Category Archives: global economic crisis

Europe’s glaring democratic deficit

Larry Elliott writes: Financial markets rallied last week when the Greek prime minister, George Papandreou, announced he was dropping plans for a referendum on the terms of his country’s bailout. Bond dealers liked the idea that the government in Athens could soon be headed by Lucas Papademos, a former vice-president of the European Central Bank. Angela Merkel and Nicolas Sarkozy think Papademos is the sort of hard-line technocrat with whom they can do business.

Silvio Berlusconi’s long-predicted departure as Italy’s prime minister will no doubt be greeted in the same way, particularly if he is replaced by a government of national unity headed by another technocrat, Mario Monti. A former Brussels commissioner, he is seen as someone who could be relied upon to push through the European Union’s austerity programme during the next 12 months, watched over by Christine Lagarde’s team of officials from the International Monetary Fund.

From the perspective of the financial markets, this makes perfect sense. Papandreou could no longer be relied upon, and his decision to hold a plebiscite threw Europe into turmoil last week, blighting the Cannes G20 summit. He had to go.

In Italy, Berlusconi is seen as entirely the wrong man to cope with his country’s deepening crisis; bond yields are above 6.5%, a level that eventually resulted in bailouts for Greece, Ireland and Portugal. He, too, has to go in the interests not just of financial and political stability but to prevent the eurozone from imploding.

The European Union has always had problems with democracy, a messy process that can interfere with the grand designs of people at the top who know best. When Ireland voted no to the Nice Treaty, it was told to come up with the right result in a second ballot. The European Central Bank wields immense power, but nobody knows how the unelected members of its governing council vote because no minutes of meetings are published. That said, the latest phase of Europe’s sovereign debt crisis has exposed the quite flagrant contempt for voters, the people who are going to bear the full weight of the austerity programmes being cooked up by the political elites.

Here’s how things work. The real decisions in Europe are now taken by the Frankfurt Group, an unelected cabal made of up eight people: Lagarde; Merkel; Sarkozy; Mario Draghi, the new president of the ECB; José Manuel Barroso, the president of the European Commission; Jean-Claude Juncker, chairman of the Eurogroup; Herman van Rompuy, the president of the European Council; and Olli Rehn, Europe’s economic and monetary affairs commissioner.

This group, which is accountable to no one, calls the shots in Europe. The cabal decides whether Greece should be allowed to hold a referendum and if and when Athens should get the next tranche of its bailout cash. What matters to this group is what the financial markets think not what voters might want. To the extent that governments had any power, it has been removed and placed in the hands of the European Commission, the European Central Bank and the IMF. It is as if the democratic clock has been turned back to the days when France was ruled by the Bourbons.

In the circumstances, it is hardly surprising that electorates have resorted to general strikes and street protests to have their say. Governments come and go but the policies remain the same, creating a glaring democratic deficit. This would be deeply troubling even if it could be shown that the Frankfurt Group’s economic remedies were working, which they are not. Instead, the insistence on ever more austerity is pushing Europe’s weaker countries into an economic death spiral while their voters are being bypassed. That is a dangerous mixture.

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The politics of austerity

Thomas B. Edsall writes: The conservative agenda, in a climate of scarcity, racializes policy making, calling for deep cuts in programs for the poor. The beneficiaries of these programs are disproportionately black and Hispanic. In 2009, according to census data, 50.9 percent of black households, 53.3 percent of Hispanic households and 20.5 percent of white households received some form of means-tested government assistance, including food stamps, Medicaid and public housing.

Less obviously, but just as racially charged, is the assault on public employees. “We can no longer live in a society where the public employees are the haves and taxpayers who foot the bills are the have-nots,” declared Scott Walker, the governor of Wisconsin.

For black Americans, government employment is a crucial means of upward mobility. The federal work force is 18.6 percent African-American, compared with 10.9 percent in the private sector. The percentages of African-Americans are highest in just those agencies that are most actively targeted for cuts by Republicans: the Department of Housing and Urban Development, 38.3 percent; the Equal Employment Opportunity Commission, 42.4 percent; and the Education Department, 36.6 percent.

The politics of austerity are inherently favorable to conservatives and inhospitable to liberals. Congressional trench warfare rewards those most willing to risk all. Republicans demonstrated this in last summer’s debt ceiling fight, deploying the threat of a default on Treasury obligations to force spending cuts.

Conservatives are more willing to inflict harm on adversaries and more readily see conflicts in zero-sum terms — the basic framework of the contemporary debate. Once austerity dominates the agenda, the only question is where the ax falls.

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The Robin Hood tax — turning a global crisis into a global opportunity

Learn more about the Robin Hood tax.

Robin Hood tax backed by more than 1,000 economists. (Telegraph)

Bill Gates backs Robin Hood tax on bank trades. (Guardian)

IMF report [PDF] says: “In principle, an FTT is no more difficult and, in some respects easier, to administer than other taxes.”

