Monday, September 29, 2008

Bailout Rejected

round up of news:
*just to say it, the articles below do NOT reflect the views of this blog. they are being reposted to show the varied takes on the situation.

House Votes "No" 228-205; Stocks Plunge
from NY Times.com
"Stock markets plunged sharply as it appeared that the measure would go down to defeat, and kept slumping into the afternoon when that appearance became a reality.

Worldwide financial markets had slumped even before the House vote; shares in Hong Kong closed down 4 percent and in Paris and London they were down 3 percent. By 3:15 p.m. Eastern time the Dow Jones industrial average had fallen more than 5 percent.House leaders pushing for the package kept the voting period open for some 40 minutes past the allotted time, trying to convert “no” votes by pointing to damage being done to the markets, but to no avail"


Black Monday?
by Mike Whitney
from CountrePunch

"It all get's down to this: The reason the system is exploding is because the various financial institutions have been allowed--via deregulation--to act as banks and create as much credit as they choose without a sufficient capital base. When one reads about massive deleveraging, this relates directly to the fact that under-capitalized businesses were operating with too much debt in relationship to their capital. That's it in a nutshell; forget about the CDOs, the MBSs, the CDS and the whole alphabet soup of derivatives garbage. They were all inserted into the system so Wall Street landsharks could expand credit without supervision and balance trillions of dollars of debt on the back of a one dollar bill. This is why Paulson wants to suspend the rules which would bring credibility and trust back to the system. After all, that might impinge on Wall Street's ability to enrich itself at the public's expense."


Instant View: House Rejects Bailout

from Reuters
"There is a risk of failure of the financial system, although I don't think that is going to happen. At least the bailout package gave some certainty, at least something was out there, but now the market is left to its own devices and whatever liquidity facilities the Fed has out there"

Shares Plummet as US Congress Rejects Bailout Plan
from the Guardian.co.uk

"Despite a round-the-clock weekend negotiating session, members of the House of Representatives ignored a last-ditch appeal from George Bush by rejecting the rescue scheme on an initial count by 228 votes to 205... The dramatic and unexpected show of political opposition came largely from the Republican benches, where a majority of congressmen opposed the measure citing concern among the public about the cost of the bail-out. The White House said Bush was "very disappointed" by the outcome"

House Bailout Vote: The Uprising comes to Wall Street and Washington
by David Sirota
from the Huffington Post

What I'm going to say is pretty simple: it's clear that Congress is facing a full on revolt from both the Right and Left... No longer is this a populist revolt merely scaring Wall Street and Washington - this is a populist revolt that has, to quote Markos, crashed the gate, and it represents a real victory for the progressive movement and voices who said Hell No... Just as I said in the book that it's not clear what is going to come out of the Left-Right grassroots uprising throughout the country, it's not clear what is going to come out of this uprising in Congress.

Nick Paretsky responds

from the comments section of, Capitalism in Crisis?
Holy cow. Just read the post about the redeployment of troops inside the U.S. for domestic counterinsurgency.

Well, anyway: Long-term ruling class strategies in wake of the financial meltdown

The immediate ruling class response is the bailout. There’s been talk in the business press about how the bailout signals the end of the neo-liberal, “free market” policy regime of the last 30 years or so. So far, it just looks like a huge, lumbering state capitalism, without any clear underlying paradigm shift in ruling class policy. But if the bailout is not successful at preventing implosion of the financial system, or even makes the crisis worse, as the Hudson piece argues, major ruling class debates may be in the offing over long-range strategies for managing the system, one issue being the role of the state in economic policy. As has been said many times before by others, their strategies have implications for what leftists do. And divisions within the ruling class can be an opportunity for a mass, radical left movement. (Hamerquist has written in the past about capitalist policy alternatives for dealing the crisis, such as a traditional reformist, social democratic approach vs a conservative “strong state” which intervenes in the economy without a popular, working class base, in the context of his theory of the secular crisis of capitalism.)

It might be useful to map out different positions emerging within the rc on dealing with the crisis, in event the financial meltdown really does require the ruling class to make a break with past policies. Among other things, this means looking at discussions taking place within the ruling class network of policy planning organizations, think tanks, research institutes, foundations, etc, which has played an important role in the past in the formation of state policy. These are organizations like the Council on Foreign Relations, Trilateral Commission, American Enterprise Institute, Business Roundtable, Institute for International Economics, and so on.

For example: Is this another “New Deal moment”? K. Phillips doubts it is, in the American Prospect article cited in the Bill Moyers interview. If this is true, reformist left politics will have tough sledding. But I think some sort of state interventionism is on the rc agenda.

Some rc ideologues are in fact talking in a “New Deal,” “social democratic” vein. They see this as chance to reassert the power of productive capital (industrial capitalists) with respect to the financial sector. NYT columnist Thomas Friedman is a visible spokespersons for this camp. His writings have been cited by some contributors to this forum as important rc statements on globalization. In recent columns he has been advocating the rebuilding of the U.S. manufacturing base using energy conservation and “green technologies.” For example, his Sept 28 op ed, “Green the Bailout.” His proposals are reminiscent of the reindustrialization” idea debated within rc circles during the late ‘70s and early ‘80s, in which the state would channel capital into the retooling of industry and rebuilding infrastructure; this time it is a “green” reindustrialization. I believe Friedman is involved with a number of policy formation organizations representing the internationalist wing of the rc, such as the Trilateral Commission, Council on Foreign Relations, and Bilderberg. So his utterances may reflect the views of a larger grouping within the ruling class, composed of real capitalists with power, and not just newspaper reporters. These would also be capitalists which have ties to specific geographic places, at the same time that they are at the helm of large multinational corporations with operations spanning the globe. This “green” reform program may go nowhere. Reformist policy options may face objective limits in the nature of contemporary capitalism. A “unitary executive” which uses force to restructure capital and society, without reformist “class compromise” politics, may be more likely. But the Friedman program is an example of a ruling class analysis of the crisis which revolutionary leftists should pay attention to.

Having just read the Army News article about a permanent domestic military presence being established under the authority of NorthCom for purposes of controlling “civil unrest,” I am reminded that a lot of ruling class strategizing for general management of the system is now taking place within the Pentagon and the other organs of the National Security State, alongside the older network of “civil society,” “private” capitalist think tanks which formulated and transmitted policy to the State. Mike Davis has said something similar in his writings on “the planet of slums.” I’m also further jolted into realizing that things are heating up and getting closer.

Nick Paretsky

sample of debates against the bailout

the bailout is not embraced by everyone. it appears that the leaderships of the Democrats and Republicans are trying to push through the bailout proposal. Dissent is emerging among the rank and file representatives. Below are two video's of Dem and Republican reps.


Rep. Marcy Kaptur (D-OH)
“My message to the American people don’t let Congress seal this deal. High financial crimes have been committed.”
“The normal legislative process has been shelved. Only a few insiders are doing the dealing, sounds like insider trading to me. These criminals have so much political power than can shut down the normal legislative process of the highest law making body of this land.”
“We are Constitutionally sworn to protect and defend this Republic against all enemies foreign and domestic. And my friends there are enemies.”


Rep. Michael Burgess (R-TX) comments that debate of the bill has been more about talking points than substance of proposal.
Rep. Michael Burgess (R-TX) reports from the floor of the House that the Republicans have been cut out of the process and called unpatriotic for not supporting the fraudulent bailout. He says the only debate has been about what talking points to use on the American people.
“I have been thrown out of more meetings in this capital in the last 24 hours than I ever thought possible, as a duly elected representative of 825,000 citizens of north Texas.” Said Congressman Burgess.
Burgess asks the Speaker of the House to post the bailout bill on the internet for at least 24 hours instead of passing the largest piece of legislation in US financial history in the “dark of night.”

Counter Insurgency at home?

and look, what timing! Just when the president, politicians and various economists start saying that the Apocalypse may just be around the corner if $700B isn't injected into the economy, the are starting a redeployment of troops into The U.S. who's main goal will be dealing with domestic disturbances.

From The Army Times,

"It is not the first time an active-duty unit has been tapped to help at home. In August 2005, for example, when Hurricane Katrina unleashed hell in Mississippi and Louisiana, several active-duty units were pulled from various posts and mobilized to those areas...

...But this new mission marks the first time an active unit has been given a dedicated assignment to NorthCom, a joint command established in 2002 to provide command and control for federal homeland defense efforts and coordinate defense support of civil authorities...

