Monday, January 28, 2008

Signs of the Economic Apocalypse, 1-28-07


Gold closed at 910.70 dollars an ounce Friday, up 2.9% from $885.20 for the week. The dollar closed at 0.6811 euros Friday, down 0.5% from 0.6843 at the close of the previous week. That put the euro at 1.4682 dollars compared to 1.4613 the Friday before. Gold in euros would be 620.28 euros an ounce, up 2.4% from 605.76 at the close of the previous Friday. Oil closed at 90.71 dollars a barrel Friday, up 0.1% from $90.62 for the week. Oil in euros would be 61.78 euros a barrel, down 0.4% from 62.01 at the close of the Friday before. The gold/oil ratio closed at 10.04 Friday, up 2.8% from 9.77 at the close of the previous week. In U.S. stocks, the Dow closed at 12,207.17 Friday, up 0.9% from 12,099.30 at the end of the week before. The NASDAQ closed at 2,326.20, down 0.6% from 2,340.02 for the week. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 3.55%, down 8 basis points from 3.63 for the week.

The stock market rose a bit last week. Ho hum, right? Of course that statement conceals the roller coaster that was last week, with stocks falling sharply the first half, then recovering the second half of the week. The drops in global stock markets in the beginning of the week (the beginning of the year, really) were so sharp that many of us, even those who had been predicting this for years, had that sick feeling in the pit of our stomach. How bad would it get? Recession, depression, or complete collapse? We still don’t know, but given the underlying situation, the collapse side of the equation seems more likely than a simple recession (two consecutive quarters of negative growth).

Why? The great big black hole of debt, of kinds of debt that have never existed before and that no one really understands:
The black box economy

Behind the recent bad news lurks a much deeper concern: The world economy is now being driven by a vast, secretive web of investments that might be out of anyone's control.

Stephen Mihm

January 27, 2008

The past year has been a harrowing one for the world's financial markets, shaken by subprime crises, credit crunches, and other ills. Things have only gotten stranger in the past week, with stock prices swinging wildly in every major market - drastically down, then back up.

Last week the Federal Reserve announced the biggest cut in overnight lending rates in more than two decades. Congress, not to be outdone, is slapping together a massive deficit spending package aimed at giving the economy an emergency booster shot.

Despite the anxiety, nobody is stockpiling canned goods just yet. The prevailing assumption in today's economy is that recessions and bear markets come and go, and that things will work out in the end, much as they have since the Great Depression. That's because there's a collective confidence that the market is strong enough to correct itself, and that experts in charge of the financial system will understand how to mount a vigorous defense.

Should we be so confident this time? A handful of financial theorists and thinkers are now saying we shouldn't. The drumbeat of bad news over the past year, they say, is only a symptom of something new and unsettling - a deeper change in the financial system that may leave regulators, and even Congress, powerless when they try to wield their usual tools.

That something is the immense shadow economy of novel and poorly understood financial instruments created by hedge funds and investment banks over the past decade - a web of extraordinarily complex securities and wagers that has made the world's financial system so opaque and entangled that even many experts confess that they no longer understand how it works.

Unlike the building blocks of the conventional economy - factories and firms, widgets and workers, stocks and bonds - these new financial arrangements are difficult to value, much less analyze. The money caught up in this web is now many times larger than the world's gross domestic product, and much of it exists outside the purview of regulators.

Some of these new-generation investments have been in the news, such as the securities implicated in the mortgage crisis that is still shaking the housing market. Others, involving auto loans, credit card debt, and corporate debt, are lurking in the shadows.

The scale and complexity of these new investments means that they don't just defy traditional economic rules, they may change the rules. So much of the world's capital is now tied up in this shadow economy that the traditional tools for fixing an economic downturn - moves that have averted serious disasters in the recent past - may not work as expected.

In tell-all books, financial blogs, and small-circulation newsletters, a handful of insiders have begun to sound the alarm, warning that governments and top bankers may simply no longer understand the financial system well enough to do anything about it.

"Central banks have only two tools," says Satyajit Das, author of "Traders, Guns and Money: Knowns and Unknowns in the Dazzling World of Derivatives," who has emerged as a voice of concern. "They can cut interest rates or they can regulate banks. But these are very old-fashioned tools, and are completely inadequate to the problems now confronting them."

