk commercial paper and derivatives based on their relative prices. So what is left out first of all was full knowledge of the value of what is being bought and sold. Mark-to-market models leave the price up to the investment bankers. If trust existed and there really was honor among these thieves, a government bailout would not be necessary, because “the market” could clear.

“Free market” ideology assumes that each party will act in his or her self-interest. If this is so, why should foreign governments accumulate more dollar claims on the U.S. Treasury, which already owes their central banks $4 trillion? When there hardly were enough Treasury securities to go around even as the United States ran unprecedented federal budget deficits, U.S. officials urged these banks and sovereign wealth funds to buy packaged mortgages yielding a higher rate of return. And at least by buying these bonds, foreign governments would not be accused of funding America’s war in Iraq that most of their voters opposed. But investors made a fatal mistake in believing U.S. representations of the value of their junk-mortgage packages. This trust has now been lost, all the more so since the bailout’s permission to keep on “marking to market.”

Congress thought that its $700 billion would distract attention at least until the November 4 election. But to no avail. Markets fell 157 points on Giveaway Friday, and kept on going down another 800 points on Monday, October 6 (to about 9500) before bouncing 500 points off the floor, only to fall even more through Friday. So the giveaway failed in its stated purpose to rescue stock market investors (“peoples’ capitalism”) or their pension funds. But that was not its real purpose. The time simply had come to clear out and take whatever one could.

Making banks and insurers in the zero-sum derivative game whole, so that winners can collect their bets while losers can sell their bad investments to the Treasury, is supposed to re-inflate the credit pyramid. The idea is to solve the debt problem with yet more debt to prop up housing prices once again to unaffordable levels! This is not a long-term solution, but it would give insiders enough time to arrange a do-over and get out of the game more quickly, to sell out their junk mortgages and junk bonds to the proverbial “greater fool” – in this case, the “greater fool of last resort,” the U.S. Treasury, as long as it can be run by Mr. Paulson or, under Mr. Obama, perhaps the former Goldman-Sachs official Robert Rubin.

The banks are to “earn” their way out of their negative equity position by selling more of their product – credit – to increase the economy’s debt levels and hence receive more interest payments. The problem is that most families are already “loaned up.” They have no more discretionary income to pledge to carry more debt. Without writing down their debts, there will be no fresh lending, and hence no source of credit and purchasing power for new autos, appliances, goods and services in general. Debt deflation is being imposed on the “real” economy. Creditors and speculators alone are to be made whole.

If no revenue was available for future Social Security, public health care and repair the nation’s depleted infrastructure before this giveaway, think of how bare the cupboard must be now that the government has run up the recent trillions of dollars in new debt rather than writing off a penny of the bad mortgage debts being blamed for causing the debacle.

We can see where this is leading. The wealthiest 1 percent of the population will come into possession of even more returns to wealth than the 57 percent that they are now taking. In contrast to the Statue of Liberty’s inscription “give me your poor … yearning to breathe free,” the Fed – and now the Treasury, with Congressional blessing – is taking from the public purse and giving to America’s wealthiest investors and insiders. This “Robin Hood in Reverse” program is being done without strings, without asking banks to stop paying dividends, exorbitant executive salaries and golden parachutes, and without taking over banks with negative net worth of the kind that many homeowners are experiencing.

Nobody is talking about a debt write-down or moratorium. The subprime mortgage problem could have been solved by writing down just $1 or $2 trillion of the face value and interest rates of predatory loans. Instead, the $10+ trillion in financial-sector damage in recent weeks reflects Wall Street’s fraudulent packaging and sale of junk mortgages at unrealistically high prices, using junk mathematics to calculate junk derivatives and sell them to gullible investors who believe that the pretenses these mathematics, credit ratings and projected income have a basis in reality.

The amazing feature of today’s crash is how many Wall Street firms actually believed that the game of musical financial chairs could go on before they had to stop dancing and indeed, escape from the room. I remember one day back in the 1970s when I warned Frank Zarb of Lazard Freres about the likelihood of Third World debt defaults, and suggested that the firm should do an ability-to-pay analysis. “We don’t have to do any such thing,” he replied. “We have the schedule of what they owe right here in this IMF report.” It was a thick printout of the scheduled debt service for an African country that soon became insolvent. But Wall Street’s mentalité was that of Herbert Hoover on the eve of the Great Depression: A debt is a debt, and that is that. The response is to blame the victim, as if the irresponsibility lies with debtors rather than creditors.

