Category Archives: Economics

All Watched Over by Machines of Loving Grace — Part One

Adam Curtis‘ latest documentary, “All Watched Over by Machines of Loving Grace,” is well worth watching — all three hours — even if by its conclusion he has not neatly tied together all its disparate threads and even if his style of production has a frenetic choppiness — “I kept thinking the dog was sitting on the remote,” a reviewer joked about one of his previous pieces.

Curtis is perhaps best known as the creator of the BBC documentary series, “The Power of Nightmares,” which examined the politics of fear post-9/11.

His new documentary, just aired in the UK but presumably close to completion before the Arab uprisings began, nevertheless has relevance for every revolution across the region. The prospect of the end of dictatorial rule easily eclipses concern about what might follow — events of the present evoke a sense that the future can take care of itself. The leaderless movements currently reshaping the Arab world have organic features that sometimes seem to imply that social justice might just be a natural fruit.

But the history of self-organizing networks — a topic at the core of Curtis’ film — is that the egalitarian hopes these would-be post-political systems embody rest on an illusory foundation.

This is the story of how our modern scientific idea of nature, the self-regulating ecosystem, is actually a machine fantasy. It has little to do with the real complexity of nature. It is based on cybernetic ideas that were projected on to nature in the 1950s by ambitious scientists. A static machine theory of order that sees humans, and everything else on the planet, as components – cogs – in a system.

But in an age disillusioned with politics, the self-regulating ecosystem has become the model for utopian ideas of human ‘self-organizing networks’ – dreams of new ways of organising societies without leaders, as in the Facebook and Twitter revolutions, and in global visions of connectivity like the Gaia theory.

This powerful idea emerged out of the hippie communes in America in the 1960s, and from counterculture computer scientists who believed that global webs of computers could liberate the world.

But, at the very moment this was happening, the science of ecology discovered that the theory of the self-regulating ecosystem wasn’t true. Instead they found that nature was really dynamic and constantly changing in unpredictable ways. But the dream of the self-organizing network had by now captured our imaginations – because it offered an alternative to the dangerous and discredited ideas of politics. [Source: BBC]

Part One: Love and Power

(Watch Part Two here and Part Three here.)

Facebooktwittermail

‘Perfect storm’ looms for world’s food supplies

AFP reports:

Oxfam called on Tuesday for an overhaul of the world’s food system, warning that in a couple of decades, millions more people would be gripped by hunger due to population growth and climate-hit harvests.

A “broken food system” means that the price of some staples will more than double by 2030, battering the world’s poorest people, who spend up to 80 percent of their income on food, the British-based aid group predicted.

“The food system is buckling under intense pressure from climate change, ecological degradation, population growth, rising energy prices, rising demand for meat and dairy products and competition for land from biofuels, industry, and urbanization,” Oxfam said in a report.

It added: “The international community is sleepwalking into an unprecedented and avoidable human development reversal.”

Facebooktwittermail

The IMF versus the Arab spring

Austin Mackell writes:

In the midst of the media storm surrounding IMF chief Dominique Strauss-Kahn last week, my feelings were perfectly expressed in a tweet by Paul Kingsnorth: “Could someone please arrest the head of the IMF for screwing the poor for 60 years?”

Without diminishing the seriousness of the sexual allegations against Strauss-Kahn, the role of the IMF, over past decades and at present, is a far bigger story. Of particular importance is its role at this crucial moment in the Middle East.

The new loans being negotiated for Egypt and Tunisia will lock both countries into long-term economic strategies even before the first post-revolution elections have been held. Given the IMF’s history, we should expect these to have devastating consequences on the Egyptian and Tunisian people. You wouldn’t guess it though, from the scant and largely fawning coverage the negotiations have so far received.

The pattern is to depict the IMF like a rich uncle showing up to save the day for some wayward child. This Dickensian scene is completed with the IMF adding the sage words that this time it hopes to see growth on the “streets” not just the “spreadsheets”. It’s almost as if the problem had been caused by these regimes failing to follow the IMF’s teachings.

Such portrayals are credulous to the point of being ahistorical. They do not even mention, for example, the very positive reports the IMF had issued about both Tunisia and Egypt (along with Libya and others) in the months, weeks, and even days before the uprisings.

