The world appears to be moving very rapidly towards a global depression. No one knows how deep it will go or how long it will last. More importantly, no one knows what long-term effects it will have. The last depression took place in the 1930s. It was responsible not only for untold misery but also indirectly for the deaths of more than 50 million human beings. Without the Great Depression it is inconceivable that the Nazi Party would have taken power in Germany. In 1928 the Nazi Party won less than 3% of the national vote; by mid 1932, close to 40%. In turn, without Hitler in control of Germany, there would have been no World War II. While the earliest of the direct effects of the global financial crisis are already with us, the indirect effects are presently unknowable. What impact will it have on the Millennium Development Goals, the pledge of the countries of the developed world to increase foreign aid to 0.7% of their GDP so that there is at least a plausible chance that a portion of the billion or so human beings who live on less than a dollar a day might be lifted out of poverty? What impact will it have on the chances of radical and binding international agreement over global warming, at Copenhagen and beyond, without which the very future of the Earth is threatened? What other radical impacts might it have which are presently unforeseen and unforeseeable? If the arrival of the astonishing global financial crisis does not now call out in all of us sobriety and seriousness, nothing ever will.
The causes of the global financial crisis are already reasonably clear. The crisis originated in a series of interconnected developments within the American financial sector. From the 1980s a vast market in obscure and opaque financial instruments known as derivatives developed there. The market grew at an accelerating pace. In 1989 it was worth US$2 trillion; by 2002, $100 trillion; and by September 2008, almost $600 trillion. (The annual GDP of the United States is presently about $15 trillion.) This explosion of the market in derivatives depended, in turn, on ideological convictions and political acts. In 1998 Brooksley Born, the head of the Commodity Futures Trading Commission, argued for the regulation of this market. Without it, she argued, the American economy and the global economy were being placed at risk. She was overpowered by the chairman of the Federal Reserve, Alan Greenspan, and President Clinton's Treasury secretary, Robert Rubin. Shortly after, Congress withdrew from the CFTC the authority to regulate derivatives. At much the same time, as a consequence of a $300-million lobbying campaign by financial corporations, Congress also repealed President Roosevelt's 1933 Glass-Steagall Act. Its purpose had been to separate the commercial banks, which had become involved in the speculative frenzy of the '20s, from the activities of the investment banks. The repeal of the Glass-Steagall Act opened all the American major banks to massive involvement in the derivatives market. More deeply, as Joseph Stiglitz has argued in Vanity Fair, the repeal completed the transformation of American banking culture.
The post-2000 derivatives explosion was also aided by American monetary policy. Greenspan reacted to the bursting of the dotcom bubble by steadily lowering official interest rates. In 2000-01 they dropped rapidly from 6.5% to 3.5%. By 2003 they had reached 1%. Effectively, at least for bankers, as Charles Morris puts it in his book The Two Trillion Dollar Meltdown, money was now free. At this time the explosion in the derivatives market intersected with the explosion in another market, sub-prime mortgage lending, which rose from US$145 billion in 2001 to $625 billion in 2005. On the basis of a housing bubble, which increased the price of houses by an annual 7-8%, borrowers with low incomes and no assets were encouraged by banks and mortgage brokers to purchase houses worth several hundred thousand dollars. Derivative traders saw these sub-prime mortgages as a splendid opportunity. They bundled up the mortgages and created from them esoteric derivatives products - like collateralised mortgage obligations or collateralised debt obligations - which were then sold on in their trillions to investors and pension funds. In an article for Portfolio, Michael Lewis gives a telling example of how the racket worked. Big Wall Street firms took piles of sub-prime mortgages with a BBB rating. They bundled them into new products and divided these products into tranches. The top 60% of these tranches were rated AAA. Lewis's informant, Steve Eisman, who made his fortune by ‘shorting' the corporations and the products involved in this trade (that is, gambling on their failure), kept asking himself: How is this possible; why is this allowed?
In essence there are two answers to Eisman's questions. The systematically phoney evaluations of the derivative products and the corporations which dealt in them, pocketing substantial fees with each contract, arose as a result of a straightforward but fatal ratings-agency conflict of interest. The profits of the agencies derived from the Wall Street banks and investment businesses they were supposed to rate. The continuation of their own very healthy profit growth relied on their willingness to turn a blind eye. Yet the fraudulent behaviour of Wall Street rested on another, even deeper, kind of blindness: the ideological blindness of the regulators. Most important here was the regulator-in-chief, Alan Greenspan, the most enthusiastic derivatives cheerleader, who believed with regard to derivatives (and everything else) that the invisible hand of the market was an infinitely more reliable and intelligent guide than any regulatory action by the state. The richest financier in the United States, Warren Buffett, famously argued in his 2002 Berkshire Hathaway annual report that derivatives were "financial weapons of mass destruction". (This, incidentally, did not prevent him, as Edward Jay Epstein pointed out in Vanity Fair last month, from dealing in derivatives worth billions of dollars or from holding a 20% stake in one of the main derivatives accomplices, Moody's ratings agency.) To this point of view, time and again, Greenspan replied in the following way: "Derivatives have been an extraordinarily useful vehicle to transfer risk from those who shouldn't be taking it to those who are willing to and are capable of doing so." The failure of the regulators to regulate eventually required the coining of a new term: de-supervision. Concerning de-supervision, James Lieber in the Village Voice tells a fascinating story. One of the engine rooms of the derivatives market was the London-based financial-products arm of the (later bailed-out) American insurance giant AIG. In 2000, the chief legal officer of AIG asked the head of insurance regulation in New York whether he would like to audit their business. The New York regulator politely declined.
It is obvious whose interest all this served. Before the recent crash, the average taxable income of the top 15,000 American income earners was US$30 million; their annual income in total, US$441 billion. In the mid 1970s the wealthiest 1% of Americans owned approximately 20% of national assets. On the eve of the financial collapse they owned some 40%. Very many of these people derived their income and their wealth from the financial sector. In 2008, even after the sector had begun imploding, the executives of the Wall Street corporations that were eventually rescued by taxpayers rewarded themselves with US$18 billion in bonuses. Vast riches had apparently come to be seen by this predatory class as an entitlement.
The end of this story is well known. By 2008 it was clear the sub-prime mortgage market had crashed. The derivatives market went with it. Most derivatives were suddenly seen for what they had always been: "toxic waste". Wall Street was in panic. Like most of the major banks and investment houses involved in the derivatives-market frenzy, Lehman Brothers was effectively bankrupt. On 15 September the firm admitted this. But unlike the other bankruptcies acknowledged at this time, it was not bought up by a larger corporation or bailed out by the Bush administration. Almost overnight, American credit markets froze. By now, however, the derivatives market was fully globalised. It had sucked in very many of the major banks and investment businesses in the developed world. The most toxic product of all seems to have been the so-called credit-default swap, which allowed the risk for defaults on debt payments to be transferred time and again between institutions. As inter-bank trust collapsed, global credit markets also froze. In an attempt to unfreeze them, the world's banks and investment businesses were given some US$13 trillion in taxpayer-funded bailouts and guarantees. So far, even this has not worked. Economies around the globe quickly passed into even deeper recession than in 1973-74. Forty per cent of the value of global stock markets evaporated. Industry after industry contracted. Massive unemployment loomed. There was widespread talk now of a new depression. With extraordinary rapidity, the collapse of the US$600-trillion derivatives market had brought the global economy to its knees.
It is strange but nonetheless true that, thus far, the most impressive Australian essay on this crisis and its implications was the one written by the prime minister during his holiday break, published last month in this magazine. As Kevin Rudd argued, the global financial crisis was of such moment that eventually it might be clear that it had closed one era of history and opened another. Since the end of World War II, within the international political economy there had been two 30-year eras. The first rested on two compromises - between capital and labour and between the state and the market - which seemed to have solved the underlying problems of capitalism: eliminating booms and busts and both inflation and unemployment. This era had been guided by the spirit of the economist John Maynard Keynes. A new era began with the elections of Thatcher and Reagan. It promised universal prosperity on the basis of the systematic contraction of government interventions in the management of economies, and the global expansion of free markets. This era was presided over by the spirit of the key economists of the Austrian and Chicago schools, Friedrich Hayek and Milton Friedman. Following standard nomenclature, Rudd called this 30-year period the age of neo-liberalism. Just as stagflation had killed off the era of the Keynesian compromise, so now, in Rudd's view, it was almost certain that the global financial crisis would bring the neo-liberal era of Hayek and Friedman to an end.
The purpose of Rudd's essay was to show why this was so and also why its happening would be to the eventual benefit of humankind. Neo-liberalism was founded on a faith in the capacity of the free market to bring order and prosperity. Far from creating either, the freedom allowed the financial markets in the United States had proven so lethal that almost overnight it had destroyed a considerable part of the global economy. No one could believe any longer in the magic of unregulated markets or in their self-correcting capacity. In the emergency following the collapse, almost no one doubted that both robust state action at home and an unprecedented level of governmental co-operation internationally were immediately required. Neo-liberalism could now, Rudd argued, be seen for what it had always been - a flawed philosophy justifying indefensible levels of inequality and rationalising greed.
The era of neo-liberal philosophical hegemony in the sphere of the political economy was almost certain to be replaced by a new era of what Rudd tentatively called social democracy. Its role in national politics would be to restore the balance between state and market and to resume, without apology, the quest for social justice, a notion that the neo-liberals, following Hayek, had sought to anathematise. Its role in international relations would be to forge a new era of co-operation in the management of the global economy and to deepen commitment to the struggle against global poverty. In the domestic sphere, the first priority was to stimulate the recessed economies with a cautious return to the demand-management policies of Keynes. In the international sphere, the first priority would be the creation of a new regulatory framework for the operation of financial markets. If social democracy failed now in the task of preventing capitalism from cannibalising itself, there was a real danger of a return of the kind of political threat that had been experienced during the Great Depression, of a drift to the radical extremes of Left or Right.
Rudd's essay was not without weakness. Apart from mentioning that global warming was the greatest case of market failure in history, the kind of failure neo-liberals were ideologically pre-programmed to discount, Rudd (for painfully obvious reasons) failed to assess the likely impact of the global financial crisis on prospects for international co-operation over climate change. This is hardly a side issue. It will determine the future of the Earth. To some extent, too, it seems clear that Rudd had exaggerated his differences with neo-liberalism. In Australia, a considerable part of the neo-liberal program was implemented by the Hawke and Keating governments: the near-complete reduction of tariff protection, the floating of the dollar, financial-market liberalisation, privatisation. Because such policies were implemented by Labor and because Rudd actually supports them, he describes them not as neo-liberal but as "economic modernisation". This is misleading. Such policies come out of the neo-liberal textbook, sometimes known as the Washington Consensus. Rudd's essay would have been stronger if he had distinguished between those parts of the neo-liberal policy agenda he supports and those parts he opposes. It would also have been stronger if he had acknowledged that neo-liberalism has had an uneven impact on policy formation across the globe. Even if you set aside the difficult matter of defining the policy implications of neo-liberalism - on certain questions, like monetary policy, even Hayek and Friedman disagreed - it is obvious that there is no real-world case in which the impact of neo-liberalism has not been influenced or diluted by national political cultures. Because a great deal of the neo-liberal program was implemented in Australia by the Hawke and Keating governments, it did not lead, except at the margins, to the unravelling of the social-welfare state. On the other hand, because neo-liberalism in the United States was for the most part implemented by Republican administrations, some items of the neo-liberal agenda were emphasised over others. Republican presidents ignored the problem of balancing their domestic budgets. They were always keen to cut the taxes of the wealthy.
Despite these weaknesses, however, the core of Rudd's argument was solid. For 30 years policymakers and elite opinion throughout the Western world, and especially throughout the English-speaking world, had maintained a suspicion of state intervention and regulation and a faith in the superior wisdom of the market. The market faith had for 30 years served the interests of the wealthiest segments of society. The global financial collapse of 2008, which was rooted in the radical deregulation of financial markets, had proven the falsity of that faith. In the crisis, both domestically and internationally, everyone had immediately turned to governments in the search for a solution. As a consequence of all this, a new era was in the process of coming into being where the claims of both the market and the state, and of both economic efficiency and social justice, would need to be honoured. The era of neo-liberalism was over. The new era had not yet found its name.
The response of the Australian political class and commentariat to Rudd's essay - with exception of Dennis Glover's perceptive piece in the Australian, on balance strongly negative - has been both fascinating and depressing to observe. Certain key themes emerge. Everyone reading Rudd's essay should have understood that it was predominantly about the general causes and implications of the global financial collapse, with arguments connected to Australia appended. Very many of the commentaries nonetheless appeared to believe that the essay was mainly about Australia. Janet Albrechtsen, for example, thought that Rudd had written an article "about a conspiracy in Australia of neo-liberals who have left the country financially wrecked". Malcolm Turnbull thought that in the supposed praise for big government, higher taxes and socialism revealed in the essay, Rudd "was channelling Gough Whitlam". Peter Costello went further. On Lateline, he summarised Rudd's argument like this: "The whole global financial crisis is somehow the fault of the Liberal Party." Rudd "puts the word ‘neo' in, but he really wants to emphasise that word ‘liberal'". Not only was the general claim a ludicrous distortion. Was Costello unacquainted with the term ‘neo-liberalism' or its central place in the contemporary international debate? With Frank Devine, of the Australian, on this question there is no need to guess. "Is neo-liberal a Rudd coinage?" he wondered in his column. "I had not encountered it before." After reading Devine, I turned to Google. For ‘neo-liberal' there were four million entries.
The failure to grasp that Rudd's essay was not primarily about Australia was linked among the journalists to party-political myopia. Michelle Grattan's report on the Rudd essay, buried on page seven of the Age, opened with the following line: "Kevin Rudd is seeking to discredit Liberal leader Malcolm Turnbull by painting him as advocate of the market fundamentalist neo-liberal philosophy trashed by the economic crisis." (Astonishingly enough, the Age seemed less excited by the appearance of the Rudd essay than the Economist or the Asian Wall Street Journal.) Crikey's Canberra correspondent, Bernard Keane, agreed with Grattan. The essay was "most of all ... an exercise in domestic politics, aimed at discrediting, even demonising, the Liberal Party". Greg Sheridan, of the Australian, was of similar mind. According to him, Rudd did not believe a word he had written in the Monthly. He simply wanted to destroy Malcolm Turnbull. Even as intelligent a journalist as Peter Hartcher of the Sydney Morning Herald thought that Rudd's essay and his previous arguments against neo-liberalism were predominantly exercises in domestic politics. Prior to Rudd's leadership bid, Hartcher argued, he had launched an attack on Hayek at a neo-liberal think-tank mainly to win votes from the ALP's socialist-Left faction. Now he was mainly trying to tar the Liberal Party with the neo-liberal brush. All this strikes me as peculiar. If (improbably enough) Robert Menzies had written a major essay in early 1940 on the failure of the policy of appeasement, would Australian journalists have interpreted that as an attempt to outmanoeuvre John Curtin? It did not occur to these journalists that Rudd could actually believe deeply what he wrote and that he was precisely what he appeared to be: an intellectual in politics struggling simultaneously both to understand and to help transform his world. At least Christian Kerr, in the Australian, accepted that Rudd was an intellectual. For him, however, this was precisely the problem. The mums and dads of Australia were hardly likely to be interested in long-dead Austrian economists.
The response to Rudd's essay was not only parochial and myopic but also remarkably ill-tempered. Tony Abbott described the piece as "pretentious and self-serving twaddle ... an only slightly more sophisticated version of playground name-calling"; Paul Sheehan called it "an inflated balloon of self-promoting spin"; Peter Costello, "miserable" and "little" - one thing it clearly was not. Paul Kelly accused Rudd of "breathtaking hubris". More simply, Janet Albrechtsen thought Rudd both "arrogant" and "wicked". Beyond the abuse, there were attempts to discredit Rudd through arguments ad hominem and through guilt by association. Piers Akerman and Gerard Henderson argued that because his wife had been successful in business, Rudd's criticism of extreme capitalism and market fundamentalism constituted hypocrisy of the most egregious kind. There was not one word in Rudd's essay that suggested he was opposed to entrepreneurial activity. In its daily compendium of schadenfreude and spleen, ‘Cut & Paste', the Australian for its part attempted to discredit Rudd through the company he kept. Rudd was a critic of neo-liberalism. So were Noam Chomsky and Hugo Chavez. What more needed to be said? Neo-liberals have become accustomed to dominating public debate in Australia. It was not surprising that the appearance of Rudd's challenge was viewed as impertinent and as an affront.
What was more surprising was how thoroughly the meaning of the global financial crisis had escaped our conservative commentariat and political class. For Janet Albrechtsen, Rudd had "conjured up the imagery of crisis". Conjured? On what planet does she live? For Greg Sheridan, the journalist who had once argued that George W Bush was a political genius on the scale of Winston Churchill, the publication of the Rudd essay on the crisis provided yet another opportunity to enthuse about "the US's economic and geo-strategic global leadership". The jaw-dropping lesson that Julie Novak, of the Institute of Public Affairs, drew from the global financial crisis was that the financial sector had been "hamstrung by regulations such as corporate reporting and accountancy standards". While for Tony Abbott, the global financial crisis demonstrated yet again the need for "lowering interest rates, reducing taxes and cutting regulation" - in short, precisely those measures which in the United States had allowed the market in derivatives to explode.
In testimony to Congress on 23 October last year, Alan Greenspan confessed to a "shocked disbelief" at the failure of his lifelong market faith. To judge by the initial response to the Rudd essay, among the Australian neo-liberal commentariat and political class that often painful process known as thought has not yet even begun.
RT On Air
Thursday, 5 March 2009
Pakistan's militants ready for more
Pakistan's militants ready for more
By Syed Saleem Shahzad
Tuesday's attack in the Pakistani city of Lahore on a convoy carrying Sri Lankan cricketers was carried out by disgruntled Punjabi militants seeking to extract concessions from the government, Asia Times Online has learned.
And the 12 highly trained gunmen who fled the scene after killing six police officers and wounding six of the cricketers had planned to take the sportsmen hostage, not kill them, high-level sources maintain.
The militants, working directly under the command of a joint Punjabi and Kashmiri leadership based in the North Waziristan tribal area and allied with al-Qaeda, planned the Lahore operation. The object was to hold the cricketers ransom in exchange for jailed militants and the safe passage of their colleagues to North Waziristan.
A spokesperson at the Sri Lankan Embassy at Islamabad also said on Tuesday that he did not believe the Sri Lankan players were meant to be killed as all fire was aimed at the police protecting the players.
The gunmen's plan to take hostages was foiled by the fierce resistance put up by the elite commandos of the Punjab police in the escorting convoy. They stood their ground and were quick to return fire. An assistant superintendent of police in the bus carrying the cricketers was smart enough to immediately urge the driver to speed to safety inside the Gaddafi Stadium where the Sri Lankans were due to resume their five-day Test match against Pakistan. The Sri Lankan team later presented the driver with their playing shirts as a sign of gratitude.
Items recovered from the scene of the attack just a few hundred meters from the stadium included bags containing AK-47s, light machine guns, hand grenades, small rocket launchers, plastic bombs and wireless sets.
Inspector General Khawaja Khalid Farooq of the Punjab police said the militants were carrying sufficient weaponry to fight for many hours. They also had plentiful supplies of food, such as almonds and mineral water.
Video footage of the incident shows the gunmen as extremely composed and well trained and dressed in urban attire, including running shoes - nothing like the rustic mountain-dwelling Taliban fighters who invariably wear traditional clothing such as turbans, long robes and sandals. They also appeared to be in excellent physical condition.
All indications are that the militants are "good sons of the soil" trained by Pakistan's premier secret service, the Inter-Services Intelligence's India cell to fight against the Indian security forces in Indian-administered Kashmir. The ISI shut its Kashmir operations a few years ago and many militants joined forces with the Taliban in Afghanistan and Pakistan.
Indeed, the appearance and modus operandi of the gunmen resembles that of the 10 gunmen who attacked Mumbai in India last November in a two-day rampage of violence that led to the deaths of 180 people, including all but once of the militants. Investigations showed that the men were linked to the banned Pakistani group Lashkar-e-Taiba, which has deep roots in the Kashmir struggle.
These "Kashmir" militants are mostly non-Pashtun (unlike the Taliban), with the majority being ethnic Punjabis.
Troubles in the mountains
The attack on Tuesday is most likely related to events in the Swat Valley, where the government last month signed a peace treaty with militants after several years of fighting. The accord also allowed for the implementation of sharia law in the area.
Before the Swat agreement was inked, the Pakistani Taliban presented their demands. These included a financial package worth 480 million rupees (US$6 million) for compensation for families that had lost members through death or injury or which had lost property as a result of the operations of the security forces. They also demanded the release of prisoners.