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Time for us to challenge the idols of high finance

The Archbishop of Canterbury, Dr Rowan Williams, writes: Many people are frustrated beyond measure at what they see as the disastrous effects of global capitalism; but it isn’t easy to say what we should do differently. It istime we tried to be more specific.

There is help to be had from a bold statement on our financial situation emerging last week from the Vatican. This document, from the Pontifical Council for Justice and Peace, is entitled ‘Towards Reforming the International Financial and Monetary Systems in the Context of Global Public Authority‘. It contains, with sharp critical analysis, a rather utopian vision of global regulation. But, more important, it offers recommendations that seek not to change everything at once but to minimise the damage of certain practices and assumptions.

One is something we have now heard clearly from many sources – a plea endorsed by the Vickers Commission that routine banking business should be clearly separated from speculative transactions. The rolling-up of individual and small-scale savings into high-risk and high-return adventures in the virtual economy is one of the more obvious danger areas. Early government action in this area is needed. A second plea is to recapitalise banks with public money. Banks should be obliged in return to help reinvigorate the real economy.

The third suggestion is probably the most far-reaching. The Vatican statement strongly backs the proposal of a Financial Transaction Tax – a “Tobin Tax” or, popularly, a “Robin Hood Tax” in the form in which it has been talked about most recently. This means a comparatively small rate of tax (0.05 per cent) being levied on share, bond, and currency transactions and their derivatives, with the resulting funds being designated for investment in the “real” economy, domestically and internationally. The modest rate of taxation conceals the high levels of return that could be expected (some $410bn globally on one estimate).

This has won the backing of significant experts who cannot be written off as naive anti-capitalists – George Soros, Bill Gates and many others. It is gaining traction among European nations, with a strong statement in support this week from Wolfgang Schaüble, the German finance minister. The objections made by some who claim it would mean a substantial drop in employment and in the economy generally seem to rest on exaggerated and sharply challenged projections – and, more important, ignore the potential of such a tax to stabilise currency markets in a way to boost rather than damage the real economy.

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Inequality in America is even worse than you thought

Justin Elliot reports: There has been no shortage of headlines this week about the growing income and wealth inequality in the United States. A new study from the Congressional Budget Office, for example, found that income of the top 1 percent of households increased by 275 percent in the 30-year period ending in 2007. American households at the bottom and in the middle, meanwhile, saw income growth of just 18 to 40 percent over the same period

But less attention has been paid to the fact that not only are the numbers bad in America, they’re particularly bad when compared to other developed nations.

A new report (.pdf) by the Bertelsmann Foundation drives this point home. The German think tank used a set of policy analyses to create a Social Justice Index of 31 developed nations in the Organisation for Economic Co-operation and Development (OECD). The United States came in a dismal 27th in the rankings.

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Bank of America’s death rattle

Bill Black writes: Bob Ivry, Hugh Son and Christine Harper have written an article that needs to be read by everyone interested in the financial crisis. The article (available here) is entitled: BofA Said to Split Regulators Over Moving Merrill Derivatives to Bank Unit. The thrust of their story is that Bank of America’s holding company, BAC, has directed the transfer of a large number of troubled financial derivatives from its Merrill Lynch subsidiary to the federally insured bank Bank of America (BofA). The story reports that the Federal Reserve supported the transfer and the Federal Deposit Insurance Corporation (FDIC) opposed it. Yves Smith of Naked Capitalism has written an appropriately blistering attack on this outrageous action, which puts the public at substantially increased risk of loss.

I write to add some context, point out additional areas of inappropriate actions, and add a regulatory perspective gained from dealing with analogous efforts by holding companies to foist dangerous affiliate transactions on insured depositories. I’ll begin by adding some historical context to explain how B of A got into this maze of affiliate conflicts. [Continue reading…]

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The bankers that rule the world

New Scientist reports: As protests against financial power sweep the world this week, science may have confirmed the protesters’ worst fears. An analysis [PDF] of the relationships between 43,000 transnational corporations has identified a relatively small group of companies, mainly banks, with disproportionate power over the global economy.

The study’s assumptions have attracted some criticism, but complex systems analysts contacted by New Scientist say it is a unique effort to untangle control in the global economy. Pushing the analysis further, they say, could help to identify ways of making global capitalism more stable.

The idea that a few bankers control a large chunk of the global economy might not seem like news to New York’s Occupy Wall Street movement and protesters elsewhere. But the study, by a trio of complex systems theorists at the Swiss Federal Institute of Technology in Zurich, is the first to go beyond ideology to empirically identify such a network of power. It combines the mathematics long used to model natural systems with comprehensive corporate data to map ownership among the world’s transnational corporations (TNCs).

“Reality is so complex, we must move away from dogma, whether it’s conspiracy theories or free-market,” says James Glattfelder. “Our analysis is reality-based.”

Previous studies have found that a few TNCs own large chunks of the world’s economy, but they included only a limited number of companies and omitted indirect ownerships, so could not say how this affected the global economy – whether it made it more or less stable, for instance.