...They may be called upon to help with civil unrest and crowd control or to deal with potentially horrific scenarios such as massive poisoning and chaos in response to a chemical, biological, radiological, nuclear or high-yield explosive, or CBRNE, attack."

read more

Sunday, September 28, 2008

quick overview of the massive bailout bill

from the Wall Street Journal. following is a summary of the 110 pages being submitted for the potential Monday morning vote by Congress.
Shape of Massive Bailout Bill Starts to Develop Definition

Thursday, September 25, 2008

Chickens with their heads cut-off: Pt. Deux

reposted from NYTimes.com
Day of Chaos Grips Washington; Talks Over Bailout Plan Implode
Published: September 25, 2008

WASHINGTON — The day began with an agreement that Washington hoped would end the financial crisis that has gripped the nation. It dissolved into a verbal brawl in the Cabinet Room of the White House, urgent warnings from the president and pleas from a Treasury secretary who knelt before the House speaker and appealed for her support.

a System in flux: trying to get our brains wrapped around the crisis in capitalism

central ideas growing from this "threewayfight" discussion board is that the System - capitalism and the administrative States - represent dynamic sets of entities in a constant flux of shaping and reshaping themselves. beyond the Systems own internal dialectic this motion and how the System manifests itself weighs heavily on the trajectory - the politics and focus - of the opposition movements. anti-capitalism, anti-fascism, fascism, popular reactionary movements, radical expressions of liberation, all are impacted by the System and vice versa. simple, right?

at times we can have a developed and fairly sophisticated praxis, at other moments our understanding is still waiting outside the door fumbling for the keys.

for several of us that contribute to threewayfight - or those who use the sites information to help draw out and develop ideas - the economic aspect of the System is paid little attention. seemingly strange considering that a total critique of these societies demands us having a grasp on how the capitalist society we are looking to uproot and overturn actually functions. but i said seemingly because we acknowledge a lack of full knowledge. its from here that we are trying to talk about and understand what is happening.

the housing crisis, the bailouts or liquidation of financial institutions, and now the $700B bailout of the market, is forcing a new discussion that many of us have only just thought over in rudimentary terms. the Democrats want us to see their party as the saviors of the common people. some Republicans are "outraged" by the Bush/Paulson bailout plan because it has government tinkering with the economy. by and large the boss class - both parties - would like for us to keep sleepwalking as they construct our futures; a future that every economist is saying is completely uncertain.

we are going to try to point "our side" in the direction of news, analysis, and overviews that deal with this future.

we cant afford to sleepwalk through the nightmares the masters create.
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1) Capitalism in Crisis? by D. Hamerquist

"There is no evidence of capitalist complacency in the current situation – but there is a good possibility that many left radicals will relax and snooze their way through it. I recommend that those who see the current situation as just “capitalists just being capitalist” make sure they understand the concept and the function of “leverage” and then google - ‘collateralized debt obligation’ and ‘credit default swap’. This should provide some recovery therapy for business as usual disorders on the left."

2) Paul Bowman writes for the Workers Solidarity Movement, Fiancial Weapons of Mass Destruction

"as a system of social relations, capitalism is also a system with internal mechanics. Those mechanics evolve in response to the historical development of struggles over exploitation, but what new directions the new mechanics make possible in terms of capitalist strategies, in turn, shape the new struggles of today and tomorrow."

3) Kevin Phillips interviewed on the Bill Moyers Journal

"KEVIN PHILLIPS: Well, just to give you an example of how many there are… I sometimes use the description 'seven sharks.' There are seven sharks in the tank with the economy… Now, whenever you get this sort of package in one decade, you got a big one. And when Greenspan says it's a once a century, I think it's another variation but on a par with the Thirties.”

4) Michael Hudson writes for Counterpunch, The Paulson-Bernake bank Bailout Plan: Will the Cure be worse than the Crisis?

"The question to be asked is just how much will the economy’s debt overhead grow, and what will it cost debtors (a.k.a. “taxpayers”)? And how will the economy look when the dust settles?"

5) from the Maoist Kasama site, Overview of the Financial Crisis.

Capitalism in Crisis?

the following is from a larger discussion between different individuals and organizations on the nature of fascism and the potentials and limitations of anti-fascist organizing. that discussion will be published in the near future, however, with the last few days events we wanted to put up this piece from D. Hamerquist.
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M. included this observation in his remarks on the current fascism discussion:

“The history of the left is littered with groups that have ended up in the metaphorical ditch after having hitched their ride to a supposedly impending crisis in the functioning of capitalism. It’s true that the past is often no guide to the future, but I’m highly skeptical of claims that capitalism is currently headed toward a major crisis.”

Despite M.s “highly skeptical” view, the events of recent days certainly look like a capitalist crisis and spokespeople for the system are commonly describing the situation in apocalyptic terms. Perhaps he thinks that it is just not a “major” crisis – only a slight “downward economic adjustment” in our corner of the global capitalist system, a momentary hiccup that we should look beyond. However this doesn’t explain why the major spokespeople for capital, accompanied by the flock of professional commentators on its workings, are uniformly describing the situation as a looming disaster for the entire global capitalist financial system and are bitterly debating the proposed remedies. Should they all relax? Has M. found some underlying limits on the problems that all of them have overlooked? Is this emerging bailout remedy that will cost a minimum of half a trillion dollars of public funds a stupid over reaction to some minor glitches? Is the palpable panic part of a massive attempt to confuse the more gullible sections of the people, including the small circles of revolutionaries and cover up some “adjustment”(s)? If so, what adjustments…and why cover them up?

There is no evidence of capitalist complacency in the current situation – but there is a good possibility that many left radicals will relax and snooze their way through it. I recommend that those who see the current situation as just “capitalists just being capitalist” make sure they understand the concept and the function of “leverage” and then google - ‘collateralized debt obligation’ and ‘credit default swap’. This should provide some recovery therapy for business as usual disorders on the left.

The essential problem is not that M.’s view has been overtaken by events - although it has. In my opinion his position was wrong when he wrote it some months ago as the current situation was just developing. Similar positions have resulted in similar mistakes since this type of argument became fashionable on the left some decades ago. I’m not arguing that an objective analysis of capitalism is unnecessary, but that analysis must look for the breaks and transformations in the structure of capital that will determine the environment for radical political work and set the potential for insurgencies. By emphasizing the elements of stability and continuity in capital and discounting the current financial panic as a planned manipulation, M. removes the imperative to develop a popular radical position for the issues of the day and tends towards confining strategic options to that long march through the institutions which has destroyed so much radical footware – perhaps he would spice it up with a little parecon.

This is not to deny there are some elements of validity in M.’s position. I assume it is a reaction against the strand of economic/historical determinism in the left tradition, particularly the self designated Marxist component, that ‘scientifically’ predicted the dual inevitabilities of the fall of capitalism and the success of communism. The mechanism to expedite the inevitable transition from capitalism to socialism was commonly located in the “boom/bust” capitalist business cycle. This supposedly would result in increasingly serious crises culminating in THE CRISIS where capitalism essentially collapsed. (I realize there are some more sophisticated expressions of the process, but this is its essence.)

Gramsci dealt with this issue in his criticism of Bukharin’s popularized ABCs of Communism, describing it as marginally useful as a morale booster for a working class movement that has experienced the class struggle as a string of defeats, but as“imbecilic optimism” for a revolutionary project that must create a future through organized and conscious struggle. (I love that term and will never miss an opportunity to use it.)

This crude economist notion of crisis was incorporated into the stage theory which defined imperialism as the final phase of capitalism, and saw WWI and the Bolshevik revolution as demarcating the “General Crisis of Capitalism”, the immediate prelude to international revolution. History developed differently. Official communist doctrine struggled with its crisis theory for a time, creating various subdivisions of the general crisis to explain the delay in its appearance. Following a brief resurgence during the 30s depression, the grand crisis theory faded into obscurity and was supplanted by the simple notion that capitalism would eventually succumb to an increasingly appealing “socialist” alternative. Of course we know what has happened to this pile of crap.

Crude determinist views of this sort reappear from time to time and present easy targets for ridicule by more sophisticated leftists. I’ve taken some shots myself. However, there is a potential for large mistakes in this reflexive criticism. Paradoxically, it can lead to a similar political posture to the one it criticizes, complacent reformist gradualism. The “imbecilic optimism” that treats eventual victory as guaranteed because time is on our side finds a functional equivalent in incremental reformism that hopes to hold on until capitalism bores itself into senility.

In its last years, STO attempted to develop an understanding of the restructuring of the capitalist labor process that was becoming evident in the U.S. and Europe. This involved taking another look at the issue of capitalist crisis. We began to draw a distinction between two notions of crisis, both of which can be located in Marx. The first was the cyclical boom/bust character of capitalist development. This has traditionally been the focus of the left which treated it in ways that parallel the treatment of the business cycle in official economics. The second notion of crisis, infinitely more important in my opinion and not included in official economic curricula, is the conception of crisis as a secular consequence of capitalist production approaching the limits of the law of value. It is important to recognize that neither of these notions equated crisis with collapse. The former notion was cyclical and to some extent self correcting. The secular crisis creates the conditions for development of countervailing forces on the left and the right, but does not ensure their success. Nor does it contradict the potential for various types of capitalist recovery. Following the Chairman, unless it is pushed, capital will not fall – where the broom does not reach the dust will remain. So let’s push a bit – and stay alert for other broom wielders.