The government accepted all of the demands, but it refused to release those prisoners who were not from Swat. At the top of this list was Maulana Abdul Aziz, a radical cleric from the Lal Masjid (Red Mosque) in Islamabad who was arrested in July 2007 while fleeing from the mosque after security forces stormed it. The government also refused to release several other militants, including a very important person, who were recently arrested in Islamabad.
The Punjabi militants were clearly upset at having their demands rejected, while the Pashtuns got what they wanted. The attack in Lahore was meant to redress the "injustice".
Ironically, the peace agreement in Swat is itself now at risk.
On Sunday, militants violated the agreement by detaining a few paramilitary Frontier Corps personnel who were later released. The next day they attacked a military convoy and killed a soldier.
In response, the army on Tuesday arrested a few important Taliban commanders in the Swat Valley. Maulana Sufi Mohammand, the main driver behind the peace agreement, then appealed at a press conference to both the Taliban and the security forces to abide by the agreement. Otherwise, he said, he would no longer stand as a guarantor of the deal.
A new phase of militancy
At the time of the United-States-led invasion of Afghanistan in 2001, Pakistani and Taliban groups linked to al-Qaeda had little ability to execute planned and coordinated attacks. At best, they could carry out sectarian assassinations against Shi'ites or plant bombs at religious congregations.
All this changed from 2003 onwards when Arabs and Pakistani militants started regrouping in the South Waziristan tribal area on the border with Afghanistan. (See The legacy of Nek Mohammed Asia Times Online, July 20, 2004.)
The attack by the jihadi group Jundullah in 2004 on the then-corps commander Karachi's motorcade could be termed as the militants' first well-planned operation. Although the attack was unsuccessful, the militants opened coordinated fire from several directions and had an exit strategy in place. The only blunder was that a cell phone was dropped at the site, which led to the arrest and destruction of the whole network.
About this time, the militant training camps were closed in Pakistan-administered Kashmir as Islamabad re-orientated as a partner in the US's "war on terror". Several respected commanders, such as Maulana Ilyas Kashmiri and Abdul Jabbar, were arrested, causing much humiliation among the country's former "heroes". At this point, several top fighters joined the Afghan resistance in the Waziristan tribal areas.
These highly trained militants, courtesy of the Pakistani state, brought with them considerable expertise and muscle and they began training local youths. Some of their most successful operations were the attacks on the Kabul Serena Hotel in January 2008 and on a national parade in Kabul in July 2008. A hallmark of these militants is that they are well versed in modern warfare and that they are ruthless in achieving their goals, even at the expense of innocent civilians.
Their attack in Lahore on Tuesday is testimony to this; they are now prepared to take the war theater to urban centers to get their comrades released, and anybody is fair game - from cricketers to high-profile personalities including ministers, diplomats, politicians and other influential people.
The emergence of these new zealots is an ominous development for a country already mired in militancy in its border areas. And things could get a lot worse as Asia Times Online has learned that Chief of Army Staff General Ashfaq Parvez Kiani has returned from a visit to Washington committed to a much more pro-active approach against militants.
Syed Saleem Shahzad is Asia Times Online's Pakistan Bureau Chief. He can be reached at saleem_shahzad2002@yahoo.com
By Syed Saleem Shahzad
Tuesday's attack in the Pakistani city of Lahore on a convoy carrying Sri Lankan cricketers was carried out by disgruntled Punjabi militants seeking to extract concessions from the government, Asia Times Online has learned.
And the 12 highly trained gunmen who fled the scene after killing six police officers and wounding six of the cricketers had planned to take the sportsmen hostage, not kill them, high-level sources maintain.
The militants, working directly under the command of a joint Punjabi and Kashmiri leadership based in the North Waziristan tribal area and allied with al-Qaeda, planned the Lahore operation. The object was to hold the cricketers ransom in exchange for jailed militants and the safe passage of their colleagues to North Waziristan.
A spokesperson at the Sri Lankan Embassy at Islamabad also said on Tuesday that he did not believe the Sri Lankan players were meant to be killed as all fire was aimed at the police protecting the players.
The gunmen's plan to take hostages was foiled by the fierce resistance put up by the elite commandos of the Punjab police in the escorting convoy. They stood their ground and were quick to return fire. An assistant superintendent of police in the bus carrying the cricketers was smart enough to immediately urge the driver to speed to safety inside the Gaddafi Stadium where the Sri Lankans were due to resume their five-day Test match against Pakistan. The Sri Lankan team later presented the driver with their playing shirts as a sign of gratitude.
Items recovered from the scene of the attack just a few hundred meters from the stadium included bags containing AK-47s, light machine guns, hand grenades, small rocket launchers, plastic bombs and wireless sets.
Inspector General Khawaja Khalid Farooq of the Punjab police said the militants were carrying sufficient weaponry to fight for many hours. They also had plentiful supplies of food, such as almonds and mineral water.
Video footage of the incident shows the gunmen as extremely composed and well trained and dressed in urban attire, including running shoes - nothing like the rustic mountain-dwelling Taliban fighters who invariably wear traditional clothing such as turbans, long robes and sandals. They also appeared to be in excellent physical condition.
All indications are that the militants are "good sons of the soil" trained by Pakistan's premier secret service, the Inter-Services Intelligence's India cell to fight against the Indian security forces in Indian-administered Kashmir. The ISI shut its Kashmir operations a few years ago and many militants joined forces with the Taliban in Afghanistan and Pakistan.
Indeed, the appearance and modus operandi of the gunmen resembles that of the 10 gunmen who attacked Mumbai in India last November in a two-day rampage of violence that led to the deaths of 180 people, including all but once of the militants. Investigations showed that the men were linked to the banned Pakistani group Lashkar-e-Taiba, which has deep roots in the Kashmir struggle.
These "Kashmir" militants are mostly non-Pashtun (unlike the Taliban), with the majority being ethnic Punjabis.
Troubles in the mountains
The attack on Tuesday is most likely related to events in the Swat Valley, where the government last month signed a peace treaty with militants after several years of fighting. The accord also allowed for the implementation of sharia law in the area.
Before the Swat agreement was inked, the Pakistani Taliban presented their demands. These included a financial package worth 480 million rupees (US$6 million) for compensation for families that had lost members through death or injury or which had lost property as a result of the operations of the security forces. They also demanded the release of prisoners.
The government accepted all of the demands, but it refused to release those prisoners who were not from Swat. At the top of this list was Maulana Abdul Aziz, a radical cleric from the Lal Masjid (Red Mosque) in Islamabad who was arrested in July 2007 while fleeing from the mosque after security forces stormed it. The government also refused to release several other militants, including a very important person, who were recently arrested in Islamabad.
The Punjabi militants were clearly upset at having their demands rejected, while the Pashtuns got what they wanted. The attack in Lahore was meant to redress the "injustice".
Ironically, the peace agreement in Swat is itself now at risk.
On Sunday, militants violated the agreement by detaining a few paramilitary Frontier Corps personnel who were later released. The next day they attacked a military convoy and killed a soldier.
In response, the army on Tuesday arrested a few important Taliban commanders in the Swat Valley. Maulana Sufi Mohammand, the main driver behind the peace agreement, then appealed at a press conference to both the Taliban and the security forces to abide by the agreement. Otherwise, he said, he would no longer stand as a guarantor of the deal.
A new phase of militancy
At the time of the United-States-led invasion of Afghanistan in 2001, Pakistani and Taliban groups linked to al-Qaeda had little ability to execute planned and coordinated attacks. At best, they could carry out sectarian assassinations against Shi'ites or plant bombs at religious congregations.
All this changed from 2003 onwards when Arabs and Pakistani militants started regrouping in the South Waziristan tribal area on the border with Afghanistan. (See The legacy of Nek Mohammed Asia Times Online, July 20, 2004.)
The attack by the jihadi group Jundullah in 2004 on the then-corps commander Karachi's motorcade could be termed as the militants' first well-planned operation. Although the attack was unsuccessful, the militants opened coordinated fire from several directions and had an exit strategy in place. The only blunder was that a cell phone was dropped at the site, which led to the arrest and destruction of the whole network.
About this time, the militant training camps were closed in Pakistan-administered Kashmir as Islamabad re-orientated as a partner in the US's "war on terror". Several respected commanders, such as Maulana Ilyas Kashmiri and Abdul Jabbar, were arrested, causing much humiliation among the country's former "heroes". At this point, several top fighters joined the Afghan resistance in the Waziristan tribal areas.
These highly trained militants, courtesy of the Pakistani state, brought with them considerable expertise and muscle and they began training local youths. Some of their most successful operations were the attacks on the Kabul Serena Hotel in January 2008 and on a national parade in Kabul in July 2008. A hallmark of these militants is that they are well versed in modern warfare and that they are ruthless in achieving their goals, even at the expense of innocent civilians.
Their attack in Lahore on Tuesday is testimony to this; they are now prepared to take the war theater to urban centers to get their comrades released, and anybody is fair game - from cricketers to high-profile personalities including ministers, diplomats, politicians and other influential people.
The emergence of these new zealots is an ominous development for a country already mired in militancy in its border areas. And things could get a lot worse as Asia Times Online has learned that Chief of Army Staff General Ashfaq Parvez Kiani has returned from a visit to Washington committed to a much more pro-active approach against militants.
Syed Saleem Shahzad is Asia Times Online's Pakistan Bureau Chief. He can be reached at saleem_shahzad2002@yahoo.com
Wednesday, 4 March 2009
Will Washington Break with Bush’s Iran Policy?
Ardeshir Ommani
On February 25, 2009, the Islamic Republic of Iran celebrated another major milestone in its scientific and technological development, announcing that “successful tests” at its first nuclear reactor at Bushehr were carried out by the common efforts of the Iranians and their Russian partners in the project.
The power plant is projected to be fully operational by the end of the year. "This, in simple terms, means that Bushehr power plant is completed today and its operation is definite," Gholamreza Aqazadeh, head of Iran's Atomic Energy Organization, told Iranian state television. "The political concerns about Bushehr plant are now completely addressed today." The start of operations at the 1,000-megawatt light-water reactor near the southern Iranian port of Bushehr - built with Russian assistance under a $1 billion contract - had long been delayed, largely due to opposition and pressure on Russia from the United States, using their EU partners to forestall progress and completion.
The test did not involve batches of low-enriched uranium supplied to Iran by Atomstroiexport, the Russian state company that is building the plant. Instead "virtual" fuel was injected in the reactor, officials said. At the official opening -- the first day of the Bushehr plant's test run -- head of the Rosatom State Atomic Corporation Sergei Kiriyenko addressed Western concerns about Iran's recent nuclear achievement.
"We believe that the structure in the Bushehr plant itself is in total conformity with the Non-Proliferation," the Russian official said. He added that Russia's cooperation in building the Bushehr plant removes every doubt about Iran's nuclear intentions, as the whole project is transparent in its entirety. "Those who think this project can be used for the proliferation of nuclear weapons can come here and see for themselves."
While the western media along with Israeli Security Forces continue to make all kinds of noises and objections about this latest advance, Iran reiterated its right of peaceful pursuit of developing nuclear energy, being a signatory to the Nuclear Non-Proliferation Treaty (NPT), and monitored under the supervision of the UN nuclear watchdog, the International Atomic Energy Agency (IAEA). The high degree of hypocrisy reflected in the outcries by officials in the United States and the European Union Trio (France, Germany and Britain) can be accurately measured with just a brief glance back into the history of nuclear technology in Iran.
The U.S. gave the Shah nuclear technology
Iran’s interest in nuclear energy, research and know-how began in the mid-1960’s under the direct tutelage of the U.S. within the framework of turning Iran, the way of Israel, into a regional and nuclear power for containing the movement of Arab Socialism and their orientation towards the then Soviet Union (Russia today). With the technical assistance of the U.S., the first nuclear research facility, namely, the Tehran Nuclear Research Center (TNRC), was built in Tehran University in 1967, and managed by the Atomic Energy Organization of Iran (AEOI), which was founded in 1974. Immediately after the founding of the TNRC, the U.S. sold a 5-megawatt research reactor to Iran that was installed at the Amirabad Technical College in Tehran, which runs on 93% highly-enriched uranium. The reactor could produce up to 600 grams of plutonium per year in its spent fuel. Simultaneously, the U.S. sold hot cells to Iran that could be used for separating plutonium from the spent fuel, and then used for the production of atomic bombs. The question that remains to be asked is why the U.S. sold the hot cells to the Shah, but is crying “foul” today?
According to de-classified U.S. government documents, cited extensively by Mohammad Sahimi, Professor and chairman of Chemical and Petroleum Engineering at the University of Southern California in Los Angeles, in his authoritative paper, “Iran's Nuclear Program”, the U.S. government in the mid-1970's advised "Iran to expand her non-oil energy base" by reasoning that "Iran needed not one but several nuclear reactors to acquire the electrical capacity that the Stanford Research Institute" paper in 1973 had proposed, and expressing interest in U.S. companies' participation in Iran's nuclear energy projects.
Emboldened by Washington's encouragement, the Shah planned to build 23 nuclear power plants throughout the country, and no authority in the U.S., France, Israel or West Germany disputed the Shah's extensive and expensive projects on the basis of the fact that Iran was rich in oil and natural gas deposits, the reasoning that the Bush Administration and opponents of Iran provided for the redundancy of plans for nuclear energy in Iran.
Germany and the Bushehr Project
Following the U.S. advocacy, in 1974 the Shah's government signed a contract with (West) Germany's Kraftwerk Union, a subsidiary of Siemens, to begin the construction of two 1200-megawatt nuclear reactors at Bushehr, a city in the south-western part of Iran. Soon, in 1975 the Atomic Energy organization of Iran (AEOI) signed a contract with the Massachusetts Institute of Technology (MIT) for the training of the first group of Iranian nuclear engineers. Meanwhile, West Germany, France, the U.K. and the U.S. trained thousands of nuclear specialists from around the world. Iranian nuclear personnel received their training in Italy, Belgium, Canada, as well as the U.S.
By 1979, when the Revolution toppled the pro-U.S. monarchial regime, the Shah had reached contracts for a total of six nuclear power reactors with France, Germany and the U.S. The two 1200-megawatt German light-water power reactors at Bushehr were partly finished. The reactor Number 1 was 90% complete and 60% of its equipment was also installed, while Number 2 reactor was 50% complete. The Iraq-Iran war brought heavy damage to the core areas of both reactors.
The same atomic reactors that the West had advocated for and sold to the Shah at high prices just a few years earlier became the targets of Iraq’s French jet fighters at the behest of the U.S. after the 1979 revolution. This pattern of trade and political relations could be observed under the U.S.-European imperialist relations with the countries formerly under their domination.
After the Iraq-Iran war, the Islamic Republic of Iran, under President Rafsanjani, reinitiated Iran's nuclear energy program and immediately approached Kraftwerk Union to complete the Bushehr project or ship the reactor components and technical documents that Iran had paid for. However, under U.S. pressure, the German government, and Kraftwerk Union refused to honor the contract or even return the money. Left in the cold, Iran filed a lawsuit in 1996 with the International Commerce Commission (ICC), asking for $5.4 billion in compensation. But the case is still unsettled.
U.S. Uses Nuclear Issue to Undermine Iran
The U.S. has used the nuclear enrichment issue, which is the right of those signatory to the NPT, to weaken Iran economically and undermine its political system. The world knows that all those countries, including the U.S., Britain and France, who readily agreed with the trade sanctions against Iran, they themselves are armed with atomic weapons numbering in the thousands, and in the case of the United States, has used these weapons on the people of Japan, in Hiroshima and Nagasaki. Therefore, they cannot be the best judges of who is a “threat” to the so-called international community.
Let it be known that Iran with its 3000-year history, a neighbor to Pakistan, Afghanistan, Turkmenistan, Azerbaijan, Turkey, Iraq, Kuwait and United Arab Emirates, has not attacked any country in the last 200 years, while the U.S., in its short history of 230 years has been in war dozens of times, and has over 737 military bases stationed in more than one hundred countries around the world. One of the resentments that the Muslim nation of Iran had towards the Shah was his pro-Israeli policy. He paid a high price for this close association with the Zionist regime and his animosity toward the Arab nations, which was fostered by the U.S. administrations for the purpose of divide and rule.
After pursing years of hot war, including arming and supplying extremist groups, the U.S. strengthened its strategy of Cold War policies, whose main arsenal were trade sanctions actualized by bans on financial exchange and banking transactions. To justify its unilateral trade and investment foreign trade policies against Iran, the U.S. needed the backing of the United Nations, which could be solicited the best by presenting Iran’s nuclear energy program as a danger to the “world community”. But the International Atomic Energy Agency (IAEA), headed by Dr. Mohammad El Baradei, in its years of inspections and intrusive examinations has repeatedly declared that Iran has never diverted the hardware or the nuclear materials for building atomic bombs. As recently as last week, the U.S. Intelligence Agency reported that Iran has not engaged in construction of the necessary parts for the building of an atomic bomb.
In accord with the IAEA report, the U.S. National Intelligence Estimate (NIE) report on Iran, made public in the first week of Dec. 2007, stated: “…that in fall 2003, Tehran halted its nuclear weapons program” and “that Tehran at a minimum is keeping open the option to develop nuclear weapons” in the future. Between the two aspects of the report, the former is essential and the latter mainly involves future speculations.
Furthermore, the U.S. Intelligence report made public on February 13, 2009, reaffirms the 2007 intelligence estimate that Iran had abandoned its nuclear weapons program in 2003, if such a project existed at all. Retired Admiral Dennis Blair said U.S. intelligence assesses that Iran has not restarted nuclear weapon’s design and weaponization work that it halted in late 2003. This report was the result of 16 U.S. intelligence agencies investigations and research.
Will Obama seek peace with Iran?
The American Iranian Friendship Committee (AIFC), founded in November of 2004, supported the election of Barack Obama to the U.S. presidency in 2008. Today and all along AIFC welcomed Obama’s foreign policy statements that the U.S. must change course and begin dialogue with the leaders of the countries that the previous administration have labeled as “enemies”. This rapprochement is only realizable if no pre-conditions such as demanding Iran’s suspension of its program of uranium enrichment are attached, and the U.S. must change its tone and respect the positions of Iran with regard to real security in the Middle East. It is time that the U.S. offers Iran security assurances that it will not use force to reach its foreign policy objectives. Any future interference in the internal affairs of Iran will be rebuffed as in the past. There is no such thing as “exporting democracy”. Such things as administering the country in the model of the West, or as changing the dress code, are the affairs of the Iranian people and not the countries that are seeking diplomatic and trade relations with Iran.
We hope the Obama Administration does not continue George Bush’s failed policies of war and aggression in Iraq, Palestine, Afghanistan, and now Pakistan. The security of the region is the responsibility of the peoples of those countries in that region and no power from 10,000 miles away should dictate how the governments and people of those countries should resolve their differences. It is AIFC’s humble opinion that the relations between the United States and Iran must be based on mutual respect and mutual benefits, and not on the childish policy of “carrot and stick”, because Iran is not looking for handouts and is not a child that can be reprimanded.
On February 25, 2009, the Islamic Republic of Iran celebrated another major milestone in its scientific and technological development, announcing that “successful tests” at its first nuclear reactor at Bushehr were carried out by the common efforts of the Iranians and their Russian partners in the project.
The power plant is projected to be fully operational by the end of the year. "This, in simple terms, means that Bushehr power plant is completed today and its operation is definite," Gholamreza Aqazadeh, head of Iran's Atomic Energy Organization, told Iranian state television. "The political concerns about Bushehr plant are now completely addressed today." The start of operations at the 1,000-megawatt light-water reactor near the southern Iranian port of Bushehr - built with Russian assistance under a $1 billion contract - had long been delayed, largely due to opposition and pressure on Russia from the United States, using their EU partners to forestall progress and completion.
The test did not involve batches of low-enriched uranium supplied to Iran by Atomstroiexport, the Russian state company that is building the plant. Instead "virtual" fuel was injected in the reactor, officials said. At the official opening -- the first day of the Bushehr plant's test run -- head of the Rosatom State Atomic Corporation Sergei Kiriyenko addressed Western concerns about Iran's recent nuclear achievement.
"We believe that the structure in the Bushehr plant itself is in total conformity with the Non-Proliferation," the Russian official said. He added that Russia's cooperation in building the Bushehr plant removes every doubt about Iran's nuclear intentions, as the whole project is transparent in its entirety. "Those who think this project can be used for the proliferation of nuclear weapons can come here and see for themselves."
While the western media along with Israeli Security Forces continue to make all kinds of noises and objections about this latest advance, Iran reiterated its right of peaceful pursuit of developing nuclear energy, being a signatory to the Nuclear Non-Proliferation Treaty (NPT), and monitored under the supervision of the UN nuclear watchdog, the International Atomic Energy Agency (IAEA). The high degree of hypocrisy reflected in the outcries by officials in the United States and the European Union Trio (France, Germany and Britain) can be accurately measured with just a brief glance back into the history of nuclear technology in Iran.
