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.
Friday, September 19, 2008
Financial Bailout: America's Own Kleptocracy
Go to Original
By Michael Hudson
The largest transformation of America's Financial System since the Great Depression
Nobody expected industrial capitalism to end up like this. Nobody even saw it evolving in this direction. I'm afraid this failing is not unusual among futurists: The natural tendency is to think about how economies can best grow and evolve, not how it can be untracked. But an unforeseen road always seems to appear, and there goes society goes off on a tangent.
What a two weeks!
On Sunday, September 7, the Treasury took on the $5.3 trillion mortgage exposure of Fannie Mae and Freddie Mac, whose heads already had been removed for accounting fraud.
On Monday, September 15, Lehman Brothers went bankrupt, when prospective Wall Street buyers couldn't gain any sense of reality from its financial books. On Wednesday the Federal Reserve agreed to make good for at least $85 billion in the just-pretend "insured" winnings owed to financial gamblers who bet on computer-driven trades in junk mortgages and bought counter-party coverage from the A.I.G. (the American International Group, whose head Maurice Greenberg already had been removed a few years back for accounting fraud).
But it is Friday, September 19, that will go down as a turning point in American history. The White House committed at least half a trillion dollars more to re-inflate real estate prices in an attempt to support the market value junk mortgages - mortgages issued far beyond the ability of debtors to pay and far above the going market price of the collateral being pledged.
These billions of dollars were devoted to keeping a dream alive - the accounting fictions written down by companies that had entered an unreal world based on false accounting that nearly everyone in the financial sector knew to be fake. But they played along with buying and selling packaged mortgage junk because that was where the money was. As Charles Prince of Citibank put it, "As long as they're playing music, you have to get up and dance." Even after markets collapsed, fund managers who steered clear were blamed for not playing the game while it was going. I have friends on Wall Street who were fired for not matching the returns that their compatriots were making. And the biggest returns were to be made in trading in the economy's largest financial asset - mortgage debt. The mortgages packaged, owned or guaranteed by Fannie and Freddie alone exceeded the entire U.S. national debt - the cumulative deficits run up by the American Government since the nation won the Revolutionary War!
This gives an idea of just how large the bailout has been - and where the government's (or at least the Republicans') priorities lie! Instead of waking up the economy to reality, the government has thrown all its resources to promote the unreal dream that debts can be paid - if not by the debtors themselves, then by the government - "taxpayers," as the euphemism goes.
Overnight, the U.S. Treasury and Federal Reserve have radically changed the character of American capitalism. It is nothing less than a coup d'Etat for the class that FDR called "banksters." What has happened in the past two weeks threatens to change the coming century - irreversibly, if they can get away with it. This is the largest and most inequitable transfer of wealth since the land giveaways to the railroad barons during the Civil War era.
Even so, there seems little sign that it even may end the free-market patter talk by financial insiders who have managed to avert public oversight by appointing non-regulators to the major regulatory agencies - and thus created the mess that Treasury Secretary Henry Paulson now says threatens the bank deposits and jobs of all Americans. What he really means, of course, are simply the largest Republican campaign contributors (and to be fair, also the largest contributors to Democratic candidates on key financial committees).
A kleptocratic class has taken over the economy to replace industrial capitalism. Franklin Roosevelt's term "banksters" says it all in a nutshell. The economy has been captured - by an alien power, but not the usual suspects. Not socialism, workers or "big government," nor by industrial monopolists or even by the great banking families. Certainly not by Freemasons and Illuminati. (It would be wonderful if there were indeed some group operating with centuries of wisdom behind them, so at least someone at least had a plan.) Rather, the banksters have made a compact with an alien power -not Communists, Russians, Asians or Arabs. Not humans at all. The group's cadre is a new breed of machine. It may sound like the Terminator movies, but computerized Machines have indeed taken over the world - at least, the White House's world.
Here is how they did it. A.I.G. wrote insurance policies of all sorts of that people and businesses need: home and property insurance, livestock insurance, even aircraft leasing. These highly profitable businesses were not the problem. (They therefore will probably be sold off to pay the company's bad gambles.) A.I.G.'s downfall came from the $450 billion - almost half a trillion - dollars it was on the hook for as a result of guaranteeing hedge-fund counterparty insurance. In other words, if two parties played the zero-sum game of betting against each other as to whether the dollar would rise or fall against sterling or the euro, or if they insured a mortgage portfolio of junk mortgages to make sure that they would get paid, they would pay a teeny tiny commission to A.I.G. for a policy promising to pay if, say, the $11 trillion U.S. mortgage market should "stumble" or if losers placing trillions of dollars in bets on foreign exchange derivatives, stock or bond derivatives should somehow find themselves in a position that so many Las Vegas patrons are in, and be unable to come up with the cash to cover their losses.
A.I.G. collected billions of dollars on such policies. And thanks to the fact that insurance companies are a Milton Friedman paradise - not regulated by the Federal Reserve or any other nation-wide agency, and hence able to get the proverbial free lunch without government oversight - writing such policies was done by computer printouts, and the company collected massive fees and commissions without putting in much capital of its own. This is what is called "self-regulation." It is how the Invisible Hand is supposed to work.
It turned out, inevitably, that some of the financial institutions that made billion-dollar gambles - usually in the form of a thousand million-dollar gambles in the course of a few minutes or so, to be precise - couldn't pay up. These gambles all occur in microseconds, at strokes of a keyboard almost without human interference. In that sense it is not unlike alien pod people taking over. But in this case they are robot-like machines, hence the analogy I drew above with the Terminators.
Their sudden rise to dominance is as unforeseen as an invasion from Mars. The nearest analogy is the invasion of the Harvard Boys, World Bank and U.S.A.I.D. to Russia and other post-Soviet economies after the Soviet Union was dissolved, pressing free-market giveaways to create national kleptocracies. It should be a worrying sign to Americans that these kleptocrats have become the Founding Fortunes of their respective countries. We should bear in mind Aristotle's observation that democracy is the political stage immediately preceding oligarchy.
The financial machines that placed the trades that bankrupted A.I.G. were programmed by financial managers to act with the speed of light in conducting electronic trades often lasting only a few seconds each, millions of times a day. Only a machine could calculate mathematical probabilities factored in regarding the squiggles up and down of interest rates, exchange rates and stock and bonds prices - and prices for packaged mortgages. And the latter packages increasingly took the form of junk mortgages, pretending to be payable debts but in reality empty flak.
The machines employed by hedge funds in particular have given a new meaning to Casino Capitalism. That was long applied to speculators playing the stock market. It meant making cross bets, lose some and win some - and getting the government to bail out the non-payers. The twist in the past two weeks' turmoil is that the winners cannot collect on their bets unless the government pays the debts that the losers are unable to cover with their own money.
One would have thought that this requires some degree of control over the government. The activity probably never should have been licensed. In fact, it never was licensed, and hence nor regulated. But there seemed to be a good reason: Investors in hedge funds had to sign a paper saying that they were rich enough to afford to lose their money on this financial gambling. Your average mom and pop investors were not permitted to participate. Despite the high rewards that millions of tiny trades generated, they were deemed too risky for the uninitiated lacking trust funds to play with.
A hedge fund does not make money by producing goods and services. It does not advance funds to buy real assets or even lend money. It borrows huge sums to leverage its bet with nearly free credit. Its managers are not industrial engineers but mathematicians who program computers to make cross-bets or "straddles" on which way interest rates, currency exchange rates, stock or bond prices may move - or the prices for packaged bank mortgages. The packaged loans may be sound or they may be junk. It doesn't matter. All that matters is making money in a marketplace where most trades last only a few seconds. What creates the gains is the price fibrillation - volatility.
This kind of transaction may make fortunes, but it is not "wealth creation" in the form that most people recognize. Before the Black-Scholes mathematical formula for calculating the value of hedge bets, this kind of put and call option was too costly to provide much profit to anyone except the brokerage houses. But the combination of powerful computers and the "innovation" of almost free credit and free access to the financial gambling tables has made possible a frenetic back-and-forth maneuvering.
So why has the Treasury found it necessary to enter this picture at all? Why should these gamblers be bailed out, if they had enough to lose without having to become public wards by going on welfare? Hedge fund trading was limited to the very rich, for investment banks and other institutional investors. But it became one of the easiest ways to make money, loaning funds at interest for people to pay out of their computer-driven cross-trades. And almost as fast as it was made, this revenue was paid out in commissions, salaries and annual bonuses reminiscent of America's Gilded Age in the years prior to World War I - years before the income tax was introduced in 1913. The remarkable thing about all this money was that its recipients didn't even have to pay normal income tax on it. The government let them call it "capital gains," which meant that the money was taxed at only a fraction of the rate that incomes were taxed.
The pretense, of course, is that all this frenetic trading creates real "capital." It certainly does not do so in the classical 19th-century concept of capital. The term has been decoupled from producing goods and services, hiring wage labor or from financing innovation. It is as much "capital" as the right to conduct a lottery and collect the winnings from the hopes of the losers. But then, casinos from Las Vegas to riverboats have become a major "growth industry," muddying the language of capital, growth and wealth itself.
For the gaming tables to be closed and the money paid out, the losers must be bailed out - Fannie Mae, Freddie Mac, A.I.G. and who knows what to come? This is the only way to solve the problem of how companies that already have paid out their revenue to their managers and stockholders instead of putting it in reserves are to collect their winnings from insolvent debtors and insurance companies. These losers also have paid out their income to their financial managers and insiders (along with the usual patriotic contributions to the political candidates on the key committees in charge of deciding the nation's financial structuring).
This has to be orchestrated well in advance. It is necessary to buy politicians and give them a plausible cover story (or at least a well-crafted set of poll-tested euphemisms) to explain to voters just why it was in the public interest to bail out gamblers. Good rhetoric is needed to explain why the government should let them go into a casino and let them keep all their winnings while using public funds to make good on the losses of their counterparties.
What happened on September 18-19 took years of preparation, capped by a faux ideology crafted by public-relations think tanks to be broadcast under emergency conditions to panic Congress - and voters - right before the presidential election. This seems to be our September election surprise. Under staged crisis conditions, Pres. Bush and Treasury Secretary Paulson are now calling for the country to come together in a War on Defaulting Homeowners. This is said to be the only hope to "save the system." (What system is this? Not industrial capitalism, or even banking as we know it.) The largest transformation of America's financial system since the Great Depression has been compressed into just two weeks, starting with the doubling of America's national debt on September 7 with the nationalization of Fannie Mae and Freddie Mac. (My computer's spellchecker will not permit me to use the euphemism "conservatorship" that Mr. Paulson applied to bailing out the Fannie Mae and Freddie Mac fraudsters.)
Economic theory used to explain that profits and interest were a return for calculated risk. But today, the name of the game is capital gains and computerized gambling on the direction of interest rates, foreign currencies and stock prices - and when bad bets are made, bailouts are the calculated economic return for campaign contributions. But this is not supposed to be the time to talk of such things. "We must act now to protect our nation's economic health from serious risk," intoned Pres. Bush on September 19. What he meant was that the White House must make the Republican Party's largest group of campaign contributors whole - Wall Street, that is - by bailing out their bad gambles. "There will be ample opportunity to debate the origins of this problem. Now is the time to solve it." In other words, don't make this an election issue. "In our nation's history there have been moments that require us to come together across party lines to address major challenges. This is such a moment." Right before the presidential election! The same guff was heard earlier on Friday morning from Sec. Paulson: "Our economic health requires that we work together for prompt, bipartisan action." The broadcasters said that half a trillion dollars was discussed for this day's maneuverings.
