Category: Economic crisis

China to the rescue?

This is something to read alongside the post I put up here a couple of hours ago.
It’s an op-ed in yesterday’s Financial Times by Arvind Subramanian, a senior fellow, at the Peterson Institute for International Economics here in Washington DC, and senior research professor, Johns Hopkins University.
Title: A master plan for China to bail out America.
Subramanian argues that the amount appropriated (and made available by the Fed) for all the US rescue plans so far may well prove insufficient. A lot more might yet be needed. He continues:

    Where will this additional money – perhaps as much as another $500bn – come from? The US taxpayer is wary. Joe Six-Pack has ponied up a lot already, and done so with no great confidence that the money was for a worthwhile cause or that it will be well spent.
    Enter China. Ken Rogoff of Harvard cheekily characterised the vast Chinese accumulation of US Treasury bonds over the past five years as the biggest foreign assistance programme in history. Why not push that further? Here is a thought experiment.

Continue reading “China to the rescue?”

Financial crisis and world power shifts, pt.2

In this recent (introductory) post on this topic I wrote, “The US financial system’s current woes have accelerated the decline in American power in the world that has already been underway for several years now.” I think it’s important to specify that this decline has occurred both in the level of raw economic power the US can wield in the world and in its reputational or ‘soft’ power.
Regarding soft power, yesterday the folks at the Pew Global Attitudes Center sent out a report (Hat-tip Jim C) stating that,

    even before this fall’s financial crisis, a 24-nation Pew Global Attitudes survey conducted in March-April 20081 found that many in other countries already felt the U.S. economy was having a negative impact on their own country’s economy.

The figures they use to illustrate this are persuasive. If you scroll down to the second figure they have in the text there, “U.S. Economic Influence”, you’ll see that in no fewer than 18 of the 23 non-US nations surveyed, a significantly greater proportion of the public judged the US’s economic influence on their country to be negative, than those who judged it positive.
In some cases, the disproportion was huge. Look at Turkey (70% ‘negative’ vs. 4% ‘positive’) or Argentina (50% ‘negative’ vs. 4% ‘positive’.)

Continue reading “Financial crisis and world power shifts, pt.2”

Financiers: Where’s the remorse?

I don’t want to see bankers jumping out of windows. But I do want to see some of these alleged “Titans” of the western financial world expressing– and enacting– some real remorse to those of their fellow-citizens whom they’ve been exploiting for so long now and whose tax dollars they are now lining up to grab hold of.
The rapidly growing literature on the strong social value of remorse (e.g., the work of Pumla Gobod-Madikizela or other sources explored in the last chapter of my “Atrocities” book) makes clear the valuable role it plays as a gateway to social healing and thereby also to resolving the problems occasioned by the miscreants’ past deeds.
When a former miscreant credibly expresses remorse to those he has harmed, that signifies to those former victims that he:

    1. Recognizes that their worth as human persons to be equal to his own,
    2. Recognizes that his own previous actions have harmed these (equally valuable) other persons,
    3. Expresses credible regret for that harm, and
    4. Communicates a sincere desire to see it repaired.

To be even more credible, such remorse may well (and most likely, should) be accompanied by the miscreant engaging in the actual work of repairing the harm, i.e. participating in reparations of some kind.
Judged by this standard of the kind of remorse we might want to see being expressed by the former “Masters of the Universe” who have brought the western world’s financial system to its knees, yesterday’s performance by Richard Fuld, Chairman and CEO of the now-failed Lehman Brothers Bank, at the House Oversight and Government Affairs Committee fell far, far short.
The committee is conducting hearings into how the actions of the leaders of the financial world has ended up wrecking the west’s financial system. Today it has been the turn of AIG, the insurance behemoth that (unlike Lehman) did get bailed out by the Treasury weeks ago.
In yesterday’s hearing, committee chair Rep. Henry Waxman (D. CA) put up a slide showing how much Fuld has been earning in recent years. Scroll down here to see it.
It shows that in 2007, Fuld earned a “cash bonus” of $4.3 million, on top of his $900,000 “regular” salary. That was down from his all-time high cash bonus: $13.8 million, in 2005. It was also quite separate from his stock options of $40.3 million in 2007 (down from a high of $93.6 million in 2001.) But his stock options are probably not worth anything now.
The cash bonuses and base-salary payments he gets to keep.
These figures are obscene.
The people and institutions that either invested in or loaned money to Lehman will get very little of their money back.
For many of them, this will bring serious harm.
I saw no recognition from Fuld of the harms his actions have caused to others. Nor does he take any responsibility for decisions he made that led to Lehman’s crash. Nor does he offer to do anything to help repair the harms.
It’s as though for him, all the “little people” whom he defrauded don’t count at all.
The WaPo’s Annys Shin reported that

    Fuld told lawmakers he hasn’t been sleeping well at all.
    “Not that anybody on this committee cares about this, but I wake up every single night thinking what I could have done different,” he said. “This is a pain that will stay with me for the rest of my life.”
    But during more than an hour of questioning, Fuld did not admit any specific mistakes. He blamed investors looking to make money from a fall in Lehman’s share price for spreading false rumors that made it harder for Lehman to raise money. That, he said, created a liquidity problem and a crisis of confidence, leading to a run on the bank…
    Lawmakers took the opportunity to exorcise taxpayer anger over executive pay, posting Fuld’s compensation since 2000, an estimated total of $484.8 million. Fuld later said it was closer to $350 million.
    The panel also took issue with a decision last month by board members to pay three executives a total of $23.2 million for leaving, even as the firm was collapsing, according to committee documents.
    Fuld defended Lehman’s pay practices, saying “the system worked” because 85 percent of his pay was in the form of stock, aligning him with shareholder interests.