The U.S. gave the Shah nuclear technology
Iran’s interest in nuclear energy, research and know-how began in the mid-1960’s under the direct tutelage of the U.S. within the framework of turning Iran, the way of Israel, into a regional and nuclear power for containing the movement of Arab Socialism and their orientation towards the then Soviet Union (Russia today). With the technical assistance of the U.S., the first nuclear research facility, namely, the Tehran Nuclear Research Center (TNRC), was built in Tehran University in 1967, and managed by the Atomic Energy Organization of Iran (AEOI), which was founded in 1974. Immediately after the founding of the TNRC, the U.S. sold a 5-megawatt research reactor to Iran that was installed at the Amirabad Technical College in Tehran, which runs on 93% highly-enriched uranium. The reactor could produce up to 600 grams of plutonium per year in its spent fuel. Simultaneously, the U.S. sold hot cells to Iran that could be used for separating plutonium from the spent fuel, and then used for the production of atomic bombs. The question that remains to be asked is why the U.S. sold the hot cells to the Shah, but is crying “foul” today?
According to de-classified U.S. government documents, cited extensively by Mohammad Sahimi, Professor and chairman of Chemical and Petroleum Engineering at the University of Southern California in Los Angeles, in his authoritative paper, “Iran's Nuclear Program”, the U.S. government in the mid-1970's advised "Iran to expand her non-oil energy base" by reasoning that "Iran needed not one but several nuclear reactors to acquire the electrical capacity that the Stanford Research Institute" paper in 1973 had proposed, and expressing interest in U.S. companies' participation in Iran's nuclear energy projects.
Emboldened by Washington's encouragement, the Shah planned to build 23 nuclear power plants throughout the country, and no authority in the U.S., France, Israel or West Germany disputed the Shah's extensive and expensive projects on the basis of the fact that Iran was rich in oil and natural gas deposits, the reasoning that the Bush Administration and opponents of Iran provided for the redundancy of plans for nuclear energy in Iran.
Germany and the Bushehr Project
Following the U.S. advocacy, in 1974 the Shah's government signed a contract with (West) Germany's Kraftwerk Union, a subsidiary of Siemens, to begin the construction of two 1200-megawatt nuclear reactors at Bushehr, a city in the south-western part of Iran. Soon, in 1975 the Atomic Energy organization of Iran (AEOI) signed a contract with the Massachusetts Institute of Technology (MIT) for the training of the first group of Iranian nuclear engineers. Meanwhile, West Germany, France, the U.K. and the U.S. trained thousands of nuclear specialists from around the world. Iranian nuclear personnel received their training in Italy, Belgium, Canada, as well as the U.S.
By 1979, when the Revolution toppled the pro-U.S. monarchial regime, the Shah had reached contracts for a total of six nuclear power reactors with France, Germany and the U.S. The two 1200-megawatt German light-water power reactors at Bushehr were partly finished. The reactor Number 1 was 90% complete and 60% of its equipment was also installed, while Number 2 reactor was 50% complete. The Iraq-Iran war brought heavy damage to the core areas of both reactors.
The same atomic reactors that the West had advocated for and sold to the Shah at high prices just a few years earlier became the targets of Iraq’s French jet fighters at the behest of the U.S. after the 1979 revolution. This pattern of trade and political relations could be observed under the U.S.-European imperialist relations with the countries formerly under their domination.
After the Iraq-Iran war, the Islamic Republic of Iran, under President Rafsanjani, reinitiated Iran's nuclear energy program and immediately approached Kraftwerk Union to complete the Bushehr project or ship the reactor components and technical documents that Iran had paid for. However, under U.S. pressure, the German government, and Kraftwerk Union refused to honor the contract or even return the money. Left in the cold, Iran filed a lawsuit in 1996 with the International Commerce Commission (ICC), asking for $5.4 billion in compensation. But the case is still unsettled.
U.S. Uses Nuclear Issue to Undermine Iran
The U.S. has used the nuclear enrichment issue, which is the right of those signatory to the NPT, to weaken Iran economically and undermine its political system. The world knows that all those countries, including the U.S., Britain and France, who readily agreed with the trade sanctions against Iran, they themselves are armed with atomic weapons numbering in the thousands, and in the case of the United States, has used these weapons on the people of Japan, in Hiroshima and Nagasaki. Therefore, they cannot be the best judges of who is a “threat” to the so-called international community.
Let it be known that Iran with its 3000-year history, a neighbor to Pakistan, Afghanistan, Turkmenistan, Azerbaijan, Turkey, Iraq, Kuwait and United Arab Emirates, has not attacked any country in the last 200 years, while the U.S., in its short history of 230 years has been in war dozens of times, and has over 737 military bases stationed in more than one hundred countries around the world. One of the resentments that the Muslim nation of Iran had towards the Shah was his pro-Israeli policy. He paid a high price for this close association with the Zionist regime and his animosity toward the Arab nations, which was fostered by the U.S. administrations for the purpose of divide and rule.
After pursing years of hot war, including arming and supplying extremist groups, the U.S. strengthened its strategy of Cold War policies, whose main arsenal were trade sanctions actualized by bans on financial exchange and banking transactions. To justify its unilateral trade and investment foreign trade policies against Iran, the U.S. needed the backing of the United Nations, which could be solicited the best by presenting Iran’s nuclear energy program as a danger to the “world community”. But the International Atomic Energy Agency (IAEA), headed by Dr. Mohammad El Baradei, in its years of inspections and intrusive examinations has repeatedly declared that Iran has never diverted the hardware or the nuclear materials for building atomic bombs. As recently as last week, the U.S. Intelligence Agency reported that Iran has not engaged in construction of the necessary parts for the building of an atomic bomb.
In accord with the IAEA report, the U.S. National Intelligence Estimate (NIE) report on Iran, made public in the first week of Dec. 2007, stated: “…that in fall 2003, Tehran halted its nuclear weapons program” and “that Tehran at a minimum is keeping open the option to develop nuclear weapons” in the future. Between the two aspects of the report, the former is essential and the latter mainly involves future speculations.
Furthermore, the U.S. Intelligence report made public on February 13, 2009, reaffirms the 2007 intelligence estimate that Iran had abandoned its nuclear weapons program in 2003, if such a project existed at all. Retired Admiral Dennis Blair said U.S. intelligence assesses that Iran has not restarted nuclear weapon’s design and weaponization work that it halted in late 2003. This report was the result of 16 U.S. intelligence agencies investigations and research.
Will Obama seek peace with Iran?
The American Iranian Friendship Committee (AIFC), founded in November of 2004, supported the election of Barack Obama to the U.S. presidency in 2008. Today and all along AIFC welcomed Obama’s foreign policy statements that the U.S. must change course and begin dialogue with the leaders of the countries that the previous administration have labeled as “enemies”. This rapprochement is only realizable if no pre-conditions such as demanding Iran’s suspension of its program of uranium enrichment are attached, and the U.S. must change its tone and respect the positions of Iran with regard to real security in the Middle East. It is time that the U.S. offers Iran security assurances that it will not use force to reach its foreign policy objectives. Any future interference in the internal affairs of Iran will be rebuffed as in the past. There is no such thing as “exporting democracy”. Such things as administering the country in the model of the West, or as changing the dress code, are the affairs of the Iranian people and not the countries that are seeking diplomatic and trade relations with Iran.
We hope the Obama Administration does not continue George Bush’s failed policies of war and aggression in Iraq, Palestine, Afghanistan, and now Pakistan. The security of the region is the responsibility of the peoples of those countries in that region and no power from 10,000 miles away should dictate how the governments and people of those countries should resolve their differences. It is AIFC’s humble opinion that the relations between the United States and Iran must be based on mutual respect and mutual benefits, and not on the childish policy of “carrot and stick”, because Iran is not looking for handouts and is not a child that can be reprimanded.
Pakistan Inching Closer to a Failed State
The cricket team of Sri Lanka was attacked in Lahore, Pakistan today. They received a Taliban-style welcome with AK-47 bullets, rockets, and grenades. While terrorists are carrying out attacks in broad daylight in the heart of Pakistan - literally, those responsible for running this country are fighting over scraps of political power.
The threats to Pakistan are many. The newly elected democratic government is engaged in an internal power struggle and is perceived as doing an awful job at running the country. Al-Qaida and Taliban are strengthening their roots in the north and northwest. They recently forced the Pakistani government into accepting fundamental Islamic law in the once-beautiful-tourist-attraction of Swat. After the Mumbai attacks, there is a looming threat of yet-another-war with India. US drones bomb Pakistani soil on a regular basis, fueling anti-US and pro-Taliban sentiments. To top this all off, Pakistan's strongest institution, the army, is at record unpopularity levels - thanks both to Musharraf and to the US-lead war on terror that the Pakistani army is carrying out.
I must admit. I am scared. For the first time, the glaring reality that Pakistan is a failed state is sinking in. We are all waiting for a train-wreck, with everyone on board. And I believe that very recently we passed a tipping point. The stage is all set. All that is missing now is a religious revolution.
Islamic fundamentalism is on the rise in the country. And I don't mean just the terrorists. There has been a passive strengthening of fundamental Islamic rules and traditions in the society at large. Islamic TV and radio stations are more popular than ever. Growing economic hardships and lack of faith in every other institution is drawing more and more people towards the institution of religion. Imagine someone with Pakistani roots following the "glorious" steps of Mullah Omar and issuing a "fatwa" that its time for Sharia (Islamic law) now. Not just in Swat, but in Islamabad and Lahore. There will be riots. Army might be called in. But without a hard man like Musharraf in power, no one will like to take the responsibility of killing religious students. People will sit back and watch. After all the average Pakistanis have watched the drama of this country unfold from the back seats since the very beginning. Why will they do anything proactive now?
The threats to Pakistan are many. The newly elected democratic government is engaged in an internal power struggle and is perceived as doing an awful job at running the country. Al-Qaida and Taliban are strengthening their roots in the north and northwest. They recently forced the Pakistani government into accepting fundamental Islamic law in the once-beautiful-tourist-attraction of Swat. After the Mumbai attacks, there is a looming threat of yet-another-war with India. US drones bomb Pakistani soil on a regular basis, fueling anti-US and pro-Taliban sentiments. To top this all off, Pakistan's strongest institution, the army, is at record unpopularity levels - thanks both to Musharraf and to the US-lead war on terror that the Pakistani army is carrying out.
I must admit. I am scared. For the first time, the glaring reality that Pakistan is a failed state is sinking in. We are all waiting for a train-wreck, with everyone on board. And I believe that very recently we passed a tipping point. The stage is all set. All that is missing now is a religious revolution.
Islamic fundamentalism is on the rise in the country. And I don't mean just the terrorists. There has been a passive strengthening of fundamental Islamic rules and traditions in the society at large. Islamic TV and radio stations are more popular than ever. Growing economic hardships and lack of faith in every other institution is drawing more and more people towards the institution of religion. Imagine someone with Pakistani roots following the "glorious" steps of Mullah Omar and issuing a "fatwa" that its time for Sharia (Islamic law) now. Not just in Swat, but in Islamabad and Lahore. There will be riots. Army might be called in. But without a hard man like Musharraf in power, no one will like to take the responsibility of killing religious students. People will sit back and watch. After all the average Pakistanis have watched the drama of this country unfold from the back seats since the very beginning. Why will they do anything proactive now?
Tuesday, 3 March 2009
The Global Financial Crisis - Kevin Rudd
From time to time in human history there occur events of a truly seismic significance, events that mark a turning point between one epoch and the next, when one orthodoxy is overthrown and another takes its place. The significance of these events is rarely apparent as they unfold: it becomes clear only in retrospect, when observed from the commanding heights of history. By such time it is often too late to act to shape the course of such events and their effects on the day-to-day working lives of men and women and the families they support.
There is a sense that we are now living through just such a time: barely a decade into the new millennium, barely 20 years since the end of the Cold War and barely 30 years since the triumph of neo-liberalism - that particular brand of free-market fundamentalism, extreme capitalism and excessive greed which became the economic orthodoxy of our time.
The agent for this change is what we now call the global financial crisis. In the space of just 18 months, this crisis has become one of the greatest assaults on global economic stability to have occurred in three-quarters of a century. As others have written, it "reflects the greatest regulatory failure in modern history". It is not simply a crisis facing the world's largest private financial institutions - systemically serious as that is in its own right. It is more than a crisis in credit markets, debt markets, derivatives markets, property markets and equity markets - notwithstanding the importance of each of these.
This is a crisis spreading across a broad front: it is a financial crisis which has become a general economic crisis; which is becoming an employment crisis; and which has in many countries produced a social crisis and in turn a political crisis. Indeed, accounts are already beginning to emerge of the long-term geo-political implications of the implosion on Wall Street - its impact on the future strategic leverage of the West in general and the United States in particular.
The global financial crisis has demonstrated already that it is no respecter of persons, nor of particular industries, nor of national boundaries. It is a crisis which is simultaneously individual, national and global. It is a crisis of both the developed and the developing world. It is a crisis which is at once institutional, intellectual and ideological. It has called into question the prevailing neo-liberal economic orthodoxy of the past 30 years - the orthodoxy that has underpinned the national and global regulatory frameworks that have so spectacularly failed to prevent the economic mayhem which has now been visited upon us.
Not for the first time in history, the international challenge for social democrats is to save capitalism from itself: to recognise the great strengths of open, competitive markets while rejecting the extreme capitalism and unrestrained greed that have perverted so much of the global financial system in recent times. It fell to Franklin Delano Roosevelt to rebuild American capitalism after the Depression. It fell also to the American Democrats, strongly influenced by John Maynard Keynes, to rebuild postwar domestic demand, to engineer the Marshall Plan to rebuild Europe and to set in place the Bretton Woods system to govern international economic engagement. And so it now falls to President Obama's administration - and to those who will provide international support for his leadership - to support a global financial system that properly balances private incentive with public responsibility in response to the grave challenges presented by the current crisis. The common thread uniting all three of these episodes is a reliance on the agency of the state to reconstitute properly regulated markets and to rebuild domestic and global demand.
The second challenge for social democrats is not to throw the baby out with the bathwater. As the global financial crisis unfolds and the hard impact on jobs is felt by families across the world, the pressure will be great to retreat to some model of an all-providing state and to abandon altogether the cause of open, competitive markets both at home and abroad. Protectionism has already begun to make itself felt, albeit in softer and more subtle forms than the crudity of the Smoot-Hawley Tariff Act of 1930. Soft or hard, protectionism is a sure-fire way of turning recession into depression, as it exacerbates the collapse in global demand. The intellectual challenge for social democrats is not just to repudiate the neo-liberal extremism that has landed us in this mess, but to advance the case that the social-democratic state offers the best guarantee of preserving the productive capacity of properly regulated competitive markets, while ensuring that government is the regulator, that government is the funder or provider of public goods and that government offsets the inevitable inequalities of the market with a commitment to fairness for all. Social democracy's continuing philosophical claim to political legitimacy is its capacity to balance the private and the public, profit and wages, the market and the state. That philosophy once again speaks with clarity and cogency to the challenges of our time.
Social-democratic governments across the world must rise to the further challenge of developing a practical policy response to the crisis that rebuilds shattered economic growth, while also devising a new regulatory regime for the financial markets of the future. This is our immediate challenge. But if we fail, there is a grave danger that new political voices of the extreme Left and the nationalist Right will begin to achieve a legitimacy hitherto denied them. Again, history is replete with the most disturbing of precedents.
We therefore need a frank analysis of the central role of neo-liberalism in the underlying causes of the current economic crisis. We also need a robust analysis of the social-democratic approach to properly regulated markets and the proper role of the state, in a new contract for the future that eschews the extremism of both the Left and the Right. And we must integrate this analysis with the unprecedented imperative for global co-operation if governments are to prevail in their task.
Around the world today, there is understandable public bewilderment at the speed, severity and scope of the unfolding crisis. While the causes of the global financial crisis are complex, a small number of simple metrics are capable of conveying its magnitude and the havoc it has wrought in financial markets, the real economy and government finances.
Financial markets have suffered the greatest dislocation in our lifetime. Global equity markets have lost approximately US$32 trillion in value since their peak, which is equivalent to the combined GDP of the G7 countries in 2008. Credit markets have all but dried up, with credit growth at its lowest level since World War II. And, at the core of the crisis, house prices are plummeting in many countries, with American prices falling at their fastest rate since modern records began.
The real economy is facing one of its toughest periods on record, with the IMF predicting that advanced economies will contract for the first time in 60 years, causing the number of unemployed to rise by 8 million across the OECD. In developing countries, the International Labour Organization predicts that the financial and economic crisis could push more than 100 million people into poverty.
Furthermore, the crisis is producing unprecedented costs and debts for governments which will be felt for decades to come. It is estimated that the 2009 deficit in the United States will be as high as 12.5% of GDP. And estimates of the combined (actual and contingent) liabilities from the array of bank bailouts and guarantees run to more than $13 trillion - more than the cost of all the major wars the United States has ever fought. What this means for future American international borrowing is equally unprecedented.
Bewilderment, however, rapidly turns to anger when the economic crisis touches the lives of families through rising unemployment, reduced wage growth and collapsing asset values - while executive remuneration in the financial sector continues to go through the roof, apparently disconnected from the reality of recent events. In 2007, S&P 500 CEOs averaged $10.5 million (some 344 times the pay of typical American workers). The top 50 hedge-fund and private-equity fund managers averaged $588 million each (19,000 times the pay of typical workers). In 2007, the ?ve biggest Wall Street firms paid bonuses of a staggering $39 billion - huge payments to the executives whose investment banks have since been bailed out by American taxpayers.
These are epic numbers, generated by a greed of epic proportions. For a bewildered and increasingly enraged public, they raise the following questions: How was this allowed to happen? What ideology, what policy, what abuses made this possible? Were there any warnings? And if so, why were they ignored?
George Soros has said that "the salient feature of the current financial crisis is that it was not caused by some external shock ... the crisis was generated by the system itself". Soros is right. The current crisis is the culmination of a 30-year domination of economic policy by a free-market ideology that has been variously called neo-liberalism, economic liberalism, economic fundamentalism, Thatcherism or the Washington Consensus. The central thrust of this ideology has been that government activity should be constrained, and ultimately replaced, by market forces.
In the past year, we have seen how unchecked market forces have brought capitalism to the precipice. The banking systems of the Western world have come close to collapse. Almost overnight, policymakers and economists have torn up the neo-liberal playbook and governments have made unprecedented and extraordinary interventions to stop the panic and bring the global financial system back from the brink.
Even the great neo-liberal ideological standard-bearer, the long-serving chairman of the US Federal Reserve Alan Greenspan, recently conceded in testimony before Congress that his ideological viewpoint was flawed, and that the "whole intellectual edifice" of modern risk management had collapsed. Henry Waxman, the chairman of the Congressional Committee on Oversight and Government Reform, questioned Greenspan further: "In other words, you found that your view of the world, your ideology, was not right; it was not working?" Greenspan replied, "Absolutely, precisely." This mea culpa by the man once called ‘the Maestro' has reverberated around the world.
To understand the failure of neo-liberalism, it is necessary to consider its central elements. The ideology of the unrestrained free market, discredited by the Great Depression, re-emerged in the 1970s amid a widespread belief that the prevailing economic woes of high inflation and low growth were exclusively the result of excessive government intervention in the market. In the '80s, the Reagan and Thatcher governments gave political voice to this neo-liberal movement of anti-tax, anti-regulation, anti-government conservatives.
Neo-liberal policy prescriptions flow from the core theoretical belief in the superiority of unregulated markets - particularly unregulated financial markets. These claims ultimately rest on the "efficient-markets hypothesis", which, in its strongest form, claims that financial-market prices, like stock-market prices, incorporate all available information, and therefore represent the best possible estimate of asset prices. It follows, therefore, that if markets are fully efficient and prices fully informed, there is no reason to believe that asset-price bubbles are probable; and if these do occur, markets will self-correct; and that there is therefore no justification for government intervention to stop them occurring. Indeed, in the neo-liberal view, deviations from market efficiency must be attributable to external causes. Bubbles and other disruptions are caused by governments and other "imperfections", not by markets themselves. This theory justifies the belief that individual self-interest should be given free rein and that the income distribution generated by markets should be regarded as natural and inherently just. In the neo-liberal view, markets are spontaneous and self-regulating products of civil society, while governments are alien and coercive intruders.
Neo-liberal economic philosophy has its roots in the theories of Hayek and von Mises, who believed that society should be characterised by the "spontaneous order" which emerges when individuals pursue their own ends within a framework set by law and tradition. Ideally, the role of governments is simply to enforce contracts and protect the allocation of property rights. All other economic functions should be left to what Reagan called "the magic of the market". Hayek himself referred to the market as "a game" - specifically the game of "catallaxy", taken from the Greek word "to barter", which according to Hayek is "a contest played according to the rules and decided by superior skill, strength or good fortune". In Hayek's order, "the game" is the only proper determinant of the allocation of resources, in contrast to any "atavistic" concept of social justice alive in the social-democratic project.