To some extent, though, the IMF is aware that its policies contributed to the desperation that so many Egyptians and Tunisians currently face, and is keen to distance itself from its past. Indeed, as IMF watchers will know, this is part of a new image that the IMF, along with its sister organisation the World Bank, has been working on for a while. The changes, so far, do not go beyond spin. You can’t, as they say, polish a turd – but you can roll it in glitter.

Facebooktwittermail

Of the 1%, by the 1%, for the 1%

Joseph E. Stiglitz writes:

It’s no use pretending that what has obviously happened has not in fact happened. The upper 1 percent of Americans are now taking in nearly a quarter of the nation’s income every year. In terms of wealth rather than income, the top 1 percent control 40 percent. Their lot in life has improved considerably. Twenty-five years ago, the corresponding figures were 12 percent and 33 percent. One response might be to celebrate the ingenuity and drive that brought good fortune to these people, and to contend that a rising tide lifts all boats. That response would be misguided. While the top 1 percent have seen their incomes rise 18 percent over the past decade, those in the middle have actually seen their incomes fall. For men with only high-school degrees, the decline has been precipitous—12 percent in the last quarter-century alone. All the growth in recent decades—and more—has gone to those at the top. In terms of income equality, America lags behind any country in the old, ossified Europe that President George W. Bush used to deride. Among our closest counterparts are Russia with its oligarchs and Iran. While many of the old centers of inequality in Latin America, such as Brazil, have been striving in recent years, rather successfully, to improve the plight of the poor and reduce gaps in income, America has allowed inequality to grow.

Economists long ago tried to justify the vast inequalities that seemed so troubling in the mid-19th century—inequalities that are but a pale shadow of what we are seeing in America today. The justification they came up with was called “marginal-productivity theory.” In a nutshell, this theory associated higher incomes with higher productivity and a greater contribution to society. It is a theory that has always been cherished by the rich. Evidence for its validity, however, remains thin. The corporate executives who helped bring on the recession of the past three years—whose contribution to our society, and to their own companies, has been massively negative—went on to receive large bonuses. In some cases, companies were so embarrassed about calling such rewards “performance bonuses” that they felt compelled to change the name to “retention bonuses” (even if the only thing being retained was bad performance). Those who have contributed great positive innovations to our society, from the pioneers of genetic understanding to the pioneers of the Information Age, have received a pittance compared with those responsible for the financial innovations that brought our global economy to the brink of ruin.

Facebooktwittermail

America is NOT broke

Michael Moore, speaking yesterday in Madison, Wisconsin:

Contrary to what those in power would like you to believe so that you’ll give up your pension, cut your wages, and settle for the life your great-grandparents had, America is not broke. Not by a long shot. The country is awash in wealth and cash. It’s just that it’s not in your hands. It has been transferred, in the greatest heist in history, from the workers and consumers to the banks and the portfolios of the uber-rich.

Right now, this afternoon, just 400 Americans have more wealth than half of all Americans combined.

Let me say that again — and please, someone in the mainstream media, just repeat this fact once. We’re not greedy. We’ll be happy to just hear it once: 400 obscenely wealthy individuals — 400 little Mubaraks — most of whom benefited in some way from the multi-trillion dollar taxpayer “bailout” of 2008, now have more cash, stock and property than the assets of 155 million Americans combined.

[Crowd chants: Shame! Shame! Shame!]

If you can’t bring yourself to call that a financial coup d’état, then you are simply not being honest about what you know in your heart to be true.

And I can see why. For us to admit that we have let a small group of men abscond with and hoard the bulk of the wealth that runs our economy, would mean that we’d have to accept the humiliating acknowledgment that we have indeed surrendered our precious Democracy to the moneyed elite. Wall Street, the banks and the Fortune 500 now run this Republic — and, until this past month here in Madison Wisconsin, the rest of us have felt completely helpless, unable to find a way to do anything about it.

