Monday, February 25, 2008

Signs of the Economic Apocalypse, 2-25-08


Gold closed at 947.80 dollars an ounce Friday, up 4.7% from $905.40 for the week. The dollar closed at 0.6744 euros Friday, down 1.0% from 0.6813 at the close of the previous Friday. That put the euro at 1.4828 dollars compared to 1.4678 the Friday before. Gold in euros would be 639.20 euros an ounce, up 3.6% from 616.84 at the close of the previous week. Oil closed at 98.81 dollars a barrel Friday, up 3.3% from $95.67 for the week. Oil in euros would be 66.64 euros a barrel, up 2.2% from 65.18 at the close of the Friday before. The gold/oil ratio closed at 9.59 Friday, up 1.4% from 9.46 for the week. In U.S. stocks, the Dow closed at 12,381.02 Friday, up 0.3% from 12,348.21 at the close of the previous week. The NASDAQ closed at 2,303.35 Friday, down 0.8% from 2,321.80 at the end of the week before. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 3.79%, up two basis points from 3.77 for the week.

Last week we asked whether Barack Obama had any intention of following up on his recent economic populist rhetoric if he got elected president. Bill Van Auken noted that the origins of his advisors and of his campaign’s financial contributions would argue that he wouldn’t. Since then, the establishment sent him a couple of clear messages to make sure he doesn’t try. The first was in the form of an editorial in the Washington Post:

A shot across the bow against Barack Obama
Washington Post criticizes populist rhetoric

Jerry White

19 February 2008

In an editorial Sunday the Washington Post, the major daily newspaper in the US capital, criticized the leading contender for the Democratic presidential nomination, Barack Obama, for stirring up “class warfare” in his recent campaign appearances.

The Post column begins approvingly, saying, “At his best, Sen. Barack Obama is a tribune of hope, an eloquent politician-prophet who unabashedly calls on Americans to remember that ‘we rise or fall as one nation.’ But then, it continues, citing a speech the Illinois senator gave to auto workers at a General Motors factory in Janesville, Wisconsin last week, “[T]here are moments like last Wednesday, when Mr. Obama struck some unusually sour notes in what was billed as a major economic policy address. Yes, there were the trademark invocations of ‘shared sacrifice and shared prosperity.’ But Mr. Obama’s remarks were also tinged with an angrier, and intellectually sloppier, message. We thought we’d heard the last of class warfare and populism when former North Carolina senator John Edwards bowed out of the race. In his speech, Mr. Obama quoted Mr. Edwards approvingly; he then echoed him in implying that he could pay for new domestic programs with an immediate U.S. withdrawal from Iraq and in exaggerating the “millions” of job losses attributable to trade agreements...”

The Post editorial followed an article in the Wall Street Journal’s weekend edition, entitled, “Democrats’ Attacks on Business Heat Up,” which singled out the same speech for attack. In particular, the Journal singled out Obama’s criticisms of trade deals with “plenty of protections for corporations and their profits, but none for our environment and our workers who’ve seen factories shut their doors and millions of jobs disappear.”

The Journal noted that “business groups are dismissive of the Democratic attacks,” quoting Randel Johnson, a vice president of the US Chamber of Commerce. “They should be talking about ways to grow the economy such as deregulation and lessening burdens on employers, rather than criticizing them with simplistic politically driven rhetoric,” said Johnson.

Obama, for his own political purposes, is seeking with considerable success to tap into the widespread and deep mood of social anger and political frustration among voters. In his Wisconsin speech he pointed to the widening gap between the wealthy and the rest of the American population, noting that many CEOs were making more in a day that the average worker makes in a year and that a typical family’s annual income had dropped by $1,000 over the last seven years.

Obama’s tepid proposals for reform in no way challenge the economic monopoly of America’s ruling elite. Far from calling for a radical redistribution of wealth, Obama proposed to provide families with a few hundred dollars worth of tax credits. He calls for a $6 billion a year infrastructure program—roughly what the Pentagon spends every three days—under conditions in which the American Society of Civil Engineers estimates $1.6 trillion is needed to bring the nation’s roads, bridges and public buildings into good condition.

To the extent, however, that he makes an appeal to social discontent, no matter how insincerely, he raises popular expectations that neither he nor any other bourgeois politician can meet. Within major business and political circles there are concerns that any appeal to class sentiment—given the level of social tensions in America after more than three decades in which the class struggle has been suppressed—could be the proverbial match being thrown into a powder keg.

Up until now Obama has been given wide latitude by the media to pursue the Democratic nomination. The Washington Post editorial and Wall Street Journal article are signs that the political and media establishment may well rein him in. If he fails to heed their advice to tone down the populist rhetoric, the media could turn on Obama like a dime.

There are, however, significant policy and tactical differences being fought out in the contest between Obama and Hillary Clinton. The day after the Post editorial, New York Times columnist Roger Cohen wrote an op-ed piece defending Obama against criticism and arguing he would be more effective than Clinton in refurbishing the international image of the United States and thereby defending the geopolitical interests of corporate America.

In a column headlined “A Realist Called Obama,” Cohen argues that the Bush administration has alienated US allies and squandered opportunities to expand US influence in the Middle East, Africa and Asia. At the same time, he says, Hillary Clinton is too sullied by “her husband’s coterie of the world’s rich and famous, with its dubious deal-making from Kazakhstan to Colombia,” to project the image of a “U.S. renewal.”

Therefore a “realistic view of Obama,” Cohen says, “would be that he is best placed to seize and shape a new world of such possibilities. He has the youth, the global background, the ability to move people, and the demonstrated talent for reaching across lines of division, even those etched in black and white.”

Cohen says Obama would help “rebrand” America. This, he says, is crucial to advance US interests worldwide. Such “rebranding,” Cohen says, was even used by the Papacy, in the late 1970s, with the elevation of a Polish pope, John Paul II, adding, “and Poles then precipitated the fall of the Soviet empire.”

Rejecting arguments about Obama’s inexperience, Cohen says his administration would have a “tough foreign policy team” to confront Iran and other potential adversaries. At the same time, Cohen reassures the foreign policy establishment, the Illinois senator “needs to recall what he once said: ‘No president should ever hesitate to use force—unilaterally if necessary—to protect ourselves and our vital interests when we are attacked or imminently threatened.’”

Cohen makes clear that those pushing Obama’s campaign see him as a useful tool to advance the interests of US imperialist policy.

The Obama campaign, however, seeks to conceal the contradiction between the interests of his supporters in the ruling elite and the concerns and hopes and expectations he is arousing within the electorate on the basis of vague calls for unity, renewal and change, and his identity as the first African-American with a serious chance to become president.

It is not possible to reconcile the domestic and international interests of America’s financial aristocracy with the needs of the masses of working people. The only means of ensuring a decent future for workers and young people is to break the economic and political stranglehold of the Wall Street banks and large corporations.

Should he win the nomination and be elected, there is no doubt whose hopes and expectations he will disappoint. In the face of the mounting crisis of American and world capitalism, the Democratic Party—the second party of American big business—will place the burden of the economic catastrophe squarely on the backs of working people.

Just in case Obama didn’t get the message, the following incident should do the trick:
Police concerned about order to stop weapons screening at Obama rally

Jack Douglas, Jr.

Thu, Feb. 21, 2008

DALLAS -- Security details at Barack Obama's rally Wednesday stopped screening people for weapons at the front gates more than an hour before the Democratic presidential candidate took the stage at Reunion Arena.

The order to put down the metal detectors and stop checking purses and laptop bags came as a surprise to several Dallas police officers who said they believed it was a lapse in security.

Dallas Deputy Police Chief T.W. Lawrence, head of the Police Department's homeland security and special operations divisions, said the order -- apparently made by the U.S. Secret Service -- was meant to speed up the long lines outside and fill the arena's vacant seats before Obama came on.

"Sure," said Lawrence, when asked if he was concerned by the great number of people who had gotten into the building without being checked. But, he added, the turnout of more than 17,000 people seemed to be a "friendly crowd."

The Secret Service did not return a call from the Star-Telegram seeking comment.

Doors opened to the public at 10 a.m., and for the first hour security officers scanned each person who came in and checked their belongings in a process that kept movement of the long lines at a crawl. Then, about 11 a.m., an order came down to allow the people in without being checked.

Several Dallas police officers said it worried them that the arena was packed with people who got in without even a cursory inspection.

They spoke on condition of anonymity because, they said, the order was made by federal officials who were in charge of security at the event.

"How can you not be concerned in this day and age," said one policeman.

The fact that this security lapse happened in Dallas was probably enough to get the message through to Obama: “We can do to you what we did to Kennedy.”

As Jerry White pointed out, the ruling elite need someone like Obama to “rebrand” the U.S. Empire, to put a new face, more acceptable to the world, on it. And they are not really afraid of what a politician they have bought and paid for will do economically. But they seem very worried about having the public’s hopes raised too much. It’s not Obama they are concerned about, it’s the hope and enthusiasm for change his candidacy is raising that worries them. Why? The following piece suggests some answers:

When Change Is Not Enough: The Seven Steps to Revolution

Sara Robinson

“Those who make peaceful evolution impossible make violent revolution inevitable.”
- John F. Kennedy

There’s one thing for sure: 2008 isn’t anything like politics as usual.

The corporate media (with their unerring eye for the obvious point) is fixated on the narrative that, for the first time ever, Americans will likely end this year with either a woman or a black man headed for the White House. Bloggers are telling stories from the front lines of primaries and caucuses that look like something from the early 60s - people lining up before dawn to vote in Manoa, Hawaii yesterday; a thousand black college students in Prairie View, Texas marching 10 miles to cast their early votes in the face of a county that tried to disenfranchise them. In recent months, we’ve also been gobstopped by the sheer passion of the insurgent campaigns of both Barack Obama and Ron Paul, both of whom brought millions of new voters into the conversation - and with them, a sharp critique of the status quo and a new energy that’s agitating toward deep structural change.

There’s something implacable, earnest, and righteously angry in the air. And it raises all kinds of questions for burned-out Boomers and jaded Gen Xers who’ve been ground down to the stump by the mostly losing battles of the past 30 years. Can it be - at long last - that Americans have, simply, had enough? Are we, finally, stepping out to take back our government - and with it, control of our own future? Is this simply a shifting political season - the kind we get every 20 to 30 years - or is there something deeper going on here? Do we dare to raise our hopes that this time, we’re going to finally win a few? Just how ready is this country for big, serious, forward-looking change?

Recently, I came across a pocket of sociological research that suggested a tantalizing answer to these questions - and also that America may be far more ready for far more change than anyone really believes is possible at this moment. In fact, according to some sociologists, we’ve already lined up all the preconditions that have historically set the stage for full-fledged violent revolution.

It turns out that the energy of this moment is not about Hillary or Ron or Barack. It’s about who we are, and where we are, and what happens to people’s minds when they’re left hanging just a little too far past the moment when they’re ready for transformative change.

Way back in 1962, Caltech sociologist James C. Davies published an article in the American Sociological Review that summarized the conditions that determine how and when modern political revolutions occur. Intriguingly, Davies cited another scholar, Crane Brinton, who laid out seven “tentative uniformities” that he argued were the common precursors that set the stage for the Puritan, American, French, and Russian revolutions. As I read Davies’ argument, it struck me that the same seven stars Brinton named are now precisely lined up at midheaven over America in 2008. Taken together, it’s a convergence that creates the perfect social, economic, and political conditions for the biggest revolution since the shot heard ’round the world.