At the time, Marx’s Grundrisse had only recently become available in English. Its extended “Chapter on Capital”– specifically pages 699-712 – was our primary reference point. I’ve referred to this material elsewhere, for example in the section on crisis in my piece of fascism – page 22-28 - and don’t want to repeat it here. Perhaps I should say that of the very few comments on that piece, a number singled out this passage as being rather useless. Nevertheless, I still think it is helpful to check out the Grundrisse passages, keeping in mind that they were written about capitalist limits as a global system at a point in time when capitalism was hardly even regional, barely developed in most areas and only clearly hegemonic in a few European countries.


I’d like to approach the problems with a quote that is very different from the one of M.’s that topped this piece. After citing the Grundrisse, Negri argues:

“This restive character of capital constitutes an ever-present point of crisis that pertains to the essence of capital itself; constant expansion is its always inadequate but nonetheless necessary attempt to quench an insatiable thirst. We do not mean to suggest that this crisis and these barriers will necessarily lead capital to collapse. On the contrary, as it is for modernity as a whole, crisis is for capital a normal condition that indicates not its end but its tendency and mode of operation.” (Negri & Hardt, Empire, p. 222).

In this view, as in mine, “crisis” should not be reduced to capitalist collapse, it is the new normality when capitalism has become global and no longer effectively has an “outside”. Of course, saying crisis is a “normal condition” is hardly sufficient, but Negri improves on M.’s position by focusing our attention on contradictions, paradigm shifts, disequilibriums, and transformations as the “normal condition” of the political terrain. This sets a much more productive framework for further analysis.

Let me make a brief excursion. Martin Nicolaus now is probably best known as the translator of the Grundrisse into English. Before this he had a brief flame out career in the New Left, starting with Weather and working through the BARU; RCP, CPML and some more exotic Maoists. (You can detect the Maoism in his introductory material for the Grundrisse.) I have no idea where he’s been for over a quarter of a century – probably some type of liberal like so many others. In any case, in the late sixties he had a widely read debate with Ernest Mandel, the Trotskyist economist and head of the 4th International. The topic was one of the ‘Where is X Going’ sort that Trotskyists favored. Nicolaus argued that colonial conditions were being imported into the metropolis and that the proper strategy was to bring the national liberation movement along with it. It fit with his thirdworldist Weather position of the period. We frequently used his essay in educationals as an illustration of a political mistake for not dealing with the contradictions within the U.S. working class, specifically the white skin privilege, and for essentially denying that the working class was a potential revolutionary agent in advanced capitalism. Of course, we regarded Mandel’s Eurocentric and economist trade unionist perspective as pure crap.

I’ve frequently thought since that there was more substance to the Nicolaus argument than we realized – possibly more than he realized. It fits very closely with the argument in Negri’s Empire”

“The Third World does not really disappear in the process of unification of the world market but enters into the First, establishes itself at the heart as ghetto, shantytown, favela, always again produced and reproduced. In turn, the First World is transferred to the Third in the form of stock exchanges and banks, transnational corporations and icy skyscrapers of money and command.” (Negri, Empire, 253-254.)

I think this notion of capital globalizing as both a cause of, and a response to the incorporation of the periphery is useful. In the first place it points to the mobility of capital, its increasing lack of ties to a definite place. In the second place it points to the exacerbation of political fractures that previously could be exported - remember the Cecil Rhodes comment that imperialism was essential to prevent 40,000,000 Englishmen falling into “bloody civil war” – it points to the import of populations and problems that previously could be externally quarantined.

Ultimately, I think, that the tremendous international mobility of labor will become the crucial element in the political conjuncture. This is where the working class is potentially on the offensive and where the ingredients of an internationalist perspective can find a social base. This is also one of the fault areas where fascist movements will emerge. Again, not conflating crisis with collapse, it is apparent that this labor mobility provides an element of the capitalist crisis. It challenges traditional methods of governing and labor discipline and any attempt to deal with it will necessarily undermine some aspect of capitalist hegemony or profitability.

However, the immediate manifestation of crisis is on the other side of the process, the internationalization of capital. There is a contradiction between the growing elimination of obstacles to the free movement of capital and the national state framework which still must mediate and arbitrate differences within capital to advance its overall class interests. Somehow this contradiction must be negotiated without undermining capital’s ability to respond to potential class challenges emerging from the mobility of labor and without providing too much fuel for an already existing challenge from the political right.

In the current case, global capital has created mammoth financial processes – consider the market in credit derivatives – that are largely opaque, immensely profitable, and also very risky. They are also outside the range of any national regulatory structure. Yet when they overreach, as they have, the problems must be confronted through fiscal (taxes) and monetary (credit expansion) policies through the existing state structures. When and if, as is certainly not unlikely, the problems and their solutions result in mass protests, the police and military response to them will also be administered through nations. (I’ve made this point elsewhere concerning the “War against terror”.) There is a tension between the political and economic interests of global capital and the national frameworks that field armies, raise taxes, and print money. This will result in recurring crises that must be countered by a radical left, not because capital will be collapsing into a revolutionary situation, but because it quite conceivably might be strengthened by dealing with its dilemmas and/or because a radical challenge from the right might preempt the historical stage.

I was going to write a bit more but I want to catch the Bill Marr show to see how Naomi Klein forces a situation that refutes her book into a substantiation of it.

D. H.

For further discussion of this piece on Three Way Fight, see the "Comments" below and also separately posted replies by Dave Ranney (posted October 2, 2008) and Juan de la O (posted December 27, 2008).

Financial Weapons of Mass Destruction

by Paul Bowman - Workers Solidarity Movement

featured image
Everything comes tumbling down

With financial giants toppling at rates that shock even seasoned financial commenter, many of us are left wondering, how did this state of affairs come to pass. What is becoming obvious is that the financial markets have become increasingly complex. In this article, Paul Bowman looks the nuts and bolts behind the economic headlines, explaining what is it that is being sold and why nobody seems to be able to stop the chaos from unfolding.

This is the first part of a series of articles investigating the capitalist financial markets from a critical perspective. With such a large topic it is tricky finding a route into the subject and a plan of enquiry. The chosen road is to start with a look at the financial markets, particularly focusing on the mechanics of some of the instruments that have led to a momentous transformation of the workings of global financial markets in the most recent decades.

At first sight, this approach may seem odd, perverse even, like examining the internal workings of a clock as a prelude to discussion the social relations of time. However this "inside-out" approach is justified by the fact that as well as a system of social relations, capitalism is also a system with internal mechanics. Those mechanics evolve in response to the historical development of struggles over exploitation, but what new directions the new mechanics make possible in terms of capitalist strategies, in turn, shape the new struggles of today and tomorrow. The next article in the series will place these market mechanics in their fuller historical context. But for now let's start by investigating the mechanics of capitalist financial markets.

read more at anarkismo.net

Kevin Phillips interviewed on the Bill Moyers Journal

Phillips gives a sobering yet refreshing interview. A long-time capitalist analyst, Phillips says that this is only the mid point of a process the end of which is unknown and not particularly inspiring.

The interview covers much ground in what the potential meanings behind the latest crisis in the capitalist markets.

“BILL MOYERS: Are you suggesting that the best thing to do is let the house burn down and build it over again?

KEVIN PHILLIPS: I would say, first of all, you never should have blown the bubble this way. If we could invent a time machine and go back and cure it that would be the best economics of all. Having blown it up, I think the case is that they should have accepted more of the tough medicine beginning last year and not tried to rescue every stray tentacle of the financial octopus-

BILL MOYERS: But they didn't. We don't have a time-

KEVIN PHILLIPS: They didn't. No.

BILL MOYERS: So here we are. Where are we?

KEVIN PHILLIPS: Where we are, in my opinion, is about halfway through. Halfway through the serious part.

BILL MOYERS: Halfway to the bottom?

KEVIN PHILLIPS: It depends what you use in terms of bottom. I mean, in some ways, real estate prices were lower in 1936, '37 than they were in 1929 or '30. So I'm not sure exactly what you use as the measurement, real estate, the stock market. But it's a package which Americans have to understand is going to be awful. We're probably going to wind up nationally losing 20 to 30 percent of the average value of homes…

BILL MOYERS: So we're all going to be poor? Well, not all-

KEVIN PHILLIPS: Well, we're not all going to be poor because there are people in Wall Street who've used all this new technology basically to bet the other way. I mean, one of the things that finance can do now, it can bet on anything.”