Since the last financial crisis that genuinely threatened the fabric of our society, the Great Depression, the United States has built a system of regulatory checks and balances that has, for the most part, worked. The system has worked because the new regulations enforced some semblance of transparency. Companies abide by an extensive set of rules and file information on their profits, losses, and assets.

Obviously, there are limits to transparency: Without withholding some information from public view, it would be hard for companies to take advantage of opportunities in the marketplace. But a modicum of transparency can go a long way, enabling both regulators and investors to make informed decisions. The advantages of the system are many; the costs of even a single case of nontransparency, as with Enron, can be high.

But when the mortgage crisis broke last summer, it opened a window on something else: The existence of a huge wilderness of investments in the financial sector that are nearly impossible to track or measure, and which operate out of the view of both investors and regulators. It emerged that investment banks, hedge funds, and other financial players had issued, bought, and sold hundreds of billions of dollars' worth of esoteric securities backed in part by other securities, which in turn were backed by payments on high-risk mortgages.

When borrowers began defaulting on their loans, two things happened. One, banks, pension funds, and other institutional investors began revealing that they owned huge quantities of these unusual new securities, called collateralized debt obligations, or CDOs. The banks began writing them off, causing the massive losses that have buffeted the country's best-known financial companies. And two, without a market for these securities, brokers stopped wanting to issue risky mortgages to new home buyers. Home values began their plunge.

In other words, a staggeringly complex financial instrument that most Americans had never heard of, and which many financial writers still don't fully understand, became in a matter of months the most important influence on home values in America. That's not how the economy is supposed to work - or at least that's not what they teach students in Economics 101.

The reason this had been happening totally out of sight is not difficult to understand. Banks of all stripes chafe against the restraints that federal and state regulators place on their ability to make money. By cleverly exploiting regulatory loopholes, investment banks created new types of high-risk investments that did not appear on their balance sheets. Safe from the prying eyes of regulators, they allowed banks to dodge the requirement that they keep a certain amount of money in reserve. These reserves are a crucial safety net, but also began to seem like a drag to financiers, money that was just sitting on the sidelines.

"A lot of financial innovation is designed to get around regulation," says Richard Sylla, professor of economics and financial history at NYU's Stern School of Business. "The goal is to make more money, and you can make more money if you don't have to keep capital to back up your investments."

The hiding places for these financial instruments are called conduits. They go by various names - the SIV, or structured investment vehicle, is one that's been in the news a great deal the past few months. These conduits and the various esoteric investments they harbor constitute what Bill Gross, manager of the world's largest bond mutual fund, called a "Frankensteinian levered body of shadow banks" in his January newsletter.

"Our modern shadow banking system," Gross writes, "craftily dodges the reserve requirements of traditional institutions and promotes a chain letter, pyramid scheme of leverage, based in many cases on no reserve cushion whatsoever."

The mortgage-driven securities that have been making headlines are but the tip of a much larger iceberg. Far larger categories of investment have sprung up, with just as much secrecy, and even less clarity into who holds them and how much they are truly worth.

Many of these began as conventional instruments of finance. For instance, derivatives - the broad category of investments whose value is somehow based on other assets, whether a stock, commodity, debt, or currency - have been traded for more than a century as a form of insurance, helping stabilize otherwise volatile markets.

But today, increasingly, a new generation of derivatives doesn't trade on markets at all. These so-called over-the-counter derivatives are highly customized agreements struck in private between two parties. No one else necessarily knows about such investments because they exist off the books, and don't show up in the reports or balance sheets of the parties who signed them.

As the derivatives business has grown more complex, it has also ballooned in scale. Broadly speaking, Das - author of a leading textbook on derivatives and complex securities - estimates that investors worldwide hold more than $500 trillion worth of derivatives. This number now dwarfs the global GDP, which tops out around $60 trillion.

Essentially unregulated and all but invisible, over-the-counter derivatives comprise a huge web of bets, touching every sector of the world economy, that entangles a massive amount of money. If they start to look shaky - or if investors need to start selling them to cover other losses - that value could vanish, with catastrophic results to the owner and unpredictable effects on financial markets.

Derivatives can ripple through the market and link players that might not otherwise be connected. With some types of new investments, that fusion takes place within the security itself.

For instance, some financial instruments are built of two or more different types of assets, linking together sectors of the economy that aren't supposed to move in tandem. In the name of transferring risk - and in the interest of creating an appealing new product to sell to aggressive investors seeking higher returns - a bank could create a CDO, for instance, that packaged subprime mortgages together with corporate bonds. An economist would expect those to move independently, but thanks to a large - and unseen - investment in such a linked package, problems with one could drive down the other. A bad apple can ruin an entire barrel of fruit.