The advocates of neo-liberalism have sought, wherever possible, to dismantle all aspects of the social-democratic state. The idea of social solidarity, reflected in the collective provision of social goods, is dismissed as statist nonsense. In the face of vigorous resistance to cuts in public services, the neo-liberal political project has followed a strategy of "starving the beast", cutting taxes in order to strangle the capacity of the government to invest in education, health and economic infrastructure. The end point: to provide maximal space in the economy for private markets.
Neo-liberalism progressively became the economic orthodoxy. It was reflected in wave after wave of tax cuts. Governments bragged about their success in reducing measured levels of debt, while refusing to acknowledge the long-term economic cost of non-investment in education, skills and training (which increase productivity), and repudiating an appropriate role for public debt in financing investment in the infrastructure that underpins long-term economic growth. Neo-liberals have also exhibited a passionate commitment to the total deregulation of the labour market. Labour is routinely regarded by neo-liberals as no different from any other economic commodity. In the ideal neo-liberal system, labour-market protections should be restricted to physical safety rather than appropriate remuneration or minimum negotiation standards. Again, contract law, rather than any wider concept of a social contract, should prevail. Neo-liberals in government also become notoriously reluctant to identify and respond to instances of market failure. Climate change is a potent example. What Sir Nicholas Stern legitimately describes as the greatest market failure in human history is dismissed by neo-liberals as a prescription for wanton interference in market forces.
The neo-liberal deregulation mantra has been even more evident in the management of financial markets. In the United States, the pursuit of financial deregulation crossed the Rubicon with the repeal of the Glass-Steagall Act, which had been established in the wake of the Great Depression. In the heady bubble years of the 1920s, American commercial banks, whose traditional function was simply to take deposits and make loans, plunged into the roaring bull market, trading on their own account, underwriting new stock issues and participating in reckless speculation. When the stock-market bubble burst in 1929, it took commercial banks with it, causing a devastating chain reaction which affected the entire economy for a decade. President Roosevelt implemented Glass-Steagall in 1933 to prevent Main Street commercial banks from being exposed to the vagaries of Wall Street in the future. As Keynes, himself a successful speculator, observed: "When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done."
After a $300-million lobbying effort by the financial-services industry, Glass-Steagall was effectively repealed in 1999, removing the prohibition on commercial banks owning investment banks. The door was now open for the creation of huge financial-services conglomerates. One of the first to take advantage of the new regime was Citigroup, formed from the regular bank Citicorp and Travelers Group, which had previously incorporated the investment bank Salomon Smith Barney. The problem was that such combined entities became too systemically important to fail, yet their investment-banking arms were allowed to engage in speculation on a massive scale - so great as to imperil the finances of any government that had to bail them out. Citigroup was in fact to become the recipient of a taxpayer-funded rescue package worth an estimated $249 billion. It is ironic and - given the anti-government orthodoxy of neo-liberals - grossly hypocritical that the massive exposure to risk of these private financial conglomerates has resulted in a parallel exposure of the government, given the scale of possible government intervention in the event of bank failure. During the bubble, however, no account was taken of this, as massive profits were privatised and prospective losses socialised through the operation of implicit banking guarantees.
At the international level, bank risk is regulated by the Basel Accord. Yet the Basel II guidelines, published in June 2004, have now been demonstrated to be inadequate because they left the determination of risk to flawed credit-ratings processes and the banks' own "self-regulated" internal assessment models. Even then, the Basel rules were easily circumvented using innovative financial structures: structured investment vehicles were deliberately employed to shift risk off bank balance sheets. As Joseph Stiglitz has argued, "many of America's big banks moved out of the ‘lending' business and into the ‘moving' business," focusing on originating loans, repackaging them and selling them on, with little emphasis on their traditional role of assessing risk and screening credit worthiness.
Instead, the crucial risk-assessment function was passed, in large part, to the ratings agencies. Dependent as they were on the banks for their revenue, the agencies were hopelessly conflicted by the lure of big profits in return for easy ratings. Jerome Fons, former managing director for credit quality at Moody's, admitted in October 2008 that "the focus of Moody's shifted from protecting investors to being a marketing-driven organization ... management's focus increasingly turned to maximizing revenues." Ultimately, this focus on the bottom line contributed to an atmosphere in which a number of private ratings agencies became too inclined to take a favourable view of the risks inherent in their clients' investments.
Financial liberalisation also gave rise to a plethora of new, unregulated financial institutions in what is now broadly defined as the bank-intermediation market: hedge funds, private-equity funds, mortgage brokers. Investment banks with debt-to-equity ratios of 30:1 were also propped up by weak and defective accounting standards, which encouraged listed companies to "mark to market" their assets: that is, to effectively revalue their assets at market prices as they soared during booms.
A series of major national and international financial crises over the past decade should have begun to give pause for reflection, intervention and action. The Asian financial crisis of 1997 caused large-scale economic and social devastation and led to a flurry of calls for a "new international financial architecture". But these calls were always smugly discounted by the advanced economies as being primarily for the benefit of the Asian and other developing economies that had been caught up in the crisis. It was easier to blame "crony capitalism" than to look at the fundamentals of the neo-liberal orthodoxy (including unrestrained hedge-fund assaults on national currencies) that continued to govern global financial markets. Further warning signs came, including the bailout of the hedge fund Long-Term Capital Management (LTCM) in 1998 and the spectacular dotcom bubble and bust of 2000-01.
Each time a crisis arose, the US Federal Reserve came to the rescue by significantly lowering the federal funds rate, in order to pump liquidity back into the market and avert any further deterioration. After the 1987 stock-market crash, the Gulf War, the 1994 Mexican crisis, the 1997-98 Asian financial crisis, the LTCM debacle of 1998 and the 2000-01 bursting of the internet bubble, the response was always the same.
Investors increasingly came to believe that when things went bad, they would be protected by monetary policy in what came to be known as the "Greenspan put" - low interest rates, high liquidity and the protection of asset prices. Easy monetary policy was seen as an elixir that could cure any market instability that arose. In fact, it added yet more fuel to the fire, in the form of cheap money available for lending.
Low interest rates brought forth a new class of borrowers in the US who were encouraged by mortgage brokers to buy their own home. As a result, a huge amount of capital rushed into the sub-prime mortgage market, where it was directed towards borrowers with weak credit histories. At the same time, the prevailing anti-regulation culture in financial markets fostered a new banking model - the so-called originate-and-distribute model. Mortgage brokers originated loans that were then sold on to others, including hedge funds and structured investment vehicles, thereby severing the link between the assessor of credit worthiness and the ultimate holder of the loan. This is where the two worlds met: the world of easy credit as the defining characteristic of Greenspan's neo-liberal financial order, and the other neo-liberal world of unregulated financial institutions with its new banking model that effectively atomised risk. The combination was toxic: it produced an asset bubble of unprecedented proportions and, most critically, with unprecedented reach across the global financial system through the bank-intermediation market. Were the bubble to burst, the links to the mainstream commercial-banking system, with its implicit government guarantees, meant that the state (not the market) would be left carrying the can. This is the essence of the neo-liberal legacy now left to taxpayers - both today and into the future.
The rest, of course, is history. The annual volume of US sub-prime and other securitised mortgages rose from approximately $160 billion in 2001 to over $600 billion in 2006. Low interest rates and high demand for housing caused house prices to soar. In comparison to the 1.4% average annual appreciation of American home values during the 30 years leading up to 2000, the values of homes increased at 7.6% annually from 2000 to 2006, with massive growth in the sub-prime market. Indications of financial instability slowly became apparent to all who cared to look. Business leader Warren Buffett had recognised the emerging risks of financial innovation, easy money and weak regulation in 2003 when he noted that many of the new financial instruments were akin to "financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal".
The Bank for International Settlements, always more sceptical than most, was the first official institution to sound the alarm. In its 2007 annual report, the BIS warned that "years of loose monetary policy have fuelled a giant global credit bubble, leaving us vulnerable to another 1930s-style slump." Despite this, no systemic action was taken.
Despite three crises in a decade, despite the clear warnings that came with them and after them, the neo-liberals were so convinced of the ideological righteousness of their cause, and so blinded by their unquestioning belief that markets were inherently self-correcting, that they refused even to recognise the severity of the problems that emerged. The problems did not fit the model, so the evidence was simply discarded. Hardline neo-liberals were not interested, because they knew in their hearts they were right.
The time has come, off the back of the current crisis, to proclaim that the great neo-liberal experiment of the past 30 years has failed, that the emperor has no clothes. Neo-liberalism, and the free-market fundamentalism it has produced, has been revealed as little more than personal greed dressed up as an economic philosophy. And, ironically, it now falls to social democracy to prevent liberal capitalism from cannibalising itself.
With the demise of neo-liberalism, the role of the state has once more been recognised as fundamental. The state has been the primary actor in responding to three clear areas of the current crisis: in rescuing the private financial system from collapse; in providing direct stimulus to the real economy because of the collapse in private demand; and in the design of a national and global regulatory regime in which government has ultimate responsibility to determine and enforce the rules of the system.
The challenge for social democrats today is to recast the role of the state and its associated political economy of social democracy as a comprehensive philosophical framework for the future - tempered both for times of crisis and for times of prosperity. In doing so, social democrats will draw in part on a long-standing Keynesian tradition. Social democrats will also need to reach beyond Keynes, given some of the new realities we face some 70 years after the publication of Keynes's General Theory.
Long before the term ‘Third Way' was popularised in the policy literature of the 1990s, social democrats viewed themselves as presenting a political economy of the middle way, which rejected both state socialism and free-market fundamentalism. Instead, social democrats maintain robust support for the market economy but posit that markets can only work in a mixed economy, with a role for the state as regulator and as a funder and provider of public goods. Transparency and competitive neutrality, ensured by a regime of competition and consumer-protection law, are essential.
Social justice is also viewed as an essential component of the social-democratic project. The social-democratic pursuit of social justice is founded on a belief in the self-evident value of equality, rather than, for example, an exclusively utilitarian argument that a particular investment in education is justified because it yields increases in productivity growth (although, happily, from the point of view of modern social democrats, both things happen to be true). Expressed more broadly, the pursuit of social justice is founded on the argument that all human beings have an intrinsic right to human dignity, equality of opportunity and the ability to lead a fulfilling life. In a similar vein, Amartya Sen writes of freedom as the means to achieve economic stability and growth, but also as an end in itself. Accordingly, government has a clear role in the provision of such public goods as universal education, health, unemployment insurance, disabilities insurance and retirement income. This contrasts with the Hayekian view that a person's worth should primarily, and unsentimentally, be determined by the market.
Social-democratic governments face the continuing challenge of harnessing the power of the market to increase innovation, investment and productivity growth - while combining this with an effective regulatory framework which manages risk, corrects market failures, funds and provides public goods, and pursues social equity. Examples of such a government are the Australian Labor governments of Bob Hawke and Paul Keating during the 1980s and early '90s. Hawke and Keating pursued an ambitious and unapologetic program of economic modernisation. Their reforms internationalised the Australian economy, removed protectionist barriers and opened it up to greater competition. They were able dramatically to improve the productivity of the Australian private economy, while simultaneously expanding the role of the state in the provision of equity-enhancing public services in health and education.
In the current crisis, social democrats therefore have the great advantage of a consistent position on the central role of the state - in contrast to neo-liberals, who now find themselves tied in ideological knots, in being forced to rely on the state they fundamentally despise to save financial markets from collapse. This enables social-democratic governments to undertake such current practical tasks as credit-market regulation, intervention, and demand-side stimulus in the economy. The uncomfortable truth for neo-liberals is that they have not been able to turn to non-state actors or non-state mechanisms to defray risk and restore confidence, rebuild balance sheets and unlock global capital flows. This is only possible through the agency of the state.
In the early stages of the global financial collapse, the centrality of the state was reaffirmed by governments of both the classical Left and Right as they acted to guarantee the integrity of the banking system. Die-hard neo-liberals invoked "moral hazard" - akin to arguing about who should pay for the fire brigade while the house itself is burning down. The alternative to government intervention, as the global banking fraternity knows all too well, was systemic collapse. The first step towards preserving confidence and restoring liquidity in late 2008 was the provision of an explicit guarantee of deposits placed in mainstream financial institutions. The willingness of the public, as expressed through their respective governments, to accept the associated contingent liabilities reveals a widely held perception that the stability of banking systems is itself a public good. As Robert Skidelsky, Keynes's biographer, observed: "when the crunch came, we discovered that national taxpayers still stand behind banks, and national insolvency regimes matter."
Subsequently, governments have also demonstrated a willingness to undertake unprecedented interventions in private credit markets. Specifically, governments have involved themselves in the capitalisation of banks, the direct purchase of bank and corporate securities, the establishment of joint-purpose vehicles to share risk with private financial institutions, and in sovereign guarantees to underpin inter-bank lending. In the United States, the rescue of Citigroup and the Bank of America amounts to a de facto nationalisation. This followed the placing into conservatorship of Fannie Mae and Freddie Mac, and the effective nationalisation of AIG, the world's largest insurance company. Once again, the social-democratic state, not the unfettered forces of the market, was called to the rescue.
These measures have not been implemented on the basis of socialist ideology, nor are they a return to state ownership and control. When the financial system stabilises and the global recession eases, we can expect to see governments pulling back from direct involvement in the ownership and operation of the banking sector. The object of the current intervention is to secure private credit markets so that they can serve the needs of private businesses and consumers. But clearly the days of effective non-regulation and unconstrained financial innovation are gone, and must not be allowed to return. The consequences for the economy are too great.
Stabilising the financial system is a necessary first step towards preventing systemic collapse. But the collapse of the speculative bubble and the subsequent credit squeeze have already brought about a slowdown in economic growth, rising unemployment, and the possibility of a lengthy global recession. Neo-liberals such as Alan Moran, of the Australian Institute of Public Affairs, argue that the cost of the recession should be borne by employees, through wage cuts and retrenchment - exactly the position of US Treasury Secretary Andrew Mellon at the outset of the Great Depression. Social democrats, by contrast, stress the central role of the state in maintaining aggregate demand, both for consumption and investment spending, at a time of faltering growth. That is, the state must involve itself in direct demand-side stimulus to offset the large-scale contraction in private demand. The IMF revised its growth forecast for 2009 down four times, by a total of 3% of global GDP. This "growth gap" indicates the dimensions of the fiscal-stimulus task that now lies ahead for governments if the demand-side gap is to be met and massive unemployment avoided. This is classic Keynesianism, pure and simple.
Keynes argued that, in Stiglitz's words, "in a severe downturn, monetary policy was likely to be ineffective. Fiscal policy was required." He believed that in times of dramatically slowed economic growth, monetary authorities would find themselves in a liquidity trap, unable to "induce an increase in the supply of credit in order to raise the level of economic activity". Or, as others have described it, monetary policy becomes ineffective because it is just "pushing on a string". Indeed, as Paul Krugman suggests, "the failure of monetary policy in the current crisis shows that Keynes had it right the first time." The truth is, fiscal policy must reinforce monetary policy in aggregate demand. Neither by itself is sufficient.
Reasoning that the costs of failing to provide fiscal stimulus will outweigh the negative effect on budgets, Tony Blair implores current leaders to "do whatever it takes ... to get the blood pumping back round the financial system again". The challenge for new Keynesians is also to ensure that this stimulus is targeted, timely and temporary. As private consumption and business investment recover, fiscal stimulus should be reduced commensurately, so as not to push up inflation during the period of economic recovery.
In proposing active measures to stimulate demand, it is therefore important to emphasise the central tenet of Keynesian economic management: the need to balance budgets over the course of the economic cycle. Failure to do so, along with excessive tolerance for inflation, was a major contributor to the breakdown of Keynesian economic management in the early 1970s. Increases in public investment and direct transfers to households will stimulate the economy, but they will have to be paid for in the future, when strong economic growth has resumed.
Social democrats have always emphasised the potential for systemic shocks arising from speculative bubbles and busts driven by what Keynes referred to as the unpredictable "animal spirits" of investors. Financial regulation must allow banks and other financial institutions to be intermediaries between household savings and business investment, without themselves becoming a source of systemic instability. This requires prudential regulation beyond simply ensuring that individual institutions adhere to standards designed to guard against their insolvency under normal economic conditions. The sector as a whole should be constrained from actions that promote systemic risk, such as excessive expansion of derivatives markets. Equally important in light of the recent crisis is that a social-democratic framework recognises the effect of incentive structures within firms on the level of risk-taking by individuals. For social democrats, systemic stability and integrity represent public goods in their own right - public goods which will always take precedence over individual opportunities for profit maximisation.
A further challenge for social democrats in dealing with the current crisis is its almost unprecedented global dimensions. This has two aspects: the integration and interdependence of financial markets, which has brought about a rapid spread of the contagion; and the consequences for the real economy as collapsing demand in one country affects exports from another.
Instead of distributing risk throughout the world, the global financial system has intensified it. Neo-liberal orthodoxy held that global financial markets would ultimately self-correct - the invisible hand of unfettered market forces finding their own equilibrium. But as Stiglitz has caustically observed: "the reason that the invisible hand often seems invisible is that it is not there." Financial markets have not self-corrected. Global financial innovation has compounded the problem of asset bubbles, not reduced it. Neo-liberalism's anti-regulation agenda rapidly converted a problem in American mortgage markets into a full-blown global financial and economic crisis that now threatens the future of open global markets - yet another example of capitalism cannibalising itself, but this time on a frightening, global scale.
Three cardinal principles emerge: first, national financial markets require effective national regulation; second, global financial markets require effective global regulation, if for no other reason than that the quantum of global financial transactions is now capable of overwhelming most single national economies standing alone; and third, the means for achieving effective regulation in both can only be delivered by national governments operating together. There has been no private financial-market solution on offer to deal with the scale and complexity of global systemic instability we now face.
That is why the world has turned to co-ordinated governmental action through the G20: to help provide immediate liquidity to the global financial system; to co-ordinate sufficient fiscal stimulus to respond to the growth gap arising from the global recession; to redesign global regulatory rules for the future, including a new Basel III; to reform the existing global public institutions - especially the IMF - to provide them with the powers and resources necessary for the demands of the twenty-first century. The tragedy is that after decades of neo-liberal ascendancy, the IMF, Keynes's child from Bretton Woods, for a time became the agency through which neo-liberal doctrines were spread around the world - to the detriment of the fund's long-term standing and with a real impact on its capacity to act effectively in the current crisis with the various national economies it has treated poorly in the past.
Governments must craft consistent global financial regulations to prevent a race to the bottom, where capital leaks out to the areas of the global economy with the weakest regulation. We must establish stronger global disclosure standards for systemically important financial institutions. We must also build stronger supervisory frameworks to provide incentives for more responsible corporate conduct, including executive remuneration.
Further, the IMF's authority to undertake prudential analysis must be expanded and its early-warning system for institutional vulnerabilities enhanced. And its governance arrangements must be reformed. It makes no sense for the governance structure of the global financial system today to reflect the balance of power in 1944. It is only reasonable that if we expect fast-growing developing economies like China to make a greater contribution to multilateral institutions such as the IMF, they should also gain a stronger decision-making voice in these forums.
The longer-term challenge for governments is to address the imbalances that have helped to destabilise the global economy in the past decade: in particular, the imbalances between large surplus economies such as China, Japan and the oil-exporting nations, and large debtor nations such as America. In the short term, these imbalances are likely to increase as America's budget deficit balloons. In the medium term, overcoming these imbalances and working towards a more stable global macroeconomic framework will demand new levels of global economic co-operation and co-ordination. Any sudden change in managing these global imbalances - for example, if China sharply reduced the purchase of US government bonds - would send tremors through foreign-exchange markets, with dire consequences both for the US dollar and for the prospects of global economic recovery. Again, this looms as a challenge for statecraft; we cannot simply hope that individual market participants somehow magically do the right thing.
There is one further dimension to the role of social democrats in dealing with the current global crisis. The impact of the crisis on poverty and political stability in the developing world has not fully registered in the global debate about policy responses to the crisis so far. World Bank intervention, bilateral official development assistance and the continued implementation of the Millennium Development Goals become essential elements in managing the effects of a crisis that will otherwise throw much of the developing world back into poverty. Social democrats, both by instinct and by tradition, are predisposed to engage in this, but it will become harder and harder as developed countries' budgets come under ever more stress from the unprecedented domestic demands now placed upon them by the crisis.