And even more interestingly: in every case, we got here as a direct result of either intended or unintended consequences of the conservatives’ war against liberal government, and their attempt to take over our democracy and replace it with a one-party plutocracy. It turns out that, historically, liberal nations make very poor grounds for revolution - but deeply conservative ones very reliably create the conditions that eventually make violent overthrow necessary. And our own Republicans, it turns out, have done a hell of a job.

Here are the seven criteria, along with the reasons why we’re fulfilling each of them now, and how conservative policies conspired to put us on the road to possible revolution.

1. Soaring, Then Crashing

Davies notes that revolutions don’t happen in traditional societies that are stable and static - where people have their place, things are as they’ve always been, and nobody expects any of that to change. Rather, modern revolutions - particularly the progressive-minded ones in which people emerge from the fray with greater rights and equality - happen in economically advancing societies, always at the point where a long period of rising living standards and high, hopeful expectations comes to a crashing end, leaving the citizens in an ugly and disgruntled mood. As Davies put it:

“Revolutions are most likely to occur when a prolonged period of objective economic and social development is followed by a short period of sharp reversal. The all-important effect on the minds of people in a particular society is to produce, during the former period, an expectation of continued ability to satisfy needs - which continue to rise - and, during the latter, a mental state of anxiety and frustration when manifest reality breaks away from anticipated reality….

“Political stability and instability are ultimately dependent on a state of mind, a mood, in society…it is the dissatisfied state of mind rather than the tangible provision of ‘adequate’ or ‘inadequate’ supplies of food, equality, or liberty which produces the revolution.”

The American middle class was built on New Deal investments in education, housing, infrastructure, and health care, which produced a very “prolonged period of objective economic and social development.” People were optimistic; generations of growing prosperity raised their expectations that their children would do even better. That era instilled in Americans exactly the kind of hopeful belief in their own agency that primes them to become likely revolutionaries in an era of decline.

And now, thanks to 28 years of conservative misrule, we are now at the point where “manifest reality breaks away from anticipated reality;” and the breach is creating political turbulence. The average American has seen his or her standard of living contract by fits and starts since about 1972. This fall-off that was relieved somewhat by the transition to two-earner households and the economic sunshine of the Clinton years - but then accelerated with the dot-com crash, followed by seven years of Bush’s overt hostility toward the lower 98 percent of Americans who aren’t part of his base. Working-class America is reeling from the mass exodus of manufacturing jobs and the scourge of predatory lending; middle-class America is being hollowed out by health-care bankruptcies, higher college costs, and a tax load far heavier than that of the richest 2 percent. These people expected to do better than their parents. Now, they’re screwed every direction they turn.

In the face of this reversal, Davies tells us, it’s not at all surprising that the national mood is turning ominous, from one end of the political spectrum to the other. However, he warns us: this may not be just a passing political storm. In other times and places, this kind of quick decline in a prosperous nation has been a reliable sign of a full-on revolution brewing just ahead.

2. They Call It A Class War

Marx called this one true, says Davies. Progressive modern democracies run on mutual trust between classes and a shared vision of the common good that binds widely disparate groups together. Now, we’re also about to re-learn the historical lesson that liberals like flat hierarchies, racial and religious tolerance, and easy class mobility not because we’re soft-headed and soft-hearted - but because, unlike short-sighted conservatives, we understand that tight social cohesion is our most reliable and powerful bulwark against the kinds of revolutions that bring down great economies, nations and cultures.

In all the historical examples Davies and Brinton cite, the stage for revolution was set when the upper classes broke faith with society’s other groups, and began to openly prey on them in ways that threatened their very future. Not surprisingly, the other groups soon united, took up arms, and rebelled.

And here we are again: Conservative policies have opened the wealth gap to Depression levels; put workers at the total mercy of their employers; and deprived the working and middle classes of access to education, home ownership, health care, capital, legal redress, and their expectations of a better future for their kids. You can only get away with blaming this on gays and Mexicans for so long before people get wise to the game. And as the primaries are making clear: Americans are getting wise.

Our current plutocratic nobility may soon face the same stark choice its English, French, and Russian predecessors did. They can keep their heads and take proactive steps to close the gap between themselves and the common folk (choosing evolution over revolution, as JFK counsels above). Or they can keep insisting stubbornly on their elite prerogatives, until that gap widens to the point where the revolution comes - and they will lose their heads entirely.

Right now, all we’re asking of our modern-day corporate courtiers is that they accept a tax cut repeal on people making over $200K a year, raise the minimum wage, give us decent health care and the right to unionize, and call a halt to their ridiculous “death tax” boondoggle. In retrospect, their historic forebears might have counseled them to take this deal: their headless ghosts bear testimony to the idea that’s it’s better to give in and lose a little skin early than dig in and lose your whole hide later on.

3. Deserted Intellectuals

Mere unrest among the working and middle classes, all by itself, isn’t enough. Revolutions require leaders - and those always come from the professional and intellectual classes. In most times and places, these groups (which also include military officers) usually enjoy comfortable ties to the upper classes, and access to a certain level of power. But if those connections become frayed and weak, and the disaffected intellectuals make common cause with the lower classes, revolution becomes almost inevitable.

Davies notes that, compared to both the upper and lower classes, the members of America’s upper-middle class were relatively untouched by Great Depression. Because of this, their allegiances to the existing social structure largely remained intact; and he argues that their continued engagement was probably the main factor that allowed America to avert an all-out revolution in the 1930s.

But 2008 is a different story. Both the Boomers (now in their late 40s to early 60s) and Generation X (now in their late 20s to late 40s) were raised in an economically advancing nation that was rich with opportunity and expectation. We spent our childhoods in what were then still the world’s best schools; and A students of every class worked hard to position ourselves for what we (and our parents and teachers) expected would be very successful adult careers. We had every reason to believe that, no matter where we started, important leadership roles awaited us in education, government, the media, business, research, and other institutions.

And yet, when we finally graduated and went to work, we found those institutions being sold out from under us to a newly-emerging group of social and economic conservatives who didn’t share our broad vision of common decency and the common good (which we’d inherited from the GI and Silent adults who raised us and taught us); and who were often so corrupted or so sociopathic that the working environments they created were simply unendurable. If wealth, prestige, and power came at the price of our principles, we often chose instead to take lower-paying work, live small, and stay true to ourselves.

For too many of us, these thwarted expectations have been the driving arc of our adult lives. But we’ve never lost the sense that it was a choice that the America we grew up in would never have asked us to make. In Davies’ terms, we are “deserted intellectuals” - a class that is always at extremely high risk for fomenting revolution whenever it appears in history.

Davies says that revolutions catalyze when these deserted intellectuals make common cause with the lower classes. And much of the energy of this election is coming right out of that emerging alliance. The same drive toward corporatization that savaged our dreams also hammered at other class wedges throughout American society, creating conditions that savaged the middle class and ground the working class toward something resembling serfdom. Between our galvanizing frustration with George Bush, our shared fury at the war, and the new connections forged by bloggers and organizers, that alliance has now congealed into the determinedly change-minded movements we’re seeing this election cycle.

4. Incompetent Government

As this blog has long argued, conservatives invariably govern badly because they don’t really believe that government should exist at all - except, perhaps, as a way to funnel the peoples’ tax money into the pockets of party insiders. This conflicted (if not outright hostile) attitude toward government can’t possibly lead to any outcome other than bad management, bad policy, and eventually such horrendously bad social and economic outcomes that people are forced into the streets to hold their leaders to account.

It turns out there’s never been a modern revolution that didn’t start against a backdrop of atrocious government malfeasance in the face of precipitously declining fortunes. From George III’s onerous taxes to Marie Antoinette’s “Let them eat cake,” revolutions begin when stubborn aristocrats heap fuel on the fire by blithely disregarding the falling fortunes of their once-prosperous citizens. And America is getting dangerously close to that point now. Between our corporate-owned Congress and the spectacularly bad judgment of Bush’s executive branch, there’s never been a government in American history more inept, corrupt, and criminally negligent than this one - or more shockingly out of touch with what the average American is going through. Just ask anyone from New Orleans - or anyone who has a relative in the military.

Liberal democracy avoids this by building in a fail-safe: if the bastards ignore us, we can always vote them out. But if we’ve learned anything over the last eight years, it’s that our votes don’t always count - especially not when conservatives are doing the counting. If this year’s election further confirms the growing conviction that change via the ballot box is futile, we may find a large and disgruntled group of Americans looking to restore government accountability by more direct means.

5. Gutless Wonders in the Ruling Class

Revolution becomes necessary when the ruling classes fail in their duty to lead. Most of the major modern political revolutions occurred at moments when the world was changing rapidly - and the country’s leaders dealt with it by dropping back into denial and clinging defiantly to the old, profitable, and familiar status quo. New technologies, new ideas, and new economic opportunities were emerging; and there came a time when ignoring them was no longer an option. When the leaders failed to step forward boldly to lead their people through the looming and necessary transformations, the people rebelled.

We’re hard up against some huge transformative changes now. Global warming and overwhelming pollution are forcing us to reconsider the way we occupy the world, altering our relationship to food, water, air, soil, energy, and each other. The transition off carbon-based fuels and away from non-recyclable goods is going to re-structure our entire economy. Computers are still creating social and business transformations; biotech and nanotech will only accelerate that. More and more people in the industrialized world are feeling a spiritual void, and coming to believe that moving away from consumerism and toward community may be an important step in recovering that nameless thing they’ve lost.

And, in the teeth of this restless drift toward inevitable change, America has been governed by a bunch of conservative dinosaurs who can’t even bring themselves to acknowledge that the 20th century is over. (Some of them, in fact, are still trying to turn back the Enlightenment.) Liberal governments manage this kind of shift by training and subsidizing scientists and planners, funding research, and setting policies that help their nations navigate these transitions with some grace. Conservative ones - being conservative - will reflexively try to deny that change is occurring at all, and then brutally suppress anyone with evidence to the contrary.

Which is why, every time our current crop of so-called leaders open their mouths to propose a policy or Explain It All To Us, it’s embarrassingly obvious that they don’t have the vision, the intelligence, or the courage to face the future that everyone can clearly see bearing down on us, whether we’re ready or not. Their persistent cluelessness infuriates us - and terrifies us. It’s all too clear that these people are a waste of our tax money: they will never take us where we need to go. Much of the energy we’re seeing in this year’s election is due to the fact that a majority of Americans have figured out that our government is leaving us hung out here, completely on our own, to manage huge and inevitable changes with no support or guidance whatsoever.

Historically, this same seething fury at incompetent, unimaginative, cowardly leaders - and the dawning realization that our survival depends on seizing the lead for ourselves - has been the spark that’s ignited many a violent uprising.

6. Fiscal Irresponsibility

As we’ve seen, revolutions follow in the wake of national economic reversals. Almost always, these reversals occur when inept and corrupt governments mismanage the national economy to the point of indebtedness, bankruptcy, and currency collapse.

There’s a growing consensus on both the left and right that America is now heading into the biggest financial contraction since the Great Depression. And it’s one that liberal critics have seen coming for years, as conservatives systematically dismantled the economic foundations of the entire country. Good-paying jobs went offshore. Domestic investments in infrastructure and education were diverted to the war machine. Government oversight of banks and securities was blinded. Vast sections of the economy were sold off to the Saudis for oil, or to the Chinese for cheap consumer goods and money to finance tax cuts for the wealthy.