Much of the blame should go to the Clinton Administration for leading the call to repeal Glass-Steagall in 1999, letting the banks merge with casinos. Or rather, the casinos have absorbed the banks. That is what has put the savings of Americans at risk.
But does this really mean that the only solution is to re-inflate the real estate market? The Paulson-Bernanke plan is to enable the banks to sell off the homes of five million home mortgage debtors faced with default or foreclosure this year! Homeowners with "exploding adjustable-rate mortgages" will lose their homes, but the Fed will pump enough credit into the mortgage-lending agencies to enable new buyers to go deeply enough into debt to take the junk mortgages off the hands of the gamblers who presently own them. Time for another financial and real estate bubble to bail out the junk mortgage lenders and packagers.
America has entered into a new war - a War to Save Computerized Derivative Traders. Like the Iraq war, it is based largely on fictions and entered into under seeming emergency conditions - to which the solution has little relation to the underlying cause of the problems. On financial security grounds the government is to make good on the collateralized debt obligations packaged (CDOs) that Warren Buffett has called "weapons of mass financial destruction."
Hardly by surprise, this giveaway of public money is being handled by the same group that warned the country so piously about weapons of mass destruction in Iraq. Pres. Bush and Treasury Secretary Paulson have piously announced that this is no time for partisan disagreements over this shift of public policy to favor creditors rather than debtors. There is no time to make the biggest bailout in election history an election issue. Not an appropriate time to debate whether it is a good thing to re-inflate housing prices to a level that will continue to oblige new home buyers to go so deeply into debt that they must pay some 40 percent of their take-home pay on housing.
Remember when President Bush and Alan Greenspan informed the American people that there was no money left to pay Social Security (not to mention Medicare) because at some future date (a decade from now? 20 years? 40 years?) the system might run a deficit of what now seems to be merely a trivial trillion dollars spread over many, many years. The moral was that if we can't figure out how to pay, let's plow the program under right now.
Mr. Bush and Greenspan did have a helpful solution, of course. The Treasury could turn Social Security and medical insurance money over to Bear Stearns, Lehman Brothers and their brethren to invest at the "magic of compound interest."
What would have happened to U.S. Social Security had this been done? Perhaps we should view the past two weeks' events as having assigned to Wall Street gamblers all the money that has been set aside since the Greenspan Commission in 1983 shifted the tax burden onto FICA wage withholding. It is not retirees who are being rescued, but the Wall Street investors who signed papers saying that they could afford to lose their money. The Republican slogan this November should be "Gambling insurance, not health insurance."
This is not how the much-vaunted Road to Serfdom was mapped out to be. Frederick Hayek and his Chicago Boys insisted that serfdom would come from government planning and regulation. This view turned upside down the classical and Progressive Era reformers who depicted government as acting as society's brain, its steering mechanism to shape markets - and free them from income without playing a necessary role in production.
The theory of democracy rested on the assumption that voters would act in their self-interest. Market reformers made a kindred happy assumption that consumers, savers and investors would promote economic growth by acting with full knowledge and understanding of the dynamics at work. But the Invisible Hand turned out to be accounting fraud, junk mortgage lending, insider dealing and a failure to relate the soaring debt overhead to the ability of debtors to pay - all of this mess seemingly legitimized by computerized trading models, and now blessed by the Treasury.
By Michael Hudson
The largest transformation of America's Financial System since the Great Depression
Nobody expected industrial capitalism to end up like this. Nobody even saw it evolving in this direction. I'm afraid this failing is not unusual among futurists: The natural tendency is to think about how economies can best grow and evolve, not how it can be untracked. But an unforeseen road always seems to appear, and there goes society goes off on a tangent.
What a two weeks!
On Sunday, September 7, the Treasury took on the $5.3 trillion mortgage exposure of Fannie Mae and Freddie Mac, whose heads already had been removed for accounting fraud.
On Monday, September 15, Lehman Brothers went bankrupt, when prospective Wall Street buyers couldn't gain any sense of reality from its financial books. On Wednesday the Federal Reserve agreed to make good for at least $85 billion in the just-pretend "insured" winnings owed to financial gamblers who bet on computer-driven trades in junk mortgages and bought counter-party coverage from the A.I.G. (the American International Group, whose head Maurice Greenberg already had been removed a few years back for accounting fraud).
But it is Friday, September 19, that will go down as a turning point in American history. The White House committed at least half a trillion dollars more to re-inflate real estate prices in an attempt to support the market value junk mortgages - mortgages issued far beyond the ability of debtors to pay and far above the going market price of the collateral being pledged.
These billions of dollars were devoted to keeping a dream alive - the accounting fictions written down by companies that had entered an unreal world based on false accounting that nearly everyone in the financial sector knew to be fake. But they played along with buying and selling packaged mortgage junk because that was where the money was. As Charles Prince of Citibank put it, "As long as they're playing music, you have to get up and dance." Even after markets collapsed, fund managers who steered clear were blamed for not playing the game while it was going. I have friends on Wall Street who were fired for not matching the returns that their compatriots were making. And the biggest returns were to be made in trading in the economy's largest financial asset - mortgage debt. The mortgages packaged, owned or guaranteed by Fannie and Freddie alone exceeded the entire U.S. national debt - the cumulative deficits run up by the American Government since the nation won the Revolutionary War!
This gives an idea of just how large the bailout has been - and where the government's (or at least the Republicans') priorities lie! Instead of waking up the economy to reality, the government has thrown all its resources to promote the unreal dream that debts can be paid - if not by the debtors themselves, then by the government - "taxpayers," as the euphemism goes.
Overnight, the U.S. Treasury and Federal Reserve have radically changed the character of American capitalism. It is nothing less than a coup d'Etat for the class that FDR called "banksters." What has happened in the past two weeks threatens to change the coming century - irreversibly, if they can get away with it. This is the largest and most inequitable transfer of wealth since the land giveaways to the railroad barons during the Civil War era.
Even so, there seems little sign that it even may end the free-market patter talk by financial insiders who have managed to avert public oversight by appointing non-regulators to the major regulatory agencies - and thus created the mess that Treasury Secretary Henry Paulson now says threatens the bank deposits and jobs of all Americans. What he really means, of course, are simply the largest Republican campaign contributors (and to be fair, also the largest contributors to Democratic candidates on key financial committees).
A kleptocratic class has taken over the economy to replace industrial capitalism. Franklin Roosevelt's term "banksters" says it all in a nutshell. The economy has been captured - by an alien power, but not the usual suspects. Not socialism, workers or "big government," nor by industrial monopolists or even by the great banking families. Certainly not by Freemasons and Illuminati. (It would be wonderful if there were indeed some group operating with centuries of wisdom behind them, so at least someone at least had a plan.) Rather, the banksters have made a compact with an alien power -not Communists, Russians, Asians or Arabs. Not humans at all. The group's cadre is a new breed of machine. It may sound like the Terminator movies, but computerized Machines have indeed taken over the world - at least, the White House's world.
Here is how they did it. A.I.G. wrote insurance policies of all sorts of that people and businesses need: home and property insurance, livestock insurance, even aircraft leasing. These highly profitable businesses were not the problem. (They therefore will probably be sold off to pay the company's bad gambles.) A.I.G.'s downfall came from the $450 billion - almost half a trillion - dollars it was on the hook for as a result of guaranteeing hedge-fund counterparty insurance. In other words, if two parties played the zero-sum game of betting against each other as to whether the dollar would rise or fall against sterling or the euro, or if they insured a mortgage portfolio of junk mortgages to make sure that they would get paid, they would pay a teeny tiny commission to A.I.G. for a policy promising to pay if, say, the $11 trillion U.S. mortgage market should "stumble" or if losers placing trillions of dollars in bets on foreign exchange derivatives, stock or bond derivatives should somehow find themselves in a position that so many Las Vegas patrons are in, and be unable to come up with the cash to cover their losses.
A.I.G. collected billions of dollars on such policies. And thanks to the fact that insurance companies are a Milton Friedman paradise - not regulated by the Federal Reserve or any other nation-wide agency, and hence able to get the proverbial free lunch without government oversight - writing such policies was done by computer printouts, and the company collected massive fees and commissions without putting in much capital of its own. This is what is called "self-regulation." It is how the Invisible Hand is supposed to work.
It turned out, inevitably, that some of the financial institutions that made billion-dollar gambles - usually in the form of a thousand million-dollar gambles in the course of a few minutes or so, to be precise - couldn't pay up. These gambles all occur in microseconds, at strokes of a keyboard almost without human interference. In that sense it is not unlike alien pod people taking over. But in this case they are robot-like machines, hence the analogy I drew above with the Terminators.
Their sudden rise to dominance is as unforeseen as an invasion from Mars. The nearest analogy is the invasion of the Harvard Boys, World Bank and U.S.A.I.D. to Russia and other post-Soviet economies after the Soviet Union was dissolved, pressing free-market giveaways to create national kleptocracies. It should be a worrying sign to Americans that these kleptocrats have become the Founding Fortunes of their respective countries. We should bear in mind Aristotle's observation that democracy is the political stage immediately preceding oligarchy.
The financial machines that placed the trades that bankrupted A.I.G. were programmed by financial managers to act with the speed of light in conducting electronic trades often lasting only a few seconds each, millions of times a day. Only a machine could calculate mathematical probabilities factored in regarding the squiggles up and down of interest rates, exchange rates and stock and bonds prices - and prices for packaged mortgages. And the latter packages increasingly took the form of junk mortgages, pretending to be payable debts but in reality empty flak.
The machines employed by hedge funds in particular have given a new meaning to Casino Capitalism. That was long applied to speculators playing the stock market. It meant making cross bets, lose some and win some - and getting the government to bail out the non-payers. The twist in the past two weeks' turmoil is that the winners cannot collect on their bets unless the government pays the debts that the losers are unable to cover with their own money.
One would have thought that this requires some degree of control over the government. The activity probably never should have been licensed. In fact, it never was licensed, and hence nor regulated. But there seemed to be a good reason: Investors in hedge funds had to sign a paper saying that they were rich enough to afford to lose their money on this financial gambling. Your average mom and pop investors were not permitted to participate. Despite the high rewards that millions of tiny trades generated, they were deemed too risky for the uninitiated lacking trust funds to play with.
A hedge fund does not make money by producing goods and services. It does not advance funds to buy real assets or even lend money. It borrows huge sums to leverage its bet with nearly free credit. Its managers are not industrial engineers but mathematicians who program computers to make cross-bets or "straddles" on which way interest rates, currency exchange rates, stock or bond prices may move - or the prices for packaged bank mortgages. The packaged loans may be sound or they may be junk. It doesn't matter. All that matters is making money in a marketplace where most trades last only a few seconds. What creates the gains is the price fibrillation - volatility.
This kind of transaction may make fortunes, but it is not "wealth creation" in the form that most people recognize. Before the Black-Scholes mathematical formula for calculating the value of hedge bets, this kind of put and call option was too costly to provide much profit to anyone except the brokerage houses. But the combination of powerful computers and the "innovation" of almost free credit and free access to the financial gambling tables has made possible a frenetic back-and-forth maneuvering.
