Category: Economic crisis

Distrustfulness, politics, and the financial crisis

So Bush and Paulson failed in their attempt to conclude a deal with the congressional leaders yesterday on the proposed financial bailout. And it was their fellow Republicans in Congress, egged on by a grandstanding John McCain, who stymied the plan. Today, the negotiations resume.
My judgment is that Obama came out of the events of the past two days looking a lot better than than McCain. (Sorry that in an earlier version I put that the wrong way round. I’m working on a very small screen here) Here’s the NYT’s account of yesterday’s White House emergency summit. It was McCain who’d injected campaign politics into the negotiations by insisting that both he and Obama should be at the table– but then he came out looking like a childish drama queen and spoiler, while Obama came out looking much more statesmanlike.
That political judgment is quite independent of the actual content of the plan, which still looks like a pig however much lipstick they daub onto it. This is a good round-up of the views of many academic economists. Calculated Risk pulled out some money quotes, as follows:

    “There is a kind of suggestion in the Paulson proposal that if only we provide enough money to financial markets, this problem will disappear,” said Joseph Stiglitz, a Nobel Prize-winning economist. “But that does nothing to address the fundamental problem of bleeding foreclosures and the holes in the balance sheets of banks.”
    … “The root of the issue is recapitalizing banks,” said Glenn Hubbard, dean of Columbia Business School and a former chairman of President Bush’s Council of Economic Advisers. “That could be done more efficiently through the government injection of preferred equity. Then the market could figure out the prices of the assets.”

As I see it, the crisis is overwhelmingly one of confidence within the banking/’financial system, and also of the underlying credibility of the figures and claims produced by many of the system’s leading actors. (The word “credit” has to do with trust, as much as with the technical details of borrowing or lending.)
But the problem of confidence goes much further than just between one financial institution and another. There is a much deeper crisis of confidence in the US financial and economic system as a whole– one that is made a lot worse by the fact that the regulatory structure underlying the financial part of the economy has been so badly eroded that we’ve arrived at a point almost of “anything goes”, and certainly, one of great unpredictability.
The crisis of confidence now infects the whole of the US’s governance system, regarding this issue and perhaps other issues, too. From that perspective, having John McCain rushing around like drama queen makes the problem worse. But it is already bad enough.
What an amazing week. To see Bush apparently handing over control of the economy to a cabinet member, said cabinet member coming in with a massive blackmail demand against taxpayers, the congressional Democrats dancing to the tune of the big bankers, the congressional Republicans and McCain working hard to demagogue the issue, the economy heading south, and the US’s international reputation plunging even more rapidly… And all this, while the Chinese are doing their first space walk, and Russia has stuck a nail in the coffin of Bush’s lengthy campaign of coercive diplomacy against Iran…
And we haven’t even seen Friday’s news yet.

Financial crisis, leadership, and governance

Nobody elected Hank Paulson. Prior to being named US Treasury Secretary in March 2006, he was the CEO of Goldman Sachs, so his credibility as someone who has the interest of the whole citizenry first and foremost in his mind is not necessarily high. We did, however, elect George W. Bush to be President, back in 2004. He is the one who has to be held responsible for the actions of all members of his administration, who answer to him. That certainly includes Hank Paulson.
So if the country’s financial system is in such a dire situation that it will take $700 billion of taxpayers’ money to sort it out, shouldn’t it have been the president who told us about that last Friday, at the point when the bailout decision was first announced?
Instead of which, Pres. Bush waited until last night– a full five days later– to make any public statements at all about the crisis and the bailout proposal.
I watched his performance on the t.v. last night, and found it terrifying.
If he was trying to “reassure” the markets and the citizenry, I cannot imagine that he succeeded in doing that.
I think Gail Collins was quite right to note this morning that that Bush was,

    reading his lines flatly and stolidly, like an announcer delivering a long public-service message about new parking regulations for the holiday season…
    There is, in a way, a kind of talent required to tell the nation that it’s teetering on the brink of disaster in a way that makes the viewers’ attention wander. Bush’s explanation about how the rescue bill would unclog the lines of credit made the whole thing sound less important than a Liquid-Plumr commercial.