Again, it's not as though anyone necessarily knows the composition of these structured securities. Nor do they know who has invested in them, thanks to the fact that they have not, until recently, counted as conventional assets subject to the normal rules of accounting. And because they don't trade on open markets, their values are essentially guesses, calculated by computer algorithms.

Das disparages much of this as the product of bankers creating "complexity for the sake of complexity," trying to wow their clients by inventing more sophisticated-seeming investments. "Financial innovation is a magical catch phrase," he explains. "It's very sophisticated and chi-chi."

"Investment bankers want to make them more complex, so that they won't be copied, and so that their clients won't understand them," he says. "When they ask whether they're paying the right amount, they won't know."

But when reality comes home to roost, things can get ugly pretty quickly: If an investor is forced to sell a CDO, the onetime price realized on the open market may bear no relationship to the theoretical value generated by a computer formula. That means that everyone holding CDOs can no longer sleep well at night: the same thing can happen to them.

These risks are magnified, as they were during the stock bubble of the 1920s, by the fact that many of these assets are owned by investors who borrowed money to make the investments in the first place. When a market shock like the subprime crisis hits, it can send tremors through the system with incredible speed.

If the contagion spreads, the conventional wisdom holds that the Federal Reserve and other central banks around the world can step into the breach caused when consumers and investors start to lose their confidence. But what happens when all these complicated financial arrangements and instruments start to unravel? The market for one product alone - the credit default swap, or CDS - dwarfs this country's economy. The Fed has an uphill battle, made harder by the fact that it is grappling, to a large extent, with unseen forces.

In theory, additional regulation may help with this. The Financial Accounting Standards Board, which establishes corporate accounting procedures and guidelines, took a first step in that direction this past November, ordering investment banks and anyone else holding complicated securities to assign market values to so-called Level 3 assets - a fancy name for assets for which there is no prevailing market price. This meant assigning a market value to all those CDOs.

Banks promptly began writing down tens of billions of dollars of assets, and their investors are still trying to sort through the results. It's still too early to tell whether or not the effort will work, or whether the "market prices" that get reported are anything more than figments of in-house accountants' imaginations. For his part, Das is skeptical. "It will help that people will know the poison they're drinking," he says. "Whether it will help stabilize the system is another question."

It would be ideal if the financial markets became a bit less opaque and intelligible before that happens. That would be the job of regulators, but Das isn't sure that regulators have the intellectual horsepower to figure out what they need to do. "If you're bright and you can make $5 million a year on Wall Street," he asks, "why would you settle for making 50K as a regulator?"

And in any case, transparency isn't really what the denizens of Wall Street want, Das observes. "The regulators keep espousing things like clarity and transparency, but it's in the investment bankers' interest to keep things opaque." Das pauses for a moment.

"It's like a butcher. He doesn't want the buyer to know what goes into making the sausage." He chuckles, noting that it's the same with financiers. "That's what they're all about and always have been."

Stephen Mihm is an assistant professor of American history at the University of Georgia and the author of “A Nation of Counterfeiters.”

There’s a history to this. Most trace this complexification of financial instruments back twenty years, to the 1987 stock market crash and Alan Greenspan’s term as Federal Reserve Chairman.
More than 20 Years in the Making

Doug Noland

It all began innocently enough: “The Federal Reserve, consistent with its responsibilities as the Nation’s central bank, affirmed today its readiness to serve as a source of liquidity to support the economic and financial system.”

The newly appointed Federal Reserve chairman, Alan Greenspan, released this statement prior to the opening of market trading on Tuesday, October 20, 1987. The previous day, “Black Monday,” the Dow Jones Industrial Average crashed 508 points, or 22.6%. All the major indices were down in the neighborhood of 20%, with S&P500 futures ending the historic trading session down 29%.

The 1987 stock market crash was contemporary Wall Street finance’s first serious market dislocation. Stock market speculation had been running rampant, at least partially fostered by newfangled hedging and “portfolio insurance” trading strategies. When a highly speculative market began to buckle, the forced selling of S&P futures contracts to hedge the rapidly escalating exposure to market insurance written (“dynamic trading”) played an instrumental role in instigating illiquidity and a market panic.

