Go to Original
By EDMUND L. ANDREWS
The Bush administration, moving to prevent an economic cataclysm, urged Congress on Friday to grant it far-reaching emergency powers to buy hundreds of billions of dollars in distressed mortgages despite many unknowns about how the plan would work.
Henry M. Paulson Jr., the Treasury secretary, made it clear that the upfront cost of the rescue proposal could easily be $500 billion, and outside experts predicted that it could reach $1 trillion.
The outlines of the plan, described in conference calls to lawmakers on Friday, include buying assets only from United States financial institutions — but not hedge funds — and hiring outside advisers who would work for the Treasury, rather than creating a separate agency. Democratic leaders immediately pledged to work closely with Mr. Paulson to pass a plan in the next week, but they also demanded that the measure include relief for deeply indebted homeowners, not just for banks and Wall Street firms.
At the end of a week that will be long remembered for the wrenching changes it brought to Wall Street and Washington, Mr. Paulson and Ben S. Bernanke, the Federal Reserve chairman, told lawmakers that the financial system had come perilously close to collapse. According to notes taken by one participant in a call to House members, Mr. Paulson said that the failure to pass a broad rescue plan would lead to nothing short of disaster. Mr. Bernanke said that Wall Street had plunged into a full-scale panic, and warned lawmakers that their own constituents were in danger of losing money on holdings in ultra-conservative money market funds.
People involved in the discussions on Friday said that Mr. Paulson said he did not want to create a new government agency to handle the rescue plan. Rather, he said, the Treasury Department would hire professional investment managers to oversee what could be a huge portfolio of mortgage-backed securities.
He indicated that he wanted to buy securities only from United States financial institutions, a decision that could anger legions of foreign institutions that poured hundreds of billions of dollars into the American mortgage market in the housing boom, and have customers located here.
Basic questions remained unanswered as of Friday evening, including how much of the mortgage market the administration hoped to buy up. The broader economic questions were even more daunting. What were the dangers in letting the government borrow another $500 billion — which ultimately might have to come from foreign investors — at the same time the deficit was already skyrocketing?
Would this epic bailout lead to the same kind of runaway inflation that plagued the United States throughout the 1970s?
But as the stock market zoomed for the second day in a row, mainly in response to hopes of a sweeping bailout plan from Washington, President Bush and lawmakers alike focused on how fast they could deliver as much government help as necessary.
“Given the precarious state of today’s financial markets — and their vital importance to the daily lives of the American people — government intervention is not only warranted, it is essential,” President Bush said in a speech in the Rose Garden at the White House.
News of the giant rescue plan sent stock markets soaring around the world. The Dow Jones industrial average shot up 368 points, or 3.35 percent, on Friday, after having jumped 410 points on Thursday on early rumors of the plan. The rally erased the losses from earlier in the week and allowed stock prices to end higher for the week. Perhaps more important to Fed and Treasury officials, the credit markets showed signs of thawing as well. Yields on three-month Treasury bills had sunk to almost zero on Wednesday and Thursday as investors fled from most debt securities and poured their money into the safest and shortest-term Treasuries. But on Friday, the yield on three-month Treasuries had edged up to 0.99 percent — still well below normal, but much closer to normal than before.
Meanwhile, the Federal Reserve and Treasury deployed additional tens of billions of dollars to prevent an investor panic and flight from the nation’s money market mutual funds. Such funds, totaling $3.4 trillion in assets, are held by tens of millions of individuals and are traditionally considered as safe as bank deposits. But they had come under pressure in recent days as investors began to pull money out faster than the funds could sell assets.
The Fed announced that it would lend money to money market funds to make certain they could meet all the demands of investors without having to sell off assets — including mortgage-backed securities — at fire-sale prices.
The Treasury Department, in a coordinated announcement, said it would use $50 billion in the government’s Exchange Stabilization Fund, a fund normally reserved to deal with currency imbalances, to insure money market fund customers against losses.
While the stock market showed its euphoria, the political obstacles to resolving the financial crisis remained high. The first is simply a matter of time: Congress is set to adjourn at the end of next week, and it is being asked to approve a plan involving more money than any single program in history.
As of Friday evening, Mr. Paulson had yet to deliver a formal plan to Congress. House and Senate leaders pledged to work through the weekend, but they insisted that Mr. Paulson bring them a detailed plan rather than just an outline.
An even bigger obstacle was the goal of the plan. President Bush and Mr. Paulson made it clear that their primary, and perhaps only, goal was to stabilize the financial markets by removing hundreds of billions of dollars in “illiquid assets” from the balance sheets of banks and financial institutions.
“Confidence in our financial system and its institutions is essential to the smooth operation of our economy, and recently that confidence has been shaken,” the president said. “We must address the root cause behind much of the instability in our markets — the mortgage assets that have lost value during the housing decline and are now restricting the flow of credit.”
But Democratic lawmakers insisted that any plan would also have to provide relief to millions of families that were poised to lose their homes to foreclosure.
The House Speaker, Nancy Pelosi of California, said she would insist that the plan “uphold key principles — insulating Main Street from Wall Street and keeping people in their homes by reducing mortgage foreclosures.”
Representative Barney Frank, Democrat of Massachusetts and chairman of the House Financial Services Committee, said the plan would have to include requirements that the government reduce the loan amounts or improve the terms for many distressed borrowers.
“We should be more willing to write down the mortgages,” Mr. Frank said in a telephone interview on Friday. “We’ll become the lender. The government will wind up in a controlling position so that we can reduce the number of foreclosures.”
Democrats also plan to push to include another economic stimulus measure that could provide extra money for Medicaid, highways and public work projects. Republican leaders quickly warned Democrats against trying to use the emergency to extract other gains.
“Loading it up to score political points or fit a partisan agenda will only delay the economic stability that families, seniors and small businesses deserve,” said Representative John Boehner of Ohio, the House Republican leader.
In the conference calls with lawmakers, Mr. Bernanke said that the critical need was to have the government unclog the financial system by taking over unsellable assets — primarily securities tied to bad mortgages — so that financial institutions could resume normal business. Without action, Mr. Bernanke warned, the panic would quickly lead to a deep and extended recession.
In a briefing to reporters on Friday morning, Mr. Paulson said administration officials would try to lift the overall mortgage market by having the Treasury Department immediately start buying mortgage-backed securities on the open market.
The Treasury Department had already announced plans to buy $5 billion worth of securities issued by Fannie Mae and Freddie Mac, as part of its bailout of those two government-sponsored mortgage companies earlier this month. But Mr. Paulson plans to step up the Treasury’s buying, a move reminiscent of the Japanese government’s attempt to prop up Japan’s stock market by buying shares.
In addition, Mr. Paulson said Fannie Mae and Freddie Mac would be pushed to buy more mortgages and mortgage-backed securities. Because the government has seized both companies and put them into a conservatorship, policy makers have direct control over their activities.
Congressional officials said that they expected to get copies of a written proposal from the Treasury Department either late Friday or Saturday morning at a meeting on Capitol Hill between Treasury and Congressional staff members.
Senator Christopher J. Dodd, Democrat of Connecticut and chairman of the banking committee, said that he was eagerly awaiting the administration’s plan. “I am anxious to see what they are going to offer and what tolerance level there is for things we feel a need to include if they don’t include it themselves,” Mr. Dodd said in an interview.