How’s that again? The system worked?? The proof of that would be that the firm would still be in business, doing the useful work of helping provide financial backing for productive businesses in the real economy while giving a steady (even if sometimes small) return to its shareholders.
Earth to Richard Fuld: The system did not work!!!
Also, just because you got an extra payment in stock options, additional to the millions you took home in cash, that still didn’t “align your interests with those of the shareholders.” You got out of the mess with tens or hundreds of millions of dollars of past cash compensation payments squirreled away. They got out with nothing.
Anyway, the company wasn’t structured as a “partnership” between you and the shareholders. You were their employee, however many (now worthless) stock options you might have been given. As their employee you had a responsibility to safeguard their investment.
The “system”, including that whole quite rotten structure of executive compensation from which you benefitted, did not in any sense “work.”
The financial crisis– and the real-economy crisis that it has already started to cause– is very bad news for the Republicans, on whose watch the vast majority of this mess has occurred. And of course, John McCain must bear some personal responsibility for what has happened. He has been an ardent deregulator for many years; and before that, he showed his sleaziness through his involvement in the “fast money” S&L scandal of the 1980s.
Many Democratic leaders in congress also bear a portion of the blame, as did the Clinton administration in its day. Leading Democrats have taken huge amounts of money from the financial “industry” for far too long. So now those legislators are bobbing and weaving a bit to avoid getting stuck with too much of the blame. I hope that one other big change that’s enacted as next year’s congress and president continue dealing with this crisis is that– finally– they start to enact some serious, hard-hitting campaign finance reform.
Meanwhile, though, let’s continue demanding that these recently failed financiers start to show (and act upon) some real remorse in their communications with the public. Not just a thin form of “regret”, which could mean mainly that they “regret” the fact that they got caught. But a much thicker form of remorse. And a good readiness to engage in some real acts of reparation, too.
One commenter over on this post on Think Progress suggests today, regarding the amazingly lavishly pampered leaders of AIG, that “They should have their ‘homes’ turned into homeless shelters.” That might not be a wholly bad idea, though homeless shelters are not a great longterm solution to the anguish of homelessness.
But maybe those executives’ “homes”– all except the one-each that might actually be called a home with some validity– could be divided into condos at the executives’ expense and given away to foreclosee families by lottery?
The legal basis for such a plan? Well, regarding Lehman Brothers, Annys Shin notes that, “The FBI is investigating whether there was fraud at Lehman Brothers, and the Securities and Exchange Commission is looking into what Lehman disclosed about housing-related investments and how it valued them…. ”
So who knows what’s next for Richard Fuld and his former colleagues?

Google Reader highlight #2: Willem Buiter on the financial crisis

This is my second pick of current highlights from my Google Reader.
Buiter is the former chief economist of the European Bank for Reconstruction and Development, currently Professor of European Political Economy at LSE. This week, the Economist described him as “an honorary Brit.” (Not clear whether that was meant as a compliment?)
Anyway, I have found Buiter’s Maverecon blog, published by the Financial Times really helpful and informative in recent weeks. (Along with, I should say, Calculated Risk, a person with excellent judgment for what’s important in breaking financial news, and a good clear way of presenting it. They cover slightly different slices of the action: while CR looks more at breaking news most of Buiter’s posts are written with a broader, though still extremely timely, purview.)
So here’s what we have from Buiter yesterday and today: “Don’t worry: We can always lease Heathrow to the Russians”. It’s a short but I’d say classic post, which reads in its entirety:

    The government of Iceland is using the threat of a €4 bn loan from Russia in exchange for a 99-year lease on the airport at Keflavik – a former American air base – as leverage to obtain financial support from the West. This is high-stakes poker -not without risk to Iceland, if their bluff is called. I would have securitised the future revenues from hydro and geo-thermal power generation before bringing on the Red Army. It does show, however, that there may be more collateralisable assets around for governments to draw on that one might have thought. Good news for Chancellor Darling.