So why has the Treasury found it necessary to enter this picture at all? Why should these gamblers be bailed out, if they had enough to lose without having to become public wards by going on welfare? Hedge fund trading was limited to the very rich, for investment banks and other institutional investors. But it became one of the easiest ways to make money, loaning funds at interest for people to pay out of their computer-driven cross-trades. And almost as fast as it was made, this revenue was paid out in commissions, salaries and annual bonuses reminiscent of America's Gilded Age in the years prior to World War I - years before the income tax was introduced in 1913. The remarkable thing about all this money was that its recipients didn't even have to pay normal income tax on it. The government let them call it "capital gains," which meant that the money was taxed at only a fraction of the rate that incomes were taxed.
The pretense, of course, is that all this frenetic trading creates real "capital." It certainly does not do so in the classical 19th-century concept of capital. The term has been decoupled from producing goods and services, hiring wage labor or from financing innovation. It is as much "capital" as the right to conduct a lottery and collect the winnings from the hopes of the losers. But then, casinos from Las Vegas to riverboats have become a major "growth industry," muddying the language of capital, growth and wealth itself.
For the gaming tables to be closed and the money paid out, the losers must be bailed out - Fannie Mae, Freddie Mac, A.I.G. and who knows what to come? This is the only way to solve the problem of how companies that already have paid out their revenue to their managers and stockholders instead of putting it in reserves are to collect their winnings from insolvent debtors and insurance companies. These losers also have paid out their income to their financial managers and insiders (along with the usual patriotic contributions to the political candidates on the key committees in charge of deciding the nation's financial structuring).
This has to be orchestrated well in advance. It is necessary to buy politicians and give them a plausible cover story (or at least a well-crafted set of poll-tested euphemisms) to explain to voters just why it was in the public interest to bail out gamblers. Good rhetoric is needed to explain why the government should let them go into a casino and let them keep all their winnings while using public funds to make good on the losses of their counterparties.
What happened on September 18-19 took years of preparation, capped by a faux ideology crafted by public-relations think tanks to be broadcast under emergency conditions to panic Congress - and voters - right before the presidential election. This seems to be our September election surprise. Under staged crisis conditions, Pres. Bush and Treasury Secretary Paulson are now calling for the country to come together in a War on Defaulting Homeowners. This is said to be the only hope to "save the system." (What system is this? Not industrial capitalism, or even banking as we know it.) The largest transformation of America's financial system since the Great Depression has been compressed into just two weeks, starting with the doubling of America's national debt on September 7 with the nationalization of Fannie Mae and Freddie Mac. (My computer's spellchecker will not permit me to use the euphemism "conservatorship" that Mr. Paulson applied to bailing out the Fannie Mae and Freddie Mac fraudsters.)
Economic theory used to explain that profits and interest were a return for calculated risk. But today, the name of the game is capital gains and computerized gambling on the direction of interest rates, foreign currencies and stock prices - and when bad bets are made, bailouts are the calculated economic return for campaign contributions. But this is not supposed to be the time to talk of such things. "We must act now to protect our nation's economic health from serious risk," intoned Pres. Bush on September 19. What he meant was that the White House must make the Republican Party's largest group of campaign contributors whole - Wall Street, that is - by bailing out their bad gambles. "There will be ample opportunity to debate the origins of this problem. Now is the time to solve it." In other words, don't make this an election issue. "In our nation's history there have been moments that require us to come together across party lines to address major challenges. This is such a moment." Right before the presidential election! The same guff was heard earlier on Friday morning from Sec. Paulson: "Our economic health requires that we work together for prompt, bipartisan action." The broadcasters said that half a trillion dollars was discussed for this day's maneuverings.
Much of the blame should go to the Clinton Administration for leading the call to repeal Glass-Steagall in 1999, letting the banks merge with casinos. Or rather, the casinos have absorbed the banks. That is what has put the savings of Americans at risk.
But does this really mean that the only solution is to re-inflate the real estate market? The Paulson-Bernanke plan is to enable the banks to sell off the homes of five million home mortgage debtors faced with default or foreclosure this year! Homeowners with "exploding adjustable-rate mortgages" will lose their homes, but the Fed will pump enough credit into the mortgage-lending agencies to enable new buyers to go deeply enough into debt to take the junk mortgages off the hands of the gamblers who presently own them. Time for another financial and real estate bubble to bail out the junk mortgage lenders and packagers.
America has entered into a new war - a War to Save Computerized Derivative Traders. Like the Iraq war, it is based largely on fictions and entered into under seeming emergency conditions - to which the solution has little relation to the underlying cause of the problems. On financial security grounds the government is to make good on the collateralized debt obligations packaged (CDOs) that Warren Buffett has called "weapons of mass financial destruction."
Hardly by surprise, this giveaway of public money is being handled by the same group that warned the country so piously about weapons of mass destruction in Iraq. Pres. Bush and Treasury Secretary Paulson have piously announced that this is no time for partisan disagreements over this shift of public policy to favor creditors rather than debtors. There is no time to make the biggest bailout in election history an election issue. Not an appropriate time to debate whether it is a good thing to re-inflate housing prices to a level that will continue to oblige new home buyers to go so deeply into debt that they must pay some 40 percent of their take-home pay on housing.
Remember when President Bush and Alan Greenspan informed the American people that there was no money left to pay Social Security (not to mention Medicare) because at some future date (a decade from now? 20 years? 40 years?) the system might run a deficit of what now seems to be merely a trivial trillion dollars spread over many, many years. The moral was that if we can't figure out how to pay, let's plow the program under right now.
Mr. Bush and Greenspan did have a helpful solution, of course. The Treasury could turn Social Security and medical insurance money over to Bear Stearns, Lehman Brothers and their brethren to invest at the "magic of compound interest."
What would have happened to U.S. Social Security had this been done? Perhaps we should view the past two weeks' events as having assigned to Wall Street gamblers all the money that has been set aside since the Greenspan Commission in 1983 shifted the tax burden onto FICA wage withholding. It is not retirees who are being rescued, but the Wall Street investors who signed papers saying that they could afford to lose their money. The Republican slogan this November should be "Gambling insurance, not health insurance."
This is not how the much-vaunted Road to Serfdom was mapped out to be. Frederick Hayek and his Chicago Boys insisted that serfdom would come from government planning and regulation. This view turned upside down the classical and Progressive Era reformers who depicted government as acting as society's brain, its steering mechanism to shape markets - and free them from income without playing a necessary role in production.
The theory of democracy rested on the assumption that voters would act in their self-interest. Market reformers made a kindred happy assumption that consumers, savers and investors would promote economic growth by acting with full knowledge and understanding of the dynamics at work. But the Invisible Hand turned out to be accounting fraud, junk mortgage lending, insider dealing and a failure to relate the soaring debt overhead to the ability of debtors to pay - all of this mess seemingly legitimized by computerized trading models, and now blessed by the Treasury.
AG candidate backs prosecution of President Bush for murder
Go to Original
By DANIEL BARLOW
Charlotte Dennett, the Progressive Party candidate for Vermont attorney general, said Thursday that if elected she would prosecute President Bush for murder.
Dennett, an attorney from Cambridge challenging incumbent Democrat William Sorrell, was joined by Vincent Bugliosi, a famed prosecutor who took on Charles Manson in the early 1970s, at a press conference in downtown Burlington.
As Vermont attorney general, Dennett said she would appoint Bugliosi, who published a book this year called "The Prosecution of George W. Bush for Murder," as a special prosecutor to hold Bush accountable for deaths stemming from the Iraq war.
Dennett said Vermont is the ideal state to bring murder charges against Bush, since the state has carried the country's highest per capita deaths of soldiers in the war. It is also home to nearly 40 communities that moved to impeach the president last year.
"Lots of Vermonters feel very frustrated that the impeachment efforts did not go anywhere," she said. "This is another avenue for us."
Bugliosi, a 74-year-old Los Angeles resident and author of the famed "Helter Skelter" book about his prosecution of Manson, called Dennett a "valiant and patriotic woman" willing to put her reputation on the line to bring to justice what he sees as one of the worst criminal acts in recent history.
He told a small crowd gathered in downtown Burlington on Thursday morning that his book clearly lays out evidence showing that Bush and his administration misled the American people and the U.S. Congress into war in 2003.
"George Bush and his people have gotten away with thousands and thousands of murders," Bugliosi said, citing both American and Iraqi deaths in the five-year-old war. "We, the American people, cannot let him get away with this."
Bugliosi said any state attorney general or local district attorney can bring criminal charges against Bush once he leaves office early next year. He said Vermont could take on the soon-to-be ex-president by bringing conspiracy to murder charges against him, using his own public statements during the build-up to the Iraq war as evidence.
"Bush and his administration deliberately told lies to deceive people and get the support of the country behind the war," he said. "That information went out through the media and was heard by residents of the state of Vermont."
Sorrell said Thursday that promises to prosecute Bush for murder makes "good political sound bites," but said he does not believe he — or any other local or state prosecutor — has that authority.
To bring about a murder or conspiracy to murder charge against Bush, the actual crime — the death of an individual — would need to take place within his jurisdiction, Sorrell said, which in this case is the Green Mountain State.
"And if I remember correctly, Vermont is still the only state George Bush has not visited while president," Sorrell said.
Dennett said she read "The Prosecution of George W. Bush for Murder" earlier this year and was interested in pursuing Bugliosi's notion that local prosecutors could bring criminal charges against the president.
She was put in touch with him through a friend who has a mutual publicist with Bugliosi. Within a half hour, the two were on the phone discussing the possibility of prosecuting Bush once he leaves office, she explained.
"Right away I felt a real rapport with him," she said.
But Dennett said she is not a single-issue candidate, adding that she is also interested in issues surrounding the Vermont Yankee nuclear power plant in Vernon and its proposal to extend its operating license beyond 2012.
When asked by a reporter if she thinks she has a chance against Sorrell, a well-entrenched incumbent, Dennett said she thinks the Democrat is a "nice man," but that her push to hold Bush accountable for the deaths in Iraq will "strike a chord" with Vermonters.
"I think I will have a groundswell of support," she said.
The general election is Tuesday, Nov. 4.
By DANIEL BARLOW
Charlotte Dennett, the Progressive Party candidate for Vermont attorney general, said Thursday that if elected she would prosecute President Bush for murder.
Dennett, an attorney from Cambridge challenging incumbent Democrat William Sorrell, was joined by Vincent Bugliosi, a famed prosecutor who took on Charles Manson in the early 1970s, at a press conference in downtown Burlington.
As Vermont attorney general, Dennett said she would appoint Bugliosi, who published a book this year called "The Prosecution of George W. Bush for Murder," as a special prosecutor to hold Bush accountable for deaths stemming from the Iraq war.
Dennett said Vermont is the ideal state to bring murder charges against Bush, since the state has carried the country's highest per capita deaths of soldiers in the war. It is also home to nearly 40 communities that moved to impeach the president last year.
"Lots of Vermonters feel very frustrated that the impeachment efforts did not go anywhere," she said. "This is another avenue for us."