“BILL MOYERS: So who do you trust anymore? I mean, you write in your book that the most worrisome thing is the extent of official understatement and misstatement, the preference for minimizing how many problems there are and how interconnected they are.

KEVIN PHILLIPS: Well, just to give you an example of how many there are… I sometimes use the description "seven sharks." There are seven sharks in the tank with the economy… Now, whenever you get this sort of package in one decade, you got a big one. And when Greenspan says it's a once a century, I think it's another variation but on a par with the Thirties.”

Speaking on the parties, Phillips spends little time on McCain making one particular comment, “Well, John McCain once said he didn't know anything about economics. And half the time what he says, you know, proves that on a day-by-day basis.”

Phillips spends more time on Obama, seemingly not out of a partisan mindedness, but in a way to deconstruct the Obama message of “Change” and bring to light the real implications of the financial crisis on what the Dems will really be having to undertake.

“BILL MOYERS: No, I was going to say Obama's trademark rhetoric of inspiration seems to desert him when he talks about economic affairs.

KEVIN PHILLIPS: He doesn't seem to have anything very specific to say. That's part of the problem. A second problem is, for me at least, you know, just as I can't believe that John McCain ever wanted to get his economic advice from Phil Gramm. I mean, Phil Gramm, a former Texas Senator, appalling. He and his wife were known as Mr. and Mrs. Enron because they were so flagrant, that's McCain.

But then you've got Obama with Bob Rubin and he doesn't have any problem with the hedge fund types. I mean, one of the Chicago people was a major financer of his. He gets a guy to pick his vice-president. Turns out to be somebody who was part of the Fannie and Freddie mess.

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

BILL MOYERS: I've known you a long time. Are you reaching the point where you're leaving yourself and us despairing?

KEVIN PHILLIPS: Well, I'm not despairing because one of the things, as you know, when you get to be more or less our age, you've got grandchildren you can feel young with. But I'm sick of Washington. It really deserves the fact that 81 percent or 85 percent of the people think we're on the wrong track. I mean, we are on the wrong track. I wish I could say that there's a blueprint that would get us back on the right track. But my sense of histories previous goes to the one or two percent leading world economic power is you don't get back on the right track.

BILL MOYERS: So what happens?

KEVIN PHILLIPS: You go through a painful adjustment process… And I'm afraid the United States is coming right into that period which marks a couple of decades coming up that are going to be very difficult for America.

BILL MOYERS: You wrote in that AMERICAN PROSPECT piece that some people, particularly in the reform community and among progressives, see this as a great opportunity for returning to the New Deal regulatory period instigated by Franklin Roosevelt in the pits of the Depression. You don't think that's happening.

KEVIN PHILLIPS: The Democrats think it's going to be another 1933, they get in there, they can do all the New Deal stuff. My feeling is that they're coming in halfway and they're going to have to make hard decisions that are going to eat the Democratic coalition like a bologna sandwich. They're going to start civil wars-

BILL MOYERS: How come? What do you mean?

KEVIN PHILLIPS: Well, if you're going to bail out Wall Street while you're saying oh, the Social Security recipients, maybe they don't even need that money. A lot of people in the financial community basically want to push Social Security on some sort of voluntary basis and needs test it and get rid of it. Now, a lot of Democrats in the labor movement are very nervous about Obama. They put out press releases talking about Rubin-nomics because they see that the flesh of the Democratic Party carries a lunchbox. But the new soul of the Democratic Party wears a pinstripe suit.”

In what Philips says, we can see the argument that the Democrats - once able to secure themselves in the saddle of government, and with this “new” coalition based around “Hope” and “Change” and “Si se Puede!” but really just momentum derived in large part from an anti-Bush sentiment - will be able to push through massive reforms, ie. austerity measures.

If allowed the reigns of government, the Obamaites will make the argument that austerity measures may go against the agenda that they - the Obamites - had started their campaigning with, but that implementation of such measures are demanded because of the “American” and by extension the global financial crisis. The whole rhetoric of “change” will be used as the carrot to get much of the populace to follow the boss class down the path that ends in the confrontation and final liquidation of 100 years of concessions and social adjustments made by the System in the face of struggle.

There is no doubt that the Republicans will do the same. However, the difference with the Dems is that they have risen to where they are on a vague promise to “come to the rescue” of everyday people.

It is important to not sound alarmist or that this is the “CRISIS”, society is reproduced through a series of crisis and the workings of capitalism are defined by a constant recuperation and fracturing of its antagonisms – those movements opposed to the form that capitalism takes in the now: its rule and values – Left, Right, and beyond.

The crisis within capitalism may allow for capitalism itself to once again regenerate. Renewed life for the System means new forms of the subjugation of labor – us, the masses, existing labor pools and those who have been bled into irrelevancy.

you can watch the whole interview on Moyers' site: The Bill Moyers Journal


or view the youtube videos:




The Paulson-Bernacke Bank Bailout Plan: Will the Cure be Worse than the Crisis?

Reposted from Counterpunch

by Michael Hudson

Saturday’s $700 billion junk mortgage bailout is the largest and worst giveaway since a corrupt Congress gave land grants to the railroad barons a century and a half ago. If it goes through, it will shape the coming century by giving finance unprecedented power over debtors – homebuyers, industry, state and local government, and the federal government as well.

But what threatens to be even worse is the government’s move to let the financial sector make even higher, unprecedented gains by working its way out of negative equity to “make taxpayers whole” by repaying the government’s bailout by bleeding the economy at large. nticipating congressional capitulation in this license to engage in predatory credit, the latest Sunday evening surprise is that Treasury Secretary Henry Paulson’s own firm, Goldman Sachs, is to become bank holding company picking up the financial wreckage now that the government is covering the bad loans and investment gambles Wall Street has made.

What Mr. Paulson did not say in his weekend TV interviews, organized as what he hoped would be a series of victory laps. Neither he nor Fed Chairman Ben Bernanke nor any other Wall Street spokesman has acknowledged that the government has helped promote today’s $46 trillion debt bomb. This enormous overhead consists of the product that banks are selling – interest-bearing debt that is being added to real estate, corporate industry and personal income to price the U.S. economy out of world markets.

We have heard nothing about how Wall Street lobbyists have succeeded in killing the financial cops on Wall Street – and done the same with the consumer cops on Main Street. There is no public recognition of the fact that more money in tax cuts went to the top 1% than the bottom 80% combined.

So how much credence should we give the newest proposals for the United States to commit economic suicide by turning over the powers of government in effect to Wall Street? When they talk about “making taxpayers whole,” what really is their game?

At first glance it may sound appealing to taxpayers for banks to be told to use their future earnings to pay back the $700 billion dollars in junk mortgages, bad hedge-fund bets and other gambles that the Treasury promised on September 20 to pick up at face value, no loss incurred. To provide a sense of proportion, this money could have funded the next forty or fifty years of Social Security. It could have funded health care for all Americans. It could have made a big step toward rebuilding the nation’s crumbling infrastructure. But that is another story. For now the major question is just how the banks, insurance companies and financial conglomerates are to raise the money to pay off this bailout.

The last time the government let banks earn their way out of negative equity was in 1980. Interest rates to bank customers topped 20 percent, driving down prices for real estate, stocks and bonds so low that the leading U.S. banks saw their net worth wiped out. Their debts to depositors and bondholders exceeded the collateral they held in their reserves to back these deposit obligations. But as soon as Ronald Reagan led the Republicans back into office, the Federal Reserve began to flood the economy with free credit, driving down the interest rates that banks had to pay. They were allowed to act as a monopoly and keep credit-card interest rates high, at 20 percent, and above 30 percent with penalties, thanks to the fact that America’s high post-Vietnam interest rates led state after state to repeal anti-usury laws to keep credit flowing.

So the banks did “earn their way out of debt.” But if you were a taxpayer who needed to use a credit card, you paid through the nose. The banks earned their way out of debt at your expense. And by the way, if you really did pay an income tax, you probably did not own commercial real estate or significant financial assets. The Internal Revenue Service made commercial real estate and a large swath of finance (at least for the wealthiest investors) income-tax free by generating tax credits that could be applied against income across the board. The capital-gains tax was lowered to a fraction of the income tax, leading investors to pay out whatever income their investments generated as interest on loans to buy property they expected to sell at a markup. And with Alan Greenspan appointed the head the Federal Reserve Board in 1987, the age of asset-price inflation had arrived.

Cities and states vied with each other to slash property taxes, replacing them with income and sales taxes that fall mainly on labor and consumers. The upshot is that wealth has polarized to an unprecedented degree. According to statistics collected by the Congressional Budget Office, the wealthiest 1% now own 57% of the nation’s returns to wealth (interest, dividends and capital gains) and the richest 10% own no less than 77%.