This is no way to run an economy, unless you’re a borrow-and-spend conservative determined to starve the government beast to the point where you can, as Grover Norquist proposed, drag it into the bathtub and drown it entirely. The current recession is the bill come due for 28 years of Republican financial malfeasance. It’s also another way in which conservatives themselves have unwittingly set up the historical preconditions for revolution.

7. Inept and Inconsistent Use of Force

The final criterion for revolution is this: The government no longer exercises force in a way that people find fair or consistent. And this can happen in all kinds of ways.

Domestically, there’s uneven sentencing, where some people get the maximum and others get cut loose without penalty - and neither outcome has any connection to the actual circumstances of the crime (though it often correlates all too closely with race, class, and the ability to afford a good lawyer). Unchecked police brutality (tasers, for example) that hardens public perception against the constabulary. Unwarranted police surveillance and legal harassment of law-abiding citizens going about their business. Different kinds of law enforcement for different neighborhoods. The use of government force to silence critics. And let’s not forget the unconstitutional restriction of free speech and free assembly rights.

Abroad, there’s the misuse of military force, which forces the country to pour its blood and treasure into misadventures that offer no clear advantage for the nation. These misadventures not only reduce the country’s international prestige and contribute to economic declines; they often create a class of displaced soldiers who return home with both the skills and the motivation to turn political unrest into a full-fledged shooting war.

This kind of capricious, irrational ineptitude in deploying government force leads to public contempt for the power of the state, and leads the governed to withdraw their consent. And, eventually, it also raises people’s determination to stand together to oppose state power. That growing solidarity and fearlessness - along with the resigned knowledge that equal-opportunity goons will brutalize loyalists and rebels alike, so you might as well be a dead lion rather than a live lamb - is the final factor that catalyzes ordinary citizens into ready and willing revolutionaries.

* * *

“A revolutionary state of mind requires the continued, even habitual but dynamic expectation of greater opportunity to satisfy basic needs…but the necessary additional ingredient is a persistent, unrelenting threat to the satisfaction of those needs: not a threat which actually returns people to a state of sheer survival but which put them in the mental state where they believe they will not be able to satisfy one or more basic needs….The crucial factor is the vague or specific fear that ground gained over a long period of time will be quickly lost… [This fear] generates when the existing government suppresses or is blamed for suppressing such opportunity.”

When Davies wrote that paragraph in 1962, he probably couldn’t have imagined how closely it would describe America in 2008. Thirty years of Republican corporatist government have failed us in ways that are not just inept or corrupt, but also have brought us to the same dangerous brink where so many other empires have erupted into violent revolution. The ground we have gained steadily over the course of the entire 20th Century is eroding under our feet. Movement conservatism has destroyed our economic base, declared open war on the middle and working classes, thwarted the aspirations of the intellectual and professional elites, dismantled the basic processes and functions of democracy, failed to prepare us for the future, overseen the collapse of our economy, and misused police and military force so inconsistently that Americans are losing respect for government.

It’s not always the case that revolution inevitably emerges wherever these seven conditions occur together, just as not everybody infected with a virus gets sick. But over the past 350 years, almost every major revolution in a modern industrialized country has been preceded by this pattern of seven preconditions. It’s fair to say that all those who get sick start out by being exposed to this virus.

Hillary Clinton is failing because this is a revolutionary moment - and she, regrettably, has the misfortune to be too closely identified with the mounting failures of the past that we’re now seeking to move beyond. On the other hand, Ron Paul’s otherwise inexplicable success has been built on his pointed and very specific critique of the kinds of government leadership failures I’ve described.

And Barack Obama is walking away with the moment because he talks of “hope” - which, as Davies makes clear, is the very first thing any would-be revolutionary needs. And then he talks of “change,” which many of his followers are clearly hearing as a soft word for “revolution.” And then he describes - not in too much detail - a different future, and what it means to be a transformative president, and in doing so answers our deep frustration at 30 years of leaders who faced the looming future by turning their heads instead of facing it.

Will he deliver on this promise of change? That remains to be seen. But the success of his presidency, if there is to be one, will likely be measured on how well his policies confront and deal with these seven criteria for revolution. If those preconditions are all still in place in 2012, the fury will have had another four years to rise. And at that point, if history rhymes, mere talk of hope and change will no longer be enough.

What Sara Robinson doesn’t realize, with her positive view of revolution, is the diabolical game-theory employed by the elite whose most ruthless elements tend to end up on top after the revolutions sweep away the existing order. If that fate is to be avoided, the public that would be doing the uprising will have to be armed with knowledge of Ponerology, of rule by psychopaths.

Labels: , ,

Monday, February 18, 2008

Signs of the Economic Apocalypse, 2-18-08


Gold closed at 905.40 dollars an ounce Friday, down 1.9% from $922.30 for the week. The dollar closed at 0.6813 euros Friday, down 1.2% from 0.6893 at the close of the previous Friday. That put the euro at 1.4678 dollars compared to 1.4507 the Friday before. Gold in euros would be 616.84 euros an ounce, down 3.1% from 635.76 at the close of the previous week. Oil closed at 95.67 dollars a barrel, up 4.2% from $91.77 for the week. Oil in euros would be 65.18 euros a barrel, up 3.0% from 63.26 at the close of the Friday before. The gold/oil ratio closed at 9.46 Friday, down 6.4% from 10.06 for the week. In U.S. stocks, the Dow closed at 12,348.21 Friday, up 1.4% from 12,182.13 at the close of the previous week. The NASDAQ closed at 2,321.80 Friday, up 0.7% from 2,304.85 at the end of the week before. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 3.77%, up 12 basis points from 3.65 for the week.

Gold dropped last week on recession fears and oil probably would have too if not for the unrealistic threat by Hugo Chavez to cut of oil exports to the United States. The threat worked like a charm, though, for both Exxon-Mobil and Venezuela, both of which benefit from higher oil prices. Something has to prop those prices up now that tensions between the U.S. and Iran have eased a bit. I’m not saying that Hugo Chavez is working for the oil companies or in the interests of the United States. Most of the evidence would argue against that. But it is curious how long-lived all of the very public enemies of the United States are: first Castro, then Khaddafi, then Bin Laden, who, isn’t even alive, but is kept alive in the virtual world of mainstream discourse because of his value as a public enemy. Such a status can even keep you alive when you are dead!

This kind of ambiguity never ends. Who was John Kennedy? A rabid anti-communist Cold Warrior who instituted counterinsurgency programs around the world? Or were those poses tactical feints concealing a fundamental radical reformism? The fact that he was assassinated gives weight to the latter. Similar questions can be asked about Barack Obama. Bill Van Auken wrote a piece last week detailing Obama’s economic populist rhetoric along with his base of support among the neoliberal super-elite. Is Obama courting these types because that’s what you have to do to get elected and to have any hope of reform, or is University of Chicago-style neoliberalism what he believes in? Or could he be naïve enough to think that neoliberalism is economic populism? That would be scary. The fact that he is being advised by Zbigniew Brzezynski, Paul Volcker and University of Chicago economist Austan Goolsbee is not a good sign.
The two faces of Barack Obama

Bill Van Auken
14 February 2008

Appearing before a packed auditorium at the University of Wisconsin Tuesday on the night of his victories in the “Potomac primaries,” held in Maryland, Virginia and Washington, D.C., Illinois senator and Democratic presidential candidate Barack Obama delivered a speech that was notable for its populist demagogy, not only on the war in Iraq but also social conditions in America.

The Wisconsin rally is the latest in a series of campaign events that have drawn large and predominantly younger crowds—20,000 at the University of Maryland and 17,000 in Virginia Beach on the eve of Tuesday’s primaries—and which have seen Obama adopt a more “left” public face.

The Illinois senator has the instincts of an agitator and seeks to give the crowds what he senses they want. In Wisconsin, he linked “record profits” for Exxon to the rising “price at the pump,” provoking enthusiastic applause. He spoke of trade agreements that “ship jobs overseas and force parents to compete with their teenagers for minimum wage at Wal-Mart.” And he pledged to be a “president who will listen to Main Street—not just Wall Street; a president who will stand with workers not just when it’s easy, but when it’s hard.”

Turning to the question of Iraq, he declared that “our troops are sent to fight tour after tour of duty in a war that should’ve never been authorized and should’ve never been waged,” and derided those who “use 9/11 to scare up votes.”

He continued by citing deteriorating social conditions facing average Americans: “the father who goes to work before dawn and then lies awake at night wondering how he’s going to pay the bills;” “the woman who told me she works the night shift after a full day at college and still can’t afford health care for a sister who’s ill;” the retiree “who lost his pension when the company he gave his life to went bankrupt;” and “the teacher who works at Dunkin Donuts after school just to make ends meet.”

He responded with promises of tax cuts for working people, health care reform, better pay and a government that would “protect pensions, not CEO bonuses.”

Echoing the rhetoric of Martin Luther King, he concluded his speech with the vow that “our dream will not be deferred, our future will not be denied, and our time for change has come.”

There is an element in these speeches that would seem to give pause to the Democratic Party establishment and the big business interests it represents. Obama’s rhetorical excursions could be seen as leading into dangerous territory. After all, the Democratic Party has served as an indispensable partner in the Bush administration’s policies of war abroad and social reaction at home.

But this populist primary rhetoric is only one face of Obama. There is another, and it is turned firmly towards the very corporate interests he publicly criticizes, which have poured tens of millions of dollars into his campaign.

On the day after the Potomac primaries, BusinessWeek ran a special report entitled, “Is Obama Good for Business?” While the piece provided no direct answer to this question, the attitude taken by the business magazine appeared to be a qualified “yes,” based in large part on the private discussions that the Illinois senator is holding with top Wall Street and corporate insiders even as he is delivering his public appeals for “change.”

Thus, BusinessWeek noted, last Sunday, after learning of his victory in the Maine Democratic caucuses, Obama sat down at his computer to exchange emails with Robert Wolf, CEO of UBS America, one of his major Wall Street “bundlers,” responsible for bringing in millions in donations from fellow multi-millionaires to finance what Obama refers to as his “movement.” According to estimates made by the Center for Responsive Politics, 80 percent of the money raised by the Obama campaign last year came from donors affiliated with business, with Wall Street leading the pack. More than half of the money came in the form of donations totaling $2,300 or more.

In addition to Wolf, Obama stays in regular touch with Warren Buffett, the second-wealthiest individual in America, with a net worth of some $52 billion. Among his leading economic advisors is Austan Goolsbee, a University of Chicago professor and prominent advocate of free market policies.

The Volcker endorsement

Perhaps most significant was last month’s little reported endorsement of Obama by Paul Volcker, who was appointed Federal Reserve Board chairman by Democratic President Jimmy Carter in 1979 and remained in charge of the US central bank for nearly seven years under the right-wing Republican administration of Ronald Reagan.

Volcker was responsible for inaugurating a high-interest-rate regime demanded by the dominant sections of finance capital in the name of the battle against inflation. His monetary policy was inextricably linked to the offensive against the working class begun with the firing of the air traffic controllers and the breaking of the PATCO strike and continued with the shutdown of large sections of basic industry and the unleashing of the worst economic downturn since the Great Depression of the 1930s. The ultimate effect of these policies was a vast transfer of wealth from the mass of working people to a narrow financial elite, a process that has continued to this day.