Actually, I think his performance was even worse than she described it. Bush (like Wesley Clark, when I saw him talking about the financial crisis last week) seemed to talk about how the sub-prime mortgages got sliced ‘n diced and then atop them was built a whole shaky house of distinctly sleazy “derivatives” cards, as though he had no familiarity with any of these subjects at all, but was sort of talking about them in public for the first time ever.
And Bush has an MBA from Harvard? (And has been in charge of our country’s economy for nearly eight years, already?)
But it was even worse than that. His face was puffy, his hair a little bushy and ill-kempt, his expression that of a scared rabbit, his affect wooden. He looked as if he’d been having a rough day– or a rough week.
Understandable, perhaps. But he is the person whom, for better or worse, we elected to be the one to take charge of the administrative charge in crises like the present one. And he campaigned hard for the job, two times. So he has to take the responsibility.
And now, we’re in the middle of the election for his successor…
I have to say, first, that I think it’s completely inappropriate for any presidential candidate to be injecting himself (and thereby, the whole business of election-campaign politics) into the present situation of crisis-time economic governance. Neither John McCain nor Barack Obama has any responsibility under the law for dealing with the current crisis that is any greateer than that of any of the other 98 US senators. They are not the leaders of– or even, as far as I know, members of– any of the relevant Senate committees. Yes, they need to be kept informed of what’s going on in the negotiations in Washington (which are reported to be nearing completion.) But they are not members of the current congressional leadership. It is that leadership, the leadership of the administrative branch, and the heads of the Federal reserve and SEC who between them need to reach agreement on the size, terms, and modalities of the bailout package.
McCain’s rushing around acting as though he is currently the “leader” of something is childish at best, an active distraction at worst.
Reminds of a certain young member of our family… someone I’ll refer to only as A… who on one occasion when we came back from a family outing to discover raw sewage welling up into the finished basement of the house started rushing around with a face mask and wellington boots on, shouting “Nobody panic! It’s all under control!” … while the rest of us more quietly set about shoveling out the muck, calling the plumber and the water department, and generally cleaning up.
Actually, that was pretty funny both at the time and in retrospect. McCain’s behavior is definitely not funny.
And neither has Bush’s been on this crisis, so far. It seemed for the first five days after last Friday as if it was Hank Paulson calling the shots. Bush was almost completely MIA on the issue.
Reassuring, as an example of Constitution-based good governance of the country at a time of crisis?
I think not. Shades of 9/11 and the “Pet Goat”, or of Bush’s response to Hurricane Katrina (which famously included taking a bunch of time out to present a birthday cake to John McCain.)
And then, when the Hidden Imam of the White House finally did appear last night, his performance was, as noted, distinctly unreassuring, in style and in content.,
Steve Clemons blogged, quite rightly, that Bush’s performance,

    seems like a bad episode of “24.”
    What is shocking about the presentation by Bush — and the deal that is unfolding is that we don’t see any acceptance of responsibility for the failure of his team’s stewardship of the economy…
    We didn’t hear Bush say that it’s time to reverse the tax cuts that he put in place to help those who have already benefited from the perverse finance and housing bubble that was pumped up.
    We didn’t hear a firm commitment from Bush to help the working families who hold these sub-prime and adjustable rate mortgages to stay in their homes and to help stabilize the lives of hard-hit Americans, their neighborhoods and their jobs. All the while, the macro players and big firms and their stakeholders are bailed out…

Well, let’s hope the Democratic (and GOP) leaders in Congress have succeeded in working out a much more equitable form for the bailout than the one Paulson presented them with last Friday.
The big international players in the global economy don’t seem reassured by Washington’s performance on the crisis so far, either. That matters a lot, given the deep interconnections between the US and the rest-of-the-world’s economies.
Steven Mufson and Anthony Faiola wrote in the WaPo today,

    As the world watched Congress struggle yesterday with a plan to bail out the U.S. financial system, foreign leaders balked at similar fixes for their own economies, a few even dismissing the credit meltdown as an American problem. Some foreign investors who had previously provided crucial injections of capital remained on the sidelines.
    Senior U.S. officials, notably Treasury Secretary Henry M. Paulson Jr., have in recent days urged the leaders of other industrialized countries to help prop the global financial system. But the appeals have fallen short…

The NYT’s Eric Pfanner has some even worse news for Washington about the reaction from Germany to Bush’s speech last night.
He wrote,

    Trans- Atlantic sniping over the global financial crisis intensified Thursday after President Bush cited an influx of foreign money into the United States as one of the root causes of the tight credit market.
    Peer Steinbrück, the German finance minister, countered in a speech in Berlin that the conditions that gave rise to the current turmoil in the markets were allowed to develop because of a reckless pursuit of short-term profit and huge bonuses in “Anglo-Saxon” financial centers — along with a lack of political backbone to stand up to what he characterized as bankers’ greed.
    “Investment bankers and politicians in New York, Washington and London were not willing to give these up,” he said. “The financial market crisis is above all an American problem”
    The long-term consequences, Mr. Steinbrück added, could be serious for the United States. “The U.S. will lose its status as the superpower of the world financial system,” he told the Bundestag. “The world financial system will become multipolar.”

That sounds very serious to me.
The Wall Street Journal published a much broader article today (p.A3, behind their paywall), in which it looked at the reaction in numerous foreign capitals to the US financial crisis so far. The bottom line of the reporters who reported that one from Beijing, Berlin, and Seoul: “The troubles of the past several weeks seem to have done more than any downturn in recent decades to sow doubt about the U.S. approach.”
I’ll say.

US citizens’ resistance grows to greedy bankers?

There are signs that some influential US bankers and financiers are playing a greedy and self-centered game of, essentially, blackmailing the rest of the citizenry (and everyone else with an interest in the integrity of the US financial system) with their– the bankers’– non-cooperation in the bailout unless they continue to be able to lead their self-centered and completely irresponsible lifestyle and continue to be able to exercize their accustomed level of untramelled control over vast portions of the world economy and financial system…
See e.g. this quote from Bloomberg today (HT: Calculated Risk):

    Senate Banking Committee Chairman Christopher Dodd has proposed that the Treasury potentially receive equity stakes in some companies that sell assets to the government. The stakes would “vest” in an amount equal to the 125 percent of the dollar value of the loss realized by the Treasury on the sale of the assets.
    That type of “loss participation” proposal would endanger companies’ ability to raise private capital afterwards, Jeffrey Rosenberg, head of credit strategy research at Bank of America Corp. in New York, wrote in a report yesterday.