Saturday, September 20, 2008
Time to Take a Second Look at Our “Free Trade” Agreements
Go to Original
By Mark Weisbrot
“Battle in Seattle” opens September 19-26 in movie theaters across the country, a rare combination of high drama and history-making events as they actually happened when thousands of protesters shut down the World Trade Organization in Seattle nearly nine years ago. It has an all-star cast including Oscar-winning beauty Charlize Theron, Woody Harrelson, Michelle Rodriguez, Ray Liotta, and Andre Benjamin (of Outkast hip-hop fame). Perhaps most unusual for a feature film, it gives the protesters credit for what they accomplished: they changed the debate over what has been deceptively marketed as “free trade.” They were beaten and jailed, choked with tear gas and shot with rubber bullets, but they succeeded in raising awareness about what these organizations and international agreements really do.
Prior to the Seattle protests in 1999, almost nobody knew that the World Trade Organization was not so much about “free trade” as about creating new rights and privileges for corporations at the expense of the environment, public health, and the public interest in general. The WTO and NAFTA’s provisions on “intellectual property,” for example, are the exact opposite of free trade, according to standard economic analysis. They increase the cost of medicines by extending and protecting the patent monopolies of big pharmaceutical companies and stifling international free trade in generic medicines, some of which are desperately needed in developing countries.
The debate has widened and now the Democratic presidential nominee, Senator Barack Obama, has proposed to renegotiate NAFTA. And why not? This agreement was approved in 1993, before anyone knew what was in it. Among other things, it contained “sleeper” provisions that enabled corporations, for the first time, to sue governments directly for environmental regulation that affects their bottom line.
We also have nearly 15 years of experience with NAFTA and it clearly did not deliver on most of its promises. It was sold as a job creator, but the United States has actually lost jobs, especially in manufacturing, as our trade deficit with Mexico has grown. Even more importantly, NAFTA has helped perpetuate the downward pressure on wages that have made the United States a much more unequal society over the last three decades. From 1973-2007, wages in the United States barely grew at all, as compared to a 74 percent increase from 1948-1973.
This change in the economy is partly the result of subjecting the majority of the American labor force – the more than 70 percent that do not have a college degree – to increased international competition, while maintaining protectionism for highly paid professionals such as lawyers, doctors, and upper management. It is also what standard economic theory would predict. Yet almost every newspaper editorial board in the country has someone who took an Econ 101 course and thinks they learned that increasing trade must be good because it makes “countries” better off. The late A.M. Rosenthal, a long-time New York Times editor and columnist, summed it up while NAFTA was being debated in Congress: “how they would howl, those journalistic and academic supporters of NAFTA who have shown so little care, compassion or understanding about the fears of working people who might lose their jobs, how they would howl if their own jobs were in danger.”
Unfortunately NAFTA does not appear to have helped Mexico either, where growth since it was implemented in 1994 has been sluggish, wages stagnant, and hundreds of thousands of families displaced from farming as they were forced to compete with U.S. agriculture.
NAFTA did, however, increase trade. But trade is not an end in itself; the goal is to improve people’s living standards.
So by all means, let’s renegotiate NAFTA – and the WTO agreement too. We’re likely to end up with better agreements now that people know something about what is being negotiated.
By Mark Weisbrot
“Battle in Seattle” opens September 19-26 in movie theaters across the country, a rare combination of high drama and history-making events as they actually happened when thousands of protesters shut down the World Trade Organization in Seattle nearly nine years ago. It has an all-star cast including Oscar-winning beauty Charlize Theron, Woody Harrelson, Michelle Rodriguez, Ray Liotta, and Andre Benjamin (of Outkast hip-hop fame). Perhaps most unusual for a feature film, it gives the protesters credit for what they accomplished: they changed the debate over what has been deceptively marketed as “free trade.” They were beaten and jailed, choked with tear gas and shot with rubber bullets, but they succeeded in raising awareness about what these organizations and international agreements really do.
Prior to the Seattle protests in 1999, almost nobody knew that the World Trade Organization was not so much about “free trade” as about creating new rights and privileges for corporations at the expense of the environment, public health, and the public interest in general. The WTO and NAFTA’s provisions on “intellectual property,” for example, are the exact opposite of free trade, according to standard economic analysis. They increase the cost of medicines by extending and protecting the patent monopolies of big pharmaceutical companies and stifling international free trade in generic medicines, some of which are desperately needed in developing countries.
The debate has widened and now the Democratic presidential nominee, Senator Barack Obama, has proposed to renegotiate NAFTA. And why not? This agreement was approved in 1993, before anyone knew what was in it. Among other things, it contained “sleeper” provisions that enabled corporations, for the first time, to sue governments directly for environmental regulation that affects their bottom line.
We also have nearly 15 years of experience with NAFTA and it clearly did not deliver on most of its promises. It was sold as a job creator, but the United States has actually lost jobs, especially in manufacturing, as our trade deficit with Mexico has grown. Even more importantly, NAFTA has helped perpetuate the downward pressure on wages that have made the United States a much more unequal society over the last three decades. From 1973-2007, wages in the United States barely grew at all, as compared to a 74 percent increase from 1948-1973.
This change in the economy is partly the result of subjecting the majority of the American labor force – the more than 70 percent that do not have a college degree – to increased international competition, while maintaining protectionism for highly paid professionals such as lawyers, doctors, and upper management. It is also what standard economic theory would predict. Yet almost every newspaper editorial board in the country has someone who took an Econ 101 course and thinks they learned that increasing trade must be good because it makes “countries” better off. The late A.M. Rosenthal, a long-time New York Times editor and columnist, summed it up while NAFTA was being debated in Congress: “how they would howl, those journalistic and academic supporters of NAFTA who have shown so little care, compassion or understanding about the fears of working people who might lose their jobs, how they would howl if their own jobs were in danger.”
Unfortunately NAFTA does not appear to have helped Mexico either, where growth since it was implemented in 1994 has been sluggish, wages stagnant, and hundreds of thousands of families displaced from farming as they were forced to compete with U.S. agriculture.
NAFTA did, however, increase trade. But trade is not an end in itself; the goal is to improve people’s living standards.
So by all means, let’s renegotiate NAFTA – and the WTO agreement too. We’re likely to end up with better agreements now that people know something about what is being negotiated.
Lloyds TSB takeover of HBOS leaves Britain’s banks in trouble
Go to Original
By Julie Hyland
Lloyds TSB’s £12 billion takeover of Halifax Bank of Scotland (HBOS) Thursday followed a collapse of the UK’s largest mortgage lenders’ shares, which threatened to destablise the entire British banking system.
With 20 percent of the mortgage market, HBOS has some 22 million customers and 72,000 employees. Lloyds is the fourth-largest mortgage lender with an 8 percent share.
The rescue package came amidst panic selling of shares on Wall Street, as confidence in the US and global financial system collapsed. In events that led many to recall the Great Crash of 1929, leading US financial institutions Merrill Lynch and AIG were bailed out in billion-dollar deals by the Bank of America and the US Treasury, while Lehman Brothers, America’s fourth-largest investment bank, filed for bankruptcy protection.
Writing on the scale of the crisis in the Times on September 17, Anatole Kaletsky noted, “Two weeks ago nobody would have imagined that, before the end of the month, the Bush Administration would have nationalised the world’s biggest insurance company, that two of the four biggest global investment banks would be out of business and that the US Government would take responsibility for three quarters of the country’s new mortgage loans.”
“Sadly,” he went on, “the events of the past two weeks may be only the prelude, not the climax, of this amazing crisis.”
This was clearly the concern of the markets and the Brown government in Britain. In two days of trading beginning Monday, HBOS had seen its share price fall by more than two thirds—recording a £7 billion loss by Tuesday evening—and at one point stood at just 88 pence.