In a statement announcing his backing for Obama, Volcker noted that he had previously avoided involvement in partisan politics. He said that he was moved to intervene now not “by the current turmoil in markets,” but because of “the breadth and depth of challenges that face our nation at home and abroad.” He added, “Those challenges demand a new leadership and a fresh approach.” Obama’s leadership, he concluded, would be able to “restore needed confidence in our vision, our strength and our purposes right around the world.”

Larry Kudlow, the right-wing pundit and former Reagan administration economic advisor, commented on the endorsement earlier this month, noting that he had once worked as a speechwriter for Volcker and describing him as “a great American... a classic conservative... a man of fiscal and monetary rectitude.”

Volcker, Kudlow wrote, “would not have made this endorsement on a whim. Believe me. He never gets involved in these kinds of political decisions.” He concluded by asking: “Is Volcker the new Robert Rubin [the Wall Street insider who directed the Clinton administration’s economic policy]? Is it possible that Mr. Volcker is somehow tutoring Obama? Is it possible that Obama is more financially conservative than originally believed?”

These are the real relations that are being forged behind the scenes as Obama delivers left phrases from the podium. Those like Volcker see the Illinois senator as a useful vehicle for effecting major changes aimed not at ameliorating the conditions of life for masses of working people, but rather at securing the global interests of American finance capital.

No doubt, they believe Obama, who would be America’s first African-American president, is best suited to confront the dangers posed by continuing economic crisis and rising social tensions. Who better to demand even greater sacrifices from the working class, all in the name of national unity and “change?” At the same time, he would present a fresh face to the world, which they hope would help extricate US imperialism from the foreign policy debacles and growing global isolation that are the legacy of the Bush administration.

Given these big business ties, Obama’s campaign rhetoric about confronting poverty and social inequality involve a level of cynicism and demagogy that is truly staggering. His incessant promises of change are not tied to any radical economic program that fundamentally challenges the profit interests of the giant corporations and Wall Street.

On the contrary, Obama has advanced a conservative fiscal policy, pledging himself to a “pay as you go” approach and stressing the need to reduce debt and deficits. Given that he would take office with a near-record $400 billion deficit inherited from the Bush administration, this already determines an agenda of austerity measures.

On Wednesday, the candidate toured a General Motors plant in Janesville, Wisconsin and put forward a so-called jobs program involving investments in infrastructure and alternative energy that would total $210 billion over 10 years. In the face of the deep-going crisis confronting American capitalism, this is less than a drop in the bucket—and even this drop would quickly evaporate in the face of demands for deficit reduction.

Those who don’t want to talk about capitalism should by rights keep their mouths shut when it comes to poverty and unemployment. One cannot deal with either seriously without confronting the private ownership of society’s productive forces and the immense social inequality that it has created. The defense of jobs and living standards, the right to decent housing, health care and education for hundreds of millions of Americans can be advanced only through a far-reaching redistribution of wealth from the super rich to the broad mass of working people.

Clearly, the likes of Wolf, Buffett and Volcker are backing Obama because they know that he has no intention of going anywhere near such a policy.

As for the question of war, those looking to the Obama campaign as a means of ending American militarism will be sorely disappointed. The Illinois Senator has vowed not to reduce the ballooning US military budget—which consumes an estimated $700 billion annually—but rather to increase it. He has called for the recruitment of another 65,000 soldiers for the Army as well as 27,000 more Marines. He has vowed to put “more boots on the ground” in the “war on terror,” the pretext invented by the Bush administration to justify “preemptive war,” i.e., military aggression aimed at asserting US hegemony over the oil-rich regions of the Middle East and Central Asia.

As for Iraq itself, his promises to end the war are belied by his pledge to keep American forces in Iraq to defend “US interests” and conduct “counterterrorism operations,” a formula that would see tens of thousands of US soldiers and Marines continuing to occupy Iraq and repress its population for many years to come.

To the extent that Obama’s rhetoric arouses popular expectations—and there are indications that it does—these will inevitably be dashed. In all probability, this will happen once the primary season is over and Obama is confronted by the Republican right as well as elements within the Democratic Party itself with the demand that he clarify his program. Should he capture the White House in November, he will head an administration committed to defending the interests of the American oligarchy both at home and abroad.

Those turning towards the Obama campaign as a means of effecting progressive social change in the US and bringing an end to US militarism abroad will find that the Democratic Party and the corporate and financial interests it represents will allow neither.

These necessary goals can be achieved only through a decisive break with the Democrats and the entire two-party system and the independent mobilization of the working class through the building of a mass socialist movement.

In one sense, the fact that the Warren Buffets and the Paul Volckers of the world are putting their hopes on someone like Obama to keep the system intact instead of the usual right-wing Republicans indicates just how much they fear the present crisis might actually lead to real change. Much like how capitalism saved itself in the 1930s by the New Deal reforms of Roosevelt, reforms that were abhorrent to the captains of capitalism of the time.

The economic crisis the world is entering into now represents the end of an era that began in the 1970s, the neoliberal era. Here is Steve Kangas, writing in the late 1990s, on how it all started:

The Origins of the Overclass

Steve Kangas

The wealthy have always used many methods to accumulate wealth, but it was not until the mid-1970s that these methods coalesced into a superbly organized, cohesive and efficient machine. After 1975, it became greater than the sum of its parts, a smooth flowing organization of advocacy groups, lobbyists, think tanks, conservative foundations, and PR firms that hurtled the richest 1 percent into the stratosphere.

The origins of this machine, interestingly enough, can be traced back to the CIA. This is not to say the machine is a formal CIA operation, complete with code name and signed documents. (Although such evidence may yet surface — and previously unthinkable domestic operations such as MK-ULTRA, CHAOS and MOCKINGBIRD show this to be a distinct possibility.) But what we do know already indicts the CIA strongly enough. Its principle creators were Irving Kristol, Paul Weyrich, William Simon, Richard Mellon Scaife, Frank Shakespeare, William F. Buckley, Jr., the Rockefeller family, and more. Almost all the machine's creators had CIA backgrounds.

During the 1970s, these men would take the propaganda and operational techniques they had learned in the Cold War and apply them to the Class War. Therefore it is no surprise that the American version of the machine bears an uncanny resemblance to the foreign versions designed to fight communism. The CIA's expert and comprehensive organization of the business class would succeed beyond their wildest dreams. In 1975, the richest 1 percent owned 22 percent of America’s wealth. By 1992, they would nearly double that, to 42 percent — the highest level of inequality in the 20th century.

…Historically, the CIA and society’s elite have been one and the same people. This means that their interests and goals are one and the same as well. Perhaps the most frequent description of the intelligence community is the "old boy network," where members socialize, talk shop, conduct business and tap each other for favors well outside the formal halls of government.

Many common traits made it inevitable that the CIA and Corporate America would become allies. Both share an intense dislike of democracy, and feel they should be liberated from democratic regulations and oversight. Both share a culture of secrecy, either hiding their actions from the American public or lying about them to present the best public image. And both are in a perfect position to help each other.

How? International businesses give CIA agents cover, secret funding, top-quality resources and important contacts in foreign lands. In return, the CIA gives corporations billion-dollar federal contracts (for spy planes, satellites and other hi-tech spycraft). Businessmen also enjoy the romantic thrill of participating in spy operations. The CIA also gives businesses a certain amount of protection and privacy from the media and government watchdogs, under the guise of "national security." Finally, the CIA helps American corporations remain dominant in foreign markets, by overthrowing governments hostile to unregulated capitalism and installing puppet regimes whose policies favor American corporations at the expense of their people…

The Business Origins of CIA Crimes

Although many people think that the CIA’s primary mission during the Cold War was to "deter communism," Noam Chomksy correctly points out that its real mission was "deterring democracy." From corrupting elections to overthrowing democratic governments, from assassinating elected leaders to installing murderous dictators, the CIA has virtually always replaced democracy with dictatorship. It didn’t help that the CIA was run by businessmen, whose hostility towards democracy is legendary. The reason they overthrew so many democracies is because the people usually voted for policies that multi-national corporations didn't like: land reform, strong labor unions, nationalization of their industries, and greater regulation protecting workers, consumers and the environment.

So the CIA’s greatest "successes" were usually more pro-corporate than anti-communist. Citing a communist threat, the CIA helped overthrow the democratically elected Mohammed Mussadegh government in Iran in 1953. But there was no communist threat — the Soviets stood back and watched the coup from afar. What really happened was that Mussadegh threatened to nationalize British and American oil companies in Iran. Consequently, the CIA and MI6 toppled Mussadegh and replaced him with a puppet government, headed by the Shah of Iran and his murderous secret police, SAVAK. The reason why the Ayatollah Khomeini and his revolutionaries took 52 Americans hostage in Tehran in 1979 was because the CIA had helped SAVAK torture and murder their people.

Another "success" was the CIA’s overthrow of the democratically elected government of Jacabo Arbenz in Guatemala in 1954. Again, there was no communist threat. The real threat was to Guatemala’s United Fruit Company, a Rockefeller-owned firm whose stockholders included CIA Director Allen Dulles. Arbenz threatened to nationalize the company, albeit with generous compensation. In response, the CIA initiated a coup that overthrew Arbenz and installed the murderous dictator Castillo Armas. For four decades, CIA-backed dicatators would torture and murder hundreds of thousands of leftists, union members and others who would fight for a more equitable distribution of the country’s resources.

Another "success" story was Chile. In 1973, the country’s democratically elected leader, Salvadore Allende, nationalized foreign-owned interests, like Chile’s lucrative copper mines and telephone system. International Telephone & Telegraph (ITT) offered the CIA $1 million to overthrow Allende — which the CIA allegedly refused — but paid $350,000 to his political opponents. The CIA responded with a coup that murdered Allende and replaced him with a brutal tyrant, General Augusto Pinochet. Pinochet tortured and murdered thousands of leftists, union members and political opponents as economists trained at the University of Chicago under Milton Friedman installed a "free market" economy. Since then, income inequality has soared higher in Chile than anywhere else in Latin America.

Even when the communist threat was real, the CIA first and foremost took care of the elite. In testimony before Congress in the early 50s, it artificially inflated Soviet military capabilities. A notorious example was the "bomber gap" that later turned out to be grossly exaggerated. Another was "Team B," a group of hawkish CIA analysts who seriously distorted Soviet military data. These scare tactics worked. Congress awarded giant defense contracts to the U.S. military-industrial complex…

By the early seventies, economic inequality was at its lowest in the United States, the right-wing movement was at its weakest and the CIA faced congressional hearings that exposed its crimes for the first time.
The CIA wasn’t the only conservative institution that found itself embattled in the early 70s. This was a bad time for conservatives everywhere. America had lost the war in Vietnam. U.S. corporations had to cope with the rise of OPEC. The anti-poverty programs of Roosevelt’s New Deal and Johnson’s Great Society were causing a major redistribution of wealth. And Nixon was making things worse with his own anti-poverty and regulatory programs. Between 1960 and 1973, these efforts cut poverty in half, from 22 to 11 percent. Meanwhile, between 1965 and 1976, the richest 1 percent had gone from owning 37 percent of America’s wealth to only 22 percent.

At a 1973 Conference Board meeting of top American business leaders, executives declared: "We are fighting for our lives," "We are fighting a delaying action," and "If we don’t take action now, we will see our own demise. We will evolve into another social democracy."

The CIA to the rescue

In the mid-1970s, at this historic low point in American conservatism, the CIA began a major campaign to turn corporate fortunes around.