Following “Black Monday,” there was of course considerable media attention directed at the event’s causes and consequences. Some believed at the time the stock market was discounting a severe economic downturn. Others recognized the reality that the situation had little to do with underlying economic forces. The economy was in the midst of a robust economic expansion, while Credit was flowing (too) freely. Immediately post-crash, however, the financial system was extremely vulnerable and the Greenspan Fed acted decisively to ensure the marketplace understood clearly that the Federal Reserve was a willing and able liquidity provider.

Credit then really began to flow. Greenspan’s assurances came at a critical juncture for the fledging Wall Street securitization marketplace; for Michael Milken, Drexel Burnham and the junk bond market; for private equity, hostile takeovers and the leveraged buyout boom; for the fraudulent S&L industry and for many banks’ commercial lending operations. While it sounds a little silly after what we’ve witnessed since, there was a time when the eighties were known as the “decade of greed.”

When the junk bonds, LBOs, S&Ls, and scores of commercial banks all came crashing down beginning in late-1989 to 1990, the Greenspan Fed initiated an historic easing cycle that saw Fed funds cut from 9.0% in November 1989 all the way to 3.0% by September 1992. In order to recapitalize the banking system, free up system Credit growth, and fight economic headwinds, the Greenspan Federal Reserve was more than content to garner outsized financial profits to the fledgling leveraged speculator community and a Wall Street keen to seize power from the frail banking system. Wall Street investment bankers, all facets of the securitization industry, the derivatives market, the hedge funds and the GSEs never looked back –not for a second.

In the guise of “free markets,” the Greenspan Fed sold their soul to unfettered and unregulated Wall Street-based Credit creation. What proceeded was the perpetration of a 20-year myth: that an historic confluence of incredible technological advances, a productivity revolution, and momentous financial innovation had fundamentally altered the course of economic and financial history. The ideology emerged (and became emboldened by each passing year of positive GDP growth and rising asset prices) that free market forces and enlightened policymaking raised the economy’s speed limit and increased its resiliency; conquered inflation; and fundamentally altered and revolutionized financial risk management/intermediation. It was one heck of a compelling – alluring – seductive story.

But, as they say, “there’s always a catch”. In order for New Age Finance to work, the Fed had to make a seemingly simple – yet outrageously dangerous - promise of “liquid and continuous” markets. Only with uninterrupted liquidity could much of securities-based contemporary risk intermediation come close to functioning as advertised. Those taking risky positions in various securitizations (especially when highly leveraged) needed confidence that they would always have the opportunity to offload risk (liquidate positions and/or easily hedge exposure). Those writing derivative “insurance” – accommodating the markets’ expanding appetite for hedging - required liquid markets whereby they could short securities to hedge their risk, as necessary. There were numerous debacles that should have alerted policymakers to some of New Age Finance’s inherent flaws (1994’s bond rout, Orange Co., Mexico, SE Asia, Russia, Argentina, LTCM, the tech bust, and Enron to name a few). Yet the bottom line was that the combination of the Fed’s flexibility to aggressively cut rates on demand; ballooning GSE balance sheets on demand; ballooning foreign official dollar reserve holdings on demand; and insatiable demand for the dollar as the world’s reserve currency all worked in powerful concert to sustain (until recently) the U.S. Credit Bubble - through thick and thin…

The greatest flaw in the Greenspan/Bernanke monetary policy doctrine was a dangerously misguided understanding of the risks inherent to their “risk management” approach. Repeatedly, monetary policymaking was dictated by the Fed’s focus on what it considered the possibility of adverse consequences from relatively low probability (“tail”) developments in the Credit system and real economy. In other words, if the markets (certainly inclusive of “New Age” structured finance) were at risk of faltering, it was believed that aggressive accommodation was required. The avoidance of potentially severe real economic risks through “activist” monetary easing was accepted outright as a patently more attractive proposition compared to the (generally perceived minimal) inflationary risks that might arise from policy ease. As it was in the late 1920s, such an accommodative (“coin in the fuse box”) policy approach is disastrous in Bubble environments.

The Fed’s complete misconception of the true nature of contemporary “inflation" risk was a historic blunder in monetary doctrine and analysis. To be sure, the consequences of accommodating the markets were anything but confined to consumer prices. Instead, the primary - and greatly unappreciated - risks were part and parcel to the perpetuation of dangerous Credit Bubble Dynamics and myriad attendant excesses. Importantly, the Fed failed to recognize that obliging Wall Street finance ensured ever greater Bubble-related distortions and fragilities – deeper structural impairment to both the financial system and real economy. In the end, the Fed’s focus on mitigating “tail” risk guaranteed a much more certain and problematic “tail” – a rather fat one at that.