Bugliosi, a 74-year-old Los Angeles resident and author of the famed "Helter Skelter" book about his prosecution of Manson, called Dennett a "valiant and patriotic woman" willing to put her reputation on the line to bring to justice what he sees as one of the worst criminal acts in recent history.
He told a small crowd gathered in downtown Burlington on Thursday morning that his book clearly lays out evidence showing that Bush and his administration misled the American people and the U.S. Congress into war in 2003.
"George Bush and his people have gotten away with thousands and thousands of murders," Bugliosi said, citing both American and Iraqi deaths in the five-year-old war. "We, the American people, cannot let him get away with this."
Bugliosi said any state attorney general or local district attorney can bring criminal charges against Bush once he leaves office early next year. He said Vermont could take on the soon-to-be ex-president by bringing conspiracy to murder charges against him, using his own public statements during the build-up to the Iraq war as evidence.
"Bush and his administration deliberately told lies to deceive people and get the support of the country behind the war," he said. "That information went out through the media and was heard by residents of the state of Vermont."
Sorrell said Thursday that promises to prosecute Bush for murder makes "good political sound bites," but said he does not believe he — or any other local or state prosecutor — has that authority.
To bring about a murder or conspiracy to murder charge against Bush, the actual crime — the death of an individual — would need to take place within his jurisdiction, Sorrell said, which in this case is the Green Mountain State.
"And if I remember correctly, Vermont is still the only state George Bush has not visited while president," Sorrell said.
Dennett said she read "The Prosecution of George W. Bush for Murder" earlier this year and was interested in pursuing Bugliosi's notion that local prosecutors could bring criminal charges against the president.
She was put in touch with him through a friend who has a mutual publicist with Bugliosi. Within a half hour, the two were on the phone discussing the possibility of prosecuting Bush once he leaves office, she explained.
"Right away I felt a real rapport with him," she said.
But Dennett said she is not a single-issue candidate, adding that she is also interested in issues surrounding the Vermont Yankee nuclear power plant in Vernon and its proposal to extend its operating license beyond 2012.
When asked by a reporter if she thinks she has a chance against Sorrell, a well-entrenched incumbent, Dennett said she thinks the Democrat is a "nice man," but that her push to hold Bush accountable for the deaths in Iraq will "strike a chord" with Vermonters.
"I think I will have a groundswell of support," she said.
The general election is Tuesday, Nov. 4.
Citing Grave Financial Threats, Officials Ready Massive Rescue
Go to Original
By Binyamin Appelbaum and Lori Montgomery
Lawmakers Work With Fed, Treasury To Try to Restore The Flow of Money
The Bush administration is urgently preparing a massive intervention to revive the U.S. financial system, including a plan to sweep away the unpaid loans that are choking banks and blocking the flow of money to borrowers.
Congressional leaders gave bipartisan support to the administration's efforts after a meeting last night with Treasury Secretary Henry M. Paulson Jr. and Federal Reserve Chairman Ben S. Bernanke.
Paulson and Bernanke presented a "chilling" picture of the state of the financial system, according to a participant in the meeting who spoke on condition of anonymity. Lawmakers were told that the consequences would be grave if they failed to pass legislation by the end of next week. Sen. Harry Reid (D-Nev.) and Rep. Nancy Pelosi (D-Calif.) committed to meeting that deadline.
The plan involves using hundreds of billions of dollars in government funding to buy bad loans, leaving banks with more money and fewer problems, according to two sources familiar with what was said at the meeting.
After the meeting, Paulson told reporters the proposal was "an expeditious solution that is aimed right at the heart of this problem."
Also last night, the Fed was considering offering backing for money-market mutual funds, which have had massive withdrawals in recent days, said a source familiar with the discussions.
And the Securities and Exchange Commission is considering further limits on short-selling, a practice that allows investors to bet on a decline in a company's stock price, according to a person familiar with the matter. Critics of the practice say short sellers are driving down the share prices of financial companies, thereby contributing to their destruction.
The government has already tried three times this month to keep money flowing through the financial system. It took over the two largest providers of funding for mortgage loans, Fannie Mae and Freddie Mac. It created a new source of funding for investment banks. And it took over the insurance giant American International Group.
Now the government is contemplating its broadest -- and perhaps most expensive -- intervention to date.
The urgency has only grown with each successive intervention because the first three tries have not worked. People are withdrawing money from money-market mutual funds. Banks are refusing to lend to one another. Several large financial companies need money to stay in business, including the bank Washington Mutual, which is seeking a buyer.
Regulators and the banking industry are increasingly concerned about customer withdrawals from money-market funds. Crane Data, which tracks the industry, said total deposits in money-market funds fell Wednesday by at least $79 billion, or about 2.6 percent. Financial executives have told government officials in recent conversations that the rising pace of withdrawals is the equivalent of a bank run and that if it continues, it will drain a massive and critical source of funding.
Money-market funds are particularly important because they buy short-term debt, which is used by financial companies and other corporations to finance day-to-day activities.
According to legislative aides, yesterday's meeting was arranged after Pelosi called Paulson's office mid-afternoon to discuss the state of the markets. During that call, Paulson asked to meet with Pelosi, Reid and key lawmakers from the banking committees. That meeting took place at 7 p.m. in Pelosi's office on the second floor of the Capitol.
Paulson and Bernanke did not present lawmakers with a written proposal but are expected to do so by tonight, congressional aides said.
During the meeting, one lawmaker worried aloud that Paulson was asking for "a blank check," according to a participant. There was also a "healthy debate" about whether this action would finally stabilize the markets.
"They couldn't answer yes to that question," the participant said.
Paulson and Bernanke generally have kept Congress at arm's length as they have sought to deal with the financial crisis. Yesterday, however, after meeting with congressional leaders, they exchanged awkward compliments with the lawmakers at a news conference. Lawmakers had been increasingly critical of the Fed and Treasury leaders for failing to consult with Capitol Hill. The administration will need congressional approval to commit taxpayer money to its new plan.
"We'll do this as quickly as we can. We're not talking about a month," said Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, which would probably review the plan before it went to the House floor.
A hearing on the topic that Frank had scheduled for next Wednesday could now become a legislative drafting session, he said.
Also yesterday, Sen. Charles E. Schumer (D-N.Y.), chairman of the Joint Economic Committee, suggested that the government create an entity that would operate much like the Depression-era Reconstruction Finance Corp. -- it would buy "equity and possibly secured debt," providing desperately needed cash to companies while permitting the government to share in any profit.
"The government would get repaid before the others in the financial chain," Schumer said.
If a plan does move forward, Democrats may try to demand concessions from the suddenly humbled industry, Schumer said, including support for a proposal to permit bankruptcy judges to modify mortgages for distressed borrowers. Currently, judges may set new terms for mortgages on second homes but not on primary residences.
That idea is contentious and has been fiercely opposed by the banking industry. Frank said he would instead demand that banks reduce the number of foreclosures.
Still, it's not clear that Democrats would insist on such concessions at the expense of passing the plan quickly.
"The costs of doing nothing are enormous," Frank said. He added that with the recent deterioration in the financial markets, "I think the timetable for something has been greatly sped up."
By Binyamin Appelbaum and Lori Montgomery
Lawmakers Work With Fed, Treasury To Try to Restore The Flow of Money
The Bush administration is urgently preparing a massive intervention to revive the U.S. financial system, including a plan to sweep away the unpaid loans that are choking banks and blocking the flow of money to borrowers.
Congressional leaders gave bipartisan support to the administration's efforts after a meeting last night with Treasury Secretary Henry M. Paulson Jr. and Federal Reserve Chairman Ben S. Bernanke.
Paulson and Bernanke presented a "chilling" picture of the state of the financial system, according to a participant in the meeting who spoke on condition of anonymity. Lawmakers were told that the consequences would be grave if they failed to pass legislation by the end of next week. Sen. Harry Reid (D-Nev.) and Rep. Nancy Pelosi (D-Calif.) committed to meeting that deadline.
The plan involves using hundreds of billions of dollars in government funding to buy bad loans, leaving banks with more money and fewer problems, according to two sources familiar with what was said at the meeting.
After the meeting, Paulson told reporters the proposal was "an expeditious solution that is aimed right at the heart of this problem."
Also last night, the Fed was considering offering backing for money-market mutual funds, which have had massive withdrawals in recent days, said a source familiar with the discussions.
And the Securities and Exchange Commission is considering further limits on short-selling, a practice that allows investors to bet on a decline in a company's stock price, according to a person familiar with the matter. Critics of the practice say short sellers are driving down the share prices of financial companies, thereby contributing to their destruction.
The government has already tried three times this month to keep money flowing through the financial system. It took over the two largest providers of funding for mortgage loans, Fannie Mae and Freddie Mac. It created a new source of funding for investment banks. And it took over the insurance giant American International Group.
Now the government is contemplating its broadest -- and perhaps most expensive -- intervention to date.
The urgency has only grown with each successive intervention because the first three tries have not worked. People are withdrawing money from money-market mutual funds. Banks are refusing to lend to one another. Several large financial companies need money to stay in business, including the bank Washington Mutual, which is seeking a buyer.
Regulators and the banking industry are increasingly concerned about customer withdrawals from money-market funds. Crane Data, which tracks the industry, said total deposits in money-market funds fell Wednesday by at least $79 billion, or about 2.6 percent. Financial executives have told government officials in recent conversations that the rising pace of withdrawals is the equivalent of a bank run and that if it continues, it will drain a massive and critical source of funding.
Money-market funds are particularly important because they buy short-term debt, which is used by financial companies and other corporations to finance day-to-day activities.
According to legislative aides, yesterday's meeting was arranged after Pelosi called Paulson's office mid-afternoon to discuss the state of the markets. During that call, Paulson asked to meet with Pelosi, Reid and key lawmakers from the banking committees. That meeting took place at 7 p.m. in Pelosi's office on the second floor of the Capitol.
Paulson and Bernanke did not present lawmakers with a written proposal but are expected to do so by tonight, congressional aides said.
During the meeting, one lawmaker worried aloud that Paulson was asking for "a blank check," according to a participant. There was also a "healthy debate" about whether this action would finally stabilize the markets.
"They couldn't answer yes to that question," the participant said.
Paulson and Bernanke generally have kept Congress at arm's length as they have sought to deal with the financial crisis. Yesterday, however, after meeting with congressional leaders, they exchanged awkward compliments with the lawmakers at a news conference. Lawmakers had been increasingly critical of the Fed and Treasury leaders for failing to consult with Capitol Hill. The administration will need congressional approval to commit taxpayer money to its new plan.
"We'll do this as quickly as we can. We're not talking about a month," said Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, which would probably review the plan before it went to the House floor.
A hearing on the topic that Frank had scheduled for next Wednesday could now become a legislative drafting session, he said.
Also yesterday, Sen. Charles E. Schumer (D-N.Y.), chairman of the Joint Economic Committee, suggested that the government create an entity that would operate much like the Depression-era Reconstruction Finance Corp. -- it would buy "equity and possibly secured debt," providing desperately needed cash to companies while permitting the government to share in any profit.
"The government would get repaid before the others in the financial chain," Schumer said.
If a plan does move forward, Democrats may try to demand concessions from the suddenly humbled industry, Schumer said, including support for a proposal to permit bankruptcy judges to modify mortgages for distressed borrowers. Currently, judges may set new terms for mortgages on second homes but not on primary residences.