In this post, published 45 minutes earlier, Buiter bemoaned the inability of the finance ministers of “the North Atlantic region” to fashion a workable and coordinated response to the still unfolding crisis:

    Statements that “we shall do whatever it takes to safeguard the banking system of (fill in name of country)” don’t cut it any more. The banks with border-crossing activities in the US, the UK and continental Europe are now all at risk of failing. They are all cutting back drastically on their lending to the real economy. Official dithering is exacting a growing price, to be paid by tax payers and the future unemployed.
    The European Union thus far has been an utter paper tiger. The agreement on a €30bn fund to help SMEs is almost worst than nothing, because it draws attention to what was not achieved. There has been no agreement to restrict beggar-thy-neigbour (and shoot-your-own-tax-payer-in the-foot) extensions of guarantees on bank liabilities. There has been no agreement on sharing rules for the fiscal burdens associated with recapitalisations of the 44 or so European financial institutions with significant border-crossing activities. There has been no decision so implement a full information sharing between national regulators and central banks (including the ECB) for these same border-crossing financial institutions. There has been no agreement on common principles for national TARPs, to prevent large-scale border-crossing dumping of toxic assets in whatever jurisdiction offers the best terms.
    The UK authorities are limping after the widening and deepening crisis, falling steadily further behind…

His preferred policy, for the UK, is a partial nationalization of the banks, which he argues,

    would transform the high and growing risk of private bank insolvency for a low and manageable risk of UK sovereign insolvency. The UK government is capable of the domestic fiscal transfer required to back up the partial nationalisation. With the right policies, UK Ltd (households and businesses) would be able to generate the increased external primary surpluses necessary to effect the external transfer required to make a partial nationalisation credible. It would be a good trade for the UK tax payer and for all those trying to make a living in this country.

He also notes that the UK is in a better position to make some form of a bank-nationalization move work than is Iceland, which has just implemented one: “The UK has a smaller internationally exposed financial sector relative to its GDP than Iceland (UK gross external assets and liabilities are around 450 percent of annual GDP rather than just under 900 percent) and its tax base is much larger and much diversified than Iceland’s.”
This post, published late last night London time, was titled “A Special Resolution Regime for banks must put tax payers before shareholders and bank creditors” It starts out with these very sobering words:

    It’s reasonable to assume that the banking system in the North Atlantic region is insolvent and would be bankrupt but for the reality of recent government bailouts and the expectation of future government bailouts. Certainly, for the system as a whole, the marked-to-market value of its assets is way below that of its liabilities. I strongly suspect that even the hold-to-maturity value of its assets is well below that of its liabilities. Although the system as a whole is broke, there are no doubt individual banks that are solvent. We may not, however be certain as to which banks are solvent and which banks are not.
    I also take it is given that it is desirable – essential even – to preserve the core of the banking system and to keep it operating without interruption, because it fulfills an essential role in the intermediation of funds between financial surplus units and financial deficit units – a role for which no substitute can be found or created in the short and medium term. The bulk of the banking system therefore needs to be bailed out…
    The main remaining question then becomes who will pay for the bail out, the tax payers or the existing creditors of the banks (including the shareholders and other providers of equity). I have a strong preference for putting much of the cost of a bailout on the existing creditors. This is in part for reasons of equity and fairness: the existing creditors made bad investments/loans; they ought to pay for their failures. They earned a risk premium while the going was good. They ought to eat the risk when it materialises. It is also for incentive reasons. Future lending to banks and future purchases of bank obligations will be undertaken with a better appreciation of the credit risk involved. Another massive over-expansion of the banking sector will be less likely…

This sounds like excellent good sense to me.
What I like about Buiter is (1) The fact that he evidently speaks from such broad experience as a special kind of banking practitioner, and (2) That he also speaks from what feels like a very broad and humanistic understanding of economics and finance.
I also like his tagging the problem economies as “North Atlantic” economies… H’mmm, where have a heard that term used in a different context in recent years?
It is very notable to me that the leaders and “Titans” in all these ultra-free-market systems who for years now have been shucking off (or actively subverting) regulation by governments and lobbying hard to destroy mechanisms of social security, welfare safety nets, etc, are now making a mad rush for the public feeding trough themselves. The terms on which we, the rest of the citizenry, allow them to continue to play any kind of a role in our countries’ economies should be determined by us, not them.
Which is what Buiter was broadly arguing there….
I am not as sure as he is, though, that it is “essential” to preserve “the core of the banking system.” Well, it all depends what we mean by “core.” Some form of banking system, yes. But a banking system that encourages speculation, usury, and the development of arcane financial instruments and “derivatives” that grow literally like a cancer on the body of the real economy of goods and productive (non-financial) services? I don’t think so.

And that $25 billion for Detroit…

In all the publicity around the $700 billion bailout for wall Street that became law last Friday, the fact that Congress last Tuesday also appropriated $25 billion to prop up ailing US-based carmakers passed almost unnoticed in the US.
But it was not unnoticed overseas. (A hat-tip, indeed, goes to Frank al-Irlandi, who drew this to our attention earlier today.)
Of course, this bailout considerably distorts the global “free market” in cars– not that any such thing ever actually existed. Non-US carmakers, including those who operate production lines within the US, are reportedly furious. The FT reported on Saturday that German car-makers are already lobbying to be allowed access to these funds.
The FT reporters there note that European and Asian banks were successful in their efforts to gain access to the federal bailout loans being made available to the US-based (but often foreign owned or foreign funded) banks.
Regarding access to the car industry loans, they write:

    While the aid package does not specifically exclude foreign carmakers, one European executive said it was “clearly a bail-out” of the Detroit-based industry.
    The loans would help carmakers modernise their plants to build more environmentally friendly vehicles. They are available only to plants that are more than 20 years old, excluding all but a handful of foreign-owned facilities.
    Stefan Jacoby, the US head of Volkswagen, said lobbying had already started, with Tennessee and Virginia – the two states where the German carmaker has a US presence – also taking part.
    The Department of Energy has yet to flesh out the legislation with detailed regulations in a process that will take at least six and maybe as long as 18 months.