According to the Guardian, after the Bank of England was informed by the US Treasury that Washington had decided not to bail out Lehman Brothers, the city’s Financial Services Authority “trawled through the finances of British banks to see which were particularly vulnerable.” The failure to rescue Lehman Brothers meant that the banks would not lend to each other, and the interbank lending rates was already beginning to rise rapidly.
In February, the Brown government had been forced to nationalise Northern Rock, the UK’s eighth-largest bank, at the cost of more than £80 billion to the taxpayer. With HBOS almost 10 times the size of Northern Rock, neither the government nor the City wanted a similar scenario this time round. The Guardian reported that during a private event sponsored by Citigroup in London on Monday evening, Prime Minister Gordon Brown had met Sir Victor Blank, the chair of Lloyds TSB, and asked for his help. Lloyds TSB had been looking to expand and had been involved in tentative talks since July with HBOS.
On Tuesday morning, Brown met with Mervyn King, the Bank of England governor, and Alastair Darling, chancellor of the Exchequer. The Bank of England announced it would extend the special liquidity scheme it had introduced after the collapse of Bear Stearns for a further three months until January—a move previously ruled out by King. In the meantime, the FSA scouted for other potential buyers for HBOS, including HSBC.
With HBOS shares continuing to slide, it appears that only Lloyds TSB was willing to take on the ailing bank. As soon as the stock market closed Tuesday, talks began in earnest, paving the way for the deal to be announced Wednesday.
HBOS had been resisting Lloyds TSB’s approaches for months. Since it was formed in 2001 as the outcome of a merger between the Bank of Scotland (formed in 1695 and the oldest surviving bank in the UK until this week) and the Halifax Building Society, HBOS had sought to position itself as a significant challenger to the “Big Four” high street banks of Lloyds TSB, Barclays, HSBC and the Royal Bank of Scotland.
But HBOS was dependent on money markets to fund 40 percent of its operations and had been partcularly hit by the credit crunch following the sub-prime mortgage crisis. Earlier this year, several hundred of its senior managers had clubbed together to purchase 1.4 million shares at 446.25p. That £6 million had reportedly been reduced to just £2 million this week Only a few weeks ago, HBOS raised £4 billion in a rights issue where there was only an 8 percent take up, leaving the underwriters, mainly the high street banks, holding the rest.
The government intends to break the rules governing competition and mergers in order to ensure that deal goes through. Business and Enterprise Secretary John Hutton is to use emergency powers to prevent the deal being referred to the Competition Commission on the grounds of national interest. Fearing speculation on HBOS and other banks, the government also banned short-selling of bank shares aimed at driving down share prices to make a killing for three months.
Under the deal, Blank will become chairman of the greatly expanded entity, the Bank of Britain, controlling almost one third of the UK’s savings and mortgage market and four times larger than any other bank as regards savings.
Lloyds TSB and the government dismissed reports of redundancies involving one third of the workforce and pledged to continue using HBOS headquarters in Scotland, but the deal sets out that “significant cost savings can be made by combining the networks and back offices of Lloyds TSB and HBOS.” With plans to slash costs by £1 billion a year—equivalent to 10 percent of the banks’ combined costs—union leaders believe the job cuts will be in the region of 21,000 and 28,000 out of a 140,000 workforce.
Such cuts take place under conditions in which the latest government figures showed the largest rise in the number of people unemployed and claiming benefit for 16 years. In the three months to July, some 138,000 were made redundant—a sharp increase over the 28,000 laid off in the three months to April. Some 1.72 million were officially registered as unemployed in July, taking the official unemployment rate up from 5.3 percent to 5.5 percent. In the last week alone, jobs have also been shed at the collapsed travel firm XL—the UK’s third-largest travel operator—and Lehman Brothers in London. Referring to earlier warnings by David Blanchflower of the Bank of England’s monetary policy committee that 2 million people could be out of work by Christmas, the Guardian editorialised, “at this rate we will be lucky if...[his two million forecast] is all that happens.”
Even with such extensive government backing, it was immediately apparent that the crisis had not passed. Kaletsky had warned, “Even the apparent rescue of Halifax Bank of Scotland may result in a bigger crisis, if the drowning HBOS drags down its rescuer, Lloyds TSB.... If this fails, it will take down all Britain’s banks.”
He expressed little confidence in the viability of the new bank if it was not offered “some kind of firm government safety net”—paid for, of course, by the taxpayer—for shareholders and was instead a “pure private sector solution.” If not, then “market attacks against HBOS will soon be revived and redirected against the merged bank,” leaving “only one solution— nationalisation of the entire British banking system.”
These predictions were swiftly confirmed when almost £2 billion was slashed off the value of Lloyds TSB’s takeover of HBOS in initial trading and the bank’s shares fell by 15 percent. Attention has also turned to other potential fatalities—most notably the Royal Bank of Scotland, which was also recently forced to raise additional finance through a rights issue and whose shares fell by 10 percent.
The Scotsman reported, “A source familiar with the situation yesterday warned that Scotland may be in danger of losing both its banks. ‘This is a revolutionary day for the banking sector,’ the source said. ‘Nothing is ever going to be the same. Look at the state of the markets. There’s still another shoe to fall—a merger of Royal Bank of Scotland with HSBC.’ ”
It is somewhat disingenuous to described RBS as merely a “Scottish” bank. One of the top 10 banking groups in the United States and amongst the largest in Europe, RBS is a target for speculation because, like HBOS, its loan book exceeded its deposit base. Reports indicate that the funding gap at RBS is £161 billion (HBOS was £198 billion) while it also “has a heavy exposure to the United States via its Citizens Bank subsidiary,” the Scotsman reported.
Only the announcement by the US that it would buy billions of bad mortgage debts held by American banks produced a rally of Britain’s banking share prices and of the London shares market. But the long-term picture remains fraught with danger, given the massive sums involved. The credit agency Standard & Poor’s has predicted that US and European banks will suffer a second massive wave of losses from the credit crunch in the next few months, raising the present total from US$378 billion to something nearer US$500 billion.
By Julie Hyland
Lloyds TSB’s £12 billion takeover of Halifax Bank of Scotland (HBOS) Thursday followed a collapse of the UK’s largest mortgage lenders’ shares, which threatened to destablise the entire British banking system.
With 20 percent of the mortgage market, HBOS has some 22 million customers and 72,000 employees. Lloyds is the fourth-largest mortgage lender with an 8 percent share.
The rescue package came amidst panic selling of shares on Wall Street, as confidence in the US and global financial system collapsed. In events that led many to recall the Great Crash of 1929, leading US financial institutions Merrill Lynch and AIG were bailed out in billion-dollar deals by the Bank of America and the US Treasury, while Lehman Brothers, America’s fourth-largest investment bank, filed for bankruptcy protection.
Writing on the scale of the crisis in the Times on September 17, Anatole Kaletsky noted, “Two weeks ago nobody would have imagined that, before the end of the month, the Bush Administration would have nationalised the world’s biggest insurance company, that two of the four biggest global investment banks would be out of business and that the US Government would take responsibility for three quarters of the country’s new mortgage loans.”
“Sadly,” he went on, “the events of the past two weeks may be only the prelude, not the climax, of this amazing crisis.”
This was clearly the concern of the markets and the Brown government in Britain. In two days of trading beginning Monday, HBOS had seen its share price fall by more than two thirds—recording a £7 billion loss by Tuesday evening—and at one point stood at just 88 pence.