That idea is contentious and has been fiercely opposed by the banking industry. Frank said he would instead demand that banks reduce the number of foreclosures.
Still, it's not clear that Democrats would insist on such concessions at the expense of passing the plan quickly.
"The costs of doing nothing are enormous," Frank said. He added that with the recent deterioration in the financial markets, "I think the timetable for something has been greatly sped up."
Hey U.S., welcome to the Third World!
Go to Original
By Rosa Brooks
It's been a quick slide from economic superpower to economic basket case.
Dear United States, Welcome to the Third World!
It's not every day that a superpower makes a bid to transform itself into a Third World nation, and we here at the World Bank and the International Monetary Fund want to be among the first to welcome you to the community of states in desperate need of international economic assistance. As you spiral into a catastrophic financial meltdown, we are delighted to respond to your Treasury Department's request that we undertake a joint stability assessment of your financial sector. In these turbulent times, we can provide services ranging from subsidized loans to expert advisors willing to perform an emergency overhaul of your entire government.
As you know, some outside intervention in your economy is overdue. Last week -- even before Wall Street's latest collapse -- 13 former finance ministers convened at the University of Virginia and agreed that you must fix your "broken financial system." Australia's Peter Costello noted that lately you've been "exporting instability" in world markets, and Yashwant Sinha, former finance minister of India, concluded, "The time has come. The U.S. should accept some monitoring by the IMF."
We hope you won't feel embarrassed as we assess the stability of your economy and suggest needed changes. Remember, many other countries have been in your shoes. We've bailed out the economies of Argentina, Brazil, Indonesia and South Korea. But whether our work is in Sudan, Bangladesh or now the United States, our experts are committed to intervening in national economies with care and sensitivity.
We thus want to acknowledge the progress you have made in your evolution from economic superpower to economic basket case. Normally, such a process might take 100 years or more. With your oscillation between free-market extremism and nationalization of private companies, however, you have successfully achieved, in a few short years, many of the key hallmarks of Third World economies.
Your policies of irresponsible government deregulation in critical sectors allowed you to rapidly develop an energy crisis, a housing crisis, a credit crisis and a financial market crisis, all at once, and accompanied (and partly caused) by impressive levels of corruption and speculation. Meanwhile, those of your political leaders charged with oversight were either napping or in bed with corporate lobbyists.
Take John McCain, your Republican presidential nominee, whose senior staff includes half a dozen prominent former lobbyists. As he recently put it, "I was chairman of the [Senate] Commerce Committee that oversights every part of the economy." No question about it: Your leaders' failure to notice the damage done by irresponsible deregulation was indeed an oversight of epic proportions.
Now you are facing the consequences. Income inequality has increased, as the rich have gotten windfalls while the middle class has seen incomes stagnate. Fewer and fewer of your citizens have access to affordable housing, healthcare or security in retirement. Even life expectancy has dropped. And when your economic woes went from chronic to acute, you responded -- like so many Third World states have -- with an extensive program of nationalizing private companies and assets. Your mortgage giants Fannie Mae and Freddie Mac are now state owned and controlled, and this week your reinsurance giant AIG was effectively nationalized, with the Federal Reserve Board seizing an 80% equity stake in the flailing company.
Some might deride this as socialism. But desperate times call for desperate measures.
Admittedly, your transition to Third World status is far from over, and it won't be painless. At first, for instance, you may find it hard to get used to the shantytowns that will replace the exurban sprawl of McMansions that helped fuel the real estate speculation bubble. But in time, such shantytowns will simply become part of the landscape. Similarly, as unemployment rates continue to rise, you will initially struggle to find a use for the expanding pool of angry, jobless young men. But you will gradually realize that you can recruit them to fight in a ceaseless round of armed conflicts, a solution that has been utilized by many other Third World states before you. Indeed, with your wars in Iraq and Afghanistan, you are off to an excellent start.
Perhaps this letter comes as a surprise to you, and you feel you're not fully ready to join the Third World. Don't let this feeling concern you. Though you may never have realized it, you've been preparing for this moment for years.
By Rosa Brooks
It's been a quick slide from economic superpower to economic basket case.
Dear United States, Welcome to the Third World!
It's not every day that a superpower makes a bid to transform itself into a Third World nation, and we here at the World Bank and the International Monetary Fund want to be among the first to welcome you to the community of states in desperate need of international economic assistance. As you spiral into a catastrophic financial meltdown, we are delighted to respond to your Treasury Department's request that we undertake a joint stability assessment of your financial sector. In these turbulent times, we can provide services ranging from subsidized loans to expert advisors willing to perform an emergency overhaul of your entire government.
As you know, some outside intervention in your economy is overdue. Last week -- even before Wall Street's latest collapse -- 13 former finance ministers convened at the University of Virginia and agreed that you must fix your "broken financial system." Australia's Peter Costello noted that lately you've been "exporting instability" in world markets, and Yashwant Sinha, former finance minister of India, concluded, "The time has come. The U.S. should accept some monitoring by the IMF."
We hope you won't feel embarrassed as we assess the stability of your economy and suggest needed changes. Remember, many other countries have been in your shoes. We've bailed out the economies of Argentina, Brazil, Indonesia and South Korea. But whether our work is in Sudan, Bangladesh or now the United States, our experts are committed to intervening in national economies with care and sensitivity.
We thus want to acknowledge the progress you have made in your evolution from economic superpower to economic basket case. Normally, such a process might take 100 years or more. With your oscillation between free-market extremism and nationalization of private companies, however, you have successfully achieved, in a few short years, many of the key hallmarks of Third World economies.
Your policies of irresponsible government deregulation in critical sectors allowed you to rapidly develop an energy crisis, a housing crisis, a credit crisis and a financial market crisis, all at once, and accompanied (and partly caused) by impressive levels of corruption and speculation. Meanwhile, those of your political leaders charged with oversight were either napping or in bed with corporate lobbyists.
Take John McCain, your Republican presidential nominee, whose senior staff includes half a dozen prominent former lobbyists. As he recently put it, "I was chairman of the [Senate] Commerce Committee that oversights every part of the economy." No question about it: Your leaders' failure to notice the damage done by irresponsible deregulation was indeed an oversight of epic proportions.
Now you are facing the consequences. Income inequality has increased, as the rich have gotten windfalls while the middle class has seen incomes stagnate. Fewer and fewer of your citizens have access to affordable housing, healthcare or security in retirement. Even life expectancy has dropped. And when your economic woes went from chronic to acute, you responded -- like so many Third World states have -- with an extensive program of nationalizing private companies and assets. Your mortgage giants Fannie Mae and Freddie Mac are now state owned and controlled, and this week your reinsurance giant AIG was effectively nationalized, with the Federal Reserve Board seizing an 80% equity stake in the flailing company.
Some might deride this as socialism. But desperate times call for desperate measures.
Admittedly, your transition to Third World status is far from over, and it won't be painless. At first, for instance, you may find it hard to get used to the shantytowns that will replace the exurban sprawl of McMansions that helped fuel the real estate speculation bubble. But in time, such shantytowns will simply become part of the landscape. Similarly, as unemployment rates continue to rise, you will initially struggle to find a use for the expanding pool of angry, jobless young men. But you will gradually realize that you can recruit them to fight in a ceaseless round of armed conflicts, a solution that has been utilized by many other Third World states before you. Indeed, with your wars in Iraq and Afghanistan, you are off to an excellent start.
Perhaps this letter comes as a surprise to you, and you feel you're not fully ready to join the Third World. Don't let this feeling concern you. Though you may never have realized it, you've been preparing for this moment for years.
Vice President Dick Cheney's Incredible and Deadly Lie
Go to Original
By JOHN W. DEAN
By Deceiving a Congressional Leader, Cheney Sent Us to War on False Pretenses And Violated the Separation of Powers - as Well as the Criminal Law
By JOHN W. DEAN
By Deceiving a Congressional Leader, Cheney Sent Us to War on False Pretenses And Violated the Separation of Powers - as Well as the Criminal Law
This week, I agreed to deliver a "Constitution Day" talk on a college campus. My talk was not partisan. Yet the subject matter I selected was prompted by the most incredible - not to mention the most deadly - lie Dick Cheney has yet told, which was reported earlier this week.
Last year, Washington Post reporter Barton Gellman and Jo Baker, now of the New York Times, did an extensive series for the Post on Cheney. Now, Gellman has done some more digging, and published the result in a book he released this week: Angler: The Cheney Vice Presidency. The book reveals a lie told to a high-ranking fellow Republican, and the difference that lie made. In this column, I’ll explain how Cheney defied the separation of powers, and go back to the founding history to show why actions like his matter so profoundly.
Cheney’s Bold Face Lie To Congress
According to Gellman (and to paraphrase from the Post story on his finding), in the run-up to the war in Iraq, the White House was worried about the stance of Republican Majority Leader Richard Armey of Texas, who had deep concerns about going to war with Saddam Hussein. According to the Post, Armey met with Cheney for a highly classified, one-on-on briefing, in Room H-208, Cheney’s luxurious hideaway office on the House side of the Capitol.
During this meeting, the Post reports, Cheney turned Armey around on the war issue. Cheney did so by telling the House Majority Leader that he was giving him information that the Administration could not tell the public -- namely (according to Armey), that Iraq had the "’ability to miniaturize weapons of mass destruction, particularly nuclear,’ which had been ’substantially refined since the first Gulf War,’ and would soon result in ’packages that could be moved even by ground personnel.’ In addition, Cheney linked that threat to Saddam’s alleged personal ties to al Qaeda, explaining that ’we now know they have the ability to develop these weapons in a very portable fashion, and they have a delivery system in their relationship with organizations such as al Qaeda.’"
The Post story continues, "Armey has asked: "Did Dick Cheney ... purposely tell me things he knew to be untrue?" His answer: "I seriously feel that may be the case...Had I known or believed then what I believe now, I would have publicly opposed [the war] resolution right to the bitter end, and I believe I might have stopped it from happening."
In short, it was this lie that sealed the nation’s fate, and sent us to war in Iraq. By lying to such an influential figure in Congress, Cheney not only may have changed the course of history, but also corrupted the separation of powers with their inherent checks and balances.
Cheney’s monumental dishonesty, the news of which has been buried under the current meltdown of the nation’s economy, did not strike me as a topic for a Constitution Day speech. But a realistic discussion of the working of the separations of powers did seem a fitting topic, for college students need to understand the basics of our system. After we remind ourselves of those basics, Cheney’s great lie can be viewed not only as a great immorality and violation of the criminal code, but also and more fundamentally as the significant breach of his oath of office to protect and defend the Constitution that it is.
Our Constitutional Separation of Powers
Historians, not to mention contemporary historical documents, establish that no issue was more important to the founders of our national government than that of what its structure should be. Accordingly, in anticipation of the Constitutional Convention in Philadelphia during the summer of 1787, James Madison of Virginia plowed through historical accounts of governments and concluded that there are three basic forms of government: monarchy (the one), oligarchy (an elite few) and democracy (the many). Each form, however, had serious drawbacks.
As a result, Madison sought to take the best of each to create a "republic" - as had been done in varying degrees with many of the American colonies. Republics, of course, had been around a long time, for they were the forms employed by the Greeks and Romans. Thus, the republic was a form of government those who were meeting in Philadelphia well understood, in which sovereignty resides with the people who elect agents to represent them in the political decision-making process.