Fundamentally, the Greenspan/Bernanke “doctrine” totally misconstrued the various risks inherent in their strategy of disregarding Bubbles as they expanded – choosing instead the aggressive implementation of post-Bubble “mopping up” measures as necessary. They were almost as oblivious to the nature of escalating Bubble risk as they were to present-day complexities incident to implementing “mop up” reflationary policies. “Mopping up” the technology Bubble created a greatly more precarious Mortgage Finance Bubble. Aggressively “mopping up” after the mortgage/housing carnage in an age of a debased and vulnerable dollar, $90 oil, $900 gold, surging commodities and food costs, massive unwieldy pools of speculative global finance, myriad global Bubbles, and a runaway Chinese boom is fraught with extraordinary risk. Furthermore, the Fed’s previously most potent reflationary mechanism - Wall Street-backed finance – is today largely inoperable…

I’ll stick with the view that an unfolding breakdown in various trading models and hedging strategies is at risk of precipitating a crisis of confidence for the leveraged speculating community. I suspect hedge fund trading was much more responsible for chaotic global securities markets this week than a rogue French equities trader. There is, unfortunately, little prospect for markets to calm down anytime soon. There is no quick or easy fix to any of the myriad current problems – seized up securitization markets, sinking housing prices, faltering bond insurers, counterparty issues, a crisis in confidence for “Wall Street finance”, or acute economic vulnerability - to name only the most obvious. Again, they’ve been More than 20 Years in the Making.

Noland seems to think that Greenspan and all the other Ayn Rand/Milton Friedman disciples have made a blunder. What if they knew all along that they were setting up the United States-led world economy of the turn of the 21st century for a massive crash? What if it all was deliberate?

A reading of an indispensable work for understanding what has been happening over the past forty years, Naomi Klein’s The Shock Doctrine: The Rise of Disaster Capitalism, makes that possibility seem likely. According to Klein, the free market, neoliberal ideology of Milton Friedman and the University of Chicago Economics Department requires brutal shocks for its implementation. No one would choose to organize society on the basis of pure unadulterated capitalism, so the public and the politicians must be psychically overloaded in ways reminiscent of Cold War-era CIA experiments in brainwashing and torture. With a society thus immobilized, cold-blooded neoliberal technocrats can then impose economic “shock therapy.” Quite often real torture and public murders of opponents are part of the shock therapy policy.

After discussing the horrific story of Dr. Ewen Cameron and his CIA experiments in the unspeakable “psychic driving” techniques, Klein walks the reader through the torture regimes of the Southern Cone countries, most notably Chile under Pinochet and Argentina in the 1970s, Britain under Thatcher, Poland, Russia, South Africa, China, the Asian financial crisis of late 1990s, down to the United States and Iraq under Bush II. Klein’s work should be enough to enshrine Milton Friedman as one of the great villains of the 20th century, right up there with Hitler and Stalin.

Has any university in the history of the world contributed more to evil than the University of Chicago? The university is not only the home of the Straussian Neocons but also Milton Friedman and the whole neoliberal project. Here is Klein on the parallels between Cameron and Friedman:
Friedman’s mission, like Cameron’s, rested on a dream of raching back to a state of “natural” health, when all was in balance, before human interferences created distorting patterns. Where Cameron dreamed of returning the human mind to that pristine state, Friedman dreamed of depatterning societies, of returning them to a state of pure capitalism, cleansed of all interruptions—government regulations, trade barriers and entrenched interests. Also like Cameron, Friedman believed that when the economy is highly distorted, the only way to reach that prelapsarian state was to deliberately inflict painful shocks: only “bitter medicine” could clear those distortions and bad patterns out of the way. Cameron used electricity to inflict his shocks, Friedman’s tool of choice was policy—the shock treatment approach he urged on countries in distress. (The Shock Doctrine, p. 50)