Facebooktwittermail

The rise of the new plutocracy

At the Atlantic, Chrystia Freeland writes:

If you happened to be watching NBC on the first Sunday morning in August last summer, you would have seen something curious. There, on the set of Meet the Press, the host, David Gregory, was interviewing a guest who made a forceful case that the U.S. economy had become “very distorted.” In the wake of the recession, this guest explained, high-income individuals, large banks, and major corporations had experienced a “significant recovery”; the rest of the economy, by contrast—including small businesses and “a very significant amount of the labor force”—was stuck and still struggling. What we were seeing, he argued, was not a single economy at all, but rather “fundamentally two separate types of economy,” increasingly distinct and divergent.

This diagnosis, though alarming, was hardly unique: drawing attention to the divide between the wealthy and everyone else has long been standard fare on the left. (The idea of “two Americas” was a central theme of John Edwards’s 2004 and 2008 presidential runs.) What made the argument striking in this instance was that it was being offered by none other than the former five-term Federal Reserve Chairman Alan Greenspan: iconic libertarian, preeminent defender of the free market, and (at least until recently) the nation’s foremost devotee of Ayn Rand. When the high priest of capitalism himself is declaring the growth in economic inequality a national crisis, something has gone very, very wrong.

This widening gap between the rich and non-rich has been evident for years. In a 2005 report to investors, for instance, three analysts at Citigroup advised that “the World is dividing into two blocs—the Plutonomy and the rest”:

In a plutonomy there is no such animal as “the U.S. consumer” or “the UK consumer”, or indeed the “Russian consumer”. There are rich consumers, few in number, but disproportionate in the gigantic slice of income and consumption they take. There are the rest, the “non-rich”, the multitudinous many, but only accounting for surprisingly small bites of the national pie.

Before the recession, it was relatively easy to ignore this concentration of wealth among an elite few. The wondrous inventions of the modern economy—Google, Amazon, the iPhone—broadly improved the lives of middle-class consumers, even as they made a tiny subset of entrepreneurs hugely wealthy. And the less-wondrous inventions—particularly the explosion of subprime credit—helped mask the rise of income inequality for many of those whose earnings were stagnant.

But the financial crisis and its long, dismal aftermath have changed all that. A multibillion-dollar bailout and Wall Street’s swift, subsequent reinstatement of gargantuan bonuses have inspired a narrative of parasitic bankers and other elites rigging the game for their own benefit. And this, in turn, has led to wider—and not unreasonable—fears that we are living in not merely a plutonomy, but a plutocracy, in which the rich display outsize political influence, narrowly self-interested motives, and a casual indifference to anyone outside their own rarefied economic bubble.

Facebooktwittermail

Is Islamic finance the new challenge to Wall Street?

Andrew Sheng writes:

In the 1990s, Islamic finance was a fledgling fringe industry. But today, its size has grown from roughly US$150 billion to about US$1 trillion in size. This is of course still small relative to some of the largest global fund managers and universal banks, who manage more than US$1 trillion each. But the double-digit growth and potential size of the market cannot be ignored. Some pundits think that the market size will reach US$2 trillion within the next five years.

There are roughly 1.3 billion Muslims in the world, with 138 million in India and roughly 30 million in China. These are growing markets in terms of income and wealth. As the Muslim community seeks to invest in interest-free banking, Islamic funds have been growing in leaps and bounds. Today, there are roughly US$800 billion in Islamic banking funds, US$100 billion in the sukuk (or Islamic bond) market and another US$100 billion in takaful (Islamic insurance) and fund management business. Hong Kong, of course, introduced the Hang Seng Shariah Compliant China Index Fund in 2008 to attract Muslim investors.

As oil prices continue to remain at high levels, the Middle East oil-producers will continue to generate surpluses that must be parked somewhere. With the Western markets and economies under pressure, some of that money has moved Eastwards.

Will Islamic finance be a serious challenge to traditional Wall Street finance? That is a question that deserves a good answer.