Or this, also from Bloomberg (HT: Moon of Alabama), about much-lauded investment whiz Warren Buffet:

    [Buffett] made it very clear that he would not have bought anything right now if he wasn’t confident Congress will do the “right thing” and approve the financial bailout proposal put forward by Treasury Secretary Henry Paulson.

That is, the bailout plan that would not include the US citizenry ending up getting any actual equity warrants in return for the massive generosity the financiers are requesting from us…
Paulson and Bernanke tried to ram their “no equity, no restrictions” plan through Congress early week without any further deliberation, discussion, or changes. Perhaps they and their financier friends were counting on two things to succeed at this: (1) Fear, and (2) The lovey-dovey relationships the banking world has built up with all the members of the relevant congressional oversight committess over the years, greased by often massive campaign contributions.
So far, the US Congress has dug in its heels and resisted the strong railroading blackmail/pressure being exerted on it by the Bush administration and the “community” of uber-rich (and right now, spectacularly unsuccessful) bankers and financiers in this country. This, in parallel with the resistance to the administration’s plans that has been exhibited in recent weeks by the (actually, US-constituted) government in Iraq…
It seems the Bushists’ ability to cow and intimidate their opponents has waned considerably?
We still, quite evidently, need a financial bailout/reform/restructuring plan. But let it be one that is fair to all stakeholders, including at the head of the queue the US citizens who’re being asked to sign on to the whole of the costs involved.
Oops. Maybe trying to ram this legislation through in the pre-election period wasn’t such a smart idea for the Bush administration people after all?
(Publishing note: I am writing this on an extremely slow internet connection, as provided by my hosts here in Lewes, Delaware. I’m a little web-deprived right now, but I’ll be back at a good connection in NYC by Thursday afternoon. Expect resumption of normal JWN posting at that point. In the mean-time, for updates on the global implications of the US financial crisis, read Calculated, Moon, Krugman, etc.)

Paulson’s Goldman Sachs bonuses…

…were earned for what? John Gapper of the FT has done some digging around, and found that in the period before Paulson quit being GS’s CEO to become US Treasury Secretary in May 2006, he was busy slicin’, dicin’, and repackagin’ those old mortgage-backed securities along with the rest of them.
Gapper found that GS’s regulatory filing for the first quarter of 2006 reported that,

    During the three months ended February 2006 and February 2005, the firm securitised $19.25bn and $15.24bn, respectively, of financial assets, including $18.15bn and $14.43bn, respectively, of residential mortgage loans and securities.

And GS had also by that time apparently acquired additional investments in mortgage-backed and other allegedly asset-backed (in-)securities and CDOs, including $22 billion of CDOs, $2.9bn of “asset repackagings and credit-linked notes” and $6.5bn of “mortgage-backed and other asset-backed” securities…
Well, I guess that for “Hank” Paulson, as everyone seems very chummily to refer to him, where you stand really does depend on where you sit.
Because yesterday, he was all over the airwaves denouncing as “irresponsible” the way in which the big banks and financial houses had been slicing’ and dicin’ all those worthless pieces of mortgage-paper junk.
Gapper also recalls that GS gave Paulson a performance bonus of $18.7 million for the first half of 2006.
Intriguing to see even such a dedicated free-marketer as John Gapper wondering in public whether,

    as a public gesture, Mr Paulson might consider handing that bonus over to the Treasury’s fund and lowering the US taxpayer’s bill by $18.7m?

The highest paid official in the US government is the President, at $400 million thousand (nice digs, Air Force One, helicopters, etc not included.)
I see John McCain today said during a campaign stop that “The senior executives of any firm that is bailed out by Treasury should not be making more than the highest paid government official.”
Not a bad principle, at all.

Washington’s ‘Air on a G-string’

No comment from Washington yet about Chinese President Hu Jintao’s explicit linking of help for the financial crisis to the question of Taiwan. However, Treasury Secretary Paulson and Fed chief Bernanke did engage this morning in somewhat public international consultations on the crisis with their counterparts from “Group of Seven” industrial nations.
This is interesting from a couple of perspectives. The “G7” is a quite idiosyncratically composed (and completely unaccountable) grouping of what are described as “the world’s leading industrial countries.” Until recently, it was known as the “G8”, but there was a proposal to kick Russia out because of the Georgia conflict; and it looks as if that has happened already.
But whether 7 or 8, this “G” grouping notably doesn’t include China– though it does include Japan, the US’s other mega-creditor on the international scene.
Today’s statement about the actions the various G members have taken has the air of a slightly self-congratulatory group hug:

    We strongly welcome the extraordinary actions taken by the United States to enhance the stability of financial markets and address credit concerns… We also strongly welcome the measures taken by other G-7 countries…”

But unless they can find a way to include China and Russia in the planning for the stabilization program, it probably can’t get very far.

China’s condition to bail out the US: Taiwan?