What did the “Chicago School” led by Milton Friedman advocate?
Frank Knight, one of the founders of the Chicago School economics, thought professors should “inculcate” in their students the belief that each economic theory, is “a sacred feature of the system,” not a debatable hypothesis. The core of such sacred Chicago teachings was that the economic forces of supply, demand, inflation and unemployment were like the forces of nature, fixed and unchanging. In the truly free market imagined in Chicago classes and texts, these forces existed in perfect equilibrium, supply communicating with demand the way the moon pulls the tides. If economies suffered from high inflation, it was, according to Friedman’s strict theory of monetarism, invariably because misguided policy makers had allowed too much money to flood the system, rather than letting the market find its balance. Just as ecosystems self-regulate, keeping themselves in balance, the market, left to its own devices, would create just the right number of products at precisely the right prices, produced by workers at just the right wages to buy those products—an Eden of plentiful employment, boundless creativity and zero inflation.” (p. 50)

The challenge for Friedman and his colleagues was how to prove that a real-world market could live up to their rapturous imaginings… Friedman could not point to any living economy that proved that if all “distortions” were stripped away, what would be left would be a society in perfect health and bounteous, since no country in the world met all the criteria for perfect laissez-faire.” (p. 52)

Like all fundamentalist faiths, Chicago School economics is, for its true believers, a closed loop. The starting premise is that the free market is the perfect scientific system, one in which individuals, acting on their own self-interested desires, create the maximum benefits for all. It follows ineluctably that if something is wrong within a free-market economy—high inflation or soaring unemployment—it has to be because the market is not truly free. There must be some interference, some distortion in the system. The Chicago solution is always the same: a stricter and more complete application of the fundamentals. (p. 51)

The question, as always, was how to get to that wondrous place from here. The Marxists were clear: revolution—get rid of the current system, replace it with socialism. For the Chicagoans, the answer was not as straightforward. The United States was already a capitalist country, but as far as they were concerned, just barely. In the U.S., and in all supposedly capitalist economies, the Chicagoans saw interferences everywhere. To make products more affordable, politicians fixed prices; to make workers less exploited, they set minimum wages; to make sure everyone had access to education, they kept it in the hands of the state. These measures often seemed to help people, but Friedman and his colleagues were convinced—and they “proved” it with their models—that they were actually doing untold harm to the equilibrium of the market and the ability of its various signals to communicate with each other. The mission of the Chicago School was thus one of purification—stripping the market of these interruptions so that the free market could sing.

For this reason, Chicagoans did not see Marxism as their true enemy. The real source of trouble was to be found in the ideas of the Keynesians in the United States, the social democrats in Europe and the developmentalists in what was then called the Third World. These were believers not in a utopia but in a mixed economy, to Chicago eyes an ugly hodgepodge of capitalism for the manufacture and distribution of consumer products, socialism in education, state ownership for essentials like water services, and all kinds of laws designed to temer the extremes of capitalism. Like the religious fundamentalist who has a grudging respect for funamentalists of other faiths and for avowed atheists but disdains the casual believer, the Chicagoans declared war on these mix-and-match economists. What they wanted was not a revolution exactly but a capitalist Reformation: a return to uncontaminated capitalism. (p. 51)

For the heads of U.S. multinational corporations, contending with a distinctly less hospitable developing world and with stronger, more demanding unions at home, the postwar boom years were unsettling times. The economy was growing fast, enourmous wealth was being created, but owners and shareholders were forced to redistribute a great deal of wealth through corporate taxes and workers’ salaries. Everyone was doing well, but with a return to the pre-New Deal rules, a few people could have been doing a lot better. (p. 56)

Though always cloaked in the language of math and science, Friedman’s vision coincided precisely with the interests of large multinationals, which by nature hunger for vast new unregulated markets. In the first stage of capitalist expanion, that kind of ravenous growth was provided by colonialism—by “discovering” new territories and grabbing land without paying for it, then extracting riches from the earth without compensating local populations. Friedman’s war on the “welfare state” and “big government” held out the promise of a new font of rapid riches—only this time, rather than conquering new territory, the state itself would be the new frontier, its public services and assets auctioned off for far less than they were worth. (p. 57)

Klein shows how the realization of the Chicago School planners that no normal society would ever implement their ideas except in time of severe crisis soon led to the deliberate creation of crises for just that reason. Then, immoblized by shock, all public assets are plundered and privatized. Not only that, but decisions about such matters, surely among the most important, are removed from public debate.