Facebooktwittermail

‘The world has divided into rich and poor as at no time in history’

Speaking ahead of the G20 summit held in Toronto last week, Maude Barlow, head of the Council of Canadian — Canada’s largest public advocacy organization — said:

On the eve of this G-20 gathering, let’s look at a few facts. Fact, the world has divided into rich and poor as at no time in our history. The richest 2% own more than half the household wealth in the world. The richest 10% hold 85% of total global assets and the bottom half of humanity owns less than 1% of the wealth in the world. The three richest men in the world have more money than the poorest 48 countries. Fact, while those responsible for the 2008 global financial crisis were bailed out and even rewarded by the G-20 government’s gathering here, the International Labor Organization tells us that in 2009, 34 million people were added to the global unemployed, swelling those ranks to 239 million, the highest ever recorded. Another 200 million are at risk in precarious jobs and the World Bank tells us that at the end of 2010, another 64 million will have lost their jobs. By 2030, more than half the population of the megacities of the Global South will be slumdwellers with no access to education, health care, water, or sanitation. Fact, global climate change is rapidly advancing, claiming at least 300,000 lives and $125 billion in damages every year. Called the silent crisis, climate change is melting glaciers, eroding soil, causing freak and increasingly wild storms, displacing untold millions from rural communities to live in desperate poverty in peri-urban centers. Almost every victim lives in the Global South in communities not responsible for greenhouse gas emissions and not represented here at the summit.

The atmosphere has already warmed up a full degree in the last several decades and is on course to warm up another two degrees by 2100. Fact, half the tropical forests in the world, the lungs of our ecosystem, are gone. By 2030, at the present rate of extraction or so-called harvest, only 10% will be left standing. 90% of the big fish in the sea are gone, victim to wanton predatory fishing practice. Says a prominent scientist studying their demise, there is no blue frontier left. Half the world’s wetlands, the kidneys of our ecosystem, have been destroyed in the 20th century. Species extinction is taking place at a rate 1,000 times greater than before humans existed. According to a Smithsonian scientist, we are headed toward of biodiversity deficit in which species and ecosystems will be destroyed at a rate faster than nature can replace them with new ones. Fact, we are polluting our lakes, rivers and streams to death. Every day, two million tons of sewage and industrial agricultural waste are discharged into the world’s water. That’s the equivalent of the entire human population of 6.8 billion people. The amount of waste water produced annually is about six times more water than exists in all the rivers of the world. We are mining our ground water faster than we can replenish it, sucking it to grow water guzzling chemical-fed crops in deserts or to water thirsty cities who dump an astounding 700 trillion liters of land-based water into oceans every year as waste.

Facebooktwittermail

The other plot to wreck America

The other plot to wreck America
By Frank Rich, New York Times, January 10, 2010

There may not be a person in America without a strong opinion about what coulda, shoulda been done to prevent the underwear bomber from boarding that Christmas flight to Detroit. In the years since 9/11, we’ve all become counterterrorists. But in the 16 months since that other calamity in downtown New York — the crash precipitated by the 9/15 failure of Lehman Brothers — most of us are still ignorant about what Warren Buffett called the “financial weapons of mass destruction” that wrecked our economy. Fluent as we are in Al Qaeda and body scanners, when it comes to synthetic C.D.O.’s and credit-default swaps, not so much.

What we don’t know will hurt us, and quite possibly on a more devastating scale than any Qaeda attack. Americans must be told the full story of how Wall Street gamed and inflated the housing bubble, made out like bandits, and then left millions of households in ruin. Without that reckoning, there will be no public clamor for serious reform of a financial system that was as cunningly breached as airline security at the Amsterdam airport. And without reform, another massive attack on our economic security is guaranteed. Now that it can count on government bailouts, Wall Street has more incentive than ever to pump up its risks — secure that it can keep the bonanzas while we get stuck with the losses. [continued…]

Editor’s Comment — It’s always struck me as odd that the expression “parasite on society” is so often applied to society’s least fortunate members. On the contrary, it is those who like bloated ticks engorge themselves at the host’s expense who are surely the real parasites.

Frank Rich picks the right metaphor, yet at this time America’s nemeses far from being hunted down by the US government have instead repeatedly been provided with a safe haven.

Should we make any distinction between those who harmed us and those who now give them protection? Indeed we should because it is the banking bandits who should be brought to justice. Indiscriminate rage against government simply helps the culprits stay in hiding.