They did this in several ways. First, they helped create numerous foundations to finance their domestic operations. Even before 1973, the CIA had co-opted the most famous ones, like the Ford, Rockefeller and Carnegie Foundations. But after 1973, they created more. One of their most notorious recruits was billionaire Richard Mellon Scaife. During World War II, Scaife's father served in the OSS, the forerunner of the CIA. By his mid-twenties, both of Scaife's parents had died, and he inherited a fortune under four foundations: the Carthage Foundation, the Sarah Scaife Foundation, the Scaife Family Foundations and the Allegheny Foundation. In the early 1970s, Scaife was encouraged by CIA agent Frank Barnett to begin investing his fortune to fight the "Soviet menace." From 1973 to 1975, Scaife ran Forum World Features, a foreign news service used as a front to disseminate CIA propaganda around the world. Shortly afterwards he began donating millions to fund the New Right.

…The political machine they built is broad and comprehensive, covering every aspect of the political fight. It includes right-wing departments and chairs in the nation’s top universities, think tanks, public relations firms, media companies, fake grassroots organizations that pressure Congress (irreverently known as "Astroturf" movements), "Roll-out-the-vote" machines, pollsters, fax networks, lobbyist organizations, economic seminars for the nation’s judges, and more. And because corporations are the richest sector of society, their greater financing overwhelms similar efforts by Democrats.

Besides creating foundations, the CIA helped organize the business community. There have always been special interest groups representing business, like the U.S. Chamber of Commerce and the National Association of Manufacturers, and the CIA has long been involved with them. However, after 1973, a spate of powerful new groups would come into existence, like the Business Roundtable and the Trilateral Commission. These organizations quickly became powerhouses in promoting the business agenda.

Their efforts clearly succeeded. With the 1975 SUN-PAC decision, corporations persuaded government to legalize corporate Political Action Committees (the lobbyist organizations that bribe our government). By 1992, corporations formed 67 percent of all PACs, and they donated 79 percent of all campaign contributions to political parties. In two landmark elections — 1980 and 1994 — corporations gave heavily and one-sidedly to Republicans, turning one or both houses of Congress over to the GOP. Democratic incumbents were shocked by the threat of being rolled completely out of power, so they quietly shifted to the right on economic issues, even though they continued a public façade of liberalism. Corporations went ahead and donated to Democratic incumbents in all other elections, but only as long as they abandoned the interests of workers, consumers, minorities and the poor. As expected, the new pro-corporate Congress passed laws favoring the rich: between 1975 and 1992, the amount of national household wealth owned by the richest 1 percent soared from 22 to 42 percent.

The CIA also helped create the conservative think tank movement. Prior to the 70s, think tanks spanned the political spectrum, with moderate think tanks receiving three times as much funding as conservative ones. At these early think tanks, scholars typically brainstormed for creative solutions to policy problems. This would all change after the rise of conservative foundations in the early 70s. The Heritage Foundation opened its doors in 1973, the recipient of $250,000 in seed money from the Coors Foundation. A flood of conservative think tanks followed shortly thereafter, and by 1980 they overwhelmed the scene. The new think tanks turned out to be little more than propaganda mills, rigging studies to "prove" that their corporate sponsors needed tax breaks, deregulation and other favors from government.

Of course, think-tank studies are useless without publicity, and here the CIA proved especially valuable. Using propaganda techniques it had perfected at the Voice of America and Radio Free Europe, the CIA and its allies turned American AM radio into a haven for conservative talk show hosts. Yes — Rush Limbaugh uses the same propaganda techniques that Muscovites once heard from Voice of America. The CIA has also developed countless other media outlets, like Capital Cities (which eventually bought ABC), major PR firms like Hill & Knowlton, and of course, all the Agency’s connections in the national news media.

The following is a typical example of how the "New Media" operates. As most political observers know, the Republicans suffer from a "gender gap," in which women prefer Democrats by huge majorities. This is, in fact, why Clinton has twice won the presidency. But, curiously enough, as the 90s progressed, conservative female pundits began popping up everywhere in the media. Hard-right pundits like Ann Coulter, Kellyanne Fitzpatrick, Laura Ingraham, Barbara Olson, Melinda Sidak, Anita Blair and Whitney Adams conditioned us to the idea of the conservative woman. This phenomenon was no accident. It turns out that Richard Mellon Scaife donated $450,000 over three years to the Independent Women's Forum, a booking agency that heavily seeds such female conservative pundits into the media.


The most obvious criticism of the New Overclass is that their political machine is undemocratic. Using subversive techniques once aimed at communists, and with all the money they ever need to succeed, the Overclass undemocratically controls our government, our media, and even a growing part of academia. These institutions in turn allow the Overclass to control the supposedly "free" market. It doesn't win all the time, of course — witness Bill Clinton's impeachment trial — but it does score an endless string of other victories elsewhere, all to the detriment of workers, consumers, women, minorities and the poor. We need to fight it with everything we've got.

Radical, undemocratic neoliberalism by the late 1990s had gotten nearly everything it wanted. It was then ready to go into hyperdrive, thanks to Alan Greenspan, Bill Clinton and the 1999 repeal of the Glass-Steagall Act. This may be what finally brings the whole thing down.
Financial Crisis: Asset Securitization-- The Last Tango
Endgame: Unregulated Private Money Creation

F. William Engdahl

What had emerged going into the new millennium after the 1999 repeal of Glass-Steagall was an awesome transformation of American credit markets into what was soon to become the world’s greatest unregulated private money creation machine.

The New Finance was built on an incestuous, interlocking, if informal, cartel of players, all reading from the script written by Alan Greenspan and his friends at J.P. Morgan, Citigroup, Goldman Sachs, and the other major financial houses of New York. Securitization was going to secure a "new" American Century and its financial domination, as its creators clearly believed on the eve of the millennium.

Key to the revolution in finance in addition to the unabashed backing of the Greenspan Fed, was the complicity of the Executive, Legislative and Judicial branches of the US Government right to the Supreme Court. In addition, to make the game work seamlessly, it required the active complicity of the two leading credit agencies in the world—Moody’s and Standard & Poors.

It required a Congress and Executive branch that would repeatedly reject rational appeals to regulate over-the-counter financial derivatives, bank-owned or financed hedge funds or any of the myriad steps to remove supervision, control, transparency that had been painstakingly built up over the previous century or more. It required that the major government-certified rating agencies give their credit AAA imprimatur to a tiny handful of poorly regulated insurance companies called Monolines, all based in New York. The monolines were another essential part of the New Finance.

The interlinks and consensus behind the massive expansion of securitization among all these institutional players was so clear and pervasive it might have been incorporated as America New Finance Inc. and its shares sold over NASDAQ.

Alan Greenspan anticipated and encouraged the process of asset securitization for years before his actual nurturing of the phenomenal real estate bubble in the beginning of the first decade of the new Century. In a pathetic attempt to deny his central role after the fall, Greenspan last year claimed that the problem was not mortgage lending to sub-prime customers but the securitization of the sub-prime credits. In April 2005, he sung a quite different hymn to sub-prime securitization. Addressing the Federal Reserve System’s Fourth Annual Community Affairs Research Conference, the Fed chairman declared,

"Innovation has brought about a multitude of new products, such as subprime loans and niche credit programs for immigrants. Such developments are representative of the market responses that have driven the financial services industry throughout the history of our country. With these advances in technology, lenders have taken advantage of credit-scoring models and other techniques for efficiently extending credit to a broader spectrum of consumers…The mortgage-backed security helped create a national and even an international market for mortgages, and market support for a wider variety of home mortgage loan products became commonplace. This led to securitization of a variety of other consumer loan products, such as auto and credit card loans."

That 2005 speech was about the time he later claimed to have suddenly realized securitization was getting out of hand. In September 2007 once the crisis was full force, CBS’ Leslie Stahl asked why he did nothing to stop "illegal or shady practices you knew were taking place in sub-prime lending." Greenspan replied, "Err, I had no notion of how significant these practices had become until very late. I didn’t really get it until late 2005 and 2006." (emphasis added-w.e.)

As far back as November 1998, only weeks after the near-meltdown of the global financial system through the collapse of the LTCM hedge fund, Greenspan had told an annual meeting of the US Securities Industry Association, "Dramatic advances in computer and telecommunications technologies in recent years have enabled a broad unbundling of risks through innovative financial engineering. The financial instruments of a bygone era, common stocks and debt obligations, have been augmented by a vast array of complex hybrid financial products, which allow risks to be isolated, but which, in many cases, seemingly challenge human understanding."

That speech was the clear signal to Wall Street to move into asset-backed securitization in a big way. After all, hadn’t Greenspan just demonstrated through the harrowing Asia crises of 1997-98 and the systemic crisis triggered by the August 1998 sovereign debt default that the Federal Reserve and its liquidity spigot stood more than ready to bailout the banks in event of any major mishap? The big banks were, after all, clearly now, Too Big To Fail—TBTF.

The Federal Reserve, the world’s largest and most powerful central bank with what was arguably the world’s most liberal market-friendly Chairman, Greenspan, would back its major banks in the bold new securitization undertaking. When Greenspan said risks "which seemingly challenge human understanding," he signaled that he understood at least in a crude way that this was a whole new domain of financial obfuscation and complication. Central bankers traditionally were known for their pursuit of transparency among banks and conservative lending and risk management practices by member banks.

Not ‘ole Alan Greenspan.

Most significantly, Greenspan reassured his Wall Street securities underwriting friends in the Securities Industry Association audience that November of 1998 that he would do all possible to ensure that in the New Finance, the securitization of assets would remain for the banks alone to self-regulate.

Under the Greenspan Fed, the foxes would be trusted to guard the henhouse. He stated:

"The consequence (of the banks’ innovative financial engineering-w.e.) doubtless has been a far more efficient financial system…The new international financial system that has evolved as a consequence has been, despite recent setbacks, a major factor in the marked increase in living standards for those economies that have chosen to participate in it.

“It is important to remember--when we contemplate the regulatory interface with the new international financial system--the system that is relevant is not solely the one we confront today. There is no evidence of which I am aware that suggests that the transition to the new advanced technology-based international financial system is now complete. Doubtless, tomorrow's complexities will dwarf even today's.

“It is, thus, all the more important to recognize that twenty-first century financial regulation is going to increasingly have to rely on private counterparty surveillance to achieve safety and soundness. There is no credible way to envision most government financial regulation being other than oversight of process. As the complexity of financial intermediation on a worldwide scale continues to increase, the conventional regulatory examination process will become progressively obsolescent--at least for the more complex banking systems.” (emphasis added-w.e.)

One might naively ask, why then surrender all those powers like Glass-Steagall to the private banks far beyond possible official regulatory purview?

Again in October 1999, amid the frenzy of the IT stock market bubble mania, a bubble which Greenspan repeatedly and stubbornly insisted he could not confirm as a bubble, he once again praised the role of financial derivatives and "new financial instruments…reallocating risk in a manner that makes risk more tolerable. Insurance, of course, is the purest form of this service. All the new financial products that have been created in recent years, financial derivatives being in the forefront, contribute economic value by unbundling risks and reallocating them in a highly calibrated manner.” He was speaking of securitization on the eve of the all-but certain repeal of the Glass-Steagall Act.