With this background in mind, it looks like the Paulson-Bernanke plan for the Wall Street investment banks and other predatory lenders – and insurers such as A.I.G. – to “earn their way out of debt” will be at the economy’s expense. The bailout is to be achieved by letting Wall Street’s post-Glass-Steagall financial conglomerates charge their customers exorbitant financial charges. As Britain’s Conservative Party leader Margaret Thatcher put it in her favorite phrase, TINA: There is no alternative. And as Lady Macbeth said, if the deed is to be done, let it be done fast. After all, it is a once-in-a-lifetime chance for every financial institution in America to cash out with a fortune!

For Mr. Paulson this means not giving Congress a chance to represent the public interest in designing the terms of this giant bailout. Sec. 8 of the Treasury plan bans any Congressional review, giving him unprecedented power by: “Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.” Under cover of emergency force majeur conditions, the plan is to take the money and run, preferably without permitting any Congressional debate.

It is bad enough for the government to buy $700 billion of bad bank investments at prices that no private-sector investor has been willing to approach. This itself is an undeserved giveaway to the financial institutions that caused the problem by living recklessly in the short run. But making them – and indeed, helping them – pay back this gift with the aid of favorable tax and deregulatory policies will simply shift the cost off their shoulders onto those of bank depositors, credit-card users, mortgage borrowers and hapless pension-fund contributors to the money managers who have taken most of the current income in the form of commissions, salaries and bonuses to themselves. This will sharply add to the price of doing business in the United States, and specifically to the economy’s debt overhead by the banks making even more predatory loans.

It gets worse. In order for the existing junk mortgages to be “made good,” real estate prices must be raised further above the ability to pay for this year’s five million homeowners in arrears and facing default. Is this a good thing? Is it good to raise access prices for housing even more, forcing new homebuyers to go further into debt than ever before to gain access to housing? Mr. Paulson has directed the Federal Reserve, Fannie Mae, Freddie Mac and the FHA (Federal Housing Authority) to re-inflate the real estate market. They are to pump nearly a trillion dollars into the mortgage market.

Fiscal policy is also to be brought to bear to turn the real estate market around by pressuring cities and states to “help homeowners pay their mortgage debts” by cutting property taxes. The idea is to leave more revenue available for property owners to pay mortgage bankers. Unfortunately, this will oblige cities to make up these cuts by taxing labor and sales, running deeper into debt than they already are, or cutting back their spending on basic infrastructure, education and public services and continue shortchanging their pension funds. This is the price to be exacted to “protect the taxpayer’s interest” by bailing out irresponsible banks. The solution is to let them make even more money by acting in a yet more predatory way.

This is not industrial capitalism; it is asset stripping. The closest analogy I can think of would be to give the Mafia free reign to start a new crime wave “in the taxpayers’ interest” so as to raise enough money to pay its fines to the Justice Department. Imagine how our world would look like if the economy had been turned over to Al Capone as head political capo and to Mafia financial manager Meyer Lansky as Treasury Secretary in the 1930s, with the pyramid schemer Carlo Ponzi heading the Federal Reserve and bank robber Willie Sutton as Attorney General.

The last thing the economy needs is a new real estate bubble. To prevent it, local property taxes need to be raised, not lowered. But this is not the Treasury’s plan. Instead of representing the national interest, it is representing the banking sector whose profits come from making more and bigger loans. This is just the opposite from what a well-run economy needs to recover its growth and competitive power. It needs debt write-downs to what homeowners can pay.

But Mr. Paulson has made it clear that aid for homeowners is not part of the Treasury’s plan. On Sunday, September 21, he resisted suggestions that his program be amended to include further relief for homeowners facing mortgage foreclosures. Because financial markets remain under severe stress, he claimed, there is an urgent need for Congress to act quickly without adding other measures that could slow down passage. “We need this to be clean and to be quick,” he said in an interview on ABC’s “This Week.” He expressed concern that debate over adding all of those proposals would slow the economy down, delaying the rescue effort that is so urgently needed to get financial markets moving again. "The biggest help we can give the American people right now is to stabilize the financial system," Mr. Paulson said.

If you doubt that this is the government’s ideal plan, just look at what it is rejecting. You hear no talk from Mr. Paulson or Mr. Bernanke about bailing out homeowners by writing down their debts to match their ability to pay. This is what economies have done from time immemorial. Instead, the Republicans – along with their allied Wall Street Democrats – have chosen to bail out investors in junk mortgages presently far exceeding the debtor’s ability to pay, and far in excess of the current (or reasonable) market price. The Treasury and Fed have opted to keep fictitious capital claims alive, forgetting the living debtors saddled with exploding adjustable-rate mortgages (ARMs) and toxic “negative amortization” mortgages that keep adding on the interest (and penalties) to the existing above-market balance.

The question to be asked is just how much will the economy’s debt overhead grow, and what will it cost debtors (a.k.a. “taxpayers”)? And how will the economy look when the dust settles?

Economically the act gives a new meaning to the classical concept of circular flow. The traditional textbook meaning has referred to the circulation between producers and consumers, from wage payments by industrial companies to their employees, who use their wages to buy what they produce. This is why Henry Ford famously paid his workers the then-towering $5 a day. This was Say’s law: Income paid for production is finds its counterpart in consumption to maintain equilibrium in a way that enables the economy to keep on growing. The new circular flow runs from the Fed and Treasury to Wall Street in the form of bailouts, and then back to Republicans in Washington in the form of campaign contributions. The money circulates without having to go through the “real” economy of production and consumption at all.

The Treasury Department issued a fact sheet on the proposal on Saturday evening: “Removing troubled assets will begin to restore the strength of our financial system so it can again finance economic growth.” In everyday language the euphemism “removing troubled assets” means buying junk mortgages at way above current market price, as if the banks didn’t know all along that they were junk but hoped to pawn them off on their clients. The problem is that the banks have not been financing growth in the form of tangible capital investment, but have found their quickest profits to lie in a combination of asset stripping and asset-price inflation.

On Sunday a BBC World Service reporter asked me to list three things that the financial sector would like to see. Taking the open-ended question on the highest philosophical plane, I said, first of all, the banks would love to free themselves of all deposit liabilities – simply to keep the money for themselves. That is their objective when they see a client, after all: How much of the client’s earnings and money can they shift into their own pockets. Second, they would like to see politicians elected directly by the amount of money they could raise, thereby doing away with the actual problem of elections. If politics is going to be privatized, this is the way to do it. Rome’s voting system was organized along these lines. Third, the financial sector prefers not to have to report any data at all or pay any taxes. It has lobbied Congress to block collection of statistics, on the premise that what is not seen will not be taxed. And at present, banks and brokerage houses are still screaming to repeal Sarbanes-Oxley bill calling for full and honest accounting. For financial ideologues this is an equivalent watershed dragon to Rowe vs. Wade, now that they have repealed the Glass-Steagall Act that had separated banks from casinos.

Somewhat taken aback by the rawness of these principles, the reporter asked what outcome was most likely. If Congress does what it is supposed to do, there should be quite a showdown. But how unlikely to be achieved is the above scenario? A few hours earlier on Sunday my friend Eric Janszen of itulip.com sent me a note he had received from a fund manager attesting to the lack of care for clients of financial institutions, giving a flavor of the predatory spirit guiding the bailout’s planners and its beneficiaries:

RAIDS OF INDIVIDUAL ACCOUNTS

This is so important a topic, that it deserves top billing!!! Hidden inside the AIG bailout funding package, surely hastily cobbled together, but carefully enough to include a totally corrupt clause, was a handy dandy clause that permits raids. The conglomerate financial firms are permitted at this point to use private individual brokerage account funds to relieve their own liquidity pressures. This represents unauthorized loans of your stock account assets. So next, if the conglomerate fails, your stock account is part of the bankruptcy process. ...

The actual evidence for legalized stock account raids by the financial firms can be found in recent articles in Financial Times and Wall Street Journal. So this is not a wild claim. The September 14th article on the Wall Street Journal entitled "Wall Street Crisis Hits Stocks" was the first exposure.

The runs on US banks are in progress. See Washington Mutual, where private email messages have been shared by WaMu bank officers. WaMu alone could deplete the entire Federal Deposit Insurance Corp fund for bank deposit coverage. Eventually the FDIC will compete for USGovt federal money for bailouts and nationalizations, which would be funded by the US Govt because they will not let FDIC run dry.