Still, there is one caveat I would add before getting completely carried away with this populist vent: the greed on Wall Street is not an aberration — it simply represents one of the most extreme expressions of American values.

The titans now reviled were until quite recently revered as models of American success, for in society at large we still too often measure success by the outcome — how much gets accrued — rather than the path that led there. We value rewards above accomplishments.

Wall Street couldn’t wreck America if America didn’t have a propensity to wreck itself.

Facebooktwittermail

The demise of the dollar

The demise of the dollar
By Robert Fisk, The Independent, October 6, 2009

n the most profound financial change in recent Middle East history, Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.

Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars.

The plans, confirmed to The Independent by both Gulf Arab and Chinese banking sources in Hong Kong, may help to explain the sudden rise in gold prices, but it also augurs an extraordinary transition from dollar markets within nine years.

The Americans, who are aware the meetings have taken place – although they have not discovered the details – are sure to fight this international cabal which will include hitherto loyal allies Japan and the Gulf Arabs. Against the background to these currency meetings, Sun Bigan, China’s former special envoy to the Middle East, has warned there is a risk of deepening divisions between China and the US over influence and oil in the Middle East. “Bilateral quarrels and clashes are unavoidable,” he told the Asia and Africa Review. “We cannot lower vigilance against hostility in the Middle East over energy interests and security.” [continued…]

Facebooktwittermail

US income inequality is at an all-time high

Income inequality is at an all-time high
Huffington Post, August 14, 2009

Income inequality in the United States is at an all-time high, surpassing even levels seen during the Great Depression, according to a recently updated paper by University of California, Berkeley Professor Emmanuel Saez. The paper, which covers data through 2007, points to a staggering, unprecedented disparity in American incomes. On his blog, Nobel prize-winning economist and New York Times columnist Paul Krugman called the numbers “truly amazing.”

Though income inequality has been growing for some time, the paper paints a stark, disturbing portrait of wealth distribution in America. Saez calculates that in 2007 the top .01 percent of American earners took home 6 percent of total U.S. wages, a figure that has nearly doubled since 2000.

As of 2007, the top decile of American earners, Saez writes, pulled in 49.7 percent of total wages, a level that’s “higher than any other year since 1917 and even surpasses 1928, the peak of stock market bubble in the ‘roaring” 1920s.'” [continued…]

The Spirit Level: Why More Equal Societies Almost Always Do Better
Reviewed by John Welshman, Times Higher Education Supplement, May 21, 2009

The Spirit Level: Why More Equal Societies Almost Always Do Better by Kate Pickett and Richard Wilkinson – Amazon US (released December 22, 2009) Amazon UK (available now).

The costs of income inequality are clear. The most equal countries are Japan, Sweden, Norway and Finland, and the most unequal are the US, Portugal, the UK and New Zealand. Similarly, the most equal US states include Alaska, Utah, New Hampshire and Wisconsin, and New York, Louisiana, Massachusetts and Connecticut are among the most unequal.

In those countries and states where income differentials are larger, social relations deteriorate and levels of trust are lower. In the US during the 1980s and 1990s, for example, increasingly popular sports utility vehicles began to bear macho names including Outlander, Cherokee, Defender, Shogun and Crossfire.

In the most unequal countries and states, there is more gender inequality, too, and these places are less generous. A higher proportion of people suffer from mental illness, and more use drugs.

Less egalitarian countries have six times as much obesity. Educational attainment is poorer, with higher dropout rates, shorter periods of paid maternity leave and less early childhood education. Teenage birth rates are higher, and it is young men from disadvantaged neighbourhoods who are most likely to be the victims and perpetrators of violence.

In more unequal countries, children experience more bullying, fights and conflict, and rates of imprisonment are five times higher. Although it is possible that heath and social problems cause bigger income differentials, inequalities are the common denominator.