Madison’s republic combined elements of each type of government, in a mixing of forms. It featured an executive who incorporated the strength of monarchy without the evils of a King; a Senate that embodied the wisdom of an oligarchy; and a House that balanced the self-interest of such elites with a throng of representatives who spoke for the people of the nation.
Many delegates at the founding convention were mistrustful of a pure democracy since none had worked well in the past; moreover, the country was too large and diverse to directly involve everyone. Later, Madison nicely explained the differences in Federalist No. 14: "[I]n a democracy, the people meet and exercise the government in person; in a republic they assemble and administer it by their representatives and agents. A democracy consequently will be confined to a small spot. A republic may be extended over a large region."
Most importantly, Madison’s structure had three separate branches of the government - legislative, executive and judicial -- and each branch was empowered to check and balance the others, and thereby diffuse power.
Madison’s system, however, has not worked as designed even in the best of times, not to mention when there is an all-powerful Vice President hell-bent on gaming the system.
The Reality of Separation of Powers
An article in the June 2006 Harvard Law Journal -- Daryl J. Levinson and Richard H. Pildes, "Separation of Parties, Not Powers," Harvard Law Journal (Jun. 2006) 2311 -- provides one of the better analyses out there of the real-world workings of the separation of powers, and their accompanying checks and balances. Professors Levinson and Pildes argue that Madison’s vision of separation of powers has, in fact, been trumped in America by political parties. Their point is well taken, but as I see it their conclusion is far more applicable to the Republicans than the Democrats.
"The success of American democracy overwhelmed the Madisonian conception of separation of powers almost from the outset, preempting the political dynamics that were supposed to provide each branch with a ’will of its own’ that would propel departmental ’[a]mbition … to counteract ambition’," Levinson and Pildes explain. This, in turn, they argue, made the underlying theory of the government - separation of powers - largely "anachronistic."
When they looked at government, however, they found that when different political parties control the different branches - creating a divided government - then the parties working through those branches still do operate as Madison had hoped. Why? By sifting through the work of noted political scientists, Levinson and Pildes have concluded that it is not on behalf of protecting the institutional powers that the checking and balancing occurs; rather, it is through the influence of party politics operating through that divided branch.
I believe, based on the record (and as someone who worked on the Hill when Democrats controlled both ends of Pennsylvania Avenue) that Levinson and Pildes have it half right.
Democrats under unified government (i.e., when Democrats control both Congress and the White House) have been remarkably institutionally-minded, and the separation of powers has remained viable. On the other hand, conservative Republicans - as I have explained in my book Broken Government (just out in paperback too) - easily place party loyalty before the responsibilities of the governmental institution in which they serve. The first six years of the Bush/Cheney Administration, for example, were a travesty in Republican denial of institutional responsibilities. In contrast, there is a long list of Democratic House and Senate Chairmen who have a on-going history of refusing to be the rubber-stamps of Democratic Presidents.
For instance, unlike in the situation where Cheney lied to former Majority Leader Armey, when both the Democratic House and Senate suspected that President Lyndon Johnson had lied to them about the incident(s) in the Gulf of Tonkin that provoked Congress to authorize the war in Viet Nam, they took action. In contrast, Republicans have not acted on Cheney’s lie to Armey - and surely Washington Post reporter Barton Gellman is not the first person to learn about this lie.
Why Cheney Is Not Likely To Be Held Accountable
Those of us who follow these matters have long known - and I have written before - that it is Dick Cheney who is molding his hapless and naive president to his will, by effecting endless expansions of Presidential powers, and acting upon Cheney’s total disregard of the separation of powers.
Cheney does not seem to believe the Constitution applies to "real leaders," who do whatever they believe they must do. Nor does he believe in the separation of powers. Indeed, Cheney absurdly claims he is himself part of the Legislative Branch because he is the presiding officer of the Senate - though, in practice, that position exists only to break tie votes. It has long been clear that Cheney has been corruptly bridging the constitutional separation of powers throughout the Bush/Cheney presidency.
If Armey is right, Dick Cheney has not only behaved improperly, but also criminally: In addition, when lying to Armey, Cheney clearly committed a "high crime or misdemeanor" in his blocking the Constitution’s checks and balances from stopping our march into Iraq. During the debates that took place during the Constitution’s ratification conventions, it was specifically stated that lying to Congress about matters of war would be an impeachable offense. Congress has also made it a crime.
Nonetheless, nothing is likely to happen to Cheney, for Congress is too busy dealing with the disastrous economy that he and Bush are leaving behind as they head for the door. No one seems inclined to hold Cheney responsible, and he appears totally unconcerned about the wrath of history. Yet in lying even to those in his own party, about reasons to go to war, he has sunk to a low level few have reached, and it is no hyperbole to call his actions treasonous to the structure and spirit of the Republic.
The financial crisis and the comeback of Gerhard Schröder
Go to Original
By Ulrich Rippert
At the start of this week, the German weekly news magazine Die Spiegel appeared with the lead story titled “Schröder’s Comeback.” The article dealt with the “creeping putsch” with which the Social Democratic Party has “reorganised” its leadership in the course of the last week and notes: “Suddenly ex-chancellor Gerhard Schröder is once again part of the game.”
On the same day, the Berliner Morgenpost wrote of the “the return of the power broker Schröder” and Die Welt commented on the “amazing transformation of Frank Walter Schröder.”
It is a well-known fact that German Foreign Minister Frank Walter Steinmeier is a political protégé of the ex-chancellor and headed Schröder’s own state chancellery in Hanover before taking over the federal chancellery during the period of the Social Democratic Party-Green government (1998-2003). It has also been confirmed that the SPD putsch and the imposition of Steinmeier as the party’s candidate for the post of chancellor, as well as Franz Müntefering’s elevation to the post of chairman of the SPD, was carried out in close consultation with Gerhard Schröder and leading business associations.
It was no accident that top representatives of the German economy welcomed the abrupt change in the party leadership presidency and the nomination of Steinmeier as candidate for the chancellorship as an “encouraging indication of a course change by the SPD.” The president of the German Employers Association (BDA), Dieter Hundt, and the president of the German Committee for Industry and Commerce, George Ludwig Braun, explained they now saw “good chances for a continuation of Gerhard Schröder’s Agenda politics.”
Schröder’s return to the political stage must be seen in connection with the dramatic intensification of the international financial crisis. For months, German politicians and business representatives have been warning that the US mortgage crisis was “by no means over.” Alarm bells began to ring in Berlin in March when the US government moved in to bail out Bear Stearns. However, when Lehman Brothers finally collapsed last weekend and Merrill Lynch was hastily sold off, political and economic circles in Berlin were taken by surprise.
In just six months, three of the world’s five largest investment banks have collapsed. In its lead article Tuesday headlined “The Crash,” the Süddeutsche Zeitung wrote a virtual obituary for Wall Street: “Wall Street: that was the pride of America. The heart of capitalism. The place that determines the rules of the world economy. Wall Street, as we knew it: now it is no longer.”
With its heavy dependence on its export sector, the German economy is directly affected by the international banking crisis. In addition, the country has not forgotten the political consequences of the banking crash and economic collapse that took place 80 years ago. Following the collapse of Wall Street in October 1929 and the withdrawal of funds by American banks from Europe, mass unemployment in Germany soared overnight to 6 million. The German government reacted by shifting the burden of the crisis onto the backs of the working class. Existing democratic structures were abolished, parliament suspended, and the government ruled via emergency decrees. At the time, the SPD supported such measures by the Brüning government and therefore prepared the way for the Nazis to take power.
Once again, the ruling elite is determined to shift the burden of billions of losses onto the shoulders of the working population, and the SPD is again lining up to play a leading role. Schröder’s return to the centre of the political stage is directly bound up with an intensification of his Agenda 2010 policies and a fresh round of social attacks. There are already loud calls for the abolition of existing forms of sick pay and further weakening of the legal protection against dismissal.
Schröder’s return is also significant in another respect. While Chancellor Schröder pursued a foreign policy that was expressly critical of the Bush administration, his opposition to the US invasion of Iraq was by no means an expression of a principled opposition to war. The SPD-Green government was quite willing to support the NATO war against Serbia in 1999. And with regard to Iraq, the Schröder government cooperated on a number of levels with the US military.
Nevertheless, Schröder refused to send German troops to Iraq and made clear that Germany had its own economic and geo-strategic interests that differed from those of the US. Unlike Washington, which sought to put pressure on Russia alongside Iraq and Iran, Schröder developed forms of close cooperation with Moscow.
His decision to take over as head of the supervisory board of the North European Gas Pipeline (NEGP) after his narrow election defeat in 2005 was a political decision. The NEGP consortium is a joint venture involving the Russian energy company Gazprom (51 percent), and German companies E.ON Ruhrgas AG and BASF subsidiary Wintershall AG, with 20 percent, respectively. The remaining 9 percent of NEGP ownership rests with the Dutch company Gasunie.
This purpose of this project is to strengthen energy ties between Europe and Russia by means of an 1,200-kilometre-long pipeline from Wyborg to the west of St. Petersburg to the German coast via the Baltic Sea. The project is to consist of two pipelines with a combined capacity of 55 billion cubic metres gas per year.
While there has been no let-up in the campaign to warn of the economic and political consequences of increased energy dependence on Moscow, the ongoing crisis of the US financial system has strengthened the hand of those in the German foreign ministry arguing in favour of more self-sufficiency and more independence from Washington.
It was already notable how representatives of German big business vehemently argued against sanctions to be imposed on Russia in the wake of the recent Georgia crisis.
Following the European Union special summit on Georgia, the president of the Federal Association for German Industry, Jürgen Thumann, told the news channel N-TV that Germany and Russia depended on good relations. “Considerations to pressurise Russia with sanctions or stop negotiations regarding [Russia’s] admission to the World Trade Organisation and its partnership and cooperation agreement with the European Union Russia lead in the wrong direction.” A speaker for the eastern committee of the German economy declared on the same programme: “We hope that the peak of the escalation has now been reached.”
While the orientation towards the East on the part of Germany remains a subject of controversy it is growing in significance as US influence wanes.
This also finds a reflection in the growing orientation within established political circles towards the Left Party. In its latest edition, the weekly Die Zeit, which has close links to the SPD, writes that the change in the SPD leadership could “soon mean that the taboo rituals regarding the Left at a national level could be a thing of the past.... It is already difficult to explain why a party that is a reliable partner in state governments (e.g., Berlin) is disregarded as a coalition partner at a federal level.”
The chairman of the Left Party, Oskar Lafontaine, began his political career at the federal level three decades ago when he led protests against the stationing of NATO missile systems in Germany. At the end of the 1970s, NATO offered to discuss the limiting of middle-range missile systems with Warsaw Pact countries while at the same time introducing a new generation of US Pershing II and cruise missiles in Western Europe.
At the same time, the majority of Left Party members belonged to the former Party of Democratic Socialism, which has its roots in the ruling Stalinist party of East Germany—i.e., on the other side of the former “Iron Curtain.”
In an alliance with the SPD, Lafontaine and the Left Party could soon play a key role in the reorientation of German foreign policy on behalf of the interests of an important wing of German imperialism.