So, given what Klein has laid out, how planners deliberately induce serious crises and collapses to pave the way for a neoliberal revolution and given that the United States is entering into such a severe crisis, what could be the motivation? What is left of public services to steal? Klein provides a clue from Canada in the early nineties.
In February 1993, Canada was in the midst of financial catastrophe, or so one would have concluded by reading the newspapers and watching TV. “Debt Crisis Looms,” screamed a banner front-page headline in the national newspaper, the Globe and Mail. A major national television special reported that “economists are predicting that sometime in the next year, maybe two years, the deputy minister of finance is going to walk into cabinet and announce that Canada’s credit has run out…. Our lives will change dramatically.”

The phrase “debt wall” suddenly entered the vocabulary. What it meant was that, although life seemed comfortable and peaceful now, Canada was spending so far beyond its means that, very soon, powerful Wall Street firms like Moody’s and Standard and Poor’s would downgrade our national credit from its perfect Triple A status to something much lower. When that happened, hypermobile investors, liberated by the new rules of globalization and free trade, would simply pull their money from Canada and take it somewhere safer. The only solution, we were told, was to radically cut spending on such programs as unemployment insurance and health care. Sure enough, the Liberal Party did just that…

Two years after the deficit hysteria peaked, the investigative journalist Linda McQuaig definitively exposed that a sense of crisis had been carefully stoked and manipulated by a handful of think tanks funded by the largest banks and corporations in Canada… (p. 257)

With the baby-boom generation entering retirement and high health care spending years, clearly the neoliberals want to eliminate Social Security, Medicare and Medicaid in the U.S. and throw everyone at the mercy of the cruel marketplace. It may be that the way clear to the neoliberal paradise in their minds lies in a complete collapse of the dollar and the introduction of the Amero and a North American Union, where all the workers will have the same rights and benefits of Mexican workers.

Last week we wrote:
To the extent that a social theory or movement has an incorrect view of human nature, to that extent is it susceptible to ponerization. For Marxism or revolutionary socialism, the erroneous view of human nature would be that human nature is a blank slate created by human practice. Its downfall was that it didn’t recognize the two types of humans: psychopaths and those with the potential to develop conscience. It shares that downfall with many other ideologies and religions.

Where does neoliberalism fit in? One the one hand it clearly has an impoverished view of human nature: nothing but self-interested legal actors freely buying and selling things. But neoliberalism seems more like the vehicle for the ponerization of society at large than an idealistic movement that got corrupted. Or that its idealism and corruption are one and the same. It is as if it is a purely idealistic when seen from the point of view of psychopaths. Andrew Lobaczewski in Political Ponerology explains this strange idealism, the paradise for psychopaths:
In any society in this world, psychopathic individuals and some of the other deviant types create a ponerogenically active network of common collusions [they cooperate with each other, in other words], partially estranged from the community of normal people. An inspirational role of essential psychopathy in this network appears to be a common pheonomenon. They are aware of being different as they obtain their life-experiences and become familiar with different ways of fighting for their goals. Their world is forever divided into “us and them”; their little world with its own laws and customs and that other foreign world of normal people that they see as full of presumptious ideas and customs by which they are condemned morally. Their sense of honor bids them to cheat and revile that other human world and its values at every opportunity. In contradiction to the customs of normal people, they feel that breaking their promises is appropriate behavior… (p. 138)

In the psychopath, a dream emerges like some Utopia of a “happy” world and a social system which does not reject them or force them to submit to laws and customs whose meaning is incomprehensible to them. They dream of a world in which their simple and radical way of experiencing and perceiving reality would dominate; where they would, of course, be assured safety and prosperity. In this Utopian dream, they imagine that those “others”, different, but also more technically skillful than they are, shold be put to work to achieve this goal for the psychopaths and others of their kin. “We”, they say, “will create a new government, one of justice.” They are prepared to fight and suffer for the sake of such a brave new world, and also, of course, to inflict suffering upon others. Such a vision justifies killing people, whose suffering does not move them to compassion because “they” are not quite conspecific. (p. 139)

These are the people who are pushing the world economy over the edge to create their Utopia which, if we let them, will be a nightmarish dystopia for the rest of us.

In any case, many of us in the North Atlantic regions are facing the prospect of something that none of us under the age of seventy have experienced. How to deal with these fears? With knowledge, of course, which leads to preparedness and right action. The following two articles written by Russians who lived through economic collapse are invaluable: “Survival in Times of Uncertainty: Growing up in Russia in the 1990s” by Legal Alien and Post-Soviet Lessons for a Post-American Century by Dmitry Orlov.

Next week: a glossary of terms.

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