China’s President Hu Jintao has now explicitly linked his country’s readiness to show good cooperation in resolving the US financial crisis to the question of Taiwan.
Beijing’s official Xinhua news agency reported today that Hu and Pres. Bush conferred thusly about the crisis yesterday evening (Washington time):

    Bush briefed Hu on the latest development of the U.S. financial market, saying his government was well aware of the scope of the problem, and had taken and would continue to take necessary measures to stabilize the domestic and world financial markets.
    Hu [said he] hoped the measures would soon take effect and lead to a gradual recovery of the financial market, which he said not only serves the interests of the United States, but also those of China, and benefits the stability of the world financial market and the sound development of the world economy.
    … He said China is ready to work with the U.S. side to intensify dialogue, exchanges and cooperation, and properly handle issues concerning mutual interests and of major concern, particularly the Taiwan question, in a bid to push forward the sustained and steady development of the Sino-U.S. constructive and cooperative ties.

A big, Renaissance-style flourish of the chapeau to Bernhard of MoA for picking up this very significant news item. Bernhard, not unreasonably, compared the prospect of a this deal-in-the-possible-making to the 1803 Louisiana Purchase (and thereby also, perhaps less plausibly, Bush to Napoleon. But oh yes, Napoleon did launch that mad, very destructive military adventure into Russia, didn’t he.)
I see no mention of this crucial phone call at the White House’s website. I wonder why not? All the WH has on the financial crisis today is this extremely contentless little statement.
On Saturday, I noted that China’s current investment in/exposure to the US markets includes around $900 billion held in T-bills and Fannie and Freddie stock. They also have substantial holdings in privately owned US financial entities.
Over at Bernhard’s blog, I commented that:

    Along with Taiwan [the Chinese] will probably over time request and may end up with the whole of the US military’s obligations on the Asian side of the Pacific Rim, along with the big naval platforms used to service those… Japan-China relations will become very important. What will Japan and S. Korea do? Go along with their big continental trading partner, I expect.
    But these things will not happen overnight. After the UK’s big end-of-empire overstretch (Suez, 1956) was “called” by Eisenhower the Brits, French and Israelis withdrew from Sinai fairly rapidly but it took a further 14 years for Britain to wind down its permanent naval presence “East of Suez.” This time, it might happen somewhat faster, but the inter-great-power readjustment of security forces and obligations in East Asia will probably still take the best part of a decade?

When I read Bernhard’s post, I was just sitting down to start composing a post on the dangers of the US public getting whipped up into a very unhelpful form of economic nationalism. I still believe that’s a real and present danger.
I can understand, certainly, the very reasonable fears and concerns of US citizens worried about losing “control” of big portions of the country’s economy to non-Americans who are not accountable to them in any way.
On the other hand, for decades now, the making of US national economic policy has been in the hands of shady and irresponsible financial institutions and the many legislators they’ve kept handily on their payroll, who have abandoned many or most of their obligations to remain accountable to the citizenry. So the change wouldn’t be as big as it might seem, anyway?
But as the bailout proposals get discussed in Congress this week, we need to see an outpouring of concern from Americans for the interests of the most vulnerable people who will be affected by the continuing economic downturn, both at home and abroad. As I wrote here recently, we really do have a chance to “Re-imagine America” at this time. But none of that will happen if our legislators aren’t kept strictly to the path of putting the people’s interests first, well before those of the Wall Street speculators who got the American (and world) financial systems into this mess in the first place.

Wall Street crisis: Don’t act from panic

Paulson and Bernanke seem to be asking the US Congress to agree to the $500-1,000 billion bailout of Wall Street within the next week, before their regularly scheduled session adjourns.
I hope our lawmakers remember the horrendous consequences that flowed from the equally momentous decision– the enabling resolution for the war against Iraq– that they were railroaded into, also from a sense of very imminent fear, back in October 2002, and that this time around they refuse to be similarly hurried into enacting very far-reaching and potentially extremely damaging legislation just before yet another national election.
There are a number of huge questions about the Paulson/Bernanke proposal that need to be answered before legislators make a firm move on the subject. If the lawmakers need more time, they should take it. The country’s big outside creditors are all so deeply invested in (exposed within) the US financial sector that they– like us, the US taxpaying public– need Congress to get it right, rather than acting in haste.
We elected these legislators to have oversight over the national budget and that is what, right now and for as long as it takes, they need to do.
I realize there’s an election looming. That consideration will have to take second place for the legislators until they have dealt properly and responsibly with this crisis. Paul Krugman has raised many questions about the bailout plan as reported so far. They are well expressed here.
Bernhard of MoA has an even broader set of critiques, expressed here. He proposes the following far-reaching plan to address the whole broad, house-of-cards dimensions of the crisis:

    * all financial exchanges and markets of the world close for a week
    * [All ‘credit default swap’ transactsions (CDS’s)] are declared null and void and new CDS creation is forbidden until new regulation is in place
    * the publicly dealt financial entities have seven days to figure out and publicly restate the value of their liabilities and assets excluding all CDS
    * a onetime windfall tax will be created that socializes overt advantages some entities will have from this
    * the proceed of that tax shall be used to prop up the capital of the big losers in a program comparable to the Reconstruction Finance Corporation of 1932.

Bernhard has also been asking some very important questions about how, precisely, the proposed bailout will be financed. Unless those questions are answered satisfactorily, the proposed “solution” to the crisis as current defined could end up actually exacerbating it.
Lawmakers, get this right! Make it fair to the whole national community. Make it sustainable and workable. And above all, don’t get hustled by the fearmongers.