According to the Guardian, after the Bank of England was informed by the US Treasury that Washington had decided not to bail out Lehman Brothers, the city’s Financial Services Authority “trawled through the finances of British banks to see which were particularly vulnerable.” The failure to rescue Lehman Brothers meant that the banks would not lend to each other, and the interbank lending rates was already beginning to rise rapidly.
In February, the Brown government had been forced to nationalise Northern Rock, the UK’s eighth-largest bank, at the cost of more than £80 billion to the taxpayer. With HBOS almost 10 times the size of Northern Rock, neither the government nor the City wanted a similar scenario this time round. The Guardian reported that during a private event sponsored by Citigroup in London on Monday evening, Prime Minister Gordon Brown had met Sir Victor Blank, the chair of Lloyds TSB, and asked for his help. Lloyds TSB had been looking to expand and had been involved in tentative talks since July with HBOS.
On Tuesday morning, Brown met with Mervyn King, the Bank of England governor, and Alastair Darling, chancellor of the Exchequer. The Bank of England announced it would extend the special liquidity scheme it had introduced after the collapse of Bear Stearns for a further three months until January—a move previously ruled out by King. In the meantime, the FSA scouted for other potential buyers for HBOS, including HSBC.
With HBOS shares continuing to slide, it appears that only Lloyds TSB was willing to take on the ailing bank. As soon as the stock market closed Tuesday, talks began in earnest, paving the way for the deal to be announced Wednesday.
HBOS had been resisting Lloyds TSB’s approaches for months. Since it was formed in 2001 as the outcome of a merger between the Bank of Scotland (formed in 1695 and the oldest surviving bank in the UK until this week) and the Halifax Building Society, HBOS had sought to position itself as a significant challenger to the “Big Four” high street banks of Lloyds TSB, Barclays, HSBC and the Royal Bank of Scotland.
But HBOS was dependent on money markets to fund 40 percent of its operations and had been partcularly hit by the credit crunch following the sub-prime mortgage crisis. Earlier this year, several hundred of its senior managers had clubbed together to purchase 1.4 million shares at 446.25p. That £6 million had reportedly been reduced to just £2 million this week Only a few weeks ago, HBOS raised £4 billion in a rights issue where there was only an 8 percent take up, leaving the underwriters, mainly the high street banks, holding the rest.
The government intends to break the rules governing competition and mergers in order to ensure that deal goes through. Business and Enterprise Secretary John Hutton is to use emergency powers to prevent the deal being referred to the Competition Commission on the grounds of national interest. Fearing speculation on HBOS and other banks, the government also banned short-selling of bank shares aimed at driving down share prices to make a killing for three months.
Under the deal, Blank will become chairman of the greatly expanded entity, the Bank of Britain, controlling almost one third of the UK’s savings and mortgage market and four times larger than any other bank as regards savings.
Lloyds TSB and the government dismissed reports of redundancies involving one third of the workforce and pledged to continue using HBOS headquarters in Scotland, but the deal sets out that “significant cost savings can be made by combining the networks and back offices of Lloyds TSB and HBOS.” With plans to slash costs by £1 billion a year—equivalent to 10 percent of the banks’ combined costs—union leaders believe the job cuts will be in the region of 21,000 and 28,000 out of a 140,000 workforce.
Such cuts take place under conditions in which the latest government figures showed the largest rise in the number of people unemployed and claiming benefit for 16 years. In the three months to July, some 138,000 were made redundant—a sharp increase over the 28,000 laid off in the three months to April. Some 1.72 million were officially registered as unemployed in July, taking the official unemployment rate up from 5.3 percent to 5.5 percent. In the last week alone, jobs have also been shed at the collapsed travel firm XL—the UK’s third-largest travel operator—and Lehman Brothers in London. Referring to earlier warnings by David Blanchflower of the Bank of England’s monetary policy committee that 2 million people could be out of work by Christmas, the Guardian editorialised, “at this rate we will be lucky if...[his two million forecast] is all that happens.”
Even with such extensive government backing, it was immediately apparent that the crisis had not passed. Kaletsky had warned, “Even the apparent rescue of Halifax Bank of Scotland may result in a bigger crisis, if the drowning HBOS drags down its rescuer, Lloyds TSB.... If this fails, it will take down all Britain’s banks.”
He expressed little confidence in the viability of the new bank if it was not offered “some kind of firm government safety net”—paid for, of course, by the taxpayer—for shareholders and was instead a “pure private sector solution.” If not, then “market attacks against HBOS will soon be revived and redirected against the merged bank,” leaving “only one solution— nationalisation of the entire British banking system.”
These predictions were swiftly confirmed when almost £2 billion was slashed off the value of Lloyds TSB’s takeover of HBOS in initial trading and the bank’s shares fell by 15 percent. Attention has also turned to other potential fatalities—most notably the Royal Bank of Scotland, which was also recently forced to raise additional finance through a rights issue and whose shares fell by 10 percent.
The Scotsman reported, “A source familiar with the situation yesterday warned that Scotland may be in danger of losing both its banks. ‘This is a revolutionary day for the banking sector,’ the source said. ‘Nothing is ever going to be the same. Look at the state of the markets. There’s still another shoe to fall—a merger of Royal Bank of Scotland with HSBC.’ ”
It is somewhat disingenuous to described RBS as merely a “Scottish” bank. One of the top 10 banking groups in the United States and amongst the largest in Europe, RBS is a target for speculation because, like HBOS, its loan book exceeded its deposit base. Reports indicate that the funding gap at RBS is £161 billion (HBOS was £198 billion) while it also “has a heavy exposure to the United States via its Citizens Bank subsidiary,” the Scotsman reported.
Only the announcement by the US that it would buy billions of bad mortgage debts held by American banks produced a rally of Britain’s banking share prices and of the London shares market. But the long-term picture remains fraught with danger, given the massive sums involved. The credit agency Standard & Poor’s has predicted that US and European banks will suffer a second massive wave of losses from the credit crunch in the next few months, raising the present total from US$378 billion to something nearer US$500 billion.
Japan’s ruling party to select new prime minister as economy slides into recession
Go to Original
By John Chan
Japan’s ruling Liberal Democratic Party (LDP) is due to pick a replacement for outgoing Prime Minister Yasuo Fukuda on Monday. LDP secretary general and former foreign minister Taro Aso is the clear frontrunner in a field of five as the party desperately attempts to resurrect its political fortunes before likely early elections.
In office for just a year, Fukuda stepped down on September 1 after a cabinet reshuffle and the announcement of a stimulus package failed to lift his cabinet’s poll ratings. A Jiji poll published yesterday put the government’s approval rating at just 15.6 percent, down eight points from last month. Fukuda’s predecessor, Shinzo Abe, suffered a similar fate after taking over from Junichiro Koizumi, who held onto office for five years.
Aso’s selection appears to be almost certain. He kicked off his campaign on September 10 with 125 LDP lawmakers from the lower and upper houses of the Diet turning up to support him, compared to 20 for each of the other four. According to the Asahi Shimbun on Thursday, about 60 percent of the Diet members backed Aso, who is also well ahead among LDP prefecture chapters.
The other four candidates are: Economic and Fiscal Policy Minister Kaoru Yosano; former defence minister Yuriko Koike—the first woman to challenge for the LDP leadership; Shigeru Ishiba, another former defence minister; and Nobuteru Ishihara, son of Tokyo’s right-wing governor, Shintaro Ishihara. Yosano reportedly has the support of about 50 lawmakers. Koike has been endorsed by Koizumi, who is still an influential figure in political and business circles, but she apparently has little support within the LDP.