Neo-liberals, like neo-conservatives (their ideological bedfellows in the foreign-policy sphere), are intrinsically suspicious of all forms of multilateral governance. In fact, there is a parallel between neo-liberals' hostility to national governments intervening in national markets and their hostility to international governmental institutions intervening in global markets. Again, the contrast with social democrats is instructive, given social democrats' long tradition of internationalism - itself an accommodating attribute given the complexities of global market governance, co-operation and co-ordination we all now confront. The truth is that there are no credible unilateral solutions on offer, given the increasing dispersal of global economic power.
The political home of neo-liberalism in Australia is, of course, the Liberal Party itself. Over the past decade, the Howard government reduced investment in key public goods, including education and health. It also refused to invest in national economic infrastructure, notwithstanding multiple warnings from the Reserve Bank of the impact of long-standing capacity constraints on economic growth. The Liberals in government also set about the comprehensive deregulation of the labour market - based on the argument that human labour was no different to any other commodity. Driven by a philosophy of minimal government intervention in the markets, the Liberals ignored both the 2003 Dawson Review and multiple reports from the ACCC calling for the criminalisation of cartel conduct. They refused to act to prevent the accumulation of market power through creeping acquisitions. They refused to effectively regulate consumer credit or credit-rating agencies. And they ignored calls - from the Financial Stability Forum in 2000, the Australian Prudential Regulatory Authority submission to the HIH Royal Commission in 2002, and the 2006 IMF Financial Sector Assessment Program - to implement a deposit-insurance scheme that would bring our deposit protection in line with almost all other OECD nations. Most critically, the Howard government oversaw an unprecedented increase in household and national debt. The average ratio of household debt to annual gross disposable income more than doubled to 114.5%, up from 49.8% under the Hawke-Keating governments; household net savings to net disposable income fell to an average of 1.1%, down from an average of 7.9% under the Hawke-Keating governments; and the level of Australia's net foreign debt increased to 55.5% of GDP, up from 37.9% of GDP under the Hawke-Keating governments.
The contrast between the competing political traditions within Australia on the role of governments and the market is clear. Labor, in the international tradition of social democracy, consistently argues for a central role for government in the regulation of markets and the provision of public goods.
Consistent with this tradition, the Labor government has acted decisively through state action to maintain the stability of the Australian financial systems in the face of the economic crisis. The government acted in October to guarantee all deposits. To support intra-bank lending by the Australian majors, it intervened to provide a facility for guaranteeing wholesale funding of financial institutions. To encourage liquidity, the government legislated to increase by $25 billion the maximum value of government bonds that can be issued at any one time. It also initiated a program to purchase residential mortgage-backed securities. To protect financial institutions from predatory speculators, a temporary ban on short selling was introduced. Labor has also acted to help the real economy, to stimulate economic activity by investing in targeted job creation; in the reform of services in health, education, disabilities and homelessness; and in roads, rail, ports and other critical infrastructure. All through decisive state action.
The Liberals, embracing the neo-liberal tradition of anti-regulation, seek to reduce the agency of the state in private markets as much as possible. The distinction is reflected in the previous prime minister's statements that "competitive capitalism within free markets remains the most effective economic paradigm, both domestically and internationally"; that "the right responses will be grounded in free-market orthodoxies"; and that "we should avoid the resort to re-regulation." This ideology has not served Australia well in preparing for the current crisis.
To respond effectively to the global financial crisis in the future requires the resolution of profound questions from the past, principal among which is: What caused such a crisis to result in widespread economic and social devastation? The magnitude of the crisis and its impact across the world means that minor tweakings of long-established orthodoxies will not do. Two unassailable truths have already been established: that financial markets are not always self-correcting or self-regulating, and that government (nationally and internationally) can never abdicate responsibility for maintaining economic stability. These two truths in themselves destroy neo-liberalism's claims to any continuing ideological legitimacy, because they remove the foundations on which the entire neo-liberal system is constructed.
The extent to which social democracy responds effectively and sustainably to the challenges now left to us by the neo-liberals remains an open question. Tempering any tendencies towards ideological triumphalism from the centre-Left at neo-liberalism's demise is Robert Skidelsky's recent and reflective reminder of the cycles of history:
Societies are said to swing like pendulums between alternating phases of vigour and decay; progress and reaction; licentiousness and puritanism. Each outward movement produces a crisis of excess which leads to a reaction. The equilibrium position is hard to achieve and always unstable.
In his Cycles of American History (1986), Arthur Schlesinger Jr defined a political economy cycle as "a continuing shift in national involvement between public purpose and private interest" ...
Others have argued that we are seeing a more fundamental regime change: the third in postwar history, starting with the Keynesian model, from the 1940s to the '70s; the neo-liberal ascendancy, from 1978 to 2008; followed by a new regime, which is currently being shaped. Perhaps this new regime will come to be called ‘social capitalism' or ‘social-democratic capitalism', or simply the term ‘social democracy' itself. Whatever the nomenclature, the concept is clear: a system of open markets, unambiguously regulated by an activist state, and one in which the state intervenes to reduce the greater inequalities that competitive markets will inevitably generate.
Either way, seismic changes are underway, fault lines yielding to fractures which in time may yield to even deeper tectonic shifts. Neither governments nor the peoples they represent any longer have confidence in an unregulated system of extreme capitalism. As President Sarkozy put it: "Le laissez-faire, c'est fini." Or, as China's Vice Premier Wang Qishan reportedly said, somewhat more elliptically: "The teachers now have some problems."
For social democrats, it is critical that we get it right - not just to save the system of open markets from self-destruction, but also to rebuild confidence in properly regulated markets, so as to prevent extreme reactions from the far Left or the far Right taking hold. Social democrats must also get it right because the stakes are so high: there are the economic and social costs of long-term unemployment; poverty once again expanding its grim reach across the developing world; and the impact on long-term power structures within the existing international political and strategic order. Success is not optional. Too much now rides on our ability to prevail.
I believe that social democrats can chart an effective course that will see us through this crisis, and one that is also capable of building a fairer and more resilient order for the long term. This can only be achieved through the creative agency of government - and through governments acting together. How could it possibly now be argued that the minimalist state of which the neo-liberals have dreamt could somehow be of sufficient potency to respond to the maximalist challenge we have been left in the wake of this most spectacular failure of the entire neo-liberal orthodoxy? Government is not the intrinsic evil that neo-liberals have argued it is. Government, properly constituted and properly directed, is for the common good, embracing both individual freedom and fairness, a project designed for the many, not just the few.
There is a sense that we are now living through just such a time: barely a decade into the new millennium, barely 20 years since the end of the Cold War and barely 30 years since the triumph of neo-liberalism - that particular brand of free-market fundamentalism, extreme capitalism and excessive greed which became the economic orthodoxy of our time.
The agent for this change is what we now call the global financial crisis. In the space of just 18 months, this crisis has become one of the greatest assaults on global economic stability to have occurred in three-quarters of a century. As others have written, it "reflects the greatest regulatory failure in modern history". It is not simply a crisis facing the world's largest private financial institutions - systemically serious as that is in its own right. It is more than a crisis in credit markets, debt markets, derivatives markets, property markets and equity markets - notwithstanding the importance of each of these.
This is a crisis spreading across a broad front: it is a financial crisis which has become a general economic crisis; which is becoming an employment crisis; and which has in many countries produced a social crisis and in turn a political crisis. Indeed, accounts are already beginning to emerge of the long-term geo-political implications of the implosion on Wall Street - its impact on the future strategic leverage of the West in general and the United States in particular.
The global financial crisis has demonstrated already that it is no respecter of persons, nor of particular industries, nor of national boundaries. It is a crisis which is simultaneously individual, national and global. It is a crisis of both the developed and the developing world. It is a crisis which is at once institutional, intellectual and ideological. It has called into question the prevailing neo-liberal economic orthodoxy of the past 30 years - the orthodoxy that has underpinned the national and global regulatory frameworks that have so spectacularly failed to prevent the economic mayhem which has now been visited upon us.
Not for the first time in history, the international challenge for social democrats is to save capitalism from itself: to recognise the great strengths of open, competitive markets while rejecting the extreme capitalism and unrestrained greed that have perverted so much of the global financial system in recent times. It fell to Franklin Delano Roosevelt to rebuild American capitalism after the Depression. It fell also to the American Democrats, strongly influenced by John Maynard Keynes, to rebuild postwar domestic demand, to engineer the Marshall Plan to rebuild Europe and to set in place the Bretton Woods system to govern international economic engagement. And so it now falls to President Obama's administration - and to those who will provide international support for his leadership - to support a global financial system that properly balances private incentive with public responsibility in response to the grave challenges presented by the current crisis. The common thread uniting all three of these episodes is a reliance on the agency of the state to reconstitute properly regulated markets and to rebuild domestic and global demand.
The second challenge for social democrats is not to throw the baby out with the bathwater. As the global financial crisis unfolds and the hard impact on jobs is felt by families across the world, the pressure will be great to retreat to some model of an all-providing state and to abandon altogether the cause of open, competitive markets both at home and abroad. Protectionism has already begun to make itself felt, albeit in softer and more subtle forms than the crudity of the Smoot-Hawley Tariff Act of 1930. Soft or hard, protectionism is a sure-fire way of turning recession into depression, as it exacerbates the collapse in global demand. The intellectual challenge for social democrats is not just to repudiate the neo-liberal extremism that has landed us in this mess, but to advance the case that the social-democratic state offers the best guarantee of preserving the productive capacity of properly regulated competitive markets, while ensuring that government is the regulator, that government is the funder or provider of public goods and that government offsets the inevitable inequalities of the market with a commitment to fairness for all. Social democracy's continuing philosophical claim to political legitimacy is its capacity to balance the private and the public, profit and wages, the market and the state. That philosophy once again speaks with clarity and cogency to the challenges of our time.
Social-democratic governments across the world must rise to the further challenge of developing a practical policy response to the crisis that rebuilds shattered economic growth, while also devising a new regulatory regime for the financial markets of the future. This is our immediate challenge. But if we fail, there is a grave danger that new political voices of the extreme Left and the nationalist Right will begin to achieve a legitimacy hitherto denied them. Again, history is replete with the most disturbing of precedents.
We therefore need a frank analysis of the central role of neo-liberalism in the underlying causes of the current economic crisis. We also need a robust analysis of the social-democratic approach to properly regulated markets and the proper role of the state, in a new contract for the future that eschews the extremism of both the Left and the Right. And we must integrate this analysis with the unprecedented imperative for global co-operation if governments are to prevail in their task.
Around the world today, there is understandable public bewilderment at the speed, severity and scope of the unfolding crisis. While the causes of the global financial crisis are complex, a small number of simple metrics are capable of conveying its magnitude and the havoc it has wrought in financial markets, the real economy and government finances.
Financial markets have suffered the greatest dislocation in our lifetime. Global equity markets have lost approximately US$32 trillion in value since their peak, which is equivalent to the combined GDP of the G7 countries in 2008. Credit markets have all but dried up, with credit growth at its lowest level since World War II. And, at the core of the crisis, house prices are plummeting in many countries, with American prices falling at their fastest rate since modern records began.
The real economy is facing one of its toughest periods on record, with the IMF predicting that advanced economies will contract for the first time in 60 years, causing the number of unemployed to rise by 8 million across the OECD. In developing countries, the International Labour Organization predicts that the financial and economic crisis could push more than 100 million people into poverty.
Furthermore, the crisis is producing unprecedented costs and debts for governments which will be felt for decades to come. It is estimated that the 2009 deficit in the United States will be as high as 12.5% of GDP. And estimates of the combined (actual and contingent) liabilities from the array of bank bailouts and guarantees run to more than $13 trillion - more than the cost of all the major wars the United States has ever fought. What this means for future American international borrowing is equally unprecedented.
Bewilderment, however, rapidly turns to anger when the economic crisis touches the lives of families through rising unemployment, reduced wage growth and collapsing asset values - while executive remuneration in the financial sector continues to go through the roof, apparently disconnected from the reality of recent events. In 2007, S&P 500 CEOs averaged $10.5 million (some 344 times the pay of typical American workers). The top 50 hedge-fund and private-equity fund managers averaged $588 million each (19,000 times the pay of typical workers). In 2007, the ?ve biggest Wall Street firms paid bonuses of a staggering $39 billion - huge payments to the executives whose investment banks have since been bailed out by American taxpayers.
These are epic numbers, generated by a greed of epic proportions. For a bewildered and increasingly enraged public, they raise the following questions: How was this allowed to happen? What ideology, what policy, what abuses made this possible? Were there any warnings? And if so, why were they ignored?
George Soros has said that "the salient feature of the current financial crisis is that it was not caused by some external shock ... the crisis was generated by the system itself". Soros is right. The current crisis is the culmination of a 30-year domination of economic policy by a free-market ideology that has been variously called neo-liberalism, economic liberalism, economic fundamentalism, Thatcherism or the Washington Consensus. The central thrust of this ideology has been that government activity should be constrained, and ultimately replaced, by market forces.
In the past year, we have seen how unchecked market forces have brought capitalism to the precipice. The banking systems of the Western world have come close to collapse. Almost overnight, policymakers and economists have torn up the neo-liberal playbook and governments have made unprecedented and extraordinary interventions to stop the panic and bring the global financial system back from the brink.
Even the great neo-liberal ideological standard-bearer, the long-serving chairman of the US Federal Reserve Alan Greenspan, recently conceded in testimony before Congress that his ideological viewpoint was flawed, and that the "whole intellectual edifice" of modern risk management had collapsed. Henry Waxman, the chairman of the Congressional Committee on Oversight and Government Reform, questioned Greenspan further: "In other words, you found that your view of the world, your ideology, was not right; it was not working?" Greenspan replied, "Absolutely, precisely." This mea culpa by the man once called ‘the Maestro' has reverberated around the world.
To understand the failure of neo-liberalism, it is necessary to consider its central elements. The ideology of the unrestrained free market, discredited by the Great Depression, re-emerged in the 1970s amid a widespread belief that the prevailing economic woes of high inflation and low growth were exclusively the result of excessive government intervention in the market. In the '80s, the Reagan and Thatcher governments gave political voice to this neo-liberal movement of anti-tax, anti-regulation, anti-government conservatives.
Neo-liberal policy prescriptions flow from the core theoretical belief in the superiority of unregulated markets - particularly unregulated financial markets. These claims ultimately rest on the "efficient-markets hypothesis", which, in its strongest form, claims that financial-market prices, like stock-market prices, incorporate all available information, and therefore represent the best possible estimate of asset prices. It follows, therefore, that if markets are fully efficient and prices fully informed, there is no reason to believe that asset-price bubbles are probable; and if these do occur, markets will self-correct; and that there is therefore no justification for government intervention to stop them occurring. Indeed, in the neo-liberal view, deviations from market efficiency must be attributable to external causes. Bubbles and other disruptions are caused by governments and other "imperfections", not by markets themselves. This theory justifies the belief that individual self-interest should be given free rein and that the income distribution generated by markets should be regarded as natural and inherently just. In the neo-liberal view, markets are spontaneous and self-regulating products of civil society, while governments are alien and coercive intruders.
Neo-liberal economic philosophy has its roots in the theories of Hayek and von Mises, who believed that society should be characterised by the "spontaneous order" which emerges when individuals pursue their own ends within a framework set by law and tradition. Ideally, the role of governments is simply to enforce contracts and protect the allocation of property rights. All other economic functions should be left to what Reagan called "the magic of the market". Hayek himself referred to the market as "a game" - specifically the game of "catallaxy", taken from the Greek word "to barter", which according to Hayek is "a contest played according to the rules and decided by superior skill, strength or good fortune". In Hayek's order, "the game" is the only proper determinant of the allocation of resources, in contrast to any "atavistic" concept of social justice alive in the social-democratic project.
The advocates of neo-liberalism have sought, wherever possible, to dismantle all aspects of the social-democratic state. The idea of social solidarity, reflected in the collective provision of social goods, is dismissed as statist nonsense. In the face of vigorous resistance to cuts in public services, the neo-liberal political project has followed a strategy of "starving the beast", cutting taxes in order to strangle the capacity of the government to invest in education, health and economic infrastructure. The end point: to provide maximal space in the economy for private markets.
Neo-liberalism progressively became the economic orthodoxy. It was reflected in wave after wave of tax cuts. Governments bragged about their success in reducing measured levels of debt, while refusing to acknowledge the long-term economic cost of non-investment in education, skills and training (which increase productivity), and repudiating an appropriate role for public debt in financing investment in the infrastructure that underpins long-term economic growth. Neo-liberals have also exhibited a passionate commitment to the total deregulation of the labour market. Labour is routinely regarded by neo-liberals as no different from any other economic commodity. In the ideal neo-liberal system, labour-market protections should be restricted to physical safety rather than appropriate remuneration or minimum negotiation standards. Again, contract law, rather than any wider concept of a social contract, should prevail. Neo-liberals in government also become notoriously reluctant to identify and respond to instances of market failure. Climate change is a potent example. What Sir Nicholas Stern legitimately describes as the greatest market failure in human history is dismissed by neo-liberals as a prescription for wanton interference in market forces.
The neo-liberal deregulation mantra has been even more evident in the management of financial markets. In the United States, the pursuit of financial deregulation crossed the Rubicon with the repeal of the Glass-Steagall Act, which had been established in the wake of the Great Depression. In the heady bubble years of the 1920s, American commercial banks, whose traditional function was simply to take deposits and make loans, plunged into the roaring bull market, trading on their own account, underwriting new stock issues and participating in reckless speculation. When the stock-market bubble burst in 1929, it took commercial banks with it, causing a devastating chain reaction which affected the entire economy for a decade. President Roosevelt implemented Glass-Steagall in 1933 to prevent Main Street commercial banks from being exposed to the vagaries of Wall Street in the future. As Keynes, himself a successful speculator, observed: "When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done."
After a $300-million lobbying effort by the financial-services industry, Glass-Steagall was effectively repealed in 1999, removing the prohibition on commercial banks owning investment banks. The door was now open for the creation of huge financial-services conglomerates. One of the first to take advantage of the new regime was Citigroup, formed from the regular bank Citicorp and Travelers Group, which had previously incorporated the investment bank Salomon Smith Barney. The problem was that such combined entities became too systemically important to fail, yet their investment-banking arms were allowed to engage in speculation on a massive scale - so great as to imperil the finances of any government that had to bail them out. Citigroup was in fact to become the recipient of a taxpayer-funded rescue package worth an estimated $249 billion. It is ironic and - given the anti-government orthodoxy of neo-liberals - grossly hypocritical that the massive exposure to risk of these private financial conglomerates has resulted in a parallel exposure of the government, given the scale of possible government intervention in the event of bank failure. During the bubble, however, no account was taken of this, as massive profits were privatised and prospective losses socialised through the operation of implicit banking guarantees.
At the international level, bank risk is regulated by the Basel Accord. Yet the Basel II guidelines, published in June 2004, have now been demonstrated to be inadequate because they left the determination of risk to flawed credit-ratings processes and the banks' own "self-regulated" internal assessment models. Even then, the Basel rules were easily circumvented using innovative financial structures: structured investment vehicles were deliberately employed to shift risk off bank balance sheets. As Joseph Stiglitz has argued, "many of America's big banks moved out of the ‘lending' business and into the ‘moving' business," focusing on originating loans, repackaging them and selling them on, with little emphasis on their traditional role of assessing risk and screening credit worthiness.
Instead, the crucial risk-assessment function was passed, in large part, to the ratings agencies. Dependent as they were on the banks for their revenue, the agencies were hopelessly conflicted by the lure of big profits in return for easy ratings. Jerome Fons, former managing director for credit quality at Moody's, admitted in October 2008 that "the focus of Moody's shifted from protecting investors to being a marketing-driven organization ... management's focus increasingly turned to maximizing revenues." Ultimately, this focus on the bottom line contributed to an atmosphere in which a number of private ratings agencies became too inclined to take a favourable view of the risks inherent in their clients' investments.
Financial liberalisation also gave rise to a plethora of new, unregulated financial institutions in what is now broadly defined as the bank-intermediation market: hedge funds, private-equity funds, mortgage brokers. Investment banks with debt-to-equity ratios of 30:1 were also propped up by weak and defective accounting standards, which encouraged listed companies to "mark to market" their assets: that is, to effectively revalue their assets at market prices as they soared during booms.
A series of major national and international financial crises over the past decade should have begun to give pause for reflection, intervention and action. The Asian financial crisis of 1997 caused large-scale economic and social devastation and led to a flurry of calls for a "new international financial architecture". But these calls were always smugly discounted by the advanced economies as being primarily for the benefit of the Asian and other developing economies that had been caught up in the crisis. It was easier to blame "crony capitalism" than to look at the fundamentals of the neo-liberal orthodoxy (including unrestrained hedge-fund assaults on national currencies) that continued to govern global financial markets. Further warning signs came, including the bailout of the hedge fund Long-Term Capital Management (LTCM) in 1998 and the spectacular dotcom bubble and bust of 2000-01.