China and Japan’s stakes in the US financial crisis

Did you know that China has over $900 billion of exposure/investment in US Treasury bills and in debt issued by Fannie Mae and Freddie Mac– and that the Chinese government has therefore (quite understandably) been exerting its influence in Washington and elsewhere to prevent the US financial system tumbling completely off the cliff of insolvency?
You might never know that fact if you read only the mainstream media in the US, which have been dominated by highly Americo-centric stories about the anguished interplay among the big players in the US government and economy.
But an article buried deep within today’s WaPo tells us this:

    As U.S. financiers scrambled this week over how to deal with possible collapse of major financial institutions, Chinese Vice Premier Wang Qishan arrived in Washington with a message: To survive the crisis, U.S. equity markets need countries such as China that have massive foreign exchange reserves to jump in a big way.
    … China … is estimated to hold a fifth of its currency reserves — as much as $400 billion — in Fannie Mae and Freddie Mac debt. In addition, its banks have billions of dollars worth of exposure to the American International Group, Merrill Lynch, Lehman Brothers and other companies in crisis. The Industrial and Commercial Bank of China, for example, has $151 million in bonds issued or linked to Lehman; China Merchants Bank has $70 million of Lehman bonds; and the Bank of China has $75.62 million of Lehman bonds.

In addition, as I noted here recently, China has holdings of US T-bills that on July 31 totaled $518.7 billion.
Today’s WaPo piece is by Blaine Harden, reporting from Tokyo, and Ariana Eunjung Cha, reporting from Shanghai. The information it gives about tyhe actual content of Wang’s interventions in Washington, and the US reaction to them, is sketchy or non-existent. But at least Harden and Cha do give some important information about the role that both China and the also heavily exposed/invested Bank of Japan have been playing in the current crisis, matters that provide a crucial geostrategic background and framing for the current crisis.
The WaPo’s editors saw fit, however, to bury it deep within the “Business” section of the paper, as though it was of no particular interest to the general public.
Also buried deep within the business section is another article illustrating another significant international dimension of the US financial crisis. That is this article, that reminds us that enormous though the current– hopefully one-off– taxpayer bailout of the financial sector will be, still, it is roughly the same size as just one year of the Pentagon’s budget.
I’ll deal with some of the intriguing implications of this latter fact later on. But the Harden/Cha article contains some extremely important information that I think the WaPo’s editors should have given a lot more prominence to.
It starts with this assessment from an associate director of the Bank of Japan:

    Japan is a captive of its investment in the United States economy and its central bank has no real alternative other than to hold on to the massive amounts of U.S. Treasury bonds it owns and work hard to help clean up the mess on Wall Street, Hidehiko Sogano, an associate finance director at the Bank of Japan, said Friday.
    “The reason why we stress the importance of stability is that the amount which we have in U.S. assets is so enormous,” said Sogano, referring to the roughly $860 billion of the bank’s $1 trillion in reserves that are in U.S. investments, mostly Treasury bonds.

Of note there: Both the figure for the size of the BoJ’s total US investments, which I haven’t seen recently, and the way that this BoJ manager– reportedly representing bank policy– defined the bank’s interest during the current crisis.
As I noted here recently, the latest figure on the amount of T-bills Japan owes is $593 billion. That means it owns around $260 billion in other, quite possibly much more risky US investments. Later in the piece, Harden/Cha write that on Friday, “Finance Minister Bunmei Ibuki conceded at a parliamentary hearing that the government and central bank hold about $74.5 billion in debt issued by… Fannie Mae and Freddie Mac.” Well, not nearly as much as the Chinese hold in Fannie and Freddie. But still, not inconsequential.
Harden and Cha also wrote this:

    Sogano, who said he was speaking for the bank, is part of a team at the bank that has worked around the clock this week to calm global markets. “If we shift out of the dollar without deep consideration, then that would surely affect the market,” he said. “So that is why we always have to be very careful. If that sounds conservative, it is conservative.”
    In a week of epochal market turmoil, for the Bank of Japan being very careful has meant being aggressively interventionist. Besides injecting the equivalent of about $96 billion in four days into money markets for overnight loans, the bank has gone into the business of making dollar loans.
    It joined with four other central banks in a $180 billion currency swap with the Federal Reserve and will use its $60 billion share to supply dollars to local and foreign institutions.
    Sogano said that the Bank of Japan feels that U.S. market turmoil, even if it continues for months or years, will not alter the central place the United States occupies in global finance and will not undermine the willingness of the Bank of Japan to invest in the United States. “There will be no change because we quite understand the importance of the U.S. market and the stability of the dollar,” he said.
    …Ibuki, the Finance Minister, said Friday that Japan would consider funding the International Monetary Fund or other international lending agencies to help with bad debt.
    Sogano said there is no political support in Japan for mobilizing the several trillion dollars in Japanese pension funds and other savings funds to recapitalize troubled U.S. financial institutions. He agreed that such investments, if properly managed, could increase returns for savers in Japan.