Given that the outcome appears to be a foregone conclusion, some commentators have speculated that the contest is simply a stunt designed to give the LDP a much-needed boost. There are nevertheless sharp differences between the candidates, particularly over economic policy. These divisions have been accentuated by the US and global financial crisis, fears of a recession in Japan and public hostility over rising prices and deepening social inequality.
Despite his attempts to affect a down-to-earth character and appeal to young people by declaring his passion for manga comics, Aso is very much a traditional LDP politician. He advocates boosting public spending in an attempt to end nearly two decades of stagnation—a policy that makes him popular with the LDP rank-and-file, especially in its rural base. However, a series of huge stimulus packages since the early 1990s have failed to revive the economy significantly and led to massive government debts, which now stand at 180 percent of the GDP.
Undaunted, Aso has called for greater efforts to stimulate the economy and the postponement of the LDP’s pledge to end the budget deficit by the 2011-12 fiscal year. Speaking in a debate yesterday with other contenders, he said the economy would be his “first priority” as prime minister and has called for a supplementary budget. Official statistics released last week showed that Japan’s economy contracted 3 percent in the second quarter on the annualised basis, due to faltering exports and domestic demand as well as soaring prices for raw materials.
There are concerns in Japanese ruling circles that Aso’s hawkish foreign policy stance will lead to tensions with China and South Korea. He backed Koizumi’s public visits to the Yasukuni Shrine, a notorious symbol of Japanese militarism, that provoked protests in Beijing and Seoul. As foreign minister under Koizumi and Abe, Aso was closely associated with their hard-line stance against North Korea and support for the US occupations of Iraq and Afghanistan. Mindful of the fact that China is now Japan’s largest export market, Aso has promised to maintain Fukuda’s improved relations with China, but doubts remain among the corporate elite.
Aso’s opponents
Aso’s chief opponents are Yosano and Koike. Yosano, 70, is regarded as a “fiscal hawk” known for his support for a dramatic tax overhaul, including doubling the country’s unpopular consumption tax to 10 percent, and cutting social security expenditure.
Koike, 56, however, advocates more of the sweeping economic restructuring that was carried out under Koizumi. Not surprisingly, Koizumi has publicly backed her, rather than Yosano. He had lunch with Koike and her supporters on Tuesday. “I support Ms Koike. I will vote for her. If a prime minister Koike becomes reality, she would give a good fight to the Ozawa-led Democratic Party,” Koizumi declared. Ichiro Ozawa is the leader of the opposition Democratic Party of Japan (DPJ).
During yesterday’s debate, Koike accused Aso of risking Japan’s financial health through lavish public spending. Taking over Koizumi’s anti-establishment rhetoric, she blamed “Kasumigaseki”—the Tokyo district that houses Japan’s powerful state bureaucracy—for obstructing economic reforms. “My role is to reform or destroy Kasumigaseki. In other words, it is political leaders who should be taking the strong [national] leadership initiatives,” she declared.
Koike was one of the 80 or so “Koizumi children”—the group of lawmakers who entered the lower house of parliament after the LDP’s landslide election win in September 2005. Koizumi took the unprecedented gamble of calling the snap election after his postal privatisation bill was defeated in the upper house due the defection of LDP lawmakers. Privatising Japan Post—the largest public financial institution, employer and holder of government debt—was the cornerstone for Koizumi’s market reform.
Koizumi expelled the dissident LDP lawmakers. By posturing as an anti-establishment figure, fighting LDP vested interests, Koizumi managed to bury the substantive issues, including his highly unpopular dispatch of Japanese troops to Iraq. Koike, a former TV anchorwoman and Arabic-speaker, was one of Koizumi’s high-profile “assassins” recruited to target the so-called postal rebels in the election.
Koizumi’s triumph soon began to fade, however, as the painful social consequences of his economic agenda became apparent. In 2006, an unprecedented public discussion opened up on “winners” and “losers,” reflecting concern about the deepening social chasm between rich and poor. In July 2006, as he prepared to step down, Koizumi pulled Japanese troops out of Iraq. Contrary to the myths surrounding Koizumi, his popularity was already sliding when he handed over the reins to his hand-groomed successor, Abe, who presided over a disastrous loss in upper house elections in 2007.
While Koike is trying to revive the Koizumi political magic, the lack of enthusiasm for another round of drastic pro-market reforms is reflected in the polls. According to an Asahi Shimbun poll published on September 12, 42 percent of voters supported Aso, compared to just 8 percent for Koike and 6 percent for Yosano.
The rifts within the LDP remain, however. Koizumi’s backing for Koike opened up a split in the largest LDP faction led by Chief Cabinet Secretary Nobutaka Machimura. While the faction has officially expressed its support for Aso, a minority headed by former LDP secretary general and top Koizumi aide, Hidenao Nakagawa, is threatening to support Koike. The Financial Times cited Takao Toshikawa, editor of Inside Line, as suggesting that a significant numbers of LDP parliamentarians—the so-called “reformers” led by Nakagawa—might leave the party if it fares badly in the next election.
Aso yesterday scotched media speculation that the LDP had already decided to call an early lower house election on October 26. But there is little doubt the LDP is considering a sudden election to take advantage of any boost in the polls from the new leadership. If he becomes prime minister next week, Aso could well use his proposed supplementary budget and legislation to renew Japan’s naval support for the US occupation of Afghanistan as the basis for the campaign. The opposition DPJ, which controls the upper house, has vowed to oppose both measures.
By John Chan
Japan’s ruling Liberal Democratic Party (LDP) is due to pick a replacement for outgoing Prime Minister Yasuo Fukuda on Monday. LDP secretary general and former foreign minister Taro Aso is the clear frontrunner in a field of five as the party desperately attempts to resurrect its political fortunes before likely early elections.
In office for just a year, Fukuda stepped down on September 1 after a cabinet reshuffle and the announcement of a stimulus package failed to lift his cabinet’s poll ratings. A Jiji poll published yesterday put the government’s approval rating at just 15.6 percent, down eight points from last month. Fukuda’s predecessor, Shinzo Abe, suffered a similar fate after taking over from Junichiro Koizumi, who held onto office for five years.
Aso’s selection appears to be almost certain. He kicked off his campaign on September 10 with 125 LDP lawmakers from the lower and upper houses of the Diet turning up to support him, compared to 20 for each of the other four. According to the Asahi Shimbun on Thursday, about 60 percent of the Diet members backed Aso, who is also well ahead among LDP prefecture chapters.
The other four candidates are: Economic and Fiscal Policy Minister Kaoru Yosano; former defence minister Yuriko Koike—the first woman to challenge for the LDP leadership; Shigeru Ishiba, another former defence minister; and Nobuteru Ishihara, son of Tokyo’s right-wing governor, Shintaro Ishihara. Yosano reportedly has the support of about 50 lawmakers. Koike has been endorsed by Koizumi, who is still an influential figure in political and business circles, but she apparently has little support within the LDP.
Given that the outcome appears to be a foregone conclusion, some commentators have speculated that the contest is simply a stunt designed to give the LDP a much-needed boost. There are nevertheless sharp differences between the candidates, particularly over economic policy. These divisions have been accentuated by the US and global financial crisis, fears of a recession in Japan and public hostility over rising prices and deepening social inequality.
Despite his attempts to affect a down-to-earth character and appeal to young people by declaring his passion for manga comics, Aso is very much a traditional LDP politician. He advocates boosting public spending in an attempt to end nearly two decades of stagnation—a policy that makes him popular with the LDP rank-and-file, especially in its rural base. However, a series of huge stimulus packages since the early 1990s have failed to revive the economy significantly and led to massive government debts, which now stand at 180 percent of the GDP.