By Ulrich Rippert
At the start of this week, the German weekly news magazine Die Spiegel appeared with the lead story titled “Schröder’s Comeback.” The article dealt with the “creeping putsch” with which the Social Democratic Party has “reorganised” its leadership in the course of the last week and notes: “Suddenly ex-chancellor Gerhard Schröder is once again part of the game.”
On the same day, the Berliner Morgenpost wrote of the “the return of the power broker Schröder” and Die Welt commented on the “amazing transformation of Frank Walter Schröder.”
It is a well-known fact that German Foreign Minister Frank Walter Steinmeier is a political protégé of the ex-chancellor and headed Schröder’s own state chancellery in Hanover before taking over the federal chancellery during the period of the Social Democratic Party-Green government (1998-2003). It has also been confirmed that the SPD putsch and the imposition of Steinmeier as the party’s candidate for the post of chancellor, as well as Franz Müntefering’s elevation to the post of chairman of the SPD, was carried out in close consultation with Gerhard Schröder and leading business associations.
It was no accident that top representatives of the German economy welcomed the abrupt change in the party leadership presidency and the nomination of Steinmeier as candidate for the chancellorship as an “encouraging indication of a course change by the SPD.” The president of the German Employers Association (BDA), Dieter Hundt, and the president of the German Committee for Industry and Commerce, George Ludwig Braun, explained they now saw “good chances for a continuation of Gerhard Schröder’s Agenda politics.”
Schröder’s return to the political stage must be seen in connection with the dramatic intensification of the international financial crisis. For months, German politicians and business representatives have been warning that the US mortgage crisis was “by no means over.” Alarm bells began to ring in Berlin in March when the US government moved in to bail out Bear Stearns. However, when Lehman Brothers finally collapsed last weekend and Merrill Lynch was hastily sold off, political and economic circles in Berlin were taken by surprise.
In just six months, three of the world’s five largest investment banks have collapsed. In its lead article Tuesday headlined “The Crash,” the Süddeutsche Zeitung wrote a virtual obituary for Wall Street: “Wall Street: that was the pride of America. The heart of capitalism. The place that determines the rules of the world economy. Wall Street, as we knew it: now it is no longer.”
With its heavy dependence on its export sector, the German economy is directly affected by the international banking crisis. In addition, the country has not forgotten the political consequences of the banking crash and economic collapse that took place 80 years ago. Following the collapse of Wall Street in October 1929 and the withdrawal of funds by American banks from Europe, mass unemployment in Germany soared overnight to 6 million. The German government reacted by shifting the burden of the crisis onto the backs of the working class. Existing democratic structures were abolished, parliament suspended, and the government ruled via emergency decrees. At the time, the SPD supported such measures by the Brüning government and therefore prepared the way for the Nazis to take power.
Once again, the ruling elite is determined to shift the burden of billions of losses onto the shoulders of the working population, and the SPD is again lining up to play a leading role. Schröder’s return to the centre of the political stage is directly bound up with an intensification of his Agenda 2010 policies and a fresh round of social attacks. There are already loud calls for the abolition of existing forms of sick pay and further weakening of the legal protection against dismissal.
Schröder’s return is also significant in another respect. While Chancellor Schröder pursued a foreign policy that was expressly critical of the Bush administration, his opposition to the US invasion of Iraq was by no means an expression of a principled opposition to war. The SPD-Green government was quite willing to support the NATO war against Serbia in 1999. And with regard to Iraq, the Schröder government cooperated on a number of levels with the US military.
Nevertheless, Schröder refused to send German troops to Iraq and made clear that Germany had its own economic and geo-strategic interests that differed from those of the US. Unlike Washington, which sought to put pressure on Russia alongside Iraq and Iran, Schröder developed forms of close cooperation with Moscow.
His decision to take over as head of the supervisory board of the North European Gas Pipeline (NEGP) after his narrow election defeat in 2005 was a political decision. The NEGP consortium is a joint venture involving the Russian energy company Gazprom (51 percent), and German companies E.ON Ruhrgas AG and BASF subsidiary Wintershall AG, with 20 percent, respectively. The remaining 9 percent of NEGP ownership rests with the Dutch company Gasunie.
This purpose of this project is to strengthen energy ties between Europe and Russia by means of an 1,200-kilometre-long pipeline from Wyborg to the west of St. Petersburg to the German coast via the Baltic Sea. The project is to consist of two pipelines with a combined capacity of 55 billion cubic metres gas per year.
While there has been no let-up in the campaign to warn of the economic and political consequences of increased energy dependence on Moscow, the ongoing crisis of the US financial system has strengthened the hand of those in the German foreign ministry arguing in favour of more self-sufficiency and more independence from Washington.
It was already notable how representatives of German big business vehemently argued against sanctions to be imposed on Russia in the wake of the recent Georgia crisis.
Following the European Union special summit on Georgia, the president of the Federal Association for German Industry, Jürgen Thumann, told the news channel N-TV that Germany and Russia depended on good relations. “Considerations to pressurise Russia with sanctions or stop negotiations regarding [Russia’s] admission to the World Trade Organisation and its partnership and cooperation agreement with the European Union Russia lead in the wrong direction.” A speaker for the eastern committee of the German economy declared on the same programme: “We hope that the peak of the escalation has now been reached.”
While the orientation towards the East on the part of Germany remains a subject of controversy it is growing in significance as US influence wanes.
This also finds a reflection in the growing orientation within established political circles towards the Left Party. In its latest edition, the weekly Die Zeit, which has close links to the SPD, writes that the change in the SPD leadership could “soon mean that the taboo rituals regarding the Left at a national level could be a thing of the past.... It is already difficult to explain why a party that is a reliable partner in state governments (e.g., Berlin) is disregarded as a coalition partner at a federal level.”
The chairman of the Left Party, Oskar Lafontaine, began his political career at the federal level three decades ago when he led protests against the stationing of NATO missile systems in Germany. At the end of the 1970s, NATO offered to discuss the limiting of middle-range missile systems with Warsaw Pact countries while at the same time introducing a new generation of US Pershing II and cruise missiles in Western Europe.
At the same time, the majority of Left Party members belonged to the former Party of Democratic Socialism, which has its roots in the ruling Stalinist party of East Germany—i.e., on the other side of the former “Iron Curtain.”
In an alliance with the SPD, Lafontaine and the Left Party could soon play a key role in the reorientation of German foreign policy on behalf of the interests of an important wing of German imperialism.
Global financial storm hits Australian economy
Go to Original
By Mike Head
The deepening financial turmoil in the United States and worldwide is sending tremors through the Australian banking system and share market, and shattering what remains of the claims that the local capitalist economy would be protected by booming exports to China and other Asian markets.
Billions of dollars are being wiped off share prices, particularly those of the banks, and the Australian dollar has nose-dived, reflecting the Australian economy’s vulnerability to a global downturn, precisely because of its dependence on raw material exports and current high commodity prices.
Perplexed financial commentators have described the events of the past two weeks as “earthquakes”, “tectonic shocks” and “unimaginable”. As the New York stock exchange staggered from one crisis to another, prices on the Australian markets followed suit, falling to their lowest levels in three years. This week alone, nearly $A80 billion has been wiped off. Over the past year, prices have dropped even further than in the US—the leading indexes have lost more than a third since their peak last November.
Less than two months ago, the Australian dollar was riding high, climbing almost to parity with the US greenback, largely because of soaring coal, natural gas and iron ore prices agreed to by Chinese, Japanese, South Korean and Indian buyers. Since then, the dollar has lost more than 20 percent of its value against the US currency and even more against the Euro and yen, as every major economy has headed toward recession and growth has slowed in China and India.
Australian authorities are anxiously making soothing noises, insisting that the “fundamentals” of the economy remain strong. In a major speech this week, Reserve Bank of Australia (RBA) governor Glenn Stevens claimed that the local banks were weathering the turmoil well. He asserted that the banking system was in sound shape and “light years away from what’s happening in other banking systems around the world”.
Prime Minister Kevin Rudd and Treasurer Wayne Swan defended Stevens’s comments. They told parliament that while the global crisis had a long way to run yet, local banks’ exposure to the collapses of Lehman Brothers, Merrill Lynch and the American Insurance Group (AIG) was modest. Behind the scenes, however, Rudd and Swan held crisis meetings with the RBA, Treasury and financial regulators, while the RBA joined other central banks around the world in pumping billions of dollars into the financial markets to try to prevent a disastrous drying up of credit.
None of the reassuring words—dismissed by one commentator as “mood music”—has had the desired impact. According to the Australian Financial Review on Thursday: “The deepening financial crisis gripping the northern hemisphere has sent panic through global debt markets, prompting a blow-out in spreads and dashing what slim hope there was of a near-term recovery in credit conditions.”
Commenting on the AIG collapse, Joshua Williamson, a senior strategist at TD Securities, said it had “taken the financial crisis from being the worst in a generation to the worst since the Great Depression... Looking one step ahead, the real risk now is that global liquidity dries up further, adversely affecting the real global macro-economy.”
Another barometer of the underlying crisis was the rout at Australia’s largest merchant bank, the Macquarie Group. Last May, its shares peaked at nearly $100; this week they fell below $30, slashing its market value from $25 billion to less than $10 billion.
For two decades, Macquarie has been a free-market icon, dubbed the “millionaire’s factory” because of the multi-million dollar remuneration packages it generated for its top executives. In 2006-07, Macquarie’s then chief executive, Allan Moss, took home $33.5 million in salary, bonuses and share options, or the equivalent of $92,000 a day, setting a new Australian record for executive salaries.
Moss and his associates made their money through what became known as the “Macquarie model”—a complex Ponzi-like scheme in which they bought up assets around the world, continually revalued them upward and then borrowed against the inflated asset values to fund payments to investors and themselves. The group also spun the assets off into satellite funds and trusts, and collected fees from them along the way.
All this was conducted with the full approval of the corporate regulators. In fact, Macquarie set the benchmarks for generating profits through the ever-greater leverage of debt. Just three years ago, the Sydney Morning Herald’s business pages said the bank “has mesmerised the sharemarket with financial origami and investors have rejoiced in the apparently endless stream of money it generates. It is admired by analysts, investors and executives who praise its originality and its agility.”
Over the past 12 months, falling global stock and asset prices, combined with soaring credit costs, have seen the Macquarie model unravel. This week, Standard and Poor’s put the bank on a negative outlook and cast doubt on its structure after reports that the group would have difficulty with $5 billion of the $45 billion in debt that it must refinance by March 2009. Another outfit that adopted the Macquarie model, Babcock & Brown, has sunk even lower—its share price has collapsed from $31 last November to around 80 cents.
The fallout has not stopped there. Australia’s four largest banks are far from immune to the global shockwaves. Despite issuing statements that they had relatively small exposures (totalling about $400 million) to Lehman Brothers’ collapse, their shares have led the stockmarket down, with the National Australia Bank tumbling to its lowest level since 2000.
The international credit crunch triggered by the US sub-prime crisis in August last year has already produced a trail of high-profile collapses by heavily-leveraged companies, including ABC Learning Centres, Centro Properties, finance companies RAMS, Allco and MFS, and stockbrokers Opes and Lift.