My Kucinich-campaign colleague David Kelley and I agree on how Wall Street’s action plan ideally would work. The Republicans will take the $800 billion of U.S. Treasury securities presently earmarked for the Social Security Administration accounts, and achieve the privatization that Pres. Bush and his backers have been pressing for so hard for the past eight years. Under emergency conditions – today’s 9/21 as the modern analogue to 9/11 just seven years ago (the well-known natural lifespan of locusts) – will swap these Treasury bonds for junk mortgages, at face value of course. Then, a few months from now (after the new president takes office in February, or perhaps a few days before to achieve the usual political clean slate) the government will tell prospective retirees and workers who have been suffering FICA withholding all these years, “Oops, the government has just lost all your money. Well, that just shows how government planning is the road to serfdom. Next time save yourself by handling your own accounts – or at least choosing whether to consign your forced retirement savings to Lehman Brothers, Bear Stearns or kindred predatory money managers. If only we could have done this a few months ago, there would have been no meltdown and Wall Street would have been doing just fine.”

If you are going to take such a step, you of course say you are doing it to “save” the economy. You even proclaim yourself to be a hero. This is how the nation’s newspaper and TV media responded after news of the bailout of AIG and, more to the point, the Wall Street gamblers and derivatives traders whose gains and losses – that is, the ability of trillions of dollars worth of computer-driven trading gambles – to collect their winnings and avoid losses.

Today’s financial markets are well personified in the classic Hollywood westerns. They typically are about towns taken over and run by a banker (“Wall Street” in miniature), for whom a retinue of outlaws and their gangs work (the boys in the back room). The banker runs the town, usually doing business from its biggest building, the local saloon or casino where most of the action occurs. It has a brothel upstairs (the usual Hollywood simile for Congress). The good-hearted prostitute (sometimes the madam) with a heart of gold usually is the movie’s only honest secondary character (a stand-in for one of the bleeding-heart Congressmen on the finance or mortgage-credit committees lisping well-scripted lines promising that all new legislation will benefit homeowners, not predatory mortgage lenders).

There also is a good-hearted investigative newspaper publisher-journalist. He almost always gets killed and his printing press destroyed. (Today his paper is simply bought out by a conglomerate and merged into the pro-Wall Street mass media.) The banker’s gang appoints the sheriff (on today’s larger scale, the Federal Reserve and Justice Department), and also the mayor (who rarely is seen except to sign papers). The sheriff’s job is the same as in today’s world: to evict debtors from homes and properties on which the land-greedy banker is foreclosing. This is the common theme of westerns, after all: They are all about the great American land grab – situated out West so as to protect the identities of the guilty here in the East on Wall Street.

Attentive readers will notice that I have left out of this script the hero. His role is to fight the banker/land grabber and the gang he has brought into town. Wearing a white hat, he rides into town to clean it up, and in the final showdown shoots the head gunslinger (or perhaps the banker himself, who is done for in any event). This is the position that Mr. Paulson portrays himself. But what the audience doesn’t see (at first) is that the bullets he is shooting are merely blanks. It is in fact only a movie after all! The showdown is staged! He works for the banker himself! Goldman Sachs turns itself into a big-fish bank and gobbles up all the little fish in a great financial squeeze.

An alien class of financial mock-heroic poseurs has taken over – land grabbers and banksters of various stripes. Almost unnoticed, an invasion of government snatchers, bank snatchers, money snatchers pretending to be Main Street, pretending to be “the economy” and now claiming to need to be rescued – at the cost of saying goodbye to public finance as we have known it, goodbye to Social Security, to peoples’ hope for upward economic mobility.

It looks like Wall Street will receive government support at Main Street’s expense. This is hardly surprising when you look at who the major campaign contributors are – to both parties. Understandably, Mr. Paulson and Mr. Bernanke are trying to muddy the issue for their financial constituency. Hedge fund traders and kindred banksters have metamorphosized into “the financial system to be saved” and hence “the economy” itself. As if it is necessary to save peoples’ savings deposits and bank accounts by rescuing the casino companies with which the banks have merged – the predatory mortgage brokers, the insurance companies with their fraudulent accounting, the crooked asset-management firms, all of which have merged into conglomerates “too large to fail.” If they are too large, simply un-merge them. Restore Glass-Steagall, which worked for 65 years to prevent this kind of problem from erupting.

The most egregious pretense is that the problem is only temporary, not structural. We are merely “freeing up” the market for new loans. This is precisely the opposite of what the classical economists meant by “free markets.” What America has is a bad debt problem, not a “liquidity” problem. There is no “illiquidity” when people refuse to buy a junk mortgage on a property worth only a fraction of the mortgage’s face value. Many of these bad mortgage loans are fraudulent. The Treasury bailout seeks to make $700 billion of fictitious financial claims “real” – that is, way overvalued as compared to their actual worth(lessness).

What is reducing real estate and corporate stocks and bonds to junk is the exponential growth in the economy’s debt overhead. Debts that cannot be paid have little market value at any price. The nation must make a choice: If the government bails out the large financial institutions for having made bad loans – or to be more precise, for not being able to pawn off these bad loans on foreigners or other financial prey in a timely fashion – then the only way in which the government (or other new creditors) can be paid back is by not forgiving the debts owed by strapped homeowners. This would tighten the debt terms on debtors at the bottom of the food chain – those against whom the bank-sponsored new bankruptcy has been aimed. This is why I deplore the government bailout of Fannie Mae and Freddie Mac for the junk mortgages it has been packaging from predatory lenders such as Countrywide Financial, Washington Mutual and other deceptive lenders. The wrong parties have been gifted.

I should add that the solution does not lie simply in creating a new regulatory system, much less a single regulatory agency. After all, it was at Wall Street’s command that the Bush Administration installed deregulators in all the key regulatory positions. This meant that regulations didn’t matter at the Environmental Protection Agency (EPA), at the Fed under Alan Greenspan, at the Securities and Exchange Commission (SEC) under Mr. Cox (after William H. Donaldson resigned when the White House would not let him regulate as much as he thought necessary) or at the Department of Justice under Bush yes-men such as Alberto Gonzales. Politics and people have turned out to be more important than the law. We have seen the Supreme Court scrap the Constitution in the 2000 election – with acquiescence from the Democrats, starting with Mr. Gore’s refusal to contest Florida.

To appoint a single regulator would prevent all other regulators – and law enforcement officers, attorneys general, the SEC and so forth – from enforcing honest financial policies in the event that an incoming president should appoint another Greenspan, Gonzales or other ideological extremist averse to the idea of applying existing regulations and honest laws. Under these conditions “consolidated regulation” would mean a free ride for crooks much like J. Edgar Hoover gave the Mafia under his tenure.

My alternative solutions are as simple as Mr. Paulson’s, but of course are quite different. The public interest does indeed call for maintaining the economy’s basic credit, money-transfer, credit card and depository checking and savings functions. But not under the current venal and predatory management practices. It is this management that has lobbied so hard for deregulation, and whose industry representatives have insisted so strongly to place extremist ideological deregulators into the economy’s major positions. Therefore, the Treasury only should buy junk mortgages at current market price. The losses should be taken in order to re-even out the wealth pyramid that has become so much steeper under the Greenspan-Bernanke ploys. The banks knew full well that these mortgages lacked underlying value. The price of making use of this borrowing facility is to forfeit all equity stock to the government. The Treasury should prohibit any financial institution that sells or swaps securities to the Fed from paying any dividends to shareholders or stock options and bonuses to managers. It also should give the government priority over other creditors. Otherwise, firms that have negative equity will benefit purely at public expense, using the money to pay dividends, bonuses and exorbitant salaries.

Second, we need to restore the Glass-Steagall separation of commercial banks from risk-taking investment banks, mortgage brokers and other financial-sector flotsam and jetsam. Break up the mergers between banks and casino sell-side financial and real estate institutions. Just the opposite is occurring: On Monday, Sept. 22, the financial universe was transformed by the announcement that Mr. Paulson’s Wall Street firm, Goldman Sachs, was transforming itself into a bank holding company. The casinos are to take over the banking system as big fish eat little fish in the present financial emergency. It looks like new giants are emerging, already larger than the government in terms of the magnitude of the debts they have run up – and certainly in their earning power. Indeed, who is to say that extracting interest from the U.S. economy will not emerge as the new form of taxation?

Third, re-write the bankruptcy laws to favor debtors once again, not creditors. This means reversing the current bankruptcy code sponsored by lobbies from the credit-card companies. The interests of the five million mortgage debtors faced with foreclosure and expropriation this year should rightly be placed above the interest (literally) of predatory creditors.

Fourth, sharply increase property taxes, shifting them back off labor and sales. We need to return to the classical idea of taxing unearned and unproductive income instead of adding to the price of labor and industry. What has been freed from the tax collector by the shift of taxes off property has not lowered the cost of housing and other real estate, or corporate costs of doing business. The income “freed” has ended up being paid to the banks as interest. The government still has had to raise money – but in the form of taxes that fall on labor’s wages and industry’s profits. So labor and industry now pay twice for what they formerly paid only once. They still pay the same overall amount of taxes, but also pay an equivalent amount of interest. The financial system is crowding out the government.