Does that mean that the Japanese might be eager (or at least willing) to have the IMF help bail out some sectors of the US economy? That would raise some fascinating issues, if so.
Regarding China, Harden and Cha note that, unlike the Japanese, China might indeed be willing to intervene to buy up some troubled US financial entities– including the troubled financial giant Morgan Stanley.
Harden and Cha write:

    In recent weeks, finance chiefs from around the world have come to consult with their counterparts at the Federal Reserve and U.S. Treasury about possible interventions.
    China’s delegation, headed by a 60-year-old ex-banker who comes from the country’s depressed coal-mining region, has been among the most vocal, according to sources briefed on the discussions.
    … As U.S. officials were deciding in August whether to take over Fannie Mae and Freddie Mac, the Treasury Department held informal talks with officials from the People’s Bank of China, the country’s central bank. At that time, investors in Fannie Mae and Freddie Mac in China were dramatically reducing their holdings. The U.S. side told China that a cash infusion was in the works; China said that it expected the U.S. government to “do whatever is necessary” to protect the investments.
    Accompanied by a delegation that includes senior officials from China’s central bank and Ministry of Finance, as well as banking, insurance and securities regulators, [Vice Premier] Wang had originally traveled to the United States on Sept. 14 for trade talks in Los Angeles. But as new shocks hit earlier this week, Wang flew to Washington to meet with Treasury Secretary Henry M. Paulson Jr.
    Wang sought assurances that if the Chinese government were to encourage its companies to seek investments in the United States, the deals would not face the same political opposition that has undone past Chinese investment proposals.
    Andy Xie, an independent economist who was formerly Morgan Stanley’s chief Asia economist, said the United States needs to accept that a large amount of U.S. assets must be transferred to other countries’ ownership. “If the U.S. is not willing to accept that,” Xie said, “they will have to print money and the dollar will fall. And we will be headed toward a global financial meltdown.”
    Companies in the United States and in Europe are already reaching out to Chinese investors.
    Morgan Stanley chief executive John Mack has been in contact with the China Investment Corp., the sovereign wealth fund that manages $200 billion, and with China’s Citic Group. La Compagnie Financière Edmond de Rothschild on Thursday announced that it had sold a 20 percent, $340 million stake to Bank of China.
    It’s unclear how Chinese investors will respond to the overtures, especially given that their biggest investment in Wall Street to date, CIC’s investment in asset manager Blackstone Group, has turned out to be a disaster — its investment has lost half its value.

That investment was of around $3 billion. Ouch.
… At the end of last month I wrote here about the extent to which the economy of the “rest-of-the-world” was becoming decoupled from that of the US. It is true that that decoupling has been happening– in the sense that countries other than the US now do a lot of trade and financial business with each other that does not involve the US or US-owned companies at all. But this decoupling has been a process, not a binary on-off switch; and it is still very far from being anywhere near complete. Indeed, given the very “open”, globalized nature of the world economic system, it will never be complete. The US will still certainly, for the entire foreseeable future, be one significant participant in the world economy. But it will not dominate the world economy to anything like the extent it did from 1945 until recently.
Meanwhile, what we have seen in the past few days, is the extent to which non-US governments, seeing the size of the stake their countries’ economies have in the good health of the US financial system, have stepped in to try to help Washington shore up the system. It is true that these other countries– primarily Japan, China, some European countries, and Saudi Arabia– are not helping to save the US financial system out of pure altruism. They strongly need the US system to remain fundamentally sound. There is a very deep interdependence between the US and these these other countries.
But it is also the case that, as they help Washington shore up the US system, they will be buying increasingly large stakes in the whole of the US economy– and in both the policies that steer the US economy, and the policies that might affect it.
Those latter policies include many strands of Washington’s foreign policy, with at the forefront its incredibly expensive maintenance of a bloated (and often actively dysfunctional) worldwide military machine.
What’s more, Washington has been using that military– and threatening to use it–in a number of different ways that directly affect the national interests of what we might now handily start to call “our friendly creditors” among the world’s other nations. Those friendly creditors will most likely be having an increasingly strong say in the content of some of those policies.;
Use the military– or threaten to use it– against China, or in a way that escalates tensions between China and Japan?
You gotta be kidding.
Use the military in Afghanistan in ways that destabilize China’s long-time friend Pakistan and continue to foment additional Islamist extremism in Central Asia (including Western China)?
The Chinese will most have something to say about that, too.
Use the military to launch an act of war against Iran or to help Israel to do that?
Many of the friendly creditor nations will have plenty to say about that.
The world is changing with unprecedented speed these days…

Re-imagining America

The eventual size of the US taxpayers’ bailout to the troubled financial sector is unknown, but it is bound to be gargantuan. This morning, the ranking Republican on the Senate Banking Committee said it could go as high as a trillion dollars. Actually, it could go considerably higher than that.
You thought the Iraq war was expensive? The latest cost estimate I heard for that was $859 billion. But that was a week ago.
If there is a silver lining in the still unfolding financial crisis, it is that it gives all of us who are US citizens the chance to re-imagine at a fairly deep level what our country might become in the years ahead. This, for two reasons:

    1. The market-fundamentalist approach that has dominated economic policy in the country since at least the Reagan era has proven itself destabilizing, anti-humane, and structurally broken. We have a great opportunity to imagine– and to work to bring into being– something fundamentally different.
    2. The fact that the US’s citizenry will all become co-equal “owners” of a huge chunk of the country’s financial infrastructure means that we are all stakeholders in how its should be rebuilt. We should take this responsibility quite seriously and ensure that no groups of citizens are marginalized from having their voice heard and or from having their numbers-proportionate say in what should be done. This is certainly not a matter only for the (previous or current) owners of corporate and financial wealth, or the technocrats and economic “whizz-kids” who have largely dominated public discussions of these matters until now. It is all of our responsibility.