Each time a crisis arose, the US Federal Reserve came to the rescue by significantly lowering the federal funds rate, in order to pump liquidity back into the market and avert any further deterioration. After the 1987 stock-market crash, the Gulf War, the 1994 Mexican crisis, the 1997-98 Asian financial crisis, the LTCM debacle of 1998 and the 2000-01 bursting of the internet bubble, the response was always the same.
Investors increasingly came to believe that when things went bad, they would be protected by monetary policy in what came to be known as the "Greenspan put" - low interest rates, high liquidity and the protection of asset prices. Easy monetary policy was seen as an elixir that could cure any market instability that arose. In fact, it added yet more fuel to the fire, in the form of cheap money available for lending.
Low interest rates brought forth a new class of borrowers in the US who were encouraged by mortgage brokers to buy their own home. As a result, a huge amount of capital rushed into the sub-prime mortgage market, where it was directed towards borrowers with weak credit histories. At the same time, the prevailing anti-regulation culture in financial markets fostered a new banking model - the so-called originate-and-distribute model. Mortgage brokers originated loans that were then sold on to others, including hedge funds and structured investment vehicles, thereby severing the link between the assessor of credit worthiness and the ultimate holder of the loan. This is where the two worlds met: the world of easy credit as the defining characteristic of Greenspan's neo-liberal financial order, and the other neo-liberal world of unregulated financial institutions with its new banking model that effectively atomised risk. The combination was toxic: it produced an asset bubble of unprecedented proportions and, most critically, with unprecedented reach across the global financial system through the bank-intermediation market. Were the bubble to burst, the links to the mainstream commercial-banking system, with its implicit government guarantees, meant that the state (not the market) would be left carrying the can. This is the essence of the neo-liberal legacy now left to taxpayers - both today and into the future.
The rest, of course, is history. The annual volume of US sub-prime and other securitised mortgages rose from approximately $160 billion in 2001 to over $600 billion in 2006. Low interest rates and high demand for housing caused house prices to soar. In comparison to the 1.4% average annual appreciation of American home values during the 30 years leading up to 2000, the values of homes increased at 7.6% annually from 2000 to 2006, with massive growth in the sub-prime market. Indications of financial instability slowly became apparent to all who cared to look. Business leader Warren Buffett had recognised the emerging risks of financial innovation, easy money and weak regulation in 2003 when he noted that many of the new financial instruments were akin to "financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal".
The Bank for International Settlements, always more sceptical than most, was the first official institution to sound the alarm. In its 2007 annual report, the BIS warned that "years of loose monetary policy have fuelled a giant global credit bubble, leaving us vulnerable to another 1930s-style slump." Despite this, no systemic action was taken.
Despite three crises in a decade, despite the clear warnings that came with them and after them, the neo-liberals were so convinced of the ideological righteousness of their cause, and so blinded by their unquestioning belief that markets were inherently self-correcting, that they refused even to recognise the severity of the problems that emerged. The problems did not fit the model, so the evidence was simply discarded. Hardline neo-liberals were not interested, because they knew in their hearts they were right.
The time has come, off the back of the current crisis, to proclaim that the great neo-liberal experiment of the past 30 years has failed, that the emperor has no clothes. Neo-liberalism, and the free-market fundamentalism it has produced, has been revealed as little more than personal greed dressed up as an economic philosophy. And, ironically, it now falls to social democracy to prevent liberal capitalism from cannibalising itself.
With the demise of neo-liberalism, the role of the state has once more been recognised as fundamental. The state has been the primary actor in responding to three clear areas of the current crisis: in rescuing the private financial system from collapse; in providing direct stimulus to the real economy because of the collapse in private demand; and in the design of a national and global regulatory regime in which government has ultimate responsibility to determine and enforce the rules of the system.
The challenge for social democrats today is to recast the role of the state and its associated political economy of social democracy as a comprehensive philosophical framework for the future - tempered both for times of crisis and for times of prosperity. In doing so, social democrats will draw in part on a long-standing Keynesian tradition. Social democrats will also need to reach beyond Keynes, given some of the new realities we face some 70 years after the publication of Keynes's General Theory.
Long before the term ‘Third Way' was popularised in the policy literature of the 1990s, social democrats viewed themselves as presenting a political economy of the middle way, which rejected both state socialism and free-market fundamentalism. Instead, social democrats maintain robust support for the market economy but posit that markets can only work in a mixed economy, with a role for the state as regulator and as a funder and provider of public goods. Transparency and competitive neutrality, ensured by a regime of competition and consumer-protection law, are essential.
Social justice is also viewed as an essential component of the social-democratic project. The social-democratic pursuit of social justice is founded on a belief in the self-evident value of equality, rather than, for example, an exclusively utilitarian argument that a particular investment in education is justified because it yields increases in productivity growth (although, happily, from the point of view of modern social democrats, both things happen to be true). Expressed more broadly, the pursuit of social justice is founded on the argument that all human beings have an intrinsic right to human dignity, equality of opportunity and the ability to lead a fulfilling life. In a similar vein, Amartya Sen writes of freedom as the means to achieve economic stability and growth, but also as an end in itself. Accordingly, government has a clear role in the provision of such public goods as universal education, health, unemployment insurance, disabilities insurance and retirement income. This contrasts with the Hayekian view that a person's worth should primarily, and unsentimentally, be determined by the market.
Social-democratic governments face the continuing challenge of harnessing the power of the market to increase innovation, investment and productivity growth - while combining this with an effective regulatory framework which manages risk, corrects market failures, funds and provides public goods, and pursues social equity. Examples of such a government are the Australian Labor governments of Bob Hawke and Paul Keating during the 1980s and early '90s. Hawke and Keating pursued an ambitious and unapologetic program of economic modernisation. Their reforms internationalised the Australian economy, removed protectionist barriers and opened it up to greater competition. They were able dramatically to improve the productivity of the Australian private economy, while simultaneously expanding the role of the state in the provision of equity-enhancing public services in health and education.
In the current crisis, social democrats therefore have the great advantage of a consistent position on the central role of the state - in contrast to neo-liberals, who now find themselves tied in ideological knots, in being forced to rely on the state they fundamentally despise to save financial markets from collapse. This enables social-democratic governments to undertake such current practical tasks as credit-market regulation, intervention, and demand-side stimulus in the economy. The uncomfortable truth for neo-liberals is that they have not been able to turn to non-state actors or non-state mechanisms to defray risk and restore confidence, rebuild balance sheets and unlock global capital flows. This is only possible through the agency of the state.
In the early stages of the global financial collapse, the centrality of the state was reaffirmed by governments of both the classical Left and Right as they acted to guarantee the integrity of the banking system. Die-hard neo-liberals invoked "moral hazard" - akin to arguing about who should pay for the fire brigade while the house itself is burning down. The alternative to government intervention, as the global banking fraternity knows all too well, was systemic collapse. The first step towards preserving confidence and restoring liquidity in late 2008 was the provision of an explicit guarantee of deposits placed in mainstream financial institutions. The willingness of the public, as expressed through their respective governments, to accept the associated contingent liabilities reveals a widely held perception that the stability of banking systems is itself a public good. As Robert Skidelsky, Keynes's biographer, observed: "when the crunch came, we discovered that national taxpayers still stand behind banks, and national insolvency regimes matter."
Subsequently, governments have also demonstrated a willingness to undertake unprecedented interventions in private credit markets. Specifically, governments have involved themselves in the capitalisation of banks, the direct purchase of bank and corporate securities, the establishment of joint-purpose vehicles to share risk with private financial institutions, and in sovereign guarantees to underpin inter-bank lending. In the United States, the rescue of Citigroup and the Bank of America amounts to a de facto nationalisation. This followed the placing into conservatorship of Fannie Mae and Freddie Mac, and the effective nationalisation of AIG, the world's largest insurance company. Once again, the social-democratic state, not the unfettered forces of the market, was called to the rescue.
These measures have not been implemented on the basis of socialist ideology, nor are they a return to state ownership and control. When the financial system stabilises and the global recession eases, we can expect to see governments pulling back from direct involvement in the ownership and operation of the banking sector. The object of the current intervention is to secure private credit markets so that they can serve the needs of private businesses and consumers. But clearly the days of effective non-regulation and unconstrained financial innovation are gone, and must not be allowed to return. The consequences for the economy are too great.
Stabilising the financial system is a necessary first step towards preventing systemic collapse. But the collapse of the speculative bubble and the subsequent credit squeeze have already brought about a slowdown in economic growth, rising unemployment, and the possibility of a lengthy global recession. Neo-liberals such as Alan Moran, of the Australian Institute of Public Affairs, argue that the cost of the recession should be borne by employees, through wage cuts and retrenchment - exactly the position of US Treasury Secretary Andrew Mellon at the outset of the Great Depression. Social democrats, by contrast, stress the central role of the state in maintaining aggregate demand, both for consumption and investment spending, at a time of faltering growth. That is, the state must involve itself in direct demand-side stimulus to offset the large-scale contraction in private demand. The IMF revised its growth forecast for 2009 down four times, by a total of 3% of global GDP. This "growth gap" indicates the dimensions of the fiscal-stimulus task that now lies ahead for governments if the demand-side gap is to be met and massive unemployment avoided. This is classic Keynesianism, pure and simple.
Keynes argued that, in Stiglitz's words, "in a severe downturn, monetary policy was likely to be ineffective. Fiscal policy was required." He believed that in times of dramatically slowed economic growth, monetary authorities would find themselves in a liquidity trap, unable to "induce an increase in the supply of credit in order to raise the level of economic activity". Or, as others have described it, monetary policy becomes ineffective because it is just "pushing on a string". Indeed, as Paul Krugman suggests, "the failure of monetary policy in the current crisis shows that Keynes had it right the first time." The truth is, fiscal policy must reinforce monetary policy in aggregate demand. Neither by itself is sufficient.
Reasoning that the costs of failing to provide fiscal stimulus will outweigh the negative effect on budgets, Tony Blair implores current leaders to "do whatever it takes ... to get the blood pumping back round the financial system again". The challenge for new Keynesians is also to ensure that this stimulus is targeted, timely and temporary. As private consumption and business investment recover, fiscal stimulus should be reduced commensurately, so as not to push up inflation during the period of economic recovery.
In proposing active measures to stimulate demand, it is therefore important to emphasise the central tenet of Keynesian economic management: the need to balance budgets over the course of the economic cycle. Failure to do so, along with excessive tolerance for inflation, was a major contributor to the breakdown of Keynesian economic management in the early 1970s. Increases in public investment and direct transfers to households will stimulate the economy, but they will have to be paid for in the future, when strong economic growth has resumed.
Social democrats have always emphasised the potential for systemic shocks arising from speculative bubbles and busts driven by what Keynes referred to as the unpredictable "animal spirits" of investors. Financial regulation must allow banks and other financial institutions to be intermediaries between household savings and business investment, without themselves becoming a source of systemic instability. This requires prudential regulation beyond simply ensuring that individual institutions adhere to standards designed to guard against their insolvency under normal economic conditions. The sector as a whole should be constrained from actions that promote systemic risk, such as excessive expansion of derivatives markets. Equally important in light of the recent crisis is that a social-democratic framework recognises the effect of incentive structures within firms on the level of risk-taking by individuals. For social democrats, systemic stability and integrity represent public goods in their own right - public goods which will always take precedence over individual opportunities for profit maximisation.
A further challenge for social democrats in dealing with the current crisis is its almost unprecedented global dimensions. This has two aspects: the integration and interdependence of financial markets, which has brought about a rapid spread of the contagion; and the consequences for the real economy as collapsing demand in one country affects exports from another.
Instead of distributing risk throughout the world, the global financial system has intensified it. Neo-liberal orthodoxy held that global financial markets would ultimately self-correct - the invisible hand of unfettered market forces finding their own equilibrium. But as Stiglitz has caustically observed: "the reason that the invisible hand often seems invisible is that it is not there." Financial markets have not self-corrected. Global financial innovation has compounded the problem of asset bubbles, not reduced it. Neo-liberalism's anti-regulation agenda rapidly converted a problem in American mortgage markets into a full-blown global financial and economic crisis that now threatens the future of open global markets - yet another example of capitalism cannibalising itself, but this time on a frightening, global scale.
Three cardinal principles emerge: first, national financial markets require effective national regulation; second, global financial markets require effective global regulation, if for no other reason than that the quantum of global financial transactions is now capable of overwhelming most single national economies standing alone; and third, the means for achieving effective regulation in both can only be delivered by national governments operating together. There has been no private financial-market solution on offer to deal with the scale and complexity of global systemic instability we now face.
That is why the world has turned to co-ordinated governmental action through the G20: to help provide immediate liquidity to the global financial system; to co-ordinate sufficient fiscal stimulus to respond to the growth gap arising from the global recession; to redesign global regulatory rules for the future, including a new Basel III; to reform the existing global public institutions - especially the IMF - to provide them with the powers and resources necessary for the demands of the twenty-first century. The tragedy is that after decades of neo-liberal ascendancy, the IMF, Keynes's child from Bretton Woods, for a time became the agency through which neo-liberal doctrines were spread around the world - to the detriment of the fund's long-term standing and with a real impact on its capacity to act effectively in the current crisis with the various national economies it has treated poorly in the past.
Governments must craft consistent global financial regulations to prevent a race to the bottom, where capital leaks out to the areas of the global economy with the weakest regulation. We must establish stronger global disclosure standards for systemically important financial institutions. We must also build stronger supervisory frameworks to provide incentives for more responsible corporate conduct, including executive remuneration.
Further, the IMF's authority to undertake prudential analysis must be expanded and its early-warning system for institutional vulnerabilities enhanced. And its governance arrangements must be reformed. It makes no sense for the governance structure of the global financial system today to reflect the balance of power in 1944. It is only reasonable that if we expect fast-growing developing economies like China to make a greater contribution to multilateral institutions such as the IMF, they should also gain a stronger decision-making voice in these forums.
The longer-term challenge for governments is to address the imbalances that have helped to destabilise the global economy in the past decade: in particular, the imbalances between large surplus economies such as China, Japan and the oil-exporting nations, and large debtor nations such as America. In the short term, these imbalances are likely to increase as America's budget deficit balloons. In the medium term, overcoming these imbalances and working towards a more stable global macroeconomic framework will demand new levels of global economic co-operation and co-ordination. Any sudden change in managing these global imbalances - for example, if China sharply reduced the purchase of US government bonds - would send tremors through foreign-exchange markets, with dire consequences both for the US dollar and for the prospects of global economic recovery. Again, this looms as a challenge for statecraft; we cannot simply hope that individual market participants somehow magically do the right thing.
There is one further dimension to the role of social democrats in dealing with the current global crisis. The impact of the crisis on poverty and political stability in the developing world has not fully registered in the global debate about policy responses to the crisis so far. World Bank intervention, bilateral official development assistance and the continued implementation of the Millennium Development Goals become essential elements in managing the effects of a crisis that will otherwise throw much of the developing world back into poverty. Social democrats, both by instinct and by tradition, are predisposed to engage in this, but it will become harder and harder as developed countries' budgets come under ever more stress from the unprecedented domestic demands now placed upon them by the crisis.
Neo-liberals, like neo-conservatives (their ideological bedfellows in the foreign-policy sphere), are intrinsically suspicious of all forms of multilateral governance. In fact, there is a parallel between neo-liberals' hostility to national governments intervening in national markets and their hostility to international governmental institutions intervening in global markets. Again, the contrast with social democrats is instructive, given social democrats' long tradition of internationalism - itself an accommodating attribute given the complexities of global market governance, co-operation and co-ordination we all now confront. The truth is that there are no credible unilateral solutions on offer, given the increasing dispersal of global economic power.
The political home of neo-liberalism in Australia is, of course, the Liberal Party itself. Over the past decade, the Howard government reduced investment in key public goods, including education and health. It also refused to invest in national economic infrastructure, notwithstanding multiple warnings from the Reserve Bank of the impact of long-standing capacity constraints on economic growth. The Liberals in government also set about the comprehensive deregulation of the labour market - based on the argument that human labour was no different to any other commodity. Driven by a philosophy of minimal government intervention in the markets, the Liberals ignored both the 2003 Dawson Review and multiple reports from the ACCC calling for the criminalisation of cartel conduct. They refused to act to prevent the accumulation of market power through creeping acquisitions. They refused to effectively regulate consumer credit or credit-rating agencies. And they ignored calls - from the Financial Stability Forum in 2000, the Australian Prudential Regulatory Authority submission to the HIH Royal Commission in 2002, and the 2006 IMF Financial Sector Assessment Program - to implement a deposit-insurance scheme that would bring our deposit protection in line with almost all other OECD nations. Most critically, the Howard government oversaw an unprecedented increase in household and national debt. The average ratio of household debt to annual gross disposable income more than doubled to 114.5%, up from 49.8% under the Hawke-Keating governments; household net savings to net disposable income fell to an average of 1.1%, down from an average of 7.9% under the Hawke-Keating governments; and the level of Australia's net foreign debt increased to 55.5% of GDP, up from 37.9% of GDP under the Hawke-Keating governments.
The contrast between the competing political traditions within Australia on the role of governments and the market is clear. Labor, in the international tradition of social democracy, consistently argues for a central role for government in the regulation of markets and the provision of public goods.
Consistent with this tradition, the Labor government has acted decisively through state action to maintain the stability of the Australian financial systems in the face of the economic crisis. The government acted in October to guarantee all deposits. To support intra-bank lending by the Australian majors, it intervened to provide a facility for guaranteeing wholesale funding of financial institutions. To encourage liquidity, the government legislated to increase by $25 billion the maximum value of government bonds that can be issued at any one time. It also initiated a program to purchase residential mortgage-backed securities. To protect financial institutions from predatory speculators, a temporary ban on short selling was introduced. Labor has also acted to help the real economy, to stimulate economic activity by investing in targeted job creation; in the reform of services in health, education, disabilities and homelessness; and in roads, rail, ports and other critical infrastructure. All through decisive state action.
The Liberals, embracing the neo-liberal tradition of anti-regulation, seek to reduce the agency of the state in private markets as much as possible. The distinction is reflected in the previous prime minister's statements that "competitive capitalism within free markets remains the most effective economic paradigm, both domestically and internationally"; that "the right responses will be grounded in free-market orthodoxies"; and that "we should avoid the resort to re-regulation." This ideology has not served Australia well in preparing for the current crisis.
To respond effectively to the global financial crisis in the future requires the resolution of profound questions from the past, principal among which is: What caused such a crisis to result in widespread economic and social devastation? The magnitude of the crisis and its impact across the world means that minor tweakings of long-established orthodoxies will not do. Two unassailable truths have already been established: that financial markets are not always self-correcting or self-regulating, and that government (nationally and internationally) can never abdicate responsibility for maintaining economic stability. These two truths in themselves destroy neo-liberalism's claims to any continuing ideological legitimacy, because they remove the foundations on which the entire neo-liberal system is constructed.
The extent to which social democracy responds effectively and sustainably to the challenges now left to us by the neo-liberals remains an open question. Tempering any tendencies towards ideological triumphalism from the centre-Left at neo-liberalism's demise is Robert Skidelsky's recent and reflective reminder of the cycles of history:
Societies are said to swing like pendulums between alternating phases of vigour and decay; progress and reaction; licentiousness and puritanism. Each outward movement produces a crisis of excess which leads to a reaction. The equilibrium position is hard to achieve and always unstable.
In his Cycles of American History (1986), Arthur Schlesinger Jr defined a political economy cycle as "a continuing shift in national involvement between public purpose and private interest" ...
Others have argued that we are seeing a more fundamental regime change: the third in postwar history, starting with the Keynesian model, from the 1940s to the '70s; the neo-liberal ascendancy, from 1978 to 2008; followed by a new regime, which is currently being shaped. Perhaps this new regime will come to be called ‘social capitalism' or ‘social-democratic capitalism', or simply the term ‘social democracy' itself. Whatever the nomenclature, the concept is clear: a system of open markets, unambiguously regulated by an activist state, and one in which the state intervenes to reduce the greater inequalities that competitive markets will inevitably generate.
Either way, seismic changes are underway, fault lines yielding to fractures which in time may yield to even deeper tectonic shifts. Neither governments nor the peoples they represent any longer have confidence in an unregulated system of extreme capitalism. As President Sarkozy put it: "Le laissez-faire, c'est fini." Or, as China's Vice Premier Wang Qishan reportedly said, somewhat more elliptically: "The teachers now have some problems."
For social democrats, it is critical that we get it right - not just to save the system of open markets from self-destruction, but also to rebuild confidence in properly regulated markets, so as to prevent extreme reactions from the far Left or the far Right taking hold. Social democrats must also get it right because the stakes are so high: there are the economic and social costs of long-term unemployment; poverty once again expanding its grim reach across the developing world; and the impact on long-term power structures within the existing international political and strategic order. Success is not optional. Too much now rides on our ability to prevail.