Undaunted, Aso has called for greater efforts to stimulate the economy and the postponement of the LDP’s pledge to end the budget deficit by the 2011-12 fiscal year. Speaking in a debate yesterday with other contenders, he said the economy would be his “first priority” as prime minister and has called for a supplementary budget. Official statistics released last week showed that Japan’s economy contracted 3 percent in the second quarter on the annualised basis, due to faltering exports and domestic demand as well as soaring prices for raw materials.
There are concerns in Japanese ruling circles that Aso’s hawkish foreign policy stance will lead to tensions with China and South Korea. He backed Koizumi’s public visits to the Yasukuni Shrine, a notorious symbol of Japanese militarism, that provoked protests in Beijing and Seoul. As foreign minister under Koizumi and Abe, Aso was closely associated with their hard-line stance against North Korea and support for the US occupations of Iraq and Afghanistan. Mindful of the fact that China is now Japan’s largest export market, Aso has promised to maintain Fukuda’s improved relations with China, but doubts remain among the corporate elite.
Aso’s opponents
Aso’s chief opponents are Yosano and Koike. Yosano, 70, is regarded as a “fiscal hawk” known for his support for a dramatic tax overhaul, including doubling the country’s unpopular consumption tax to 10 percent, and cutting social security expenditure.
Koike, 56, however, advocates more of the sweeping economic restructuring that was carried out under Koizumi. Not surprisingly, Koizumi has publicly backed her, rather than Yosano. He had lunch with Koike and her supporters on Tuesday. “I support Ms Koike. I will vote for her. If a prime minister Koike becomes reality, she would give a good fight to the Ozawa-led Democratic Party,” Koizumi declared. Ichiro Ozawa is the leader of the opposition Democratic Party of Japan (DPJ).
During yesterday’s debate, Koike accused Aso of risking Japan’s financial health through lavish public spending. Taking over Koizumi’s anti-establishment rhetoric, she blamed “Kasumigaseki”—the Tokyo district that houses Japan’s powerful state bureaucracy—for obstructing economic reforms. “My role is to reform or destroy Kasumigaseki. In other words, it is political leaders who should be taking the strong [national] leadership initiatives,” she declared.
Koike was one of the 80 or so “Koizumi children”—the group of lawmakers who entered the lower house of parliament after the LDP’s landslide election win in September 2005. Koizumi took the unprecedented gamble of calling the snap election after his postal privatisation bill was defeated in the upper house due the defection of LDP lawmakers. Privatising Japan Post—the largest public financial institution, employer and holder of government debt—was the cornerstone for Koizumi’s market reform.
Koizumi expelled the dissident LDP lawmakers. By posturing as an anti-establishment figure, fighting LDP vested interests, Koizumi managed to bury the substantive issues, including his highly unpopular dispatch of Japanese troops to Iraq. Koike, a former TV anchorwoman and Arabic-speaker, was one of Koizumi’s high-profile “assassins” recruited to target the so-called postal rebels in the election.
Koizumi’s triumph soon began to fade, however, as the painful social consequences of his economic agenda became apparent. In 2006, an unprecedented public discussion opened up on “winners” and “losers,” reflecting concern about the deepening social chasm between rich and poor. In July 2006, as he prepared to step down, Koizumi pulled Japanese troops out of Iraq. Contrary to the myths surrounding Koizumi, his popularity was already sliding when he handed over the reins to his hand-groomed successor, Abe, who presided over a disastrous loss in upper house elections in 2007.
While Koike is trying to revive the Koizumi political magic, the lack of enthusiasm for another round of drastic pro-market reforms is reflected in the polls. According to an Asahi Shimbun poll published on September 12, 42 percent of voters supported Aso, compared to just 8 percent for Koike and 6 percent for Yosano.
The rifts within the LDP remain, however. Koizumi’s backing for Koike opened up a split in the largest LDP faction led by Chief Cabinet Secretary Nobutaka Machimura. While the faction has officially expressed its support for Aso, a minority headed by former LDP secretary general and top Koizumi aide, Hidenao Nakagawa, is threatening to support Koike. The Financial Times cited Takao Toshikawa, editor of Inside Line, as suggesting that a significant numbers of LDP parliamentarians—the so-called “reformers” led by Nakagawa—might leave the party if it fares badly in the next election.
Aso yesterday scotched media speculation that the LDP had already decided to call an early lower house election on October 26. But there is little doubt the LDP is considering a sudden election to take advantage of any boost in the polls from the new leadership. If he becomes prime minister next week, Aso could well use his proposed supplementary budget and legislation to renew Japan’s naval support for the US occupation of Afghanistan as the basis for the campaign. The opposition DPJ, which controls the upper house, has vowed to oppose both measures.
US government to bail out Wall Street
Go to Original
By Barry Grey
The Bush administration on Friday announced plans for a massive and unprecedented federal bailout of the US banking system. In separate appearances Friday morning, Treasury Secretary Henry Paulson and President Bush announced a series of measures to shore up collapsing financial markets and called on Congress to pass legislation next week to use, in Paulson’s words, “hundreds of billions” of taxpayer dollars to buy virtually worthless mortgage-backed assets that cannot be sold on the market from banks and other financial institutions.
Paulson said he would meet over the weekend with congressional leaders to lay out the details of the government plan.
With this plan, the full cost of the immense debts piled up by the banks will be imposed on the American people. It will shift the banks’ liabilities onto the federal government, sharply increasing government budget deficits and the US debt, a process that can only further erode the creditworthiness of the United States and place a bigger question mark on the value of the US dollar.
In the past week alone, the US Treasury has announced cash injections into the Federal Reserve Board of $200 billion to bolster the sagging balance sheet of the central bank, which has already expended hundreds of billions in loans and subsidies to the major Wall Street banks and put out another $85 billion in the takeover this week of the insurance giant American International Group.
The presidential candidates of both major parties, Republican Senator John McCain and Democratic Senator Barack Obama, quickly signaled their support for the wholesale bailout of the banks and big investors, and prominent congressional Democrats issued assurances that they would obey the demands of Paulson, Federal Reserve Board Chairman Ben Bernanke and Bush and pass the required legislation by the end of next week.
The immediate line-up of both parties and the media behind the bailout plan for Wall Street stands in the starkest contrast to their indifference and inaction in regard to the plight of millions of American working people, who face a rising tide of home foreclosures, layoffs and sinking living standards. When it comes to the social needs of the people, the universal cry from corporate America and the two parties is, “There is no money,” but when the fortunes of the financial elite are threatened, the full power of the government and unlimited resources are marshaled virtually at a moment’s notice.
There was no suggestion in the statements of Bush and Paulson of any relief for the working class—nothing to stop home foreclosures or help those who have already lost their homes. Rather, hundreds of billions—and more likely trillions—of dollars in public funds will be used to prop up the banks.
The resulting bankrupting of the government will be used to justify a brutal assault on what remains of social programs, including Medicaid, Medicare and Social Security, and demand even greater financial “sacrifices” from workers, whether the next administration is headed by Obama or McCain. Nothing could more clearly demonstrate that behind the façade of American democracy there stands a dictatorship of big business.
Paulson made his announcement following a meeting Thursday night, with Bernanke and Securities and Exchange Commission Chairman Christopher Cox also in attendance, along with congressional leaders from both parties. At the meeting, Paulson warned that the US and global financial system was on the brink of collapse and outlined in general terms the plan to set up some form of government agency to take “illiquid” mortgage-backed securities off of the balance sheets of the banks.