Wilkinson and Pickett argue that social structures that create relationships based on inequality, inferiority and social exclusion must inflict social pain, and that we need to allow a more “sociable” human nature to emerge. Inequalities ratchet up the competitive pressure to consume; indeed, our compulsive need to shop is itself a reflection of how social we are. Reducing inequality, they suggest, is “about shifting the balance from the divisive, self-interested consumerism driven by status competition towards a more socially integrated and affiliative society”. [continued…]

Facebooktwittermail

ANALYSIS: The end of Western hegemony

Crisis marks out a new geopolitical order
By Philip Stephens, Financial Times, October 9, 2008

Blame greedy bankers. Blame Alan Greenspan’s careless stewardship of the US Federal Reserve. Blame feckless homeowners who took out loans they could never expect to repay. Blame politicians and regulators everywhere for closing their eyes to the approaching tempest.

All of the above are culpable. I am sure there are even more villains lurking out there. Sometimes, though, it is worth looking through the other end of the telescope. The wreckage of the financial system holds up a mirror to the changing geopolitical balance. It offers advice, and a warning, as to what the west should make of the emerging global order.

Until quite recently, the talk was about the humbling of America’s laisser faire capitalism. The US government’s $700bn bail-out was the price to be paid for past hubris. For reasons that still elude me, one or two European politicians seemed to delight in the troubles of an ally that still guarantees their security.

Schadenfreude comes before a fall. Solid, conservative Germany has been among the European nations forced to shore up its banks. Angela Merkel, the chancellor, has been driven to assure German voters publicly that their savings are safe.

Belgium and the Netherlands have rescued Fortis. Ireland and Greece have issued blanket guarantees to bank depositors. Others have done something similar. Most dramatically, Gordon Brown’s British government has part-nationalised all of its leading banks in a desperate bid to crack the ice of the credit freeze.

If the toxic mortgage securities and opaque credit swaps that infected the world’s financial system came with a made-in-the-US stamp, European banks were eager buyers. For the humbling of America, we should substitute the humbling of the west.

Asia, as we have seen in the markets this week, is not immune from the shocks and stresses. Japan, which has only quite recently emerged from the long twilight of its 1990s banking collapse, has now been hit anew by the global storm. China felt compelled this week to follow western central banks in cutting interest rates. So did a host of smaller Asian countries. Recession in the US and Europe will slow the growth of Asia’s rising economies.

Standing back, though, two things mark out this crisis as unique. First, is its sheer ferocity. I am not sure how useful it is to make comparisons with the 1930s. History never travels in a straight line. What is evident is that governments and central banks have had no previous experience of coping with shocks and stresses of the intensity and ubiquity we have seen during the past year.

The second difference is one of geography. For the first time, the epicentre has been in the west. Viewed from Washington, London or Paris, financial crises used to be things that happened to someone else – to Latin America, to Asia, to Russia.

The shock waves would sometimes lap at western shores, usually in the form of demands that the rich nations rescue their own imprudent banks. But these crises drew a line between north and south, between the industrialised and developing world. Emerging nations got into a mess; the west told them sternly what they must do to get out of it.

The instructions came in the form of the aptly-named Washington consensus: the painful prescriptions, including market liberalisation and fiscal consolidation, imposed as the price of financial support from the International Monetary Fund.

This time the crisis started on Wall Street, triggered by the steep decline in US house prices. The emerging nations have been the victims rather than the culprit. And the reason for this reversal of roles? They had supped enough of the west’s medicine.

A decade ago, after the crisis of 1997-98 wrought devastation on some of its most vibrant economies, Asia said never again. There would be no more going cap in hand when the going got rough. To avoid the IMF’s ruinous rules, governments would build their own defences against adversity by accumulating reserves of foreign currency.

Those reserves – more than $4,000bn-worth at the present count – financed credit in the US and Europe. There were other sources of liquidity, of course, notably the Fed and the reserves accumulated by energy producers. It also took financial chicanery to turn reckless mortgage lending in to triple A rated securities. But as a Chinese official told my FT colleague David Pilling the other day: “America drowned itself in Asian liquidity.”

Owning up to the geopolitical implications will be as painful for the rich nations as paying the domestic price for the profligacy. The erosion of the west’s moral authority that began with the Iraq war has been greatly accelerated. The west’s debtors cannot any longer expect their creditors to listen to their lectures. Here lies the broader lesson. The shift eastwards in global economic power has become a commonplace of political discourse. Almost everyone in the west now speaks with awe of the pace of China’s rise, of India’s emergence as a geopolitical player, of the growing roles in international relations of Brazil and South Africa.