In the fifth place, we need to start discussing whether we really need a banking system that behaves in the way the present one does. In recent decades banks have made loans mainly to inflate asset prices by loading real estate and industry with interest-bearing debt. What if all banks were to be organized along the lines of savings banks, with 100% reserves. This is the Chicago Plan from the 1930s (currently revived by the American Monetary Institute, which holds its annual meeting this week in Chicago, by the way). This at least would go back to basics to provide a foundation from which to re-begin to discuss just what kind of credit the economy needs and what would be the best terms on which to structure financial markets.

Any solution does indeed need to be radical. But it can be much less radical than Mr. Paulson’s power grab for his Morgan Stanley firm and the rest of Wall Street in the closing days of the Bush administration just before the Republicans look like losing power. The indicated solution is to reverse predatory finance, not bail it out at permanent taxpayer expense. Government funds are not unlimited. Is it worth wiping out hopes for Social Security and public health care, for renewed national infrastructure spending and industrial restructuring in order to bail out a banking and financial system that has not contributed to economic growth but has weighed it down with reckless debt regardless of the economy’s ability to pay?

Is it right to blame the five million homeowners now in arrears and facing foreclosure, but rewarding the irresponsible bankers and outright fraudulent institutions who have used Enron accounting to make a once-in-a-lifetime rip-off? That is what Mr. Paulson would do in insisting that Congress pass his legislation without taking time to discuss the issue and above all without “assigning blame.” But without such assignation, how do we know where to go from the current mess caused by financial deregulation, repeal of Glass-Steagall, the financial system’s Enron-style accounting and predatory mortgage lending?

Before leaving from his post as Federal Reserve Chairman, Alan Greenspan’s speeches sounded like “Apres moi, le deluge.” We are living in a world whose economic and political pressures are much like those in the interregnum between Louis XIV and the French Revolution. Where are the revolutionists today?

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

Overview of the Financial Crisis

reposted from the Maoist discussion blog Kasama

Posted by John Steele on September 22, 2008

Following are articles and excerpts from some news stories and analysis on the financial crisis over the past week, including recent developments. This is a very serious crisis which is still developing, as is apparent in these articles, which are all from mainstream sources.

Dow Jones Index

Dow Jones Index

Big Financiers Start Lobbying for Wider Aid
By JENNY ANDERSON, VIKAS BAJAJ and LESLIE WAYNE
New York Times – Sept. 22, 2008

Even as policy makers worked on details of a $700 billion bailout of the financial industry, Wall Street began looking for ways to profit from it.

Financial firms were lobbying to have all manner of troubled investments covered, not just those related to mortgages.

At the same time, investment firms were jockeying to oversee all the assets that Treasury plans to take off the books of financial institutions, a role that could earn them hundreds of millions of dollars a year in fees.

Nobody wants to be left out of Treasury’s proposal to buy up bad assets of financial institutions.

“The definition of Financial Institution should be as broad as possible,” the Financial Services Roundtable, which represents big financial services companies, wrote in an e-mail message to members on Sunday.

The group said a wide variety of institutions as varied as mortgage lenders and insurance companies should be able to take advantage of the bailout, and that these companies should be able to sell off any investments linked to mortgages.

The scope of the bailout grew over the weekend. As recently as Saturday morning, the Bush administration’s proposal called for Treasury to buy residential or commercial mortgages and related securities. By that evening, the proposal was broadened to give Treasury discretion to buy “any other financial instrument.”

The lobbying became particularly intense because Congress plans to approve a package within just two weeks, without the traditional hearings and committee process.

* * * * *

Each part of the financial industry is pursuing its own interests.

Small banks, for example, are pushing the government to buy loans they made to home builders and commercial developers. Wall Street banks are lobbying to temporarily suspend certain accounting rules to avoid taking big losses on the assets they sell to Treasury, which would weaken them further.

Over the weekend, the Securities Industry and Financial Markets Association, Wall Street’s main trade and lobbying group, held conference calls to discuss “your firms’ views and priorities related to Treasury’s proposal,” according to an e-mail message sent to members.
……………………

There were signs of the industry’s fingerprints on drafts of the legislation released over the weekend. While an earlier draft said that only firms with headquarters in the United States could sell assets to the government under the program, a later version said sellers could include any financial institution. Securities firms were initially excluded but were included in a version released Sunday afternoon.

* * * * *

Perhaps the biggest question about the Treasury’s acquisition plan is how the government will decide how much it is willing to pay for the loans and securities it acquires. Will the government drive a hard bargain and acquire assets for the lowest possible price to protect taxpayers against losses? Or will the Treasury Department, in the interest of jumpstarting the credit market, try to bolster large financial institutions like Citigroup and Washington Mutual by paying a slight premium to the markets’ valuation of these troubled assets? Over the weekend, Treasury said it might use “reverse” auctions in which financial institutions rather than the Treasury — as buyer — would submit bids.

“The trick for the Treasury and American people is to make sure that the price exacts enough of a toll on the originators and holders of these securities, but not enough to destroy lending,” said Mr. Gross of Pimco, who has argued in recent weeks that the government must buy distressed debt to deal with a “financial tsunami.”
……………………

Global banks expect to fall under U. S. bailout umbrella
By Nelson D. Schwartz and Carter Dougherty
International Herald Tribune - September 21, 2008
http://www.iht.com/articles/2008/09/21/business/global.php

PARIS: After initial signs they might be left out in the cold, most European and international banks holding substantial amounts of troubled U.S. mortgage debt now expect to be eligible for the $700 billion bailout plan ironed out in Washington over the weekend.

The initial draft released Saturday limited participation to U.S. banks, but after a round of lobbying and intense questions from bankers around the world, a subsequent version on Sunday promised it would also include institutions with substantial operations in the United States.

While that is sure to please foreign bankers and reassure global markets, it also is expected to stoke some opposition among lawmakers in Congress who are already skeptical of what could ultimately turn out to be a trillion-dollar bailout for Wall Street.
…………………………

Defaults will test a fair-weather construction
By Wolfgang M√ľnchau
Financial Times [London] September 21 2008
http://www.ft.com/cms/s/0/590a4116-87ed-11dd-b114-0000779fd18c.html?nclick_check=1

The good news is that the bail-out of Wall Street will probably save us from an imminent collapse of the financial system. But it raises disturbing questions. To what extent will it transform financial sector default risk into sovereign risk? What are the long-term implications for economic growth? How will foreign investors react if the gamble does not pay off? And what effect will it have on structure and incentives in the financial sector?

Under the proposed scheme, the US government will buy up any private sector debt securities from distressed US-based financial companies at a discount, with the intention of selling them later. Theoretically, the government could make a profit and rescue the financial sector at the same time.

But that would be a triumph of hope over logic. It would imply that the irrational event is the crisis itself, which has produced the current low valuations of risky assets, rather than the bubble that preceded it.
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Any estimate of the financial damage of this crisis is prone to huge margins of error. There is, however, no doubt that the taxpayer faces a clear and present danger of a large loss. I would not be surprised if we ended up counting the costs of this joyride in thousands of billions.
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This mother of all bail-outs has shifted the burden of risk from the few to the many. But the ultimate outcome of this financial crisis is as open today as it was a week ago.

In turmoil, capitalism in U.S. sets new course
By David Wessel, Wall Street Journal, September 20, 2008
http://online.wsj.com/article/SB122187076877559117.html

This past week marks a decisive turn in the evolution of American capitalism.

Black September, the biggest financial shock since the Great Depression, is prompting a Republican Treasury secretary and Federal Reserve chairman to devise the most muscular government intervention in the economy since the Great Depression in an effort to prevent the economic devastation of the Great Depression.

Abandoning its one-rescue-at-a-time strategy of recent months, the government suddenly has shifted to a broad attack on what Treasury Secretary Henry Paulson calls “the root cause of our financial system’s stresses,” the rot on the balance sheets of America’s financial system.
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As recently as Spring 2007, Mr. Paulson, among others, was arguing that onerous regulations were crippling American finance in intensifying global competition. Those cries are silenced.
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In March, the Federal Reserve shattered a half-century of tradition in which it had lent money only to banks whose deposits were insured by the government. Declaring circumstances to be “unusual and exigent,” as required by a little-used statute, it lent to investment bank Bear Stearns and eventually risked $29 billion of taxpayer money to induce J.P. Morgan Chase to buy Bear. It seemed a very big deal at the time.