News of the plan first broke Thursday afternoon, at a point when a massive injection of liquidity by the Federal Reserve and central banks in Europe, Canada and Japan had failed to unfreeze credit markets that had collapsed over the previous days. The Fed loaned $180 billion to the other central banks and then added another $120 billion in an attempt to get banks to lend to one another and to other companies, under conditions where confidence in the financial markets and major institutions had fallen so sharply that credit markets had ceased to function. But instead of lending the fresh money to other companies, the big banks were hoarding it to protect themselves against possible default.
The breakdown in the world capitalist system—widely acknowledged to be the worst crisis since the 1929 stock market crash and heading toward another Great Depression—came in the wake of the US government takeover of the mortgage giants Fannie Mae and Freddie Mac less than two weeks ago and the collapse this week of Wall Street icons Lehman Brothers and Merrill Lynch, followed on Tuesday by the US takeover of American International Group.
In the aftermath of these developments, other major US banks had come under immense pressure and were facing bankruptcy, including the investment bank Morgan Stanley and the savings and loan giant Washington Mutual. Both were scrambling to find buyers as their share prices plummeted. The domino effect of falling banks was threatening the biggest US investment bank, Goldman Sachs, headed by Paulson prior to his becoming treasury secretary, whose stock had suffered enormous losses in the course of the week.
The crisis reached the tipping point on Tuesday and Wednesday when major US money market funds announced losses and some were forced to close. This sparked a growing run on the funds, with $78.7 billion withdrawn from the largest funds on Wednesday and, according to one industry estimate, a total of $145.3 billion over a two-day period.
Money market funds are considered the safest form of investment, and tens of millions of Americans have their savings in them. More immediately, from the standpoint of Wall Street, the funds pump money into credit markets by buying short-term IOUs issued by banks and companies, called “commercial paper.” The growing crisis of the money market funds threatened to collapse the commercial paper market, precipitating a chain reaction of defaults and bankruptcies across the economy.
“It’s the ultimate nightmare to have a run on the money markets—that is truly Armageddon—and they’re not going to allow that to happen,” said Paul McCulley at Pacific Investment Management Co.
The Dow Jones Industrial Average had already lost nearly 800 points in the first three trading days of the week, and by Thursday afternoon a rally sparked by the coordinated action of the Fed and other central banks that morning was faltering. At about 3 PM news broke of the government’s plan for a bailout of the banks, the floor of the New York Stock Exchange erupted in cheers, and the market immediately reversed itself and rocketed upward in a frenzy of buying.
In the final hour of trading, the Dow Jones Industrial Average recouped most of Wednesday’s 449-point loss, rising 410.03 points in the biggest percentage gain in almost six years. From its midday low to its late-afternoon high, shortly before the finish, the Dow swung 617 points.
The biggest winners were the financial stocks, including Morgan Stanley and Washington Mutual, which lurched from heavy losses to big gains.
On Friday morning, the government announced a series of immediate measures to bail out the markets, including a temporary ban on short-selling (betting on a fall in prices) of financial stocks and a $50 billion government program to insure money market funds. The Treasury Department also announced that Fannie Mae and Freddie Mac, now under government ownership, would increase their purchases of mortgage-backed securities and the Treasury would directly buy up a larger number of such assets. The Fed added that it would extend low-cost loans to the banks to unfreeze the commercial paper market.
These moves and the statements of Paulson and Bush set off another orgy of buying on the stock exchange, with the Dow closing up 368.75 for the day.
In his statement, Paulson said “comprehensive” action was needed “to address the root cause of our financial system stresses. The underlying weakness in our financial system today is illiquid mortgage assets that have lost value as the housing correction has proceeded.”
This is a lie. The root cause of the crisis is the unbridled parasitism of American capitalism, which over a period of decades has dismantled huge sections of industry in order to reap super profits for the rich by means of financial speculation and fraud, based on a colossal buildup of debt. Now the bill is being passed to the American people.
Bush, flanked by Paulson, Bernanke and Cox, called for a government bailout of Wall Street in the name of “our system of free enterprise.”
“There will be ample opportunity to debate the origins of this problem,” he said. “Now is the time to solve it.”
There will, in fact, be no debate or discussion. Nobody will be held accountable for the greatest financial scandal in world history. There will be no penalties. No one who made tens and hundreds of millions from the plundering of America will be forced to give back a dime.
All of the financial resources of the United States are being placed at the disposal of Wall Street and every American citizen, without being asked, is being given the responsibility for covering the debts of the richest people in the country.
Certainly no debate or resistance will come from the supposed political opposition—the Democratic Party. Speaking Friday in Miami, Obama said he fully supported the bailout plan. “John McCain and I can continue to argue about our different economic agendas for next year, but we should come together now to work on what this country urgently needs this year,” he said.
Obama is no less bound to Wall Street than his Republican opponent. In fact, he has received more campaign money from the financial industry—$22.5 million—than McCain, who has taken in $19.6 million.
Democratic congressional leaders lined up Friday to back the administration plan. New York Senator Charles Schumer, who chairs the Joint Economic Committee, said he was optimistic that Congress could approve the package in a week.
House Financial Services Committee Chairman Barney Frank, Democrat of Massachusetts, said his panel could hold a vote on the package as soon as Wednesday. “They said they would like legislation to do it, and there was virtually unanimous agreement that there would be legislation to do it,” said Frank.
Rep. Nancy Pelosi, the Democratic speaker of the House of Representatives, added, “We hope to move very quickly—time is of the essence.”
All of those involved in pushing through this scheme to funnel the entire wealth of the country into the coffers of the financial elite have direct financial stakes in the outcome. Paulson made hundreds of millions of dollars as chairman of Goldman Sachs. Pelosi reportedly has major investments in American International Group. Many of the congressional leaders of both parties are themselves multi-millionaires and rely on handouts from big business to get elected. They are all ruled by personal interests that reflect the interest of the American ruling class.
The result of the government moves announced Thursday and Friday has already been to not only cover the debts of the super-rich, but to expand their stock portfolios and bank accounts by millions more through the run-up of share prices.
By Barry Grey
The Bush administration on Friday announced plans for a massive and unprecedented federal bailout of the US banking system. In separate appearances Friday morning, Treasury Secretary Henry Paulson and President Bush announced a series of measures to shore up collapsing financial markets and called on Congress to pass legislation next week to use, in Paulson’s words, “hundreds of billions” of taxpayer dollars to buy virtually worthless mortgage-backed assets that cannot be sold on the market from banks and other financial institutions.
Paulson said he would meet over the weekend with congressional leaders to lay out the details of the government plan.
With this plan, the full cost of the immense debts piled up by the banks will be imposed on the American people. It will shift the banks’ liabilities onto the federal government, sharply increasing government budget deficits and the US debt, a process that can only further erode the creditworthiness of the United States and place a bigger question mark on the value of the US dollar.
In the past week alone, the US Treasury has announced cash injections into the Federal Reserve Board of $200 billion to bolster the sagging balance sheet of the central bank, which has already expended hundreds of billions in loans and subsidies to the major Wall Street banks and put out another $85 billion in the takeover this week of the insurance giant American International Group.
The presidential candidates of both major parties, Republican Senator John McCain and Democratic Senator Barack Obama, quickly signaled their support for the wholesale bailout of the banks and big investors, and prominent congressional Democrats issued assurances that they would obey the demands of Paulson, Federal Reserve Board Chairman Ben Bernanke and Bush and pass the required legislation by the end of next week.