I believe that social democrats can chart an effective course that will see us through this crisis, and one that is also capable of building a fairer and more resilient order for the long term. This can only be achieved through the creative agency of government - and through governments acting together. How could it possibly now be argued that the minimalist state of which the neo-liberals have dreamt could somehow be of sufficient potency to respond to the maximalist challenge we have been left in the wake of this most spectacular failure of the entire neo-liberal orthodoxy? Government is not the intrinsic evil that neo-liberals have argued it is. Government, properly constituted and properly directed, is for the common good, embracing both individual freedom and fairness, a project designed for the many, not just the few.
Monday, 2 March 2009
Systemic Failure: Capitalism "Lays an Egg"
After the 1929 October 24, 28 and 29 market crash, the weekly entertainment industry magazine Variety (on October 30) published its most famous ever headline: "Wall Street Lays an Egg." In October 2008, history repeated, and since the October 2007 peak, equity prices plunged over 50% after the Dow and S & P (in February) posted their second worst ever monthly percentage declines - topped only in 1933 during the depths of the Great Depression. So far, the current market drop matches its 1929 - 1932 pace, and like then, shows no signs of abating.
With world economies collapsing, stocks are still overvalued by every metric - dividends, price to book, sales, free cash flow, or earnings based on GAAP (Generally Accepted Accounting Principals) or "reported" earnings, not "operating" ones, easily manipulated to exclude "write-offs." By the mid-late 1990s, companies switched to the latter method to hide over-valuations. The practice still continues to let expensive stocks masquerade as cheap ones and make the market overall look attractive to the unwary.
After the 1929 crash, newspapers reflected the mood like the Chicago Tribune headlining: "Roaring Twenties grind to a halt and a new era of hard times begins." Variety reported that "Broadway T(ook) the Slap" and New York "nite clubs, speaks & dives (echoed) market cataclysm." Its Cairo correspondent cabled that a "cinema had finally been wired in Alexandria, Egypt, Cleopatra's hometown," so the paper quipped: "Only Sodom and Gomorrah remain(ed) to be heard from."
The comment resonates today on a global scale when never have such best and brightest teams done so much for so few, so little for so many, and so greatly harmed world economies in the process - for eight years under George Bush, now continuing under Obama with no end to it in sight. The result - a likely Great Depression II that will match or surpass the worst of the first one. What Michel Chossudovsky calls "The Great Depression of the 21st Century: Collapse of the Real Economy (affecting) all sectors" globally because solutions are contributing to "further collapse," too many "experts" remain in denial, and bad policies follow failed ones.
On February 28, Warren Buffett told shareholders that 2008 was Berkshire Hathaway's worst year, and he's "certain that the economy will be in shambles throughout 2009 - and, for that matter, probably well beyond...." As for government responses so far, his comment reflected gloom: "Economic medicine previously meted out by the cupful has recently been dispensed by the barrel. These once-unthinkable dosages will almost certainly bring on unwelcome aftereffects."
Perhaps this is what he has in mind: Given current conditions and the pace of continued decline, America and world economies face a possible synchronized global collapse, yet few come out publicly and say it.
Marx did in foreseeing much of what's happening today:
-- the inevitable monopoly control of production, commerce, and finance;
-- a reserve army of exploited low-paid labor;
-- a class struggle between "haves" and "have-nots;"
-- capitalism's internal contradictions: exploiting and alienating the many for the few;
-- its crisis-prone nature: unstable, "anarchic," ungovernable, self-destructive with booms creating bubbles creating busts, then depressions; and ultimately
-- its inevitable decay and demise because a system so corrupted can't endure; a socialist revolution (he believed) will replace it based on greater freedom, inclusion, and equality.
During the depths of the Great Depression, Franklin Roosevelt delivered his March 4, 1933 inaugural address and said what applies to today:
"This is preeminently the time to speak the truth, the whole truth, frankly and boldly. Nor need we shrink from honestly facing conditions in our country today....Values have shrunken to fantastic levels....our ability to pay has fallen; government of all kinds is faced by serious curtailment of income; the means of exchange are frozen in the currents of trade; the withered leaves of industrial enterprise lie on every side....the savings of many years of thousands of families are gone."
"More important, a host of unemployed citizens face the grim problem of existence, and an equally great number toil with little return. Only a foolish optimist can deny the dark realities of the moment."
"Primarily this is because the rulers of the exchange of mankind's goods have failed, through their own stubbornness and their own incompetence, have admitted their failure, and abdicated. Practices of the unscrupulous money changers indicted in the court of public opinion, rejected by the hearts and minds of men....Faced by failure of credit they have proposed only the lending of more money (and exhortations) to follow their false leadership. They have no vision, and when there is (none) the people perish."
"The money changers have fled from their high seats in the temple of our civilization. We may now restore (it. Doing it will involve) the extent to which we apply social values more noble than mere monetary profit....there must be an end to a conduct in banking and in business which too often (results in) callous and selfish wrongdoing. (We need) action and now....to put people to work....(by redistributing land to those) best fitted (to use it (and) by preventing the tragedy of....foreclosure of our small homes and our farms."
We need in place "safeguards against a return of the evils of the old order; there must be strict supervision of all banking and credits and investments; there must be an end to speculation with other people's money, and there must be provision for an adequate but sound currency....For the trust reposed in me, I will return the courage and the devotion that befit the time. I can do no less."
Roosevelt later saw poverty's spreading scourge, "millions of families trying to live on incomes so meager that the pall of family disaster (hung) over them day by day....one-third of the nation ill-housed, ill-clad, and ill-nourished." The same specter haunts millions today, but there's no Rooseveltian leadership to address it.
On February 21, Reuters reported that George Soros said the world financial system has effectively disintegrated, and there's no prospect of near-term crisis resolution. He called the turbulence worse than in the Great Depression and said Lehman Brothers bankruptcy was a turning point in "the collapse of the financial system. It was placed on life support, and it's still (there)."
On the same day at a Columbia University conference, Paul Volker couldn't "remember any time, maybe even in the Great Depression, when things went down quite so fast, quite so uniformly around the world." He cited industrial production falling faster globally than in America because of the fallout from unbridled financial markets. "It's broken down in the face of almost all expectation and prediction," and greater regulation is coming as a result.
"In the future, we are going to need a financial system which is not going to be so prone to crisis and certainly not prone to the severity of a crisis of this sort. (It will) be different from the (one) that has developed in the last 20 years." Its "primary characteristic (should be) a strong, traditional, commercial banking-type system....to service customers, individuals, businesses and governments by providing outlets for their money and by providing credit."
This should be their core business, the same as in America 30 years ago and under closer regulation. Risky "entrepreneurial activity" should be out. Big and small commercial banks must stick to their knitting and not operate like hedge funds or casinos. Mostly what's needed is stability in place of recklessly pursuing profits at the risk of a global economic collapse.
Obama Responds
Since taking office on January 20, Obama has been a caricature of a leader, a Manchurian candidate president, a front man for a criminal Wall Street - government partnership. The latest Zogby poll showed only 27% believe his stimulus will help them, and just 23% have confidence in either party.
In Obama's nationally televised February 24 address to a joint session of Congress, contrast his comments to FDR's, He:
-- downplayed the crisis;
-- vowed "We will rebuild, we will recover, we will emerge stronger than before;"
-- cited our unique greatness - "the greatest force of progress and prosperity in human history;"
-- defended trillions for bankers with "more (coming) than we've already set aside:" from a TARP II providing "commitments exceeding $2 trillion" plus another trillion or more from a so-called Public-Private Investment Fund (PPIF) offering sweetheart deal guarantees and financing to investors to buy toxic bank assets at bargain basement prices;
-- ignored the most serious unaddressed problems: decades of accumulated debt and the bad asset overhang in the hundreds of trillions that all proposed plans barely dent;
-- blamed "people" for "spend(ing) more money and pil(ing) up more debt....than ever before;"
-- ignored Wall Street's criminal excess and fraud, and
the looting of the Treasury to reward them; said nothing about a corrupted system that should be scrapped for a fair one;
-- offered nothing in the way of a New Deal approach; instead offered an anti-New Deal by promising to shrink the deficit to $533 billion, or 3% of GDP, by 2013; doing it means cutting social programs like Social Security, Medicare, and Medicaid; what FDR provided, Obama may take away;
-- defended his counterproductive policies with new ones piling more abuses on the others and increasing the debt burden instead of reducing it;
-- lied that they're "not about helping banks - (they're) about helping people;" and
-- was silent on his hidden agenda for business at the expense of working Americans and the millions criminally defrauded out of jobs, savings, homes, pensions, and futures.
In today's popular jargon, America failed its "stress test."
Yet, Obama audaciously ended by saying:
"....some day, years from now, our children can tell their children that this was the time when we performed, in the words that are carved into this very chamber, "something worthy to be remembered."
His comments followed Fed chairman Bernanke's earlier in the day's prepared semi-annual monetary policy report to Congress saying:
"If actions taken by the Administration, the Congress, and the Federal Reserve are successful in restoring some measure of financial stability....there is a reasonable prospect that the current 'recession' will end in 2009 and that 2010 will be a year of recovery."
He also said the nation's largest banks aren't "zombies" when, in fact, at least the top 20 are insolvent and need bailout help to keep operating. Earlier, he saw no market bubbles and said high home prices reflected a strong economy.
A Planned Public Response
On April 3 and 4, the Bail Out the People Movement" plans a national march on Wall Street on the anniversary of Martin Luther King's assassination. His message was:
"Rise up against wars of colonial conquest.
Fight for the right of all to a job or an income."
Nationally, more than 50 organizing centers are involved in response to the growing crisis; an absence of leadership in Washington; and an agenda of foreign wars, occupation, and rewarding criminal bankers and the rich at the expense of millions of distressed households.
"Working people must organize independently to Bail Out People, Not Banks. It's time to march on Wall Street," to denounce this injustice and act.
Visit www.BailOutPeople.org for full information on getting involved, a list of endorsing organizations, and information on organizing centers in a growing number of states, including New York, California, Illinois, Michigan, Pennsylvania, Texas, Florida, and Ohio.
In Denial Over the "D" Word
In the dominant media, inconvenient truths are suppressed, denied or delayed until they're too explosive to ignore. Even then, coverage is way short of explaining that we're in the early stages of the greatest ever economic decline. Policy makers are flying blind to contain it. They can't grasp its gravity. All measures tried have failed, and capitalism's ideological roots are at stake. For economist Richard Wolff - "Capitalism Hit the Fan," unworkable, unjust, and spreading global chaos everywhere with frightening speed.
What began as a financial crisis has now exploded with even some mainstream economists predicting a global "depression," and IMF chief Dominique Strauss-Kahn saying advanced economies are already in one.
Perhaps others will admit it after the UK Telegraph's February 26 headline: "Moody's predicts default rate will exceed peaks hit in Great Depression" when it reached 15.4%. The risks are enormous because "we are in unchartered territory....If the economy deteriorates more than expected," the rate could top 20% and be even higher in Europe - for all "non-investment grade issuers."
Merrill Lynch's David Rosenberg used the "D" word earlier in his end of January commentary titled: "Some inconvenient truths."
Not your father's recession he said, but "maybe your grandfather's....We are likely enduring a depression today," and while there are no official definitions, we've had them before - four in the 19th century and a great one in the 20th.
Recessions are generally defined as two or more consecutive GDP contracting quarters although some economists prefer measures of the relative strength or weakness of production, employment, retail sales, and so forth.
For economist John Williams, a depression is a period where inflation-adjusted peak-to-trough contraction exceeds 10%, and in a great one it's 25%.
Duration is also important. On average, recessions last about 18 months. For Rosenberg, depressions last "anywhere from three to seven years" or longer "and tend to follow years of leveraged prosperity proportions" like the period between 2002 - 2007.
Recessions are typically "inventory cycles," while depressions feature "balance sheet compression and deleveraging: debt elimination, asset liquidation, and rising savings rates." When credit expansion becomes a bubble, "the distance to the mean is longer and deeper" with upside excesses producing comparable or greater ones on the downside.
Clearly, we're way beyond a classic recession after a year and a half of massive stimulus, capital injections, "unprecedented interest rate relief," and various other measures producing no end in sight "or any signs of normalcy returning to credit."
Based on reverse-engineering the data, Williams guages unemployment at 18% when discouraged and part-time workers are included. Rosenberg says 13.5%, but either figure far exceeds the official fictitious 7.6%. Rosenberg also places idle manufacturing capacity at 30%, a level reached only once previously in the past five decades.
As for stimulus, Rosenberg sees little impact either from tax cuts or infrastructure spending. The latter "comes with a long gestation period" unlikely to be felt until "well into 2010." It also falls short of boosting long-term growth. With all proposed monetary and fiscal stimulus, the economy will still "be saddled with roughly $1 trillion of excess capacity" by year end.
So far, around $1 trillion in debt has been written off. It's not enough. We're "still in the early stages of credit contraction (and) have no idea when the credit cycle will hit bottom." Before it does, "more than $6 trillion in private sector debt must be eliminated." Time, likely years, are needed for resolution, but the Obama administration plans don't address it.
Going forward, households, especially "boomers," will stress "frugality," not "frivolity." Apres le deluge, saving for retirement is crucial as deflated assets and lost pensions won't provide it.
Here's more:
-- Federal Reserve surveys show household credit demand declining to the lowest level on record while debt is at "near-record levels relative to after-tax incomes" and so is the debt-servicing burden;
-- 10% of borrowers are in arrears or foreclosure;
-- bank delinquency rates are the highest in 15 years and rising; the earlier S & L crisis was pocket change compared to now;
-- credit card delinquencies are at an all-time high at a time the overall credit quality index "collapsed to an all-time low;"
-- this begs the question: how can banks lend when households can't and won't borrow; "bringing households to the well doesn't mean they will drink;"
-- despite much lower home prices, affordability ratios the best in over 35 years, and attractive mortgage rates, the record low National Association of Home Builders (NAHB) homebuilding index showed "residential real estate (perceptions) have changed;"
-- on February 24, the latest Conference Board consumer confidence index explained why; it plunged from 37 in January to 25 in February, its worst reading ever, and one year ago it was 76; the Economic Outlook Group's Bernard Baumohl called it a "catastrophic collapse of confidence in the economy" even after all measures the Obama administration announced;
-- it also explains "a secular (attitude) change toward consumption;" after peaking last summer, it declined at a 15% annual rate; even food is affected with consumers choosing tuna over trout and spaghetti or Spam over steak or shrimp;
-- households have been devastated by a 20% hole in their balance sheets, or a cumulative $13 trillion net worth loss as of January 1; it's the first time this happened since the 1930s; Rosenberg sees it hitting $20 trillion by year-end 2009, a level on a par with the Great Depression with no end of this in sight; this "permanent shock" is a harbinger of "sustained consumer contraction in coming years;"
-- household savings are rising but still unsustainably low (at under 3%) and will likely head toward earlier 10 - 12% levels; "there are no more rabbits to be pulled out of the hat" to encourage spending; the effect will be powerfully deflationary "for some time."
Paulson and Geithner's Violation of US Law
Specifically - Title 12, Chapter 16, Sec. 1831o of the US Code collection that Economics Professor and former Senior government regulator during the earlier troubled S & L period William K. Black discussed in his February 23 Huffington Post article titled: "Why Is Geithner Continuing Paulson's Policy of Violating the Law?"
Well before they're insolvent or when serious problems are suspected, US law "mandat(es) that the administration place troubled banks....in receivership, appoint competent managers, and restrain senior executive compensation" to prevent bonuses, huge salaries, raises, and undeserved benefits from being paid.
No provision says taxpayers should bail out bankers. Yet Paulson and now Geithner keep doing it, using vast sums kept secret - both in amounts and to whom beyond the handful of big names made public.
Geithner was at it under Bush. As New York Fed president, his responsibility was "to regulate many of the largest bank holding companies in the United States. Far too many of (them) are deeply insolvent because" they own insolvent banks. "The law mandates that" they be placed in receivership, yet as Treasury Secretary Geithner continues to violate it.
Under George Bush, congressional oversight largely stopped at the cost of today's crisis. According to some, the worst is yet to come because of criminal negligence and complicity at the highest levels of government.
"Secretaries Paulson and Geithner subverted the law by allowing failed banks to engage in massive accounting fraud (including securities fraud)."
In a follow-up February 25 article, Black explained that the FBI warned of a mortgage fraud "epidemic" in September 2004 and reported that "lenders initiated 80% of these frauds....Financial control frauds' 'weapon of choice' is accounting." It flourishes in a deregulatory climate when (as the title of Wheeler and Rothman's 1982 book suggests): "The Best Way to Rob a Bank is to Own One."
The FBI spotted it in time to stop it. Nonprime lenders were the main culprit with Wall Street deeply involved. The fraud was so extensive, it was easy to spot. Instead, banks, rating agencies, and buyers "operated on a 'don't ask; don't tell' policy." While it lasted, profits were huge, and few were the wiser. Today, "many (likely all) the big banks are deeply insolvent due to severe credit losses." They and the Treasury aren't even sure to what degree, but the amounts are staggering in size. "A 'stress test' can't remedy the banks' problem - they don't have the loan files" for documentation.
Under Bush and Obama, banks are licensed to steal. The ("quantitative") looting of the Treasury continues, and global economies sink deeper into a black hole of depression with the public as always the big loser.
The End Game to Economic Ruin?
Who can know, but look what casino capitalism brought us. In December 2006, John Bellamy Foster discussed "monopoly capital's" evolution in commemorating the 40th anniversary of Paul Baran and Paul Sweezy's classic work: "Monopoly Capital - An Essay on the American Economic and Social Order." In his new book, The Great Financial Crisis: Causes and Consequences, he discusses the legacy it left us.
Giant corporations arose early in the last century followed by wars, depression, and more wars. Post-WW II, "capitalism was fully consolidated, particularly within the United States, the most advanced capitalist economy," and for some years thereafter the only healthy major one unravaged by the war.
As a result, corporate America flourished, grew larger and more dominant. Profit-making oligopolies and monopolies resulted "competing not on price but mainly in the areas of cost-cutting and the sales effort." Out of this grew "surpluses, and the economy's problem was to absorb it to avoid stagnation."
It led to overcapacity, so key was "to find additional outlets....beyond capitalist consumption and investment" or face "economic malaise." Beginning in the late 1960s and 1970s, financialization came to the rescue, and "to some extent (shifted) control over the economy from corporate boardrooms to the financial markets. Corporations were increasingly seen as bundles of assets, the more liquid the better." A new "monopoly finance" capitalism was advanced to exploit it.
It produced new outlets for surplus in the FIRE sector (finance, insurance, and real estate), mostly for speculation, not capital goods investments in plant and equipment, transportation, and public utilities that earlier fueled business cycle expansions. It kicked off a "whole new historical period" that wasn't apparent before the late 1960s. But the implications were huge and today have backfired.
The 1980s saw "an unprecedented upsurge of debt in the economy." In the 1970s, it was about one-and-a-half times GDP. By 1985, it was double, and by 2005 it was three-and-a-times GDP, rising, and approaching "the $44 trillion (level) for the entire world." Ever since, "the way was open for a proliferation of financial instruments and markets, which (until the present) proved to be literally unlimited."
Much earlier, Keynes warned about "enterprise becom(ing) the bubble on a whirlpool of speculation" like in the 1920s, the price being the Great Depression.
Beginning in the late 1960s and 1970s, the process began repeating as "economic malaise" needed new stimulus. "Unable to find profitable outlets....within the productive economy, corporations/capitalists sought" opportunities through financialization, speculation, casino capitalism, "while the financial system responded with a bewildering array of new financial instruments - including stock futures, options, derivatives, hedge funds, etc." As a result, a "financial superstructure...took on a life of its own" that today is consuming world economies.
Back then was different. "New Economy" notions took hold. The sky was the limit, but bubbles eventually grow and always burst. Minor by comparison, the 1997-98 Asian crisis showed how fast contagion can spread. Today it's global and out-of-control. No one's sure how to contain it, so bankers are getting trillions in a desperate attempt to socializing losses, privatize profits, and pump life back into a corpse through a sort of shell game or grandest of grand theft process of sucking wealth from the public to the top in hopes enough of it will work.
Speculation and debt need more of it to prosper, but in the end it's a losing game. The greater the expansion, the harder it falls - especially when not making things and working Americans are exploited. Since the 1970s, wages stagnated and lost purchasing power as inflation rose. So did benefits like health care and pensions. Household debt rose to compensate. Two wage-earner households as well. It let "monopoly-finance capital (produce) an accumulation of misery" now exploding since 2008's global collapse, exposing capitalism's dark side and destructive contradictions, particularly its financialization form.
Foster quoted Baran and Sweezy's response to an "irrational system." What's needed is "our moral obligation to (fight) against an evil and destructive system which maims, oppresses, and dishonors those who live under it, and which threatens devastation and death to millions....around the globe." Today, the threat is real, growing, and becoming greater than most anyone imagined, remembers, or has any sure way to contain.