No reversal of the Bush tax cuts is offered to re-inflate the economy, no move toward more progressive taxation of Wall Street speculators who pay only a 15 percent “capital gains” tax rate instead of the much higher income-tax and FICA withholding rates that wage-earners pay. (Wall Street has its own golden parachute program, so why should it pay for Social Security for the rest of society?) There is to be no reduction in the special tax benefits for real estate, whose tax favoritism led to the crisis by “freeing” more income from the tax collector to be pledged to mortgage bankers as interest. The Bubble Economy is to be re-inflated by Fannie Mae, Freddie Mac and the FHA lending to help buyers bid up housing and commercial office prices once again to a rate that promises to impose debt peonage on homeowners.

The budget deficit will soar, without any prosecution of tax evasion scams by UBS or KPMG. Instead of a fiscal or regulatory comet driving these dinosaurs to extinction, the climate has turned more conducive to their proliferation. Our Age of Deception is to be locked in even more tightly. The Congressional bailout’s suspension of mark-to-market rules to rely on Wall Street’s “self-regulation” should win a prize for Oxymoron of 2008 as investors have no clue as to what financial assets are worth. No wonder lending has dried up, especially to banks themselves.

Just as financial victims fail to vote and support their self-interest, predators also turn out to pursue self-defeating “free market” strategies. The financial sector’s short-termism is the greatest enemy to its survival. It has translated its wealth into a fatal political control of its legal climate, blocking [with the explicit support of Barack Obama, Editors] Congressional efforts to rewrite the oppressive bankruptcy laws that credit-card banks lobbied so hard to pass, [with vital help from Joe Biden, the senior senator from credit card company HQ, the state of Delaware, Editors] crucial. These hard bankruptcy terms prevent the courts from renegotiating homeowner debts to keep property occupied, accelerating the real estate price collapse. The result is today’s negative equity, posing the question of just who is to bear the cost of bring debts back in line with the economy’s ability to pay. Will it be the financial institutions that sponsored asset-price inflation and lobbied for deregulation of lenders? Or, will it be the debtors who thought they were riding the wave to get an inflationary free lunch?

Instead of requiring creditors to absorb losses on the excess of debts over what can be paid, the debts are being kept in place, not scaled back to what the economy can pay. The government is to make creditors and computerized derivatives speculators whole – and will act as collecting agent for the overhead of bad debts the economy has run up.

Today we can see the debt-fueled bubble of asset-price inflation that Alan Greenspan trumpeted as real wealth creation for what it really is – credit creation to bid up real estate, stock market and packaged-debt prices. Tangible capital formation has been left out of account, as if postindustrial economies no longer need it.

Will voters see the asymmetry in Congress’s failure to offer debt relief for homeowners as real estate prices plunge below the mortgages that are owed? Will its members be blamed for not rewriting the nation’s bankruptcy laws to free families from debt peonage – and free housing markets from the price declines that result from today’s proliferation of foreclosure sales? For that matter, will there be no relief for corporations having to cut back investment in order to service their junk bonds and other debts with which Wall Street’s corporate raiders and “shareholder activists” have loaded then down?

Evidently not.

Michael Hudson is a former Wall Street economist specializing in the balance of payments and real estate at the Chase Manhattan Bank (now JPMorgan Chase & Co.), Arthur Anderson, and later at the Hudson Institute (no relation). In 1990 he helped established the world’s first sovereign debt fund for Scudder Stevens & Clark. Dr. Hudson was Dennis Kucinich’s Chief Economic Advisor in the recent Democratic primary presidential campaign, and has advised the U.S., Canadian, Mexican and Latvian governments, as well as the United Nations Institute for Training and Research (UNITAR). A Distinguished Research Professor at University of Missouri, Kansas City (UMKC), he is the author of many books, including Super Imperialism: The Economic Strategy of American Empire (new ed., Pluto Press, 2002) He can be reached via his website, mh@michael-hudson.com

http://www.counterpunch.org/hudson10132008.html

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