The Fed’s "private counterparty surveillance" brought the entire international inter-bank trading system to a screeching halt in August 2007, as panic spread over the value of the trillions of dollars in securitized Asset Backed Commercial Paper and in fact most securitized bonds. The effects of the shock have only begun, as banks and investors slash values across the US and international financial system. But that’s getting ahead of our story…

Financial Alchemy: Where the fly hits the soup

Securitization, thus, converted illiquid assets into liquid assets. It did this, in theory, by pooling, underwriting and selling the ownership claims to the payment flows, as asset-backed securities (ABS). Mortgage-backed securities were one form of ABS, the largest by far since 2001.

Here’s where the fly hit the soup.

With the US housing market beginning back in 2006 in sharp downturn and rates on Adjustable Rate Mortgages (ARMs) moving sharply higher across the United States, hundreds of thousands of homeowners were being forced to simply "walk away" from their now un-payable mortgages, or be foreclosed on by one or another party in the complex securitization chain, very often illegally, as an Ohio judge recently ruled. Home foreclosures for 2007 were 75% higher than in 2006 and the process is just beginning, in what will be a real estate disaster to rival or likely exceed that of the Great Depression. In California foreclosures were up an eye-popping 421% over the year before.

That growing process of mortgage defaults in turn left gaping holes in the underlying cash payment stream intended to back up the newly issued Mortgage Backed Securities. Because the entire system was totally opaque, no one, least of all the banks holding this paper, knew what was really the case, what asset backed security was good, or what bad. As nature abhors a vacuum, bankers and investors, especially global investors, abhor uncertainty in financial assets they hold. They treat it like toxic waste.

The architects of this New Finance, based on the securitization of home mortgages, however, found that bundling hundreds of disparate mortgages of varying credit quality from across the USA into a big MBS bond wasn’t enough. If the Wall Street MBS underwriters were to be able to sell their new MBS bonds to the well-endowed pension funds of the world, they needed some extra juice. Most pension funds are restricted to buying only bonds rated AAA, highest quality.

But how could a rating agency rate a bond which was composed of a putative spream of mortgage payments from 1,000 different home mortgages across the USA? They couldn’t send an examiner into every city to look at the home and interview its occupant. Who could stand behind the bond? Not the mortgage issuing bank. They sold the mortgage immediately, at a discount, to get it off their books. Not the Special Purpose Vehicle, they were just there to keep the transactions separate from the mortgage underwriting bank.No something else was needed. Deux Maxima! in stepped the dauntless Big Three (actually Big Two) Credit Raters, the rating agencies.

The ABS Rating Game

Never ones to despair when confronted by new obstacles, clever minds at J.P. Morgan, Morgan Stanley, Goldman Sachs, Citigroup, Merrill Lynch, Bear Stearns and a myriad of others in the game of securitizing the exploding volumes of home mortgages after 2002, turned to the Big Three rating agencies to get their prized AAA. This was necessary because, unlike issuance of a traditional corporate bond, say by GE or Ford, where a known, physical bricks ‘n mortar blue-chip company with a long-term credit history stood behind the bond, with Asset Backed Securities no corporation stood behind an ABS. Just a lot of promises on mortgage contracts across America.

The ABS or bond was, if you will, a "stand alone" artificial creation, whose legality under US law has been called into question. That meant a rating by a credit rating agency was essential to make the bond credible, or at least give it the "appearance of credibility," as we now realize from the unraveling of the present securitization debacle.

At the very heart of the new financial architecture that was facilitated by the Greenspan Fed and successive US Administrations over the past two decades and more, was a semi-monopoly held by three de facto unregulated private companies who operated to provide credit ratings for all securitized assets, of course for very nice fees.

Three rating agencies dominated the global business of credit ratings, the largest in the world being Moody’s Investors Service. In the boom years of securitization, Moody’s regularly reported well over a 50% profit on gross rating revenues. The other two in the global rating cartel were Standard & Poor's and Fitch Ratings. All three were American companies intimately tied into the financial sinews of Wall Street and US finance. The fact that the world’s rating business was a de facto US monopoly was no accident. It was planned that way, as a main pillar of the financial domination of New York. The control of the credit rating world was for the US global power projection almost tantamount to US domination in nuclear weapons as a power factor.

Former Secretary of Labor, economist Robert Reich, identified a core issue of the raters, their built-in conflict of interest. Reich noted, "Credit-rating agencies are paid by the same institutions that package and sell the securities the agencies are rating. If an investment bank doesn't like the rating, it doesn't have to pay for it. And even if it likes the rating, it pays only after the security is sold. Get it? It's as if movie studios hired film critics to review their movies, and paid them only if the reviews were positive enough to get lots of people to see the movie."

Reich went on, "Until the collapse, the result was great for credit-rating agencies. Profits at Moody's more than doubled between 2002 and 2006. And it was a great ride for the issuers of mortgage-backed securities. Demand soared because the high ratings had expanded the market. Traders didn't examine anything except the ratings…a multibillion-dollar game of musical chairs. And then the music stopped."

...Off the books

The entire securitization revolution allowed banks to move assets off their books into unregulated opaque vehicles. They sold the mortgages at a discount to underwriters such as Merrill Lynch, Bear Stearns, Citigroup, and similar financial securitizers. They then in turn sold the mortgage collateral to their own separate Special Investment Vehicle or SIV as they were known. The attraction of a stand-alone SIV was that they and their potential losses were theoretically at least, isolated from the main underwriting bank. Should things ever, God forbid, run amok with the various Asset Backed Securities held by the SIV, only the SIV would suffer, not Citigroup or Merrill Lynch.

The dubious revenue streams from sub-prime mortgages and similar low quality loans, once bundled into the new Collateralized Mortgage Obligations or similar securities, then often got an injection of Monoline insurance, a kind of financial Viagra for junk quality mortgages such as the NINA (No Income, No Assets) or "Liars’ Loans," or so-called stated-income loans, that were commonplace during the colossal Greenspan Real Estate economy up until July 2007.

According to the Mortgage Brokers’ Association for Responsible Lending, a consumer protection group, by 2006 Liars’ Loans were a staggering 62% of all USA mortgage originations. In one independent sampling audit of stated-income mortgage loans in Virginia in 2006, the auditors found, based on IRS records that almost 60% of the stated-income loans were exaggerated by more than 50%. Those stated-income chickens are now coming home to roost or far worse. The default rates on those Liars’ Loans, which is now sweeping across the entire US real estate market, makes the waste problems of Tyson Foods factory chicken farms look like a wonderland.

None of that would have been possible without securitization, without the full backing of the Greenspan Fed, without the repeal of Glass-Steagall, without monoline insurance, without the collusion of the major rating agencies, and the selling on of that risk by the mortgage-originating banks to underwriters who bundled them, rated and insured them as all AAA.

In fact the Greenspan New Finance revolution literally opened the floodgates to fraud on every level from home mortgage brokers to lending agencies to Wall Street and London securitization banks to the credit rating agencies. Leaving oversight of the new securitized assets, hundreds of billions of dollars worth of them, to private "self-regulation" between issuing banks like Bear Stearns, Merrill Lynch or Citigroup and their rating agencies, was tantamount to pouring water on a drowning man

Just like it took incompetence and hubris of the level of George W. Bush to (most likely) end the U.S. empire, it looks like the hubris of Alan Greenspan may bring the neoliberal age to an end. What will replace it? Unless the public wises up to the true nature of the pathocracy, the new system will be nothing more than a different style of pathocracy.

Labels: , , , ,

Monday, February 11, 2008

Signs of the Economic Apocalypse, 2-11-08


Gold closed at 922.30 dollars an ounce Friday, up 1.0% from $913.50 for the week. The dollar closed at 0.6893 euros Friday, up 2.0% from 0.6756 at the close of the previous Friday. That put the euro at 1.4507 dollars compared to 1.4802 the Friday before. Gold in euros would be 635.76 euros an ounce, up 3.0% from 617.15 at the close of the previous Friday. Oil closed at 91.77 dollars a barrel Friday, up 3.2% from $88.96 for the week. Oil in euros would be 63.26 euros a barrel, up 5.3% from 60.10 at the close of the Friday before. The gold/oil ratio closed at 10.06, down 2.1% from 10.27 for the week. In U.S. stocks, the Dow Jones Industrial Average closed at 12,182.13 Friday, down 4.6% from 12,743.19 at the close of the previous week. The NASDAQ closed at 2,304.85 Friday, down 4.7% from 2,413.36 at the end of the week before. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 3.65% Friday, up six basis points from 3.59 for the week.

Stocks fell sharply last week, not just on recession concerns but on something more threatening: worries of corporate defaults. Worries, in other words, that corporate bonds will be worth much less than thought, which would add another layer to the existing credit problems stemming from the subprime mess.

U.S. Stocks Drop on Credit Concern; Banks, Weyerhaeuser Fall

Elizabeth Stanton

Feb. 8 (Bloomberg) -- U.S. stocks retreated, sending the market to its first weekly decline since mid-January, as concern that corporate defaults will increase outweighed gains in technology companies and commodities producers.

Bank of America Corp. and JPMorgan Chase & Co. led banks and brokerages to their steepest weekly drop in six years as indexes of corporate credit risk climbed to records.
Weyerhaeuser Co., the largest U.S. lumber producer, fell to a 16-month low in New York after posting a loss. Declines were limited as Inc., Microsoft Corp. and Apple Inc. rose and higher oil and metals prices boosted energy and mining companies.

The Standard & Poor's 500 Index lost 5.62 points, or 0.4 percent, to 1,331.29. The Dow Jones Industrial Average fell 64.87, or 0.5 percent, to 12,182.13. The Nasdaq Composite Index increased 11.82, or 0.5 percent, to 2,304.85. Almost two stocks dropped for every one that rose on the New York Stock Exchange.

“There's going to be more writedowns, more problems,” said Quincy Krosby, who helps manage $330 billion as chief investment strategist at the Hartford in Hartford, Connecticut, during an interview with Bloomberg Television. “It's hard to navigate a market like this.”

The S&P 500 snapped two straight weeks of gains after a report on Feb. 5 showed service industries contracted at the fastest pace since 2001. The index has lost 15 percent since its Oct. 9 record, while the Dow has fallen 14 percent from its all- time high the same day. The Nasdaq has slumped 19 percent since an almost-seven year peak on Oct. 31.

Credit Concern

JPMorgan lost $1.29, or 2.9 percent, to $43.82. Bank of America retreated $1.21, or 2.8 percent, to $42.16. An index of banks and brokerages in the S&P 500 fell 8.6 percent this week, its biggest weekly loss since September 2001.

The costs of insuring various forms of corporate debt against default using derivatives rose to records. Contracts on the benchmark Markit CDX North America Investment Grade Index jumped 5 basis points to 129.59, the highest since the index started in 2004, according to CMA Datavision in New York.

The Markit LCDX Series 9 index of leveraged buyout loan derivatives traded at 91.8, according to broker Phoenix Partners Group, matching the lowest since the latest series began trading in October. Banks sitting on $160 billion of unsold leveraged loans may have to write down more losses after a plunge in the value of the debt, according to Bank of America Corp. analysts.

‘Crunch Is Intensifying’

“It tells you the credit crunch is intensifying,” said Peter Boockvar, equity strategist at Miller Tabak & Co. in New York. “A lot of this paper is sitting on bank balance sheets. There’s further potential for more writedowns, and that constricts the supply of credit in other areas.”

The world’s largest banks and brokerage firms have written down the value of debt and related products on their books by $146 billion since the beginning of 2007, according to data compiled by Bloomberg. The charges stem from the collapse of the U.S. subprime mortgage market.

