Still-PM Olmert presents resignation

Ehud Olmert has been an ineffectual lame duck in Israeli politics for over two years now. It’s possible many people have forgotten that he is still, actually, the country’s prime minister.
But he presented his resignation today, four days after his protege Tzipi Livni won the internal Likud Kadima contest for the party’s leadership.
Livni now has 42 days to wrangle enough of Israel’s other parties into a coalition that the coalition can be stable. That will take us to just before the US elections. Right now, Israel’s internal politics look provincial and not terribly important. The country doesn’t have a functioning, nationally significant pro-peace or pro-withdrawal party. The only choices are between Olmert and Livni’s Kadima Party, a center-right party that loves to engage in endless, just-for-show, negotiations with Washington tame “Palestinian” interlocutors (led by still-President Abbas) that are as unserious as they are unprincipled, and Likud, which is more plainspoken and doesn’t even bother about putting on that show.
The main significance Israeli politics might have for world politics in the coming weeks is if, as function of the country’s internal political wrangling, Olmert and/or Livni should decide they want to “look tough” and launch some kind of disastrous military adventure against Iran.
Still-President Bush should get both of them on the phone and tell them absolutely No Way!

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.