Yet the rich nations have yet to face up properly to the implications. They can imagine sharing power, but they assume the bargain will be struck on their terms: that the emerging nations will be absorbed – at a pace, mind you, of the west’s choosing – into familiar international forums and institutions.

When American and European diplomats talk about the rising powers becoming responsible stakeholders in the global system, what they really mean is that China, India and the rest must not be allowed to challenge existing standards and norms.

This is the frame of mind that sees the Benelux countries still holding a bigger share than China of the votes at the IMF; and the Group of Seven leading industrialised nations presuming this weekend that it remains the right forum to redesign the global financial system.

I have no inhibitions about promoting the values of the west – of preaching the virtues of the rule of law, pluralist politics and fundamental human rights. Nor of asserting that, for all the financial storms, a liberal market system is the worst option except for all the others. The case for global rules – that open markets need multilateral governance – could not have been made more forcefully than by the present crisis.

Yet the big lesson is that the west can no longer assume the global order will be remade in its own image. For more than two centuries, the US and Europe have exercised an effortless economic, political and cultural hegemony. That era is ending. [complete article]

Facebooktwittermail

ANALYSIS: The week the free-market bubble burst

In turmoil, capitalism in U.S. sets new course
By David Wessel, Wall Street Journal, September 20, 2008

This past week marks a decisive turn in the evolution of American capitalism.

Black September, the biggest financial shock since the Great Depression, is prompting a Republican Treasury secretary and Federal Reserve chairman to devise the most muscular government intervention in the economy since the Great Depression in an effort to prevent the economic devastation of the Great Depression.

Abandoning its one-rescue-at-a-time strategy of recent months, the government suddenly has shifted to a broad attack on what Treasury Secretary Henry Paulson calls “the root cause of our financial system’s stresses,” the rot on the balance sheets of America’s financial system.

Gone is the faith, shared by the nation’s leadership with varying degrees of enthusiasm, that the best road to prosperity is to unleash financial markets to allocate capital, take risks, enjoy profits, absorb losses. Erased is the hope that markets correct themselves when they overshoot.

Also scrapped is the notion that government’s role is to get out of the way, limiting itself to protecting consumers and small investors, setting the rules of the game and stepping in — only rarely — to cushion the economy from shocks like the 1987 stock-market crash or the 1998 collapse of hedge fund Long-Term Capital Management. Both of those episodes involved government jawboning and flooding the markets with money. In contrast to today, neither time did the U.S. take significant amounts of taxpayer money or anything approaching the nationalization of a major firm.

As recently as Spring 2007, Mr. Paulson, among others, was arguing that onerous regulations were crippling American finance in intensifying global competition. Those cries are silenced.

“The last 20 years saw people actually mouthing the idea that government should keep hands off,” says Richard Sylla, a financial historian at New York University. “We had this free market ethos: Reagan’s ‘government isn’t a solution, government is the problem.’ Now people are saying, ‘The market is the problem. The government is the solution.’ ”

The Depression triggered, among other things, sweeping new rules governing the financial system — including the 1933 Glass Steagall law that separated commercial and investment banking until its repeal in 1999. The inevitable result of this crisis, once it ends, will be more government control of the financial system. The only questions now are how much tougher the new oversight will be, what form it will take and how long until the restrictions are loosened or evaded?

In March, the Federal Reserve shattered a half-century of tradition in which it had lent money only to banks whose deposits were insured by the government. Declaring circumstances to be “unusual and exigent,” as required by a little-used statute, it lent to investment bank Bear Stearns and eventually risked $29 billion of taxpayer money to induce J.P. Morgan Chase to buy Bear. It seemed a very big deal at the time.