A U.S. recession is now an even bet as job losses and the housing contraction jeopardize the longest-ever expansion in consumer spending, according to a Bloomberg News survey. The world’s largest economy will expand at a 0.5 percent annual rate during the first quarter, capping the weakest six months since the last economic slump in 2001, according to the median estimate of 62 economists polled from Jan. 30 to Feb. 7.

Weyerhaeuser, a supplier to homebuilders, fell $2.37, or 3.7 percent, to $62.34 after reporting a fourth-quarter loss of $63 million amid the worst housing slump in a quarter century...

The economist Nouriel Roubini, who has been predicting the current crisis for a long time, posted a helpful summary of the dangers we face:

The Rising Risk of a Systemic Financial Meltdown: The Twelve Steps to Financial Disaster

Nouriel Roubini

Feb 05, 2008

Why did the Fed ease the Fed Funds rate by a whopping 125bps in eight days this past January? It is true that most macro indicators are heading south and suggesting a deep and severe recession that has already started. But the flow of bad macro news in mid-January did not justify, by itself, such a radical inter-meeting emergency Fed action followed by another cut at the formal FOMC meeting.

To understand the Fed actions one has to realize that there is now a rising probability of a “catastrophic” financial and economic outcome, i.e. a vicious circle where a deep recession makes the financial losses more severe and where, in turn, large and growing financial losses and a financial meltdown make the recession even more severe. The Fed is seriously worried about this vicious circle and about the risks of a systemic financial meltdown.

That is the reason the Fed had thrown all caution to the wind – after a year in which it was behind the curve and underplaying the economic and financial risks – and has taken a very aggressive approach to risk management; this is a much more aggressive approach than the Greenspan one in spite of the initial views that the Bernanke Fed would be more cautious than Greenspan in reacting to economic and financial vulnerabilities.

To understand the risks that the financial system is facing today I present the “nightmare” or “catastrophic” scenario that the Fed and financial officials around the world are now worried about. Such a scenario – however extreme – has a rising and significant probability of occurring. Thus, it does not describe a very low probability event but rather an outcome that is quite possible.

Start first with the recession that is now enveloping the US economy. Let us assume – as likely - that this recession – that already started in December 2007 - will be worse than the mild ones – that lasted 8 months – that occurred in 1990-91 and 2001. The recession of 2008 will be more severe for several reasons: first, we have the biggest housing bust in US history with home prices likely to eventually fall 20 to 30%; second, because of a credit bubble that went beyond mortgages and because of reckless financial innovation and securitization the ongoing credit bust will lead to a severe credit crunch; third, US households – whose consumption is over 70% of GDP - have spent well beyond their means for years now piling up a massive amount of debt, both mortgage and otherwise; now that home prices are falling and a severe credit crunch is emerging the retrenchment of private consumption will be serious and protracted. So let us suppose that the recession of 2008 will last at least four quarters and, possibly, up to six quarters. What will be the consequences of it?

Here are the twelve steps or stages of a scenario of systemic financial meltdown associated with this severe economic recession…

First, this is the worst housing recession in US history and there is no sign it will bottom out any time soon. At this point it is clear that US home prices will fall between 20% and 30% from their bubbly peak; that would wipe out between $4 trillion and $6 trillion of household wealth. While the subprime meltdown is likely to cause about 2.2 million foreclosures, a 30% fall in home values would imply that over 10 million households would have negative equity in their homes and would have a big incentive to use “jingle mail” (i.e. default, put the home keys in an envelope and send it to their mortgage bank). Moreover, soon enough a few very large home builders will go bankrupt and join the dozens of other small ones that have already gone bankrupt thus leading to another free fall in home builders’ stock prices that have irrationally rallied in the last few weeks in spite of a worsening housing recession.

Second, losses for the financial system from the subprime disaster are now estimated to be as high as $250 to $300 billion. But the financial losses will not be only in subprime mortgages and the related RMBS and CDOs. They are now spreading to near prime and prime mortgages as the same reckless lending practices in subprime (no down-payment, no verification of income, jobs and assets (i.e. NINJA or LIAR loans), interest rate only, negative amortization, teaser rates, etc.) were occurring across the entire spectrum of mortgages; about 60% of all mortgage origination since 2005 through 2007 had these reckless and toxic features. So this is a generalized mortgage crisis and meltdown, not just a subprime one. And losses among all sorts of mortgages will sharply increase as home prices fall sharply and the economy spins into a serious recession. Goldman Sachs now estimates total mortgage credit losses of about $400 billion; but the eventual figures could be much larger if home prices fall more than 20%. Also, the RMBS and CDO markets for securitization of mortgages – already dead for subprime and frozen for other mortgages - remain in a severe credit crunch, thus reducing further the ability of banks to originate mortgages. The mortgage credit crunch will become even more severe.

Also add to the woes and losses of the financial institutions the meltdown of hundreds of billions of off balance SIVs and conduits; this meltdown and the roll-off of the ABCP market has forced banks to bring back on balance sheet these toxic off balance sheet vehicles adding to the capital and liquidity crunch of the financial institutions and adding to their on balance sheet losses. And because of securitization the securitized toxic waste has been spread from banks to capital markets and their investors in the US and abroad, thus increasing – rather than reducing systemic risk – and making the credit crunch global.

Third, the recession will lead – as it is already doing – to a sharp increase in defaults on other forms of unsecured consumer debt: credit cards, auto loans, student loans. There are dozens of millions of subprime credit cards and subprime auto loans in the US. And again defaults in these consumer debt categories will not be limited to subprime borrowers. So add these losses to the financial losses of banks and of other financial institutions (as also these debts were securitized in ABS products), thus leading to a more severe credit crunch. As the Fed loan officers survey suggest the credit crunch is spreading throughout the mortgage market and from mortgages to consumer credit, and from large banks to smaller banks.

Fourth, while there is serious uncertainty about the losses that monolines will undertake on their insurance of RMBS, CDO and other toxic ABS products, it is now clear that such losses are much higher than the $10-15 billion rescue package that regulators are trying to patch up. Some monolines are actually borderline insolvent and none of them deserves at this point a AAA rating regardless of how much realistic recapitalization is provided. Any business that required an AAA rating to stay in business is a business that does not deserve such a rating in the first place. The monolines should be downgraded as no private rescue package – short of an unlikely public bailout – is realistic or feasible given the deep losses of the monolines on their insurance of toxic ABS products.

Next, the downgrade of the monolines will lead to another $150 of writedowns on ABS portfolios for financial institutions that have already massive losses. It will also lead to additional losses on their portfolio of muni bonds. The downgrade of the monolines will also lead to large losses – and potential runs – on the money market funds that invested in some of these toxic products. The money market funds that are backed by banks or that bought liquidity protection from banks against the risk of a fall in the NAV may avoid a run but such a rescue will exacerbate the capital and liquidity problems of their underwriters. The monolines’ downgrade will then also lead to another sharp drop in US equity markets that are already shaken by the risk of a severe recession and large losses in the financial system.

Fifth, the commercial real estate loan market will soon enter into a meltdown similar to the subprime one. Lending practices in commercial real estate were as reckless as those in residential real estate. The housing crisis will lead – with a short lag – to a bust in non-residential construction as no one will want to build offices, stores, shopping malls/centers in ghost towns. The CMBX index is already pricing a massive increase in credit spreads for non-residential mortgages/loans. And new origination of commercial real estate mortgages is already semi-frozen today; the commercial real estate mortgage market is already seizing up today.

Sixth, it is possible that some large regional or even national bank that is very exposed to mortgages, residential and commercial, will go bankrupt. Thus some big banks may join the 200 plus subprime lenders that have gone bankrupt. This, like in the case of Northern Rock, will lead to depositors’ panic and concerns about deposit insurance. The Fed will have to reaffirm the implicit doctrine that some banks are too big to be allowed to fail. But these bank bankruptcies will lead to severe fiscal losses of bank bailout and effective nationalization of the affected institutions. Already Countrywide – an institution that was more likely insolvent than illiquid – has been bailed out with public money via a $55 billion loan from the FHLB system, a semi-public system of funding of mortgage lenders. Banks’ bankruptcies will add to an already severe credit crunch.

Seventh, the banks losses on their portfolio of leveraged loans are already large and growing. The ability of financial institutions to syndicate and securitize their leveraged loans – a good chunk of which were issued to finance very risky and reckless LBOs – is now at serious risk. And hundreds of billions of dollars of leveraged loans are now stuck on the balance sheet of financial institutions at values well below par (currently about 90 cents on the dollar but soon much lower). Add to this that many reckless LBOs (as senseless LBOs with debt to earnings ratio of seven or eight had become the norm during the go-go days of the credit bubble) have now been postponed, restructured or cancelled. And add to this problem the fact that some actual large LBOs will end up into bankruptcy as some of these corporations taken private are effectively bankrupt in a recession and given the repricing of risk; convenant-lite and PIK toggles may only postpone – not avoid – such bankruptcies and make them uglier when they do eventually occur. The leveraged loans mess is already leading to a freezing up of the CLO market and to growing losses for financial institutions.

Eighth, once a severe recession is underway a massive wave of corporate defaults will take place. In a typical year US corporate default rates are about 3.8% (average for 1971-2007); in 2006 and 2007 this figure was a puny 0.6%. And in a typical US recession such default rates surge above 10%. Also during such distressed periods the RGD – or recovery given default – rates are much lower, thus adding to the total losses from a default. Default rates were very low in the last two years because of a slosh of liquidity, easy credit conditions and very low spreads (with junk bond yields being only 260bps above Treasuries until mid June 2007). But now the repricing of risk has been massive: junk bond spreads close to 700bps, iTraxx and CDX indices pricing massive corporate default rates and the junk bond yield issuance market is now semi-frozen. While on average the US and European corporations are in better shape – in terms of profitability and debt burden – than in 2001 there is a large fat tail of corporations with very low profitability and that have piled up a mass of junk bond debt that will soon come to refinancing at much higher spreads. Corporate default rates will surge during the 2008 recession and peak well above 10% based on recent studies. And once defaults are higher and credit spreads higher massive losses will occur among the credit default swaps (CDS) that provided protection against corporate defaults. Estimates of the losses on a notional value of $50 trillion CDS against a bond base of $5 trillion are varied (from $20 billion to $250 billion with a number closer to the latter figure more likely). Losses on CDS do not represent only a transfer of wealth from those who sold protection to those who bought it. If losses are large some of the counterparties who sold protection – possibly large institutions such as monolines, some hedge funds or a large broker dealer – may go bankrupt leading to even greater systemic risk as those who bought protection may face counterparties who cannot pay.

Ninth, the “shadow banking system” (as defined by the PIMCO folks) or more precisely the “shadow financial system” (as it is composed by non-bank financial institutions) will soon get into serious trouble. This shadow financial system is composed of financial institutions that – like banks – borrow short and in liquid forms and lend or invest long in more illiquid assets. This system includes: SIVs, conduits, money market funds, monolines, investment banks, hedge funds and other non-bank financial institutions. All these institutions are subject to market risk, credit risk (given their risky investments) and especially liquidity/rollover risk as their short term liquid liabilities can be rolled off easily while their assets are more long term and illiquid. Unlike banks these non-bank financial institutions don’t have direct or indirect access to the central bank’s lender of last resort support as they are not depository institutions. Thus, in the case of financial distress and/or illiquidity they may go bankrupt because of both insolvency and/or lack of liquidity and inability to roll over or refinance their short term liabilities. Deepening problems in the economy and in the financial markets and poor risk managements will lead some of these institutions to go belly up: a few large hedge funds, a few money market funds, the entire SIV system and, possibly, one or two large and systemically important broker dealers. Dealing with the distress of this shadow financial system will be very problematic as this system – stressed by credit and liquidity problems - cannot be directly rescued by the central banks in the way that banks can.

