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
Wednesday, December 24, 2008
Monday, December 8, 2008
A Historic Moment: The Election of the Greatest Con-Man in Recent History
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/
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
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
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
Friday, December 5, 2008
Neoliberalism and Bottom-Line Morality
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/19835Wednesday, November 26, 2008
The Obama Letdown
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 
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.htmlTuesday, November 25, 2008
Obama’s “left” cheerleaders and the right-wing transition
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
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