But in the past two weeks, the U.S. government, keeper of the flame of free markets and private enterprise, has:

    — nationalized the two engines of the U.S. mortgage industry, Fannie Mae and Freddie Mac, and flooded the mortgage market with taxpayer funds to keep it going;
    — crafted a deal to seize the nation’s largest insurer, American International Group Inc., fired its chief executive and moved to sell it off in pieces.
    — extended government insurance beyond bank deposits to $3.4 trillion in money-market mutual funds for a year;
    — banned, for 799 financial stocks, a practice at the heart of stock trading, the short-selling in which investors seek to profit from falling stock prices.
    — allowed or encouraged the collapse or sale of two of the four remaining, free-standing investment banks, Lehman Brothers and Merrill Lynch;
    — asked Congress by next week to agree to stick taxpayers with hundreds of billions of dollars of illiquid assets from financial institutions so those institutions can raise capital and resume lending.

It was less than a week ago that Mr. Paulson appeared to draw a line at government bailouts, rebuffing Lehman’s plea for a Bear Stearns-like rescue and allowing the investment bank to collapse into bankruptcy. “The national commitment to the free market lasted one day,” Barney Frank, the Massachusetts Democrat who chairs the House Financial Services Committee, quipped earlier this week. That one day was Monday, Sept. 15. The day before the government rejected Lehman’s cry for help; the day after it seized AIG.

The shift in strategy reflects the realization by Mr. Paulson and Federal Reserve Chairman Ben Bernanke that the financial crisis was intensifying in recent days, endangering the entire economy. Confidence deteriorated markedly. Distrust spread. Credit markets weren’t functioning and lending dried up. Normal business wasn’t getting done. The two remaining free-standing investment banks were under severe pressure. The panic was spreading to ordinary Americans, who were beginning to pull money out of money-market mutual funds.

“This convulsion that we’ve had in the past two weeks? I don’t think there’s anything like it in history. I want to go back and check the week in 1933, when all the banks were closed,” says Robert Aliber, a University of Chicago economic historian who updated Charles Kindleberger’s 1978 classic and newly relevant book, “Manias, Panics and Crashes.”

But there is a big difference between then and now. The authorities moved quicker this time. “In the ’30s, the intervention that mattered came after the disaster,” Mr. Sylla says. “Now the interventions are designed to prevent the disaster we had in the ’30s.” About the only pleasant surprise of the past year is that the U.S. economy hasn’t done worse.

It is too early to say whether Mr. Bernanke and Mr. Paulson have made the right call and will bring the crisis to a close, despite global stock markets’ ebullient reaction Friday. If the fear does subside, then talk will turn to writing new rules for a financial system that has changed more in the past six months than in the previous decade. The government has bailed out financial institutions — and particularly their creditors — and taxpayers will pick up the tab for many of the institutions’ bad decisions. That could encourage bad behavior in the future. So, the government needs to craft a new regulatory regime to reduce those incentives.

Some observers look to history, and predict the government will overdo the regulatory remedy. Bubbles often begin with products created to get around regulations, says Stephen Quinn, an economic historian at Texas Christian University in Fort Worth, Texas. “Smart regulation looks forward to prevent the next regulation-circumventing … idea from turning into a bubble without stymieing the flow of new ideas. Dumb regulation looks backward. You can guess which kind of regulation most crises produce.”

But Frederic Mishkin, who recently left the Fed to return to teaching at Columbia University’s business school, takes hope in the resolution of the savings and loan episode of the 1980s. “It was handled disastrously at first,” he says. Regulators and politicians were slow to respond, allowing thrifts to make more and more bad loans instead of shutting them down. Then, in 1989, the first Bush administration swallowed hard, closed thrifts, paid off depositors and sold the thrifts’ assets at fire-sale prices. The cost to the taxpayers came to about $124 billion.

Congress and the president moved to reduce the chances of a repeat, enacting a 1991 law that, among other things, increased the minimum amount of capital banks were required to hold. As a result, Mr. Mishkin says, big banks entered the current crisis with far more capital than they had in the early 1990s. “That’s one reason this crisis hasn’t led to a complete disaster. It put banks on a stronger footing so they had a larger cushion when they blew it,” he says. The other reason, he says, is the Fed’s rapid response to the current crisis.

The rub: The 1991 law didn’t apply to institutions other than banks — the investment banks, mortgage companies and even insurance companies that have been central to this episode. That puts writing new rules for them high on the agenda for the new president and the next Congress.

Facebooktwittermail