I wrote last night that as the current crisis continues we have to guard against “any signs of surging economic nationalism, nationalist greed, jingoism, or a desire for the supposed solaces of a ‘cleansing’ act of war.”
Obviously in these tough times there will be some significant degree of economic nationalism, as we have already seen. Indeed, the WTO in its current form may well be one of the major casualties of the crisis as it evolves. However, I still believe that the crisis can be dealt with and overcome by the world’s nations in ways other than war. To the three reasons for relative optimism that I listed yesterday I would certainly add the fact that today, 63 years after 1945, all the world’s major nations have long experience of working together in a rules-based system that addresses issues in the economic, political, and security arenas.
Also, after all the experience of warfare the world has had since 1939– from Hiroshima to Iraq– no responsible leader could realistically today think that going to war will “solve” any actual problems.
We are not in the 1930s. Reason, calm, and a sense of fairness can prevail.
But it depends on us all having informed and fair-minded publics, as well as wise leaders…

The financial crisis and world power shifts

The US financial system’s current woes have accelerated the decline in American power in the world that has already been underway for several years now. This is so for a number of reasons:

    1. The crisis has revealed the degree to which the US government and other American institutions have become indebted to non-US creditors, and therefore the antecedent (pre-crisis) reduction in the US’s ability to wield economic power in the world, as well as its current and ongoing reliance on the goodwill of non-Americans if the effects of the crisis are to be minimized.
    2. It has revealed the weakness and dysfunctionality of a whole series of American institutions, ways of doing business, and habits of mind that previously were thought to be successful and worthy of emulation. (Among these are the extensive de-regulation of the financial markets that has occurred in recent years; the rise of the myth of the financial “Masters of the Universe”, barely accountable to shareholders or anyone else; a glaring dissonance between personal incomes and social utility; etc.)
    3. Finally, the way the elected leaders in Washington have handled the crisis to date has shown a president who is now beyond even “lame-duck” status– “dead duck”, perhaps?– a congressional leadership that has had its mindset formed far more by political donors from among the mega-bucks high-flyers than by the constituents whom they are supposed to represent, and the lack of any discernible voices speaking credibly about what it means to be “a national community” in America today and stressing the mutual obligations that in any democratic country all citizens reciprocally owe to each other.

These failings matter. They matter, firstly, because the weakest and most vulnerable among our fellow-citizens– and among non-citizens– will be those who are hurt the hardest by the crisis in the bricks-and-mortar economy that still lies ahead.
They matter, too, in a different way, because our country has until now been the world’s sole “Uberpower” (to Josef Joffe’s vivid and evocative term.) So the contagion from our woes has already started to infect several other parts of the world– most particularly, Europe. Also, this financial crisis and the way it has been handled further assault the already-battered “brand” or reputation of the US around the world, making the descent of the US from Uberpowerdom much steeper and more rapid than it would otherwise have been.
I welcome this shift. Uberpowerdom was never either moral or sustainable and the US and its rich-world allies have inflicted grievous harm on the low-income world over the past 15-plus years. However, all such large-scale power shifts are unsettling and carry the potential for dislocation and violence. The fact that the present power shift is accompanied and accelerated by a financial crisis that will almost certainly morph into a much broader economic downturn within and outside the US makes such reactions more likely… We all need to be very vigilant in the coming period to watch for, and try to tamp down, any signs of surging economic nationalism, nationalist greed, jingoism, or a desire for the supposed solaces of a “cleansing” act of war.
There are, however, several reasons for hope at the present turning point– most of them coming with a distinctively Chinese accent:

    1. The whole world is more densely and complexly intertwined at the economic level than ever before. This has meant, yes, that the contagion from Wall Street’s woes has spread elsewhere. But it also means there really is a high degree of inter-dependence among the world’s major power centers. Some people write about the high prospect of “wars” for resources. There are, and will continue to be, contests for resources among the major powers, yes. But I see these being waged overwhelmingly through non-military means. Washington’s experience of war in Iraq– a war in which access to oil was certainly one key factor– showed the limited utility of the weapon of outright war. And thus far, the major non-Iraqi beneficiary of post-2003 Iraq’s oil agreements has been China, not the US!
    At a broader level, though, the economies of China, Russia, India, or other “rising” powers” are too tightly tied to those of the US and other trading partners for the rising powers to want to break those ties through outright war against the fading Uberpower and its allies.
    2. China may anyway be able to escape the worst ravages of the economic crisis to come. Although the People’s Bank of China and the China Investment Corporation have lost some money through (as it turned out) unwise investments in US entities, still Beijing has been successful in (a) keeping most of its economy protected from too many internally generated financial woes– precisely because of the under-development (in US terms) of its domestic financial structures, and (b) winning at least some protection from Washington for the $400 billion investments in Fannie Mae and Freddie Mac which remain, I think, by far the largest of its non-T-bill investments in the west.
    If China is indeed able to keep its economy significantly insulated from the downturn in the west, then its continued economic growth may–even at lower growth rates than the hard-to-sustain 10%-plus rates we’ve seen recently– end up being a considerable continuing engine for the world economy and may even help lift the battered “west” out of its doldrums over the years ahead.
    I see that today, Premier Wen Jiabao described the country’s financial market as “safe and stable with generally adequate liquidity.” A statement from the central bank welcomed the US House of Representative’s passage of the Wall Street bailout Friday noting that “China and the US share common interests in … a stable financial market.” And Wen said that “Maintaining ‘steady and fast’ growth is the largest contribution China can make to help the world overcome the current financial crisis stemming from the United States.”
    3. It is also worth noting here, once again, that China’s rise onto the world scene in the past 15 years has occurred in a quite unprecedented way. China has not emerged as a world power through force of arms outside its own borders or through arms-racing. (Its nuclear arsenal is, at an estimated 200 warheads, many times smaller than those of the US or Russia. It truly looks like a “minimum deterrent” force.) It has emerged onto the world scene instead by buying into the existing rules system as embodied in the United Nations and its institutions and the institutions of global economic governance– all of these institutions having been established by the US in the post-1945 period. The peaceful, rules-respecting manner of China’s rise is a cause for considerable reassurance for everyone who will be (is being) affected by it.

Here are a few of the other things I’ve found interesting to read recently, on topics related to the above:
Bloomberg told us that today the German government agreed to a $68 billion bailout for Hypo Real Estate Holding AG, a commercial property lender. Here is some more commentary from Calculated Risk, who says the underlying problem may not be as bad as it seems: “this sounds more like a liquidity issue rather than a solvency problem.”
Here is a piece by the FT’s Wolfgang Munchau looking at some o0f the tricky economic governance issues, at this time of crisis, for a Europe that is still only partly coordinated on the relevant matters. (The crisis might have a deep affect on Europe’s governance questions– and that could happen in either direction, I think.)
Here is a piece of geopolitical analysis from the very pro-US French commentator Dominique Moisi. It is titled “A global downturn in the power of the west” and says:

    First, the shock reinforces the relative decline of the US and the passage from a unipolar to a multipolar world. Whoever is its next president, America will not only have to face more diverse and complex challenges but will have fewer means with which to confront them. The interaction between the infectious greed of its financial class and its politicians’ dereliction of duty has impoverished the country. The torch of history seems to be passing from west to east. It is true that China and India are also affected by the financial turmoil; less so Japan, a country whose financial conservatism is the product of bitter experience 20 years ago. But to paraphrase French President François Mitterrand: growth is in the east and debts are in the west. Furthermore, fear is in the west and hope is in the east, so we are equipped in very different ways to face this crisis.
    The meltdown has also revealed the depth of an identity crisis, not just in America but also in Europe. Nationalisation may have been the initial American response to the crisis. But it is nationalism that is the main obstacle facing Europe. The temptation of the “to each his own” mindset was present in Europe in the good times, but has become irresistible in bad times. Nicolas Sarkozy, French president of the European Union, may be mounting a brave and gallant fight to produce a “European answer”, but his activism is not sufficient to hide deep divisions among member states.

And here is an assessment from China’s Xinhua titled “Impact of global financial turmoil on China seen as limited.” It includes this:

    “We feel China’s financial system and its banks are, to the chaos developed in the U.S. and other parts of the world, relatively shielded from those problems,” said senior economist Louis Kuijs at the World Bank Beijing Office.
    He told Xinhua one reason was that Chinese banks were less involved in the highly sophisticated financial transactions and products.
    “They were lucky not to be so-called developed, because this (financial crisis) is very much a developed market crisis.”
    A few Chinese lenders were subject to losses from investing in foreign assets involved in the Wall Street crisis, but the scope and scale were small and the banks had been prepared for possible risks, Liu Fushou, deputy director of the Banking Supervision Department I of the China Banking Regulatory Commission, told China Central Television (CCTV).
    Chinese banks had only invested 3.7 percent of their total wealth in overseas assets that were prone to international tumult, CCTV reported…
    Kuijs… expected an impact on China’s banks coming via the country’s real economy, as exports, investment and plans of companies would be affected by the troubled world economy and in turn increase pressure on bad loans.
    Wang Xiaoguang, a Beijing-based macro-economist, said the growing risks on global markets would render a negative effect on China in the short term but provided an opportunity for the country to fuel its growth more on domestic demand than on external needs.
    He urged while China, the world’s fastest expanding economy, should be more cautious of fully opening up its capital account, the government should continue its market reforms on the domestic financial industry without being intimidated.
    Chinese banks had strengthened the management of their investments in overseas liquid assets and taken a more prudent strategy in foreign currency-denominated investment products since the U.S.-born financial crisis broke out, CCTV reported.

