Signs of the Economic Apocalypse, 2-18-08

From SOTT.net:

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.

Conclusion

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 dot.com 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.