Stephen Lendman is a Research Associate of the Centre for Research on Globalization. He lives in Chicago and can be reached at lendmanstephen@sbcglobal.net.
Also visit his blog site at sjlendman.blogspot.com and listen to The Global Research News Hour on Republic Broadcasting.org Monday through Friday at 10AM US Central time for cutting-edge discussions with distinguished guests on world and national issues. All programs are archived for easy listening.
http://www.globalresearch.ca/index.php?context=va&aid=12494
With world economies collapsing, stocks are still overvalued by every metric - dividends, price to book, sales, free cash flow, or earnings based on GAAP (Generally Accepted Accounting Principals) or "reported" earnings, not "operating" ones, easily manipulated to exclude "write-offs." By the mid-late 1990s, companies switched to the latter method to hide over-valuations. The practice still continues to let expensive stocks masquerade as cheap ones and make the market overall look attractive to the unwary.
After the 1929 crash, newspapers reflected the mood like the Chicago Tribune headlining: "Roaring Twenties grind to a halt and a new era of hard times begins." Variety reported that "Broadway T(ook) the Slap" and New York "nite clubs, speaks & dives (echoed) market cataclysm." Its Cairo correspondent cabled that a "cinema had finally been wired in Alexandria, Egypt, Cleopatra's hometown," so the paper quipped: "Only Sodom and Gomorrah remain(ed) to be heard from."
The comment resonates today on a global scale when never have such best and brightest teams done so much for so few, so little for so many, and so greatly harmed world economies in the process - for eight years under George Bush, now continuing under Obama with no end to it in sight. The result - a likely Great Depression II that will match or surpass the worst of the first one. What Michel Chossudovsky calls "The Great Depression of the 21st Century: Collapse of the Real Economy (affecting) all sectors" globally because solutions are contributing to "further collapse," too many "experts" remain in denial, and bad policies follow failed ones.
On February 28, Warren Buffett told shareholders that 2008 was Berkshire Hathaway's worst year, and he's "certain that the economy will be in shambles throughout 2009 - and, for that matter, probably well beyond...." As for government responses so far, his comment reflected gloom: "Economic medicine previously meted out by the cupful has recently been dispensed by the barrel. These once-unthinkable dosages will almost certainly bring on unwelcome aftereffects."
Perhaps this is what he has in mind: Given current conditions and the pace of continued decline, America and world economies face a possible synchronized global collapse, yet few come out publicly and say it.
Marx did in foreseeing much of what's happening today:
-- the inevitable monopoly control of production, commerce, and finance;
-- a reserve army of exploited low-paid labor;
-- a class struggle between "haves" and "have-nots;"
-- capitalism's internal contradictions: exploiting and alienating the many for the few;
-- its crisis-prone nature: unstable, "anarchic," ungovernable, self-destructive with booms creating bubbles creating busts, then depressions; and ultimately
-- its inevitable decay and demise because a system so corrupted can't endure; a socialist revolution (he believed) will replace it based on greater freedom, inclusion, and equality.
During the depths of the Great Depression, Franklin Roosevelt delivered his March 4, 1933 inaugural address and said what applies to today:
"This is preeminently the time to speak the truth, the whole truth, frankly and boldly. Nor need we shrink from honestly facing conditions in our country today....Values have shrunken to fantastic levels....our ability to pay has fallen; government of all kinds is faced by serious curtailment of income; the means of exchange are frozen in the currents of trade; the withered leaves of industrial enterprise lie on every side....the savings of many years of thousands of families are gone."
"More important, a host of unemployed citizens face the grim problem of existence, and an equally great number toil with little return. Only a foolish optimist can deny the dark realities of the moment."
"Primarily this is because the rulers of the exchange of mankind's goods have failed, through their own stubbornness and their own incompetence, have admitted their failure, and abdicated. Practices of the unscrupulous money changers indicted in the court of public opinion, rejected by the hearts and minds of men....Faced by failure of credit they have proposed only the lending of more money (and exhortations) to follow their false leadership. They have no vision, and when there is (none) the people perish."
"The money changers have fled from their high seats in the temple of our civilization. We may now restore (it. Doing it will involve) the extent to which we apply social values more noble than mere monetary profit....there must be an end to a conduct in banking and in business which too often (results in) callous and selfish wrongdoing. (We need) action and now....to put people to work....(by redistributing land to those) best fitted (to use it (and) by preventing the tragedy of....foreclosure of our small homes and our farms."
We need in place "safeguards against a return of the evils of the old order; there must be strict supervision of all banking and credits and investments; there must be an end to speculation with other people's money, and there must be provision for an adequate but sound currency....For the trust reposed in me, I will return the courage and the devotion that befit the time. I can do no less."
Roosevelt later saw poverty's spreading scourge, "millions of families trying to live on incomes so meager that the pall of family disaster (hung) over them day by day....one-third of the nation ill-housed, ill-clad, and ill-nourished." The same specter haunts millions today, but there's no Rooseveltian leadership to address it.
On February 21, Reuters reported that George Soros said the world financial system has effectively disintegrated, and there's no prospect of near-term crisis resolution. He called the turbulence worse than in the Great Depression and said Lehman Brothers bankruptcy was a turning point in "the collapse of the financial system. It was placed on life support, and it's still (there)."
On the same day at a Columbia University conference, Paul Volker couldn't "remember any time, maybe even in the Great Depression, when things went down quite so fast, quite so uniformly around the world." He cited industrial production falling faster globally than in America because of the fallout from unbridled financial markets. "It's broken down in the face of almost all expectation and prediction," and greater regulation is coming as a result.
"In the future, we are going to need a financial system which is not going to be so prone to crisis and certainly not prone to the severity of a crisis of this sort. (It will) be different from the (one) that has developed in the last 20 years." Its "primary characteristic (should be) a strong, traditional, commercial banking-type system....to service customers, individuals, businesses and governments by providing outlets for their money and by providing credit."
This should be their core business, the same as in America 30 years ago and under closer regulation. Risky "entrepreneurial activity" should be out. Big and small commercial banks must stick to their knitting and not operate like hedge funds or casinos. Mostly what's needed is stability in place of recklessly pursuing profits at the risk of a global economic collapse.
Obama Responds
Since taking office on January 20, Obama has been a caricature of a leader, a Manchurian candidate president, a front man for a criminal Wall Street - government partnership. The latest Zogby poll showed only 27% believe his stimulus will help them, and just 23% have confidence in either party.
In Obama's nationally televised February 24 address to a joint session of Congress, contrast his comments to FDR's, He:
-- downplayed the crisis;
-- vowed "We will rebuild, we will recover, we will emerge stronger than before;"
-- cited our unique greatness - "the greatest force of progress and prosperity in human history;"
-- defended trillions for bankers with "more (coming) than we've already set aside:" from a TARP II providing "commitments exceeding $2 trillion" plus another trillion or more from a so-called Public-Private Investment Fund (PPIF) offering sweetheart deal guarantees and financing to investors to buy toxic bank assets at bargain basement prices;
-- ignored the most serious unaddressed problems: decades of accumulated debt and the bad asset overhang in the hundreds of trillions that all proposed plans barely dent;
-- blamed "people" for "spend(ing) more money and pil(ing) up more debt....than ever before;"
-- ignored Wall Street's criminal excess and fraud, and
the looting of the Treasury to reward them; said nothing about a corrupted system that should be scrapped for a fair one;
-- offered nothing in the way of a New Deal approach; instead offered an anti-New Deal by promising to shrink the deficit to $533 billion, or 3% of GDP, by 2013; doing it means cutting social programs like Social Security, Medicare, and Medicaid; what FDR provided, Obama may take away;
-- defended his counterproductive policies with new ones piling more abuses on the others and increasing the debt burden instead of reducing it;
-- lied that they're "not about helping banks - (they're) about helping people;" and
-- was silent on his hidden agenda for business at the expense of working Americans and the millions criminally defrauded out of jobs, savings, homes, pensions, and futures.
In today's popular jargon, America failed its "stress test."
Yet, Obama audaciously ended by saying:
"....some day, years from now, our children can tell their children that this was the time when we performed, in the words that are carved into this very chamber, "something worthy to be remembered."
His comments followed Fed chairman Bernanke's earlier in the day's prepared semi-annual monetary policy report to Congress saying:
"If actions taken by the Administration, the Congress, and the Federal Reserve are successful in restoring some measure of financial stability....there is a reasonable prospect that the current 'recession' will end in 2009 and that 2010 will be a year of recovery."
He also said the nation's largest banks aren't "zombies" when, in fact, at least the top 20 are insolvent and need bailout help to keep operating. Earlier, he saw no market bubbles and said high home prices reflected a strong economy.
A Planned Public Response
On April 3 and 4, the Bail Out the People Movement" plans a national march on Wall Street on the anniversary of Martin Luther King's assassination. His message was:
"Rise up against wars of colonial conquest.
Fight for the right of all to a job or an income."
Nationally, more than 50 organizing centers are involved in response to the growing crisis; an absence of leadership in Washington; and an agenda of foreign wars, occupation, and rewarding criminal bankers and the rich at the expense of millions of distressed households.
"Working people must organize independently to Bail Out People, Not Banks. It's time to march on Wall Street," to denounce this injustice and act.
Visit www.BailOutPeople.org for full information on getting involved, a list of endorsing organizations, and information on organizing centers in a growing number of states, including New York, California, Illinois, Michigan, Pennsylvania, Texas, Florida, and Ohio.
In Denial Over the "D" Word
In the dominant media, inconvenient truths are suppressed, denied or delayed until they're too explosive to ignore. Even then, coverage is way short of explaining that we're in the early stages of the greatest ever economic decline. Policy makers are flying blind to contain it. They can't grasp its gravity. All measures tried have failed, and capitalism's ideological roots are at stake. For economist Richard Wolff - "Capitalism Hit the Fan," unworkable, unjust, and spreading global chaos everywhere with frightening speed.
What began as a financial crisis has now exploded with even some mainstream economists predicting a global "depression," and IMF chief Dominique Strauss-Kahn saying advanced economies are already in one.
Perhaps others will admit it after the UK Telegraph's February 26 headline: "Moody's predicts default rate will exceed peaks hit in Great Depression" when it reached 15.4%. The risks are enormous because "we are in unchartered territory....If the economy deteriorates more than expected," the rate could top 20% and be even higher in Europe - for all "non-investment grade issuers."
Merrill Lynch's David Rosenberg used the "D" word earlier in his end of January commentary titled: "Some inconvenient truths."
Not your father's recession he said, but "maybe your grandfather's....We are likely enduring a depression today," and while there are no official definitions, we've had them before - four in the 19th century and a great one in the 20th.
Recessions are generally defined as two or more consecutive GDP contracting quarters although some economists prefer measures of the relative strength or weakness of production, employment, retail sales, and so forth.
For economist John Williams, a depression is a period where inflation-adjusted peak-to-trough contraction exceeds 10%, and in a great one it's 25%.
Duration is also important. On average, recessions last about 18 months. For Rosenberg, depressions last "anywhere from three to seven years" or longer "and tend to follow years of leveraged prosperity proportions" like the period between 2002 - 2007.
Recessions are typically "inventory cycles," while depressions feature "balance sheet compression and deleveraging: debt elimination, asset liquidation, and rising savings rates." When credit expansion becomes a bubble, "the distance to the mean is longer and deeper" with upside excesses producing comparable or greater ones on the downside.
Clearly, we're way beyond a classic recession after a year and a half of massive stimulus, capital injections, "unprecedented interest rate relief," and various other measures producing no end in sight "or any signs of normalcy returning to credit."
Based on reverse-engineering the data, Williams guages unemployment at 18% when discouraged and part-time workers are included. Rosenberg says 13.5%, but either figure far exceeds the official fictitious 7.6%. Rosenberg also places idle manufacturing capacity at 30%, a level reached only once previously in the past five decades.
As for stimulus, Rosenberg sees little impact either from tax cuts or infrastructure spending. The latter "comes with a long gestation period" unlikely to be felt until "well into 2010." It also falls short of boosting long-term growth. With all proposed monetary and fiscal stimulus, the economy will still "be saddled with roughly $1 trillion of excess capacity" by year end.
So far, around $1 trillion in debt has been written off. It's not enough. We're "still in the early stages of credit contraction (and) have no idea when the credit cycle will hit bottom." Before it does, "more than $6 trillion in private sector debt must be eliminated." Time, likely years, are needed for resolution, but the Obama administration plans don't address it.
Going forward, households, especially "boomers," will stress "frugality," not "frivolity." Apres le deluge, saving for retirement is crucial as deflated assets and lost pensions won't provide it.
Here's more:
-- Federal Reserve surveys show household credit demand declining to the lowest level on record while debt is at "near-record levels relative to after-tax incomes" and so is the debt-servicing burden;
-- 10% of borrowers are in arrears or foreclosure;
-- bank delinquency rates are the highest in 15 years and rising; the earlier S & L crisis was pocket change compared to now;
-- credit card delinquencies are at an all-time high at a time the overall credit quality index "collapsed to an all-time low;"
-- this begs the question: how can banks lend when households can't and won't borrow; "bringing households to the well doesn't mean they will drink;"
-- despite much lower home prices, affordability ratios the best in over 35 years, and attractive mortgage rates, the record low National Association of Home Builders (NAHB) homebuilding index showed "residential real estate (perceptions) have changed;"
-- on February 24, the latest Conference Board consumer confidence index explained why; it plunged from 37 in January to 25 in February, its worst reading ever, and one year ago it was 76; the Economic Outlook Group's Bernard Baumohl called it a "catastrophic collapse of confidence in the economy" even after all measures the Obama administration announced;
-- it also explains "a secular (attitude) change toward consumption;" after peaking last summer, it declined at a 15% annual rate; even food is affected with consumers choosing tuna over trout and spaghetti or Spam over steak or shrimp;
-- households have been devastated by a 20% hole in their balance sheets, or a cumulative $13 trillion net worth loss as of January 1; it's the first time this happened since the 1930s; Rosenberg sees it hitting $20 trillion by year-end 2009, a level on a par with the Great Depression with no end of this in sight; this "permanent shock" is a harbinger of "sustained consumer contraction in coming years;"
-- household savings are rising but still unsustainably low (at under 3%) and will likely head toward earlier 10 - 12% levels; "there are no more rabbits to be pulled out of the hat" to encourage spending; the effect will be powerfully deflationary "for some time."
Paulson and Geithner's Violation of US Law
Specifically - Title 12, Chapter 16, Sec. 1831o of the US Code collection that Economics Professor and former Senior government regulator during the earlier troubled S & L period William K. Black discussed in his February 23 Huffington Post article titled: "Why Is Geithner Continuing Paulson's Policy of Violating the Law?"
Well before they're insolvent or when serious problems are suspected, US law "mandat(es) that the administration place troubled banks....in receivership, appoint competent managers, and restrain senior executive compensation" to prevent bonuses, huge salaries, raises, and undeserved benefits from being paid.
No provision says taxpayers should bail out bankers. Yet Paulson and now Geithner keep doing it, using vast sums kept secret - both in amounts and to whom beyond the handful of big names made public.
Geithner was at it under Bush. As New York Fed president, his responsibility was "to regulate many of the largest bank holding companies in the United States. Far too many of (them) are deeply insolvent because" they own insolvent banks. "The law mandates that" they be placed in receivership, yet as Treasury Secretary Geithner continues to violate it.
Under George Bush, congressional oversight largely stopped at the cost of today's crisis. According to some, the worst is yet to come because of criminal negligence and complicity at the highest levels of government.
"Secretaries Paulson and Geithner subverted the law by allowing failed banks to engage in massive accounting fraud (including securities fraud)."
In a follow-up February 25 article, Black explained that the FBI warned of a mortgage fraud "epidemic" in September 2004 and reported that "lenders initiated 80% of these frauds....Financial control frauds' 'weapon of choice' is accounting." It flourishes in a deregulatory climate when (as the title of Wheeler and Rothman's 1982 book suggests): "The Best Way to Rob a Bank is to Own One."
The FBI spotted it in time to stop it. Nonprime lenders were the main culprit with Wall Street deeply involved. The fraud was so extensive, it was easy to spot. Instead, banks, rating agencies, and buyers "operated on a 'don't ask; don't tell' policy." While it lasted, profits were huge, and few were the wiser. Today, "many (likely all) the big banks are deeply insolvent due to severe credit losses." They and the Treasury aren't even sure to what degree, but the amounts are staggering in size. "A 'stress test' can't remedy the banks' problem - they don't have the loan files" for documentation.
Under Bush and Obama, banks are licensed to steal. The ("quantitative") looting of the Treasury continues, and global economies sink deeper into a black hole of depression with the public as always the big loser.
The End Game to Economic Ruin?
Who can know, but look what casino capitalism brought us. In December 2006, John Bellamy Foster discussed "monopoly capital's" evolution in commemorating the 40th anniversary of Paul Baran and Paul Sweezy's classic work: "Monopoly Capital - An Essay on the American Economic and Social Order." In his new book, The Great Financial Crisis: Causes and Consequences, he discusses the legacy it left us.
Giant corporations arose early in the last century followed by wars, depression, and more wars. Post-WW II, "capitalism was fully consolidated, particularly within the United States, the most advanced capitalist economy," and for some years thereafter the only healthy major one unravaged by the war.
As a result, corporate America flourished, grew larger and more dominant. Profit-making oligopolies and monopolies resulted "competing not on price but mainly in the areas of cost-cutting and the sales effort." Out of this grew "surpluses, and the economy's problem was to absorb it to avoid stagnation."
It led to overcapacity, so key was "to find additional outlets....beyond capitalist consumption and investment" or face "economic malaise." Beginning in the late 1960s and 1970s, financialization came to the rescue, and "to some extent (shifted) control over the economy from corporate boardrooms to the financial markets. Corporations were increasingly seen as bundles of assets, the more liquid the better." A new "monopoly finance" capitalism was advanced to exploit it.
It produced new outlets for surplus in the FIRE sector (finance, insurance, and real estate), mostly for speculation, not capital goods investments in plant and equipment, transportation, and public utilities that earlier fueled business cycle expansions. It kicked off a "whole new historical period" that wasn't apparent before the late 1960s. But the implications were huge and today have backfired.
The 1980s saw "an unprecedented upsurge of debt in the economy." In the 1970s, it was about one-and-a-half times GDP. By 1985, it was double, and by 2005 it was three-and-a-times GDP, rising, and approaching "the $44 trillion (level) for the entire world." Ever since, "the way was open for a proliferation of financial instruments and markets, which (until the present) proved to be literally unlimited."
Much earlier, Keynes warned about "enterprise becom(ing) the bubble on a whirlpool of speculation" like in the 1920s, the price being the Great Depression.
Beginning in the late 1960s and 1970s, the process began repeating as "economic malaise" needed new stimulus. "Unable to find profitable outlets....within the productive economy, corporations/capitalists sought" opportunities through financialization, speculation, casino capitalism, "while the financial system responded with a bewildering array of new financial instruments - including stock futures, options, derivatives, hedge funds, etc." As a result, a "financial superstructure...took on a life of its own" that today is consuming world economies.
Back then was different. "New Economy" notions took hold. The sky was the limit, but bubbles eventually grow and always burst. Minor by comparison, the 1997-98 Asian crisis showed how fast contagion can spread. Today it's global and out-of-control. No one's sure how to contain it, so bankers are getting trillions in a desperate attempt to socializing losses, privatize profits, and pump life back into a corpse through a sort of shell game or grandest of grand theft process of sucking wealth from the public to the top in hopes enough of it will work.
Speculation and debt need more of it to prosper, but in the end it's a losing game. The greater the expansion, the harder it falls - especially when not making things and working Americans are exploited. Since the 1970s, wages stagnated and lost purchasing power as inflation rose. So did benefits like health care and pensions. Household debt rose to compensate. Two wage-earner households as well. It let "monopoly-finance capital (produce) an accumulation of misery" now exploding since 2008's global collapse, exposing capitalism's dark side and destructive contradictions, particularly its financialization form.
Foster quoted Baran and Sweezy's response to an "irrational system." What's needed is "our moral obligation to (fight) against an evil and destructive system which maims, oppresses, and dishonors those who live under it, and which threatens devastation and death to millions....around the globe." Today, the threat is real, growing, and becoming greater than most anyone imagined, remembers, or has any sure way to contain.
Stephen Lendman is a Research Associate of the Centre for Research on Globalization. He lives in Chicago and can be reached at lendmanstephen@sbcglobal.net.
Also visit his blog site at sjlendman.blogspot.com and listen to The Global Research News Hour on Republic Broadcasting.org Monday through Friday at 10AM US Central time for cutting-edge discussions with distinguished guests on world and national issues. All programs are archived for easy listening.
http://www.globalresearch.ca/index.php?context=va&aid=12494
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