Well, I expect that things are not quite as rosy in China’s economy as this reporting makes it sound. Here’s a recent FT assessment– registration required.

Wall St. bailout passes, military budget bulge is next

The House of Representatives passed the Wall Street bailout bill this afternoon. So since the Senate passed it earlier, it will now shortly become enacted into law. (Update: The President signed it and it is now law.)
A $700 billion bailout for Wall Street. Wow. I still don’t know the details of the changes made in the text since Monday, when the House voted against it.
I think $700 billion is ways too much federal funding to be appropriating in such a hurry. It happened because of the fear and pressure inculcated by the blackmail note that Paulson and Bernanke delivered two weeks ago. I have seen proposals that involved smaller amounts being pumped into the financial-sector bailout right now, allowing time for a much deeper reform of the regulatory system and a more far-reaching and better considered plan to support distressed citizens to be crafted over the next few months… I thought those plans looked considerably preferable. But too many congressional leaders are hand-in-glove with the bankers for the community-services people to get much of a look-in.
$700 billion is $2,333 for each woman, man, and child in the country. Add that amount onto our now-over-TEN-TRILLION national debt.
But we should remember that each year, in recent years, Congress has been appropriating just under that same amount of money, in order to keep our bloated military fed, deployed, and fighting.
Bloomberg’s Tony Capaccio reported yesterday that,

    The U.S. military wants an increase of $57 billion in fiscal 2010, about 13.5 percent more than this year’s budget of $514.3 billion, according to the Pentagon’s outgoing comptroller.
    The White House hasn’t approved the request and Pentagon officials will make a strong case for it, Tina Jonas said.
    Some of the increase reflects a determination to include in the base budget some costs that have been funded through emergency legislation, Jonas said in an interview.
    The expense of the wars in Iraq and Afghanistan has been funded this way, even as many lawmakers, including Senator John McCain, the Republican presidential nominee, complained these requests include other spending, mask the military’s true cost and complicate their budgeting process.

(HT: Noah Schachtman.)
So that will be a DOD budget request of $571.3 billion for FY2010.
Capaccio writes,

    Defense spending, adjusted for inflation and not counting the cost of the wars, has increased about 43 percent since fiscal 2000. The proposed 2010 increase reverses a plan released in February that projected base budgets to be flat or slightly down.
    “There is an effort under way to see if we can move away from” supplemental spending measures and rely “increasingly on base budgets to fund these conflicts,” Pentagon spokesman Geoff Morrell said.
    “We are going to be involved in persistent conflict for some time to come; that’s the reality of the world we live in and we need to budget for that,” he said during a press conference Sept. 24.
    The basic defense budget Congress approved for fiscal 2009, which started yesterday, is about $514.3 billion.

This is all crazy. What “persistent conflict” is Morrell talking about? Iraq? Afghanistan? God forbid, Iran?
In Iraq, we need to get all our troops out as fast as it can be done “responsibly”– that is without having them shot at as they leave. There are various plans for how that can be done in a time period of anything between about four months and a year. Obama is still nowhere near calling for total withdrawal. But if, as I hope, one of his first acts is to take the whole question of Iraq back to the Security Council in a very open-ended way, then the multi-party negotiations that ensue there may well result in a plan for a US troop withdrawal that is total and relatively speedy– and more important still, for the establishment of an intra-Iraqi and regional political context within which that can occur in the best way possible.
Regarding Afghanistan, the knowledgeable British Ambassador there has now reportedly told his French counterpart that the war is unwinnable using military means, and support for the US-led military effort continues to dwindle among many NATO “allies”. (E.g. Canada and Australia.)
Regarding Iran: No! No! No! Attacking that country would truly be catastrophic.
The budgetary facts of life– as well as all the other facts of international life today– surely tell us as Americans that it’s time to radically reduce the military footprint we are now carving onto the world.
The Wall Street bailout has, in more than one sense, now “passed.” These mammoth(and oh so destructive) military budgets will come back and bite us again and again each year until our leaders figure out there’s a better way for our country to interact with the rest of the world, and meet the security needs of everyone concerned, including ourselves, if we place serious reliance on means other than military means to do so.
“Persistent conflict” will bring us only “persistent insecurity” and further hemorrhaging of our nation’s wealth.