Now mining shares are being hit, indicating fears for the very sector that has been held up as the saviour of Australian capitalism. A few months ago, Andrew Forrest was proclaimed by Business Review Weekly as Australia’s richest man, topping its rich list at just under $10 billion because of soaring prices for the iron ore from his Fortescue Metal Group’s mine. Since then, Fortescue’s share price has plummeted nearly 40 percent, sending Forrest’s wealth ranking tumbling.
Retirement incomes wiped out
As elsewhere around the world, it is ordinary people, not the wealthy elite, who will be forced to bear the economic burden for the failure of the financial system. Working class households, already severely stressed by soaring debt levels, high mortgage and credit card interest rates and rising prices, now face a sharp further decline in living standards.
In his speech this week, RBA governor Stevens spoke bluntly of a “new phase” in which households would have to “consolidate their debt, grow their consumption spending at a pace closer to income and perhaps look to save more of their current income”. This is under conditions where household debt has risen to an historic high of about 175 percent of disposable income (up from 75 percent a decade ago), because working people have increasingly had to borrow to cover living costs.
Governments at every level, federal, state and local, are warning of severe cuts to spending on social programs, basic services and infrastructure. In New South Wales, the most populous state, it has been revealed that local councils have lost hundreds of millions of dollars by sinking funds into complicated, high-risk investment products, and are preparing to slash spending on essential projects, including roads. A recent report found that NSW councils had a combined exposure to collateralised debt obligations and capital-guaranteed products of $1 billion. Before Lehman Brothers collapsed, some 24 councils had been considering a class action against the corporation.
At the same time, millions of people are seeing their retirement funds decimated. Over the past two decades, ordinary working people have been compelled by the compulsory superannuation scheme introduced by the previous federal Labor government to take cuts in real wages and divert money into giant superannuation funds, all of which have been caught up in speculating on the financial markets.
So far this calendar year, according to Jeff Bresnahan, managing director of SuperRatings, balanced superannuation funds have lost about 11 percent. Losses on the local and international sharemarkets, where the majority of funds were invested, had worsened since June 30, the end of the last financial year, during which the funds lost an average of 6.4 percent. Bresnahan said “some people are going to have to stay in the workforce for one or two years longer” and “hundreds of thousands of Australians ... really have to clearly rethink their retirement strategies”.
Over recent years, ordinary people have been increasingly convinced, and enticed via tax concessions, to pour extra money, including their life savings, into superannuation funds, which mushroomed in size from about $80 billion in 1992 to some $1.2 trillion in January this year. Individual investors poured $22.4 billion into the funds in the June 2007 quarter alone—three times the previous record—to take advantage of extra tax concessions granted by the Howard government. Many people borrowed money to benefit from this tax handout and have lost heavily.
The exponential growth of superannuation funds has been part of the growing financial parasitism of the Australian corporate elite, which has sent the value of funds under financial management to unprecedented levels—from 50 percent of gross domestic product in 1990 to 160 percent, or $1.7 trillion, by the beginning of this year—while large sections of industry have been restructured, downsized or shut down.
The devastation of superannuation funds is an indictment of the Labor and trade union leadership, which forced workers into these funds as a means of making them pay for their own retirement while old age pensions fell below the poverty line. Many of the largest funds are owned and run by union-employer partnerships, giving the unions a vested interest in driving up profit rates at the expense of their own members, and making them complicit in the disaster now unfolding.
By Mike Head
The deepening financial turmoil in the United States and worldwide is sending tremors through the Australian banking system and share market, and shattering what remains of the claims that the local capitalist economy would be protected by booming exports to China and other Asian markets.
Billions of dollars are being wiped off share prices, particularly those of the banks, and the Australian dollar has nose-dived, reflecting the Australian economy’s vulnerability to a global downturn, precisely because of its dependence on raw material exports and current high commodity prices.
Perplexed financial commentators have described the events of the past two weeks as “earthquakes”, “tectonic shocks” and “unimaginable”. As the New York stock exchange staggered from one crisis to another, prices on the Australian markets followed suit, falling to their lowest levels in three years. This week alone, nearly $A80 billion has been wiped off. Over the past year, prices have dropped even further than in the US—the leading indexes have lost more than a third since their peak last November.
Less than two months ago, the Australian dollar was riding high, climbing almost to parity with the US greenback, largely because of soaring coal, natural gas and iron ore prices agreed to by Chinese, Japanese, South Korean and Indian buyers. Since then, the dollar has lost more than 20 percent of its value against the US currency and even more against the Euro and yen, as every major economy has headed toward recession and growth has slowed in China and India.
Australian authorities are anxiously making soothing noises, insisting that the “fundamentals” of the economy remain strong. In a major speech this week, Reserve Bank of Australia (RBA) governor Glenn Stevens claimed that the local banks were weathering the turmoil well. He asserted that the banking system was in sound shape and “light years away from what’s happening in other banking systems around the world”.
Prime Minister Kevin Rudd and Treasurer Wayne Swan defended Stevens’s comments. They told parliament that while the global crisis had a long way to run yet, local banks’ exposure to the collapses of Lehman Brothers, Merrill Lynch and the American Insurance Group (AIG) was modest. Behind the scenes, however, Rudd and Swan held crisis meetings with the RBA, Treasury and financial regulators, while the RBA joined other central banks around the world in pumping billions of dollars into the financial markets to try to prevent a disastrous drying up of credit.
None of the reassuring words—dismissed by one commentator as “mood music”—has had the desired impact. According to the Australian Financial Review on Thursday: “The deepening financial crisis gripping the northern hemisphere has sent panic through global debt markets, prompting a blow-out in spreads and dashing what slim hope there was of a near-term recovery in credit conditions.”
Commenting on the AIG collapse, Joshua Williamson, a senior strategist at TD Securities, said it had “taken the financial crisis from being the worst in a generation to the worst since the Great Depression... Looking one step ahead, the real risk now is that global liquidity dries up further, adversely affecting the real global macro-economy.”
Another barometer of the underlying crisis was the rout at Australia’s largest merchant bank, the Macquarie Group. Last May, its shares peaked at nearly $100; this week they fell below $30, slashing its market value from $25 billion to less than $10 billion.
For two decades, Macquarie has been a free-market icon, dubbed the “millionaire’s factory” because of the multi-million dollar remuneration packages it generated for its top executives. In 2006-07, Macquarie’s then chief executive, Allan Moss, took home $33.5 million in salary, bonuses and share options, or the equivalent of $92,000 a day, setting a new Australian record for executive salaries.
Moss and his associates made their money through what became known as the “Macquarie model”—a complex Ponzi-like scheme in which they bought up assets around the world, continually revalued them upward and then borrowed against the inflated asset values to fund payments to investors and themselves. The group also spun the assets off into satellite funds and trusts, and collected fees from them along the way.
All this was conducted with the full approval of the corporate regulators. In fact, Macquarie set the benchmarks for generating profits through the ever-greater leverage of debt. Just three years ago, the Sydney Morning Herald’s business pages said the bank “has mesmerised the sharemarket with financial origami and investors have rejoiced in the apparently endless stream of money it generates. It is admired by analysts, investors and executives who praise its originality and its agility.”
Over the past 12 months, falling global stock and asset prices, combined with soaring credit costs, have seen the Macquarie model unravel. This week, Standard and Poor’s put the bank on a negative outlook and cast doubt on its structure after reports that the group would have difficulty with $5 billion of the $45 billion in debt that it must refinance by March 2009. Another outfit that adopted the Macquarie model, Babcock & Brown, has sunk even lower—its share price has collapsed from $31 last November to around 80 cents.
The fallout has not stopped there. Australia’s four largest banks are far from immune to the global shockwaves. Despite issuing statements that they had relatively small exposures (totalling about $400 million) to Lehman Brothers’ collapse, their shares have led the stockmarket down, with the National Australia Bank tumbling to its lowest level since 2000.
The international credit crunch triggered by the US sub-prime crisis in August last year has already produced a trail of high-profile collapses by heavily-leveraged companies, including ABC Learning Centres, Centro Properties, finance companies RAMS, Allco and MFS, and stockbrokers Opes and Lift.
Now mining shares are being hit, indicating fears for the very sector that has been held up as the saviour of Australian capitalism. A few months ago, Andrew Forrest was proclaimed by Business Review Weekly as Australia’s richest man, topping its rich list at just under $10 billion because of soaring prices for the iron ore from his Fortescue Metal Group’s mine. Since then, Fortescue’s share price has plummeted nearly 40 percent, sending Forrest’s wealth ranking tumbling.
Retirement incomes wiped out
As elsewhere around the world, it is ordinary people, not the wealthy elite, who will be forced to bear the economic burden for the failure of the financial system. Working class households, already severely stressed by soaring debt levels, high mortgage and credit card interest rates and rising prices, now face a sharp further decline in living standards.
In his speech this week, RBA governor Stevens spoke bluntly of a “new phase” in which households would have to “consolidate their debt, grow their consumption spending at a pace closer to income and perhaps look to save more of their current income”. This is under conditions where household debt has risen to an historic high of about 175 percent of disposable income (up from 75 percent a decade ago), because working people have increasingly had to borrow to cover living costs.
Governments at every level, federal, state and local, are warning of severe cuts to spending on social programs, basic services and infrastructure. In New South Wales, the most populous state, it has been revealed that local councils have lost hundreds of millions of dollars by sinking funds into complicated, high-risk investment products, and are preparing to slash spending on essential projects, including roads. A recent report found that NSW councils had a combined exposure to collateralised debt obligations and capital-guaranteed products of $1 billion. Before Lehman Brothers collapsed, some 24 councils had been considering a class action against the corporation.
At the same time, millions of people are seeing their retirement funds decimated. Over the past two decades, ordinary working people have been compelled by the compulsory superannuation scheme introduced by the previous federal Labor government to take cuts in real wages and divert money into giant superannuation funds, all of which have been caught up in speculating on the financial markets.
So far this calendar year, according to Jeff Bresnahan, managing director of SuperRatings, balanced superannuation funds have lost about 11 percent. Losses on the local and international sharemarkets, where the majority of funds were invested, had worsened since June 30, the end of the last financial year, during which the funds lost an average of 6.4 percent. Bresnahan said “some people are going to have to stay in the workforce for one or two years longer” and “hundreds of thousands of Australians ... really have to clearly rethink their retirement strategies”.
Over recent years, ordinary people have been increasingly convinced, and enticed via tax concessions, to pour extra money, including their life savings, into superannuation funds, which mushroomed in size from about $80 billion in 1992 to some $1.2 trillion in January this year. Individual investors poured $22.4 billion into the funds in the June 2007 quarter alone—three times the previous record—to take advantage of extra tax concessions granted by the Howard government. Many people borrowed money to benefit from this tax handout and have lost heavily.
The exponential growth of superannuation funds has been part of the growing financial parasitism of the Australian corporate elite, which has sent the value of funds under financial management to unprecedented levels—from 50 percent of gross domestic product in 1990 to 160 percent, or $1.7 trillion, by the beginning of this year—while large sections of industry have been restructured, downsized or shut down.
The devastation of superannuation funds is an indictment of the Labor and trade union leadership, which forced workers into these funds as a means of making them pay for their own retirement while old age pensions fell below the poverty line. Many of the largest funds are owned and run by union-employer partnerships, giving the unions a vested interest in driving up profit rates at the expense of their own members, and making them complicit in the disaster now unfolding.
Subscribe to:
Posts (Atom)