But in the past two weeks, the U.S. government, keeper of the flame of free markets and private enterprise, has:

– nationalized the two engines of the U.S. mortgage industry, Fannie Mae and Freddie Mac, and flooded the mortgage market with taxpayer funds to keep it going;

– crafted a deal to seize the nation’s largest insurer, American International Group Inc., fired its chief executive and moved to sell it off in pieces.

– extended government insurance beyond bank deposits to $3.4 trillion in money-market mutual funds for a year;

– banned, for 799 financial stocks, a practice at the heart of stock trading, the short-selling in which investors seek to profit from falling stock prices.

– allowed or encouraged the collapse or sale of two of the four remaining, free-standing investment banks, Lehman Brothers and Merrill Lynch;

– asked Congress by next week to agree to stick taxpayers with hundreds of billions of dollars of illiquid assets from financial institutions so those institutions can raise capital and resume lending.

It was less than a week ago that Mr. Paulson appeared to draw a line at government bailouts, rebuffing Lehman’s plea for a Bear Stearns-like rescue and allowing the investment bank to collapse into bankruptcy. “The national commitment to the free market lasted one day,” Barney Frank, the Massachusetts Democrat who chairs the House Financial Services Committee, quipped earlier this week. That one day was Monday, Sept. 15. The day before the government rejected Lehman’s cry for help; the day after it seized AIG.

The shift in strategy reflects the realization by Mr. Paulson and Federal Reserve Chairman Ben Bernanke that the financial crisis was intensifying in recent days, endangering the entire economy. Confidence deteriorated markedly. Distrust spread. Credit markets weren’t functioning and lending dried up. Normal business wasn’t getting done. The two remaining free-standing investment banks were under severe pressure. The panic was spreading to ordinary Americans, who were beginning to pull money out of money-market mutual funds.
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It is too early to say whether Mr. Bernanke and Mr. Paulson have made the right call and will bring the crisis to a close, despite global stock markets’ ebullient reaction Friday. If the fear does subside, then talk will turn to writing new rules for a financial system that has changed more in the past six months than in the previous decade. The government has bailed out financial institutions — and particularly their creditors — and taxpayers will pick up the tab for many of the institutions’ bad decisions. That could encourage bad behavior in the future. So, the government needs to craft a new regulatory regime to reduce those incentives.

The fruit of hypocrisy
Dishonesty in the finance sector dragged us here, and Washington looks ill-equipped to guide us out
Joseph Stiglitz
The Guardian [UK] - September 16 2008
http://www.guardian.co.uk/commentisfree/2008/sep/16/economics.wallstreet

Houses of cards, chickens coming home to roost - pick your cliche. The new low in the financial crisis, which has prompted comparisons with the 1929 Wall Street crash, is the fruit of a pattern of dishonesty on the part of financial institutions, and incompetence on the part of policymakers.

We had become accustomed to the hypocrisy. The banks reject any suggestion they should face regulation, rebuff any move towards anti-trust measures - yet when trouble strikes, all of a sudden they demand state intervention: they must be bailed out; they are too big, too important to be allowed to fail.
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The present financial crisis springs from a catastrophic collapse in confidence. The banks were laying huge bets with each other over loans and assets. Complex transactions were designed to move risk and disguise the sliding value of assets. In this game there are winners and losers. And it’s not a zero-sum game, it’s a negative-sum game: as people wake up to the smoke and mirrors in the financial system, as people grow averse to risk, losses occur; the market as a whole plummets and everyone loses.

Financial markets hinge on trust, and that trust has eroded. Lehman’s collapse marks at the very least a powerful symbol of a new low in confidence, and the reverberations will continue.

The crisis in trust extends beyond banks. In the global context, there is dwindling confidence in US policymakers. At July’s G8 meeting in Hokkaido the US delivered assurances that things were turning around at last. The weeks since have done nothing but confirm any global mistrust of government experts.

How seriously, then, should we take comparisons with the crash of 1929? Most economists believe we have the monetary and fiscal instruments and understanding to avoid collapse on that scale. And yet the IMF and the US treasury, together with central banks and finance ministers from many other countries, are capable of supporting the sort of “rescue” policies that led Indonesia to economic disaster in 1998. Moreover, it is difficult to have faith in the policy wherewithal of a government that oversaw the utter mismanagement of the war in Iraq and the response to Hurricane Katrina. If any administration can turn this crisis into another depression, it is the Bush administration.
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· Joseph E Stiglitz is university professor at Columbia University and recipient of the 2001 Nobel prize in economics josephstiglitz.com

Going for Broke
By ALAN ABELSON
Barrons Financial Weekly – Sept. 22, 2008
http://online.barrons.com/article/SB122186354799758549.html?mod=b_hpp_9_0002_b_this_weeks_magazine_home_right

BABY, IT’S COLD OUT THERE. So let’s toss another billion on the fire.

What’s that make it? Well, let’s see: $29 billion for Bear Stearns, somewhere between $1 billion and $100 billion each for Fannie and Freddie (a nice narrow range), $85 billion for AIG, a couple of hundred billion to keep stray banks, brokers and their errant kin from asphyxiating themselves by swallowing toxic paper. And then there’s the proposed reincarnation of the Resolution Trust Corp., which all by itself may mean shelling out $800 billion, perhaps even as much as $1 trillion.

While we’re at it, we might as well include the $400 billion with which the Paulson-Bernanke grand plan envisages endowing the Federal Deposit Insurance Corp. so it can insure money-market funds.

But, please, understand those mind-boggling sums in no way, shape or form are to be construed as designed to aid and abet a bailout. Instead, they are merely the essential ingredients of an “intervention,” or, if you prefer, a “rescue” — just about anything, in other words, that’s semantically sweeter than bailout, with its ugly connotation of a sinking ship.

Besides, we have it on the best authority that none of this largess will cost the taxpayer a cent over the long run, which, if nothing else, speaks volumes about what constitutes the best authority these days. The reasoning is simple (or perhaps simple-minded is more accurate), namely that deep-pockets Uncle Sam can sell off the assets of the foundering companies on which he has bestowed that bounty and come out whole.

Surely, they jest. For a heap of those so-called assets might easily be confused with liabilities since even those that can be sold will likely fetch a feeble fraction of what their possessors now claim they’re worth.

This is not to say that until the powers-that-be pounded the panic button last week, the billions they had already thrown at the problem as well as taking a big step further and making the wretched companies soaking up those billion de facto vassals of the government were completely in vain. They undeniably had an instant impact. Unfortunately, an instant was about as long as the impact lasted, and it failed miserably to becalm the frantic credit markets or rekindle investor confidence.

The sad truth is that just about every one of Messrs. Paulson and Bernanke’s previous brainstorms — and they seemed to come with increasing frequency as Hank and Ben’s agitation mounted — touched off a brief spasm of exhilaration among investors, only to evaporate in very short order as the credit crisis resolutely morphed into a credit calamity. Or, to change the metaphor, what had been a slow-motion train wreck picked up demonic speed.
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WILL THE GRAND PLAN WORK? Will piling on all those billions on billions atop a budget deficit that’s already a cinch to shoot up to over half a trillion next fiscal year allow the badly winded economy to start a sustainable recovery?

Ben, remember, vowed to use helicopters to drop money from the sky, but now he seems to be gearing up to use 747s. Can the Fed run its printing machine full-time to churn out all those billions without a substantial infusion from increasingly pinched taxpayers? And won’t priming the pump like mad drive the dollar back into the pits and force interest rates higher?

The plan, in all its extravagance, seems to have been thrown together on the fly, and once Congress gets a whack at it in the waning days before the lawmakers scurry off to the hustings, it may bear only passing resemblance, for better but probably for worse, to Paulson and Bernanke’s handiwork.

Obviously, the unknowns greatly outweigh the knowns, which make those and myriad other questions tough or downright impossible to answer.

We’re willing to concede that some forceful action was necessary, if only so the Fed can pay penance for its critical part in creating the incredible credit-cum-housing disaster.

As Merrill Lynch’s David Rosenberg observes, the fact that the government is suddenly so aggressive in coming to grips with an epic credit collapse is eloquent testimony to how the Fed and the Treasury “have consistently underestimated the severity of that collapse from the get-go.”

He reminds us, moreover, that the original Resolution Trust Corp. was strictly about buying bad mortgages. So he wonders whether the new incarnation will also undertake the purchase of Level 3 assets, whose value is extremely problematic and, in any case, more than a little difficult to gauge, and which are a sizable and not particularly desirable presence in many banks’ portfolios. And will the new RTC also buy credit-card debt, commercial real estate, leveraged loans “or the other mountains of bad debts out there?”

David cautions that the entire credit collapse to date has “reflected the unwind of the largest bubble of all time — residential real estate. Meanwhile, a consumer-led recession is taking hold this very quarter for the first time in 17 years, and every consumer recession in the past was followed by a negative credit cycle of its own.”