A “crude” question about gas prices

With Alaska’s governor still proclaiming her dubious energy expertise, I was disappointed that she was not asked to explain the following simple, if “crude” question: With crude oil prices now between a 35 and 40% less than they were back in the summer, why are gasoline prices barely off 10% from their summer peaks?
To be more specific, crude oil futures have fallen from close to $150 a barrel to between $90 and 94 per barrel, while US gasoline prices have dropped on average from just over $4 per gallon to around $3.63. Curiously, spot gasoline is now below $3.00 in Kansas and Oklahoma, while remaining at around $4.00 in Georgia. (the latter ostensibly related to refinery issues)
Naturally, the very Wall Street brokerage firms (Merrill Lynch especially) that had been hyping energy futures to the moon are now either bankrupt or transmogrified into “banks.” The massive speculative money that drove crude prices through the roof is now largely gone, as are the all-too-related, if breathless, warnings that the Israelis were about to emulate Senator McCain and “bomb, bomb, bomb Iran.” Speaking of which, where’s that ING analyst who early last year proclaimed that energy prices were not as tied to the health of western economies as they once were, and that any shock felt by an actual war with Iran would be insignificant?
Most of the remaining oil “analysts” on CNBC are yet again hawking their current trading position — to the downside, of crude oil prices falling further, even below $80 a barrel. As Helena noted previously, AIPAC even lost a rare one in congress last week; — no uniltaral economic blockades for the moment of Iran — adding to the “bearish” overhang on energy prices.
This could be good news for consumers, and (gas-p) for the economy. But gasoline prices remain stubbornly high. And the media doesn’t notice. It’s a political softball waiting for someone to hit.

Bush, economic crisis, and war

Steve Clemons tells us that Bush will make a public pronouncement about the financial crisis at 7:45 a.m. EST Tuesday. This is not a reassuring prospect. When he made his last such pronouncement, it was decidedly not reassuring.
My strong guess is that Bush doesn’t actually know enough about the way financial markets and the rest of the economy works to be able to have an opinion on what ought to be done, and that he’s subcontracted the entire handling of the current crisis to Treasury Secretary Paulson. Just as he subcontracted the handling of the nation’s security affairs for many years to Dick Cheney. But now Paulson’s bailout plan is in deep political trouble. It needs presidential leadership. But how can the president decide what’s the best thing to do if he doesn’t even understand the basics of how the financial system works? How can he judge the technical aspects– or the political aspects– of Paulson’s proposal? Who else does he talk with or listen to about these matters?
For a while now, the country’s sometimes deadly serious jester-in-chief, Jon Stewart, has been gently mocking Bush’s lame-duck status by referring to him as “Still-President Bush.” But I think Jon has it wrong. It seems to me that Bush has barely been a participant at all in all the negotiations and deliberations over the response to Wall Street’s crisis. Last Wednesday, he seemed completely out of it. I wrote the next morning, “His face was puffy, his hair a little bushy and ill-kempt, his expression that of a scared rabbit, his affect wooden… ”
Paulson, Bernanke, and the Democratic leadership in Congress have been doing all the heavy lifting on trying to fashion and win support for the bailout. The politics of this have been bizarre in the extreme– until you remember what generous donations the big financial houses have all been making over the years to the Dems’ political campaigns, as well as the GOP’s. There was also, of course, McCain’s completely over-dramatized and unhelpful attempt to inject campaign politics into the whole decision-making process…
We should be clear that the gargantuan amounts of money the country has poured into waging the two wars in Afghanistan and Iraq have been a big motor for the current crisis. Firstly, in themselves. Chalmers Johnson helpfully reminded us today that last week, the Congress passed by a huge majority a “$612 billion defense authorization bill for 2009 without a murmur of public protest or any meaningful press comment at all.” He notes that though “only” $68.6 billion of this is expressly to fight the wars in Iraq and Afghanistan, the year’s-end price tabs for those two wars will be much higher, as the administration continues its practice of winning huge “supplemental” appropriations for them during the course of the year.
These defense expenses are, of course, ones that recur annually… So each year it’s like the equivalent of passing an entire Wall Street bailout plan.
Johnson describes the whole defense budget as “pure waste.” I would say there are some portions of it that serve a useful purpose. But there are other, even greater portions that are either just useless or even actively counter-productive. For example, the stepped-up military actions in Afghanistan over the past year has been accompanied by a greater collapse of security there, the resurgence of the Taleban, and an apparently great increase in the number of Afghans who have been deeply angered by actions like the aerial bombardment of people accused– often with little or no evidence– of being “terrorists.”
Also, the way Bush sought to fight these wars, from the very beginning, was in a way that imposed no immediate financial burden on the US citizenry. Every previous war the US has fought has been funded mainly through increased taxation. But Bush and Cheney didn’t want to do that. They wanted US citizens to keep as much of their money as possible so they could continue spending, spending, spending– and perhaps so they’d never even really notice that two wars were being fought in their (our) name in two distant countries.
So these wars have been financed purely through borrowing. Hence the national debt, which was on its way to being erased at the end of the Clinton presidency, is now headed up toward $10 trillion. You better believe that these two war-linked phenomena of the government being badly indebted (including to a number of foreign creditors) and the US public having been encouraged to go out and spend, spend, spend have both contributed mightily to the current financial crisis.
Bush’s extremely ambitious project to remake the whole world (or important parts of it) in America’s image has proved to be an expensive and damaging fiasco. It was a project that was prefigured in the earlier writings of the neocons who determined so much of his foreign policy for him. Their big project was for a “New American Century.” However, in a twist of history, the very success the neocons had in storming the citadels of power and seizing important portions of the reins of government into their own hands led to the waging of these two wars and other acts of unilateralist arrogance around the world…that ended up ensuring that the “New American Century” would end 93 years early.
Personally, I strongly doubt that a whole new “American century” was ever possible… At some point over the decades ahead, the US would almost certainly, neocons or no neocons, have lost the pre-eminent “Uber-power” role it has played in global affairs since 1945. But the raw graspiness and arrogance that the neocons showed on the world stage certainly hastened the end of the NAC.
So now, as I started writing a bit last week, we need to Re-imagine a future for America that is very different from the triumphalist kind of place the neocons imagined and tried to bring into being.
I see Steve Clemons has started doing a bit of this re-imagining, too. He blogged today that, “America will have no choice but to add to its cumulative debt — and to invest in itself, particularly national infrastructure — as a way to keep Americans working and to stimulate important parts of the near and long term real economy.” …Which was just about exactly what I was writing last week, too.
A more modest, down-to-earth, and caring America– and one with much better physical and social infrastructure than we have here today. Now that is a project worth working for.
And along the way, we need to shed some of the very bad habits we’ve picked up over past decades. Habits like these:

    1. Maintaining a truly enormous military, in no way proportional to our real weight in world affairs, and using it in a usually fruitless quest to control and dictate to distant others.
    2. Subverting the idea of a “level playing field” in global trade by giving $250 billion annually in subsidies to US agricultural producers, primarily those associated with Big Ag.
    3. Allowing a quite anti-democratic perversion of public life by allowing money to play a massive role in politics. REal campaign funding limits– opr the public funding of political campaigns– need to be enacted now. Otherwise actors like Big Ag, the military-industrial complex, and the truly Frankensteinian “financial services sector” will all simply continue buying legislators and hog-tieing the country’s democratic processes in that way.

Fi-Cri: Washington fiddles, Brussels performs, I opine

LSE’s Willem Buiter today looks at the fi-cri in a comparative way, comparing the financial stabilization effort underway in the US with that in Europe’s Benelux region (Belgium, Netherlands, Luxemburg.) He concludes:

    Especially remarkable is the fact that it took much less time and effort to put together the multi-country fiscal rescue effort of the three EU member states than it took to cobble together the son-of-TARP in the US. Incipient federalism triumphs over disfunctional established federalism.

‘TARP’ is the Troubled– or ‘Toxic’?– Assets Relief Program still being negotiated in Washington. Those negotiations are once again today, as last Wednesday, said to be nearing completion.
Paul Krugman is (cautiously) for it, writing:

    Not a good plan. But sufficiently not-awful, I think, to be above the line; and hopefully the whole thing can be fixed next year.

Seeking Alpha has some worthwhile comments on the draft legislation here.
For my part, I am very “troubled” about the name of the plan and what it connotes. It is not the “Troubled (or Toxic) Assets” that need “Relief”. It is the economy as a whole and all the hard-working people who participate in it that need relief from the current strangulation of the credit markets and the very real threat of Depression.
What the Toxic Assets themselves need, by contrast, is radical restructuring and re-regulating. I call this my “Three R’s program.”
And what the present holders of the toxic assets need is discipline. Not the alleged “discipline” of the market, either; but the discipline and accountability of a legislated scheme to regulate the financial markets that has been publicly deliberated and adopted, and is well understood and well implemented. Enough with all these wild Ponzi schemes and dodgy financial “instruments” that have proliferated just about incomprehensibly in the barely regulated financial markets of the past nine-ten years.
As for the TARP– the idea of this extremely expensive bailout being discussed in Washington is that it should be extensive enough to protect the whole of the financial from further corrosion of its claimed “value.” No-one is sure if the $700 billion TARP is actually big enough to do this. To my view, the only value of any such bailout plan (if one is indeed needed) is that it should prevent total corrosion/meltdown of the financial system just for long enough to allow the Three Rs program to be carried out on the financial assets that it protects.
What is material wealth for, after all?
If it is good for anything, it should surely be used to allow all of humanity (or, in a more restricted sense, all members of a single national community) to have the basic underpinnings of human flourishing. That, after all, is the way to “buy” a decent sense of security, wellbeing, and hopefulness for all of us.
Meantime, Buiter’s comment about the dysfunctionality (in British English, disfunctionality) of the US political system at this time of crisis is certainly right on the mark.
(Update, 10:55 a.m.: Kudos to Rep Marcy Kaptur (Dem-Ohio) for her proposal for a Wall Street Reckoning project to replace the TARP bail-out proposal. (HT: Juan Cole.) Kaptur calls for a “modernized Glass-Steagall Act” to re-regulate the US banking sector. Glass-Steagall was the landmark 1933 legislation that established the FDIC. It was repealed in the Gramm-Leach-Bliley Act of 1999. Sen. Phil Gramm is a close ally of John McCain’s and has been tipped to become Secretary of the Treasury if McCain wins the election.)