On a related note, I think it’s very important that we all become a lot more aware of the one-sided way that most of the MSM in this country has been approaching the stories about the current crisis. It is incredibly investor-centric, in that it simply assumes that everyone in the community that it addresses is (a) him- or herself a non-trivial investor in the financial markets, and (b) concerned overwhelmingly with the effect of the crisis on his or her own investments and/or on the previously much-admired titans of the investment industry, and only very secondarily (if at all) with its effects on society as a whole, or on the country’s most economically and socially citizens.
This is self-referential and anti-humane media “coverage” of the most disturbing kind. We know that most of these bankers and stock traders we see pictures of on the nightly news will end up being okay. (And none of the industry “leaders” or failed regulators who got us into this crisis yet seem to be exhibiting any shame or remorse, at all.)
But where are the media stories about the crisis in the nation’s food banks, or about those made homeless because of the sub-prime scandals? These are the stories and the voices that need to be included.
For years now, the “big” MSM in this country has been presided over by media “stars” like Tim Russert (RIP), Katie Couric, Charlie Gibson, etc… And whenever they got new contracts the salary levels they would lock in would be breathlessly reported all over the place… $1 million, $2 million, $5 million and more. So there is a complete air of unreality when these people solemnly pretend that when they “discuss the impact of” the crisis, they are doing so purely as disinterested observers. At the very least, they owe the rest of us substantial disclosure–as we demand from politicians– regarding which sectors they hold their personal wealth in. Or, they should hold it in a blind trust until their retirement.
But this investor-centric nature of the news coverage is only one symptom of a deeper distortion in the country’s political culture: namely, the robustness until now of the myth that “everyone” in the US has a substantial ownership stake in the country’s means of production and wealth creation. That is, after all, the myth that allows people in the MSM to imagine that when they give us their very investor-centric take on breaking events, they are speaking for and to “everyone.”
But this myth of universal “ownership of wealth” is palpably untrue. I’ve been trying to look for a measure of the degree of inequality of wealth among citizens in the US, which I know has been growing apace over recent decades. This is the best source I’ve found in a quick search– plus it gives a pretty nice explanation of how the Gini coefficient of inequality is calculated.
If you scroll down beneath the color-coded world map there, it gives the following data for the nationwide Gini coefficent for personal wealth, sourced to the US Census Bureau. Remember that for the Gini, “1” is perfect inequality– one person owns everything, everyone else owns nothing; and “0” is perfect equality:

    1967: 0.397 (first year reported)
    1968: 0.386 (lowest coefficient reported)
    1970: 0.394
    1980: 0.403
    1990: 0.428
    2000: 0.462
    2005: 0.469 (most recent year reported; highest coefficient reported)

That is a significant rise from 1968 through 2005, and doubtless the trend continued after that until… well, maybe last week.
Here, for an international comparison, are some figures on the Gini coefficients of various nations regarding distribution of income, not wealth. (Though over a few years of income differences, that usually gells out into a significant difference in wealth; and the “income” measured is quite often a return on investments, rather than earned salary, so it is related to wealth in that way, too.)

    1 Iceland n.a.
    2 Norway 25.8
    3 Australia 35.2
    4 Canada 32.6
    5 Ireland 34.3
    6 Sweden 25.0
    7 Switzerland 33.7
    8 Japan 24.9
    9 Netherlands 30.9
    10 France 32.7
    11 Finland 26.9
    12 United States 40.8
    13 Spain 34.7
    14 Denmark 24.7

By the way, the listing numbers down the left column are the rankings the UN Development Program gave in 2007 to each nation for what it defines as its “Human development.” We are not Number One, and I don’t think we have been, ever since they started measuring this. We are Number 12.
All the other countries there have significantly lower Gini coeffficients of income than we do.
Norway is notable because it is a country that has considerable, nationalized oil production and revenues therefrom. But it has established ways of managing those revenues in ways that have stimulated the whole economy and have not substantially increased inequalities. Given that we US taxpayers are about to become co-owners of huge chunks of nationalized wealth, I think we could look to Norway to find out good ways to do so in a responsible, socially equalizing, and politically accountable fashion.
How about a well managed and accountable Sovereign Wealth Fund to take over all these financial and other entities we suddenly find that we’ve “bought”.
Here are a few other guidelines I’d like to put into the discussion:

    1. Since we’re essentially buying either a huge amount of somewhat marginal housing stock or the mortgages thereon, we need to figure out what to do with it for the benefit of all of society. I would say that a bunch of the unsustainable big McMansions that have been built out in distant exurbs should be ploughed under, after all the removable parts of their properties and fixtures have been auctioned off to the highest bidder. Sad to think of all those dreams and all that workmanship getting ploughed under. But imagine all the exurban subdivisions that we can return to productive agricultural purposes!
    2. As large-scale property-owners in many closer-in districts where ploughing under makes no sense, the Sovereign Wealth Fund (Housing Division), should certainly use its clout in the housing market to become an innovative developer of sustainably car-free communities. That would mean building up a lot of these areas into much denser mixed-use communities, whose density allows the installation of economically sustainable mass transit systems that can link them to each other and to nearby city centers.
    3. The economic crisis can reliably be expected to get quite a lot worse than at present, before it gets any better. We need to use the assets of the Sovereign Wealth Fund to invest in our national infrastructure at all levels. Yes, Keynesianism– as with FDR’s New Deal. But this time, Keynesianism with a strongly pro-Green purpose. Wind far,ms and all other forms of renewable energy. Innovative forms of cradle-to-cradle housing and manufacturing. The whole shebang. And perhaps as a capstone project: A completely new, Ultra-High-Speed Rail System that knits the whole country back together in a way that we haven’t seen since Eisenhower’s Interstate highway system.
    4. As another part of the rebuilding of the nation’s social and economic infrastructure, we should have a commitment to an excellent, universal and single-payer healthcare system, and other essential parts of a caring and accountable human welfare system.

It might seem crazy to think that, amidst the present crisis, our country could even start to think of financing projects like those mentioned.
But here’s the thing: Suddenly, we taxpayers find we have “bought” this huge bundle of assets. (Okay, yes, and liabilities, too)… And suddenly the numbers everyone is talking about in regard to these assets are absolutely enormous: right up there in the area of– or in many cases, well above– the costs that have always been mentioned as necessary in order to “fix” (or tinker with) this or that other aspect of the national system.
So now we, our legislators, and our next president will all have to suddenly think very “large” about what to do with these big new commitments Hank Paulson and Ben Bernanke have bequeathed us with. So let’s think just a little larger still. Let’s think about what the point of all this “wealth” and all this stuff is. Is it to enable a few superstars of the stage, screen, ballpark, or news-anchor’s desk to become even more unimaginably wealthy that before? Or is it to start over at trying to build a national community that values everyone, and that supports everyone to live up to her or his maximum human potential?
Time to think big here. (And yes, please add your own ideas below on how we might use the present opportunity to re-imagine America.)
Alternatively, we could just return to an increasingly plutocratic, mean-spirited, and unaccountable business as usual…

Culpable malfeasance at the SEC?

“Governance”? I think I was too generous in the post I wrote last night on the flaws in the American theory of governance. Well, okay, I did write that the Bush administration has pursued an active policy of what you might call de-governing this country and all the other parts of the world it could lay its hands on…
Lee Pickard, a former director of the SEC has now said publicly that back in 2004 the SEC changed the rules it applied to the country’s five biggest broker-dealer firms, allowing them to borrow up to 40 times their net capital holdings, where previously they’d been held to the same cap of 12 times net holdings as all the other, smaller brokerage firms.
It was Julie Satow of the New York Sun who broke that story this morning.
Barry Ritholtz of the Big Picture writes,

    Who were the five that received this special exemption? You won’t be surprised to learn that they were Goldman, Merrill, Lehman, Bear Stearns, and Morgan Stanley.

Ritholtz also has some good other writings on the topic there from Lee Pickard.
I got all this with a hat-tip to Bernhard of MoA who notes that Christopher Cox, who has chaired the SEC since 2005, was mentioned by rightwing commentator Bob Novak back in March as an excellent VP pick for McCain. (I note that Novak had been acting strangely for a while, including claiming he didn’t remember he’d knocked over a pedestrian on DC’s K St; and recently, he was diagnosed with a large cancer on the brain.)
All the more ironic that McCain has now called for Cox’s firing.
But there is clearly a far deeper rot at the SEC than just Cox– who became chair after the 2004 rule change, after all.
Congress is in the last portion of its term now. But it and the president between them face a tsunami of huge and very immediate decisions about economic governance. These include:

    1. How to govern the newly nationalized entities to maximize the common good of the citizenry, rather than the take-home of the bankers and their often very cosy-cosy regulators who got us into this mess;
    2. What further steps need to be taken by the federal government to stanch the present rapid erosion of global confidence in the integrity of US economic governance; and
    3. How to hold accountable those responsible for the crisis up until now.

None of these tasks can wait until after January 21. I imagine it is quite possible that as I sit here and write, people at the SEC might be holding a huge shredding party to destroy evidence of past malfeasance. (Two good questions: What influence was brought to bear that resulted in that highly irresponsible 2004 rule-change? Who knew about it at the time? Lee Pickard should certainly be called as a witness.)
And regarding the confidence of overseas investors, yesterday, the overseas edition of China’s People’s Daily published a (signed) commentary arguing that,

    Threatened by a “financial tsunami,” the world must consider building a financial order no longer dependent on the United States…

De-coupling, anyone?
Hat-tip Salah for that Reuters report. Reuters notes that de-coupling is not actually Chinese state policy at this point, and adds:

    Vice Premier Wang Qishan, on a visit to the United States, told U.S. trade officials in a meeting on Tuesday that China and the United States needed to maintain close economic ties with global markets going through such turbulence.
    “The Chinese government is well aware of the fact that the United States, which is the world’s largest developed country, and China, which is the world’s largest developing country, should have constructive and cooperative economic and trade relations,” he said.

Today, in response to the US’s financial woes, stocks on the Shanghai Composite Index plummeted 5.84 percent.
As of July 31, China held $518.7 billion of US T-bills, second only to Japan ($593.4 bn.)
Keep watching all strands of this story. The earth is shifting.