The immediate line-up of both parties and the media behind the bailout plan for Wall Street stands in the starkest contrast to their indifference and inaction in regard to the plight of millions of American working people, who face a rising tide of home foreclosures, layoffs and sinking living standards. When it comes to the social needs of the people, the universal cry from corporate America and the two parties is, “There is no money,” but when the fortunes of the financial elite are threatened, the full power of the government and unlimited resources are marshaled virtually at a moment’s notice.
There was no suggestion in the statements of Bush and Paulson of any relief for the working class—nothing to stop home foreclosures or help those who have already lost their homes. Rather, hundreds of billions—and more likely trillions—of dollars in public funds will be used to prop up the banks.
The resulting bankrupting of the government will be used to justify a brutal assault on what remains of social programs, including Medicaid, Medicare and Social Security, and demand even greater financial “sacrifices” from workers, whether the next administration is headed by Obama or McCain. Nothing could more clearly demonstrate that behind the façade of American democracy there stands a dictatorship of big business.
Paulson made his announcement following a meeting Thursday night, with Bernanke and Securities and Exchange Commission Chairman Christopher Cox also in attendance, along with congressional leaders from both parties. At the meeting, Paulson warned that the US and global financial system was on the brink of collapse and outlined in general terms the plan to set up some form of government agency to take “illiquid” mortgage-backed securities off of the balance sheets of the banks.
News of the plan first broke Thursday afternoon, at a point when a massive injection of liquidity by the Federal Reserve and central banks in Europe, Canada and Japan had failed to unfreeze credit markets that had collapsed over the previous days. The Fed loaned $180 billion to the other central banks and then added another $120 billion in an attempt to get banks to lend to one another and to other companies, under conditions where confidence in the financial markets and major institutions had fallen so sharply that credit markets had ceased to function. But instead of lending the fresh money to other companies, the big banks were hoarding it to protect themselves against possible default.
The breakdown in the world capitalist system—widely acknowledged to be the worst crisis since the 1929 stock market crash and heading toward another Great Depression—came in the wake of the US government takeover of the mortgage giants Fannie Mae and Freddie Mac less than two weeks ago and the collapse this week of Wall Street icons Lehman Brothers and Merrill Lynch, followed on Tuesday by the US takeover of American International Group.
In the aftermath of these developments, other major US banks had come under immense pressure and were facing bankruptcy, including the investment bank Morgan Stanley and the savings and loan giant Washington Mutual. Both were scrambling to find buyers as their share prices plummeted. The domino effect of falling banks was threatening the biggest US investment bank, Goldman Sachs, headed by Paulson prior to his becoming treasury secretary, whose stock had suffered enormous losses in the course of the week.
The crisis reached the tipping point on Tuesday and Wednesday when major US money market funds announced losses and some were forced to close. This sparked a growing run on the funds, with $78.7 billion withdrawn from the largest funds on Wednesday and, according to one industry estimate, a total of $145.3 billion over a two-day period.
Money market funds are considered the safest form of investment, and tens of millions of Americans have their savings in them. More immediately, from the standpoint of Wall Street, the funds pump money into credit markets by buying short-term IOUs issued by banks and companies, called “commercial paper.” The growing crisis of the money market funds threatened to collapse the commercial paper market, precipitating a chain reaction of defaults and bankruptcies across the economy.
“It’s the ultimate nightmare to have a run on the money markets—that is truly Armageddon—and they’re not going to allow that to happen,” said Paul McCulley at Pacific Investment Management Co.
The Dow Jones Industrial Average had already lost nearly 800 points in the first three trading days of the week, and by Thursday afternoon a rally sparked by the coordinated action of the Fed and other central banks that morning was faltering. At about 3 PM news broke of the government’s plan for a bailout of the banks, the floor of the New York Stock Exchange erupted in cheers, and the market immediately reversed itself and rocketed upward in a frenzy of buying.
In the final hour of trading, the Dow Jones Industrial Average recouped most of Wednesday’s 449-point loss, rising 410.03 points in the biggest percentage gain in almost six years. From its midday low to its late-afternoon high, shortly before the finish, the Dow swung 617 points.
The biggest winners were the financial stocks, including Morgan Stanley and Washington Mutual, which lurched from heavy losses to big gains.
On Friday morning, the government announced a series of immediate measures to bail out the markets, including a temporary ban on short-selling (betting on a fall in prices) of financial stocks and a $50 billion government program to insure money market funds. The Treasury Department also announced that Fannie Mae and Freddie Mac, now under government ownership, would increase their purchases of mortgage-backed securities and the Treasury would directly buy up a larger number of such assets. The Fed added that it would extend low-cost loans to the banks to unfreeze the commercial paper market.
These moves and the statements of Paulson and Bush set off another orgy of buying on the stock exchange, with the Dow closing up 368.75 for the day.
In his statement, Paulson said “comprehensive” action was needed “to address the root cause of our financial system stresses. The underlying weakness in our financial system today is illiquid mortgage assets that have lost value as the housing correction has proceeded.”
This is a lie. The root cause of the crisis is the unbridled parasitism of American capitalism, which over a period of decades has dismantled huge sections of industry in order to reap super profits for the rich by means of financial speculation and fraud, based on a colossal buildup of debt. Now the bill is being passed to the American people.
Bush, flanked by Paulson, Bernanke and Cox, called for a government bailout of Wall Street in the name of “our system of free enterprise.”
“There will be ample opportunity to debate the origins of this problem,” he said. “Now is the time to solve it.”
There will, in fact, be no debate or discussion. Nobody will be held accountable for the greatest financial scandal in world history. There will be no penalties. No one who made tens and hundreds of millions from the plundering of America will be forced to give back a dime.
All of the financial resources of the United States are being placed at the disposal of Wall Street and every American citizen, without being asked, is being given the responsibility for covering the debts of the richest people in the country.
Certainly no debate or resistance will come from the supposed political opposition—the Democratic Party. Speaking Friday in Miami, Obama said he fully supported the bailout plan. “John McCain and I can continue to argue about our different economic agendas for next year, but we should come together now to work on what this country urgently needs this year,” he said.
Obama is no less bound to Wall Street than his Republican opponent. In fact, he has received more campaign money from the financial industry—$22.5 million—than McCain, who has taken in $19.6 million.
Democratic congressional leaders lined up Friday to back the administration plan. New York Senator Charles Schumer, who chairs the Joint Economic Committee, said he was optimistic that Congress could approve the package in a week.
House Financial Services Committee Chairman Barney Frank, Democrat of Massachusetts, said his panel could hold a vote on the package as soon as Wednesday. “They said they would like legislation to do it, and there was virtually unanimous agreement that there would be legislation to do it,” said Frank.
Rep. Nancy Pelosi, the Democratic speaker of the House of Representatives, added, “We hope to move very quickly—time is of the essence.”
All of those involved in pushing through this scheme to funnel the entire wealth of the country into the coffers of the financial elite have direct financial stakes in the outcome. Paulson made hundreds of millions of dollars as chairman of Goldman Sachs. Pelosi reportedly has major investments in American International Group. Many of the congressional leaders of both parties are themselves multi-millionaires and rely on handouts from big business to get elected. They are all ruled by personal interests that reflect the interest of the American ruling class.
The result of the government moves announced Thursday and Friday has already been to not only cover the debts of the super-rich, but to expand their stock portfolios and bank accounts by millions more through the run-up of share prices.
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