Tenth, stock markets in the US and abroad will start pricing a severe US recession – rather than a mild recession – and a sharp global economic slowdown. The fall in stock markets – after the late January 2008 rally fizzles out – will resume as investors will soon realize that the economic downturn is more severe, that the monolines will not be rescued, that financial losses will mount, and that earnings will sharply drop in a recession not just among financial firms but also non financial ones. A few long equity hedge funds will go belly up in 2008 after the massive losses of many hedge funds in August, November and, again, January 2008. Large margin calls will be triggered for long equity investors and another round of massive equity shorting will take place. Long covering and margin calls will lead to a cascading fall in equity markets in the US and a transmission to global equity markets. US and global equity markets will enter into a persistent bear market as in a typical US recession the S&P500 falls by about 28%.

Eleventh, the worsening credit crunch that is affecting most credit markets and credit derivative markets will lead to a dry-up of liquidity in a variety of financial markets, including otherwise very liquid derivatives markets. Another round of credit crunch in interbank markets will ensue triggered by counterparty risk, lack of trust, liquidity premia and credit risk. A variety of interbank rates – TED spreads, BOR-OIS spreads, BOT – Tbill spreads, interbank-policy rate spreads, swap spreads, VIX and other gauges of investors’ risk aversion – will massively widen again. Even the easing of the liquidity crunch after massive central banks’ actions in December and January will reverse as credit concerns keep interbank spread wide in spite of further injections of liquidity by central banks.

Twelfth, a vicious circle of losses, capital reduction, credit contraction, forced liquidation and fire sales of assets at below fundamental prices will ensue leading to a cascading and mounting cycle of losses and further credit contraction. In illiquid market actual market prices are now even lower than the lower fundamental value that they now have given the credit problems in the economy. Market prices include a large illiquidity discount on top of the discount due to the credit and fundamental problems of the underlying assets that are backing the distressed financial assets. Capital losses will lead to margin calls and further reduction of risk taking by a variety of financial institutions that are now forced to mark to market their positions. Such a forced fire sale of assets in illiquid markets will lead to further losses that will further contract credit and trigger further margin calls and disintermediation of credit. The triggering event for the next round of this cascade is the downgrade of the monolines and the ensuing sharp drop in equity markets; both will trigger margin calls and further credit disintermediation.

Based on estimates by Goldman Sachs $200 billion of losses in the financial system lead to a contraction of credit of $2 trillion given that institutions hold about $10 of assets per dollar of capital. The recapitalization of banks sovereign wealth funds – about $80 billion so far – will be unable to stop this credit disintermediation – (the move from off balance sheet to on balance sheet and moves of assets and liabilities from the shadow banking system to the formal banking system) and the ensuing contraction in credit as the mounting losses will dominate by a large margin any bank recapitalization from SWFs. A contagious and cascading spiral of credit disintermediation, credit contraction, sharp fall in asset prices and sharp widening in credit spreads will then be transmitted to most parts of the financial system. This massive credit crunch will make the economic contraction more severe and lead to further financial losses. Total losses in the financial system will add up to more than $1 trillion and the economic recession will become deeper, more protracted and severe.

A near global economic recession will ensue as the financial and credit losses and the credit crunch spread around the world. Panic, fire sales, cascading fall in asset prices will exacerbate the financial and real economic distress as a number of large and systemically important financial institutions go bankrupt.
A 1987 style stock market crash could occur leading to further panic and severe financial and economic distress. Monetary and fiscal easing will not be able to prevent a systemic financial meltdown as credit and insolvency problems trump illiquidity problems. The lack of trust in counterparties – driven by the opacity and lack of transparency in financial markets, and uncertainty about the size of the losses and who is holding the toxic waste securities – will add to the impotence of monetary policy and lead to massive hoarding of liquidity that will exacerbates the liquidity and credit crunch.

In this meltdown scenario US and global financial markets will experience their most severe crisis in the last quarter of a century.

Can the Fed and other financial officials avoid this nightmare scenario that keeps them awake at night? The answer to this question – to be detailed in a follow-up article – is twofold: first, it is not easy to manage and control such a contagious financial crisis that is more severe and dangerous than any faced by the US in a quarter of a century; second, the extent and severity of this financial crisis will depend on whether the policy response – monetary, fiscal, regulatory, financial and otherwise – is coherent, timely and credible. I will argue – in my next article - that one should be pessimistic about the ability of policy and financial authorities to manage and contain a crisis of this magnitude; thus, one should be prepared for the worst, i.e. a systemic financial crisis.

It’s a sure sign of a crisis when we learn about institutions that few even knew existed. A case in point is the bond insurers that we have been hearing about quite a bit in recent weeks.

Bonds Unbound

James Surowiecki

February 11, 2008

If the ongoing turmoil in the world’s financial markets has made anything clear, it’s that the list of things that can go wrong in those markets is a very long one. Month after month, it seems, another potentially disastrous problem rises to the surface. The latest looming crisis is the possible implosion of a group of companies called monoline insurers. If you haven’t heard of monoline insurers, don’t worry: until recently, few people, even on Wall Street, were all that interested in them. Yet their problems have become a serious threat to global markets. Rumors that monoline insurers, like M.B.I.A. and Ambac, were in serious trouble helped spark the vast market sell-off that prompted the Federal Reserve’s interest-rate cut two weeks ago, and, only a few days later, rumors of a government-orchestrated bailout of these companies set off a six-hundred-point rally in the Dow.

Monoline insurers do a straightforward job: they insure securities—guaranteeing, for instance, that if a bond defaults they’ll cover the interest and the principal. Historically, this was a fairly sleepy business; these companies got their start by insuring municipal bonds, which rarely default, and initially they confined themselves to bonds with relatively predictable risks, which were easy to put a price on. Unfortunately, a sleepy, straightforward business wasn’t good enough for the insurers. Like everyone else in recent years, they wanted to cash in on the housing and lending boom. In order to expand, they started insuring the complex securities that Wall Street created by packaging mortgages, including subprime ones, for investors. This was a lucrative business—M.B.I.A.’s revenues rose nearly a hundred and forty per cent between 2001 and 2006—but it rested on a false assumption: that the insurers knew how risky these securities really were. They didn’t. Instead, they gravely underestimated how likely the loans were to go bad, which meant that they didn’t charge enough for the insurance they were offering, and didn’t put away enough to cover the claims. They’re now on the hook for tens of billions of dollars in potential losses, and some estimates suggest that they’ll need more than a hundred billion to restore themselves to health.

Obviously, this is bad news for the insurers—at one point, M.B.I.A.’s and Ambac’s stock prices were down more than ninety per cent from their all-time highs—but it’s also very dangerous for credit markets as a whole. This is because of a peculiar feature of bond insurance: insurers’ credit ratings get automatically applied to any bond they insure. M.B.I.A. and Ambac have enjoyed the highest rating possible, AAA. As a result, any bond they insured, no matter how junky, became an AAA security, which meant access to more investors and a generally lower interest rate. The problem is that this process works in reverse, too. If the insurers lose their AAA ratings—credit agencies have made clear that both companies are at risk of this, and one agency has already downgraded Ambac to AA—then the bonds they’ve insured will lose their ratings as well, which will leave investors holding billions upon billions in assets worth a lot less than they thought. That’s why so many people on Wall Street are pushing for a bailout for the insurers. It may be an abandonment of free-market principles, but no one has ever accused the Street of putting principle above profit.

Normally when companies make bad decisions and fail to deliver value, it’s just their workers and investors who suffer. But monoline insurers’ desire to grab as much new business as they could, risks be damned, quickly radiated across global markets and will have huge consequences for millions of people who have never heard of M.B.I.A. or Ambac. The situation illustrates a fundamental paradox of today’s financial system: it’s bigger than ever, but terrible decisions by just a few companies—not even very big companies, at that—can make the entire edifice totter…

The food crisis has also been accelerating recently. Food prices have been rising rapidly and reserve stocks have been falling. A perfect storm of climate disruption, energy cost increases, and demand for biofuels adds yet another threat to the economic and physical well being of people.

Wheat continues to surge above $10 a bushel

Sue Kirchhoff,

USA Today

U.S. wheat prices continued to soar Wednesday as export demand remained robust despite record high prices, with values in the United States rising by the maximum allowed in a trading day and helping to rally corn and soybeans.

Overall, wheat prices have doubled since last June at the Chicago Mercantile Exchange, which owns the Chicago Board of Trade. Prices have been pushed higher by surging world demand and bad weather in some major producing nations.

"For the near-term price, it's still heading higher," says Joe Victor, vice president of marketing at Allendale, a commodity research firm. He says prices will stay elevated until the markets get a better handle on potential production in coming months. "If we have good weather, plenty of plantings, then there's likely a price correction," Victor says. "If it's bad weather … (prices will) continue their upward trends."

There were fresh signs that record high prices for wheat had yet to dent demand from importing nations.

Egypt, one of the world's largest importers of wheat, bought 150,000 tons of the grain, including 25,000 tons from the United States, the world's top exporter of wheat.

"That is such an important factor in the wheat market," says grains analyst Bill Nelson of A.G. Edwards, referring to the purchase by Egypt.

"Egypt is being seen as a proxy for world grain buyers who are, in general, willing to buy grain even at record prices. This is evidence that day after day of record prices are not limiting demand," he says.

The May futures contract for Chicago soft red winter wheat, used in cakes and crackers, jumped by the daily limit of 30 cents to an all-time high of $10.50 a bushel. The nearby March contract rose its 30-cent daily limit to a high of $10.33. Wheat prices briefly jumped to more than $10 a bushel in December.

Minneapolis Grain Exchange March spring wheat also rose by the daily limit to $14.93 a bushel, the highest price for any U.S. wheat futures contract. High-protein spring wheat, prized by millers and bakers for its quality, is forecast to have the smallest surplus in at least 30 years, and harvest doesn't start till August. The Minneapolis Exchange will raise the daily trading limit to 40 cents, beginning Feb 12.

Trading on Tuesday was influenced by a Canadian government report showing the wheat supply in that nation plummeting 30% from December 2006 to December 2007. The sharp drop was mainly caused by a more than 20% dip in wheat production last year.

The U.S. Department of Agriculture expects the U.S. wheat surplus this year to be the smallest in 60 years.
Despite higher prices, U.S. plantings of winter wheat rose only about 4% from last year. Farmers had been expected to increase plantings by far more.

Prices for corn, soybeans and other grains have also surged in recent months. That helped push U.S. food inflation up to 4.9% in 2007 from 2.1% in 2006. The impact has been far greater in less-affluent nations, where people spend more of their income on food.

Merrill Lynch analysts in a recent report said the rate of what they call "agflation" could slow if economic growth cools. But costs will remain elevated. "Longer term, however, we remain convinced that agflation will be an important issue for consumers and policymakers alike," the Merrill Lynch report said.

The following chart from Doug Nolan’s Credit Bubble Bulletin shows wheat prices over the past five years:

I Guess soon we won’t have to worry about the obesity crisis anymore.

Labels: , ,