The Zurich team can. From Orbis 2007, a database listing 37 million companies and investors worldwide, they pulled out all 43,060 TNCs and the share ownerships linking them. Then they constructed a model of which companies controlled others through shareholding networks, coupled with each company’s operating revenues, to map the structure of economic power.

The work, to be published in PloS One, revealed a core of 1318 companies with interlocking ownerships (see image). Each of the 1318 had ties to two or more other companies, and on average they were connected to 20. What’s more, although they represented 20 per cent of global operating revenues, the 1318 appeared to collectively own through their shares the majority of the world’s large blue chip and manufacturing firms – the “real” economy – representing a further 60 per cent of global revenues.

When the team further untangled the web of ownership, it found much of it tracked back to a “super-entity” of 147 even more tightly knit companies – all of their ownership was held by other members of the super-entity – that controlled 40 per cent of the total wealth in the network. “In effect, less than 1 per cent of the companies were able to control 40 per cent of the entire network,” says Glattfelder. Most were financial institutions. The top 20 included Barclays Bank, JPMorgan Chase & Co, and The Goldman Sachs Group.

John Driffill of the University of London, a macroeconomics expert, says the value of the analysis is not just to see if a small number of people controls the global economy, but rather its insights into economic stability.

Concentration of power is not good or bad in itself, says the Zurich team, but the core’s tight interconnections could be. As the world learned in 2008, such networks are unstable. “If one [company] suffers distress,” says Glattfelder, “this propagates.”

“It’s disconcerting to see how connected things really are,” agrees George Sugihara of the Scripps Institution of Oceanography in La Jolla, California, a complex systems expert who has advised Deutsche Bank.

The top 25 of the 147 superconnected companies

1. Barclays plc
2. Capital Group Companies Inc
3. FMR Corporation
4. AXA
5. State Street Corporation
6. JP Morgan Chase & Co
7. Legal & General Group plc
8. Vanguard Group Inc
9. UBS AG
10. Merrill Lynch & Co Inc
11. Wellington Management Co LLP
12. Deutsche Bank AG
13. Franklin Resources Inc
14. Credit Suisse Group
15. Walton Enterprises LLC
16. Bank of New York Mellon Corp
17. Natixis
18. Goldman Sachs Group Inc
19. T Rowe Price Group Inc
20. Legg Mason Inc
21. Morgan Stanley
22. Mitsubishi UFJ Financial Group Inc
23. Northern Trust Corporation
24. Société Générale
25. Bank of America Corporation

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How to make banks really mad: occupy foreclosures

Mike Konczal asks: Could the next step after camping in Zuccotti Park be camping out in homes facing foreclosure?

As people think a bit more critically about what it means to “occupy” contested spaces that blur the public and the private and the boundaries between the 99% and the 1%, and as they also think through what Occupy Wall Street might do next, I would humbly suggest they check out the activism model of Project: No One Leaves. It exists in many places, especially in Massachusetts — check out this Springfield version of it — and grows out of activism pioneered by City Life Vida Urbana. It is similar to activism done by the group New Bottom Line and other foreclosure fighters. Here is PBS NewsHour’s coverage of the movement.

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How the austerity class rules Washington

Ari Berman writes: In September the Committee for a Responsible Federal Budget (CRFB), a bipartisan deficit-hawk group based at the New America Foundation, held a high-profile symposium urging the Congressional “supercommittee” to “go big” and approve a $4 trillion deficit reduction plan over the next decade, which is well beyond its $1.2 trillion mandate. The hearing began with an alarming video of top policy-makers describing the national debt as “the most serious threat that this country has ever had” (Alan Simpson) and “a threat to the whole idea of self-government” (Mitch Daniels). If the debt continues to rise, predicted former New Mexico Senator Pete Domenici, there would be “strikes, riots, who knows what?” A looming fiscal crisis was portrayed as being just around the corner.

The event spotlighted a central paradox in American politics over the past two years: how, in the midst of a massive unemployment crisis—when it’s painfully obvious that not enough jobs are being created and the public overwhelmingly wants policy-makers to focus on creating them—did the deficit emerge as the most pressing issue in the country? And why, when the global evidence clearly indicates that austerity measures will raise unemployment and hinder, not accelerate, growth, do advocates of austerity retain such distinction today?

An explanation can be found in the prominence of an influential and aggressive austerity class—an allegedly centrist coalition of politicians, wonks and pundits who are considered indisputably wise custodians of US economic policy. These “very serious people,” as New York Times columnist Paul Krugman wryly dubs them, have achieved what University of California, Berkeley, economist Brad DeLong calls “intellectual hegemony over the course of the debate in Washington, from 2009 until today.”

Its members include Wall Street titans like Pete Peterson and Robert Rubin; deficit-hawk groups like the CRFB, the Concord Coalition, the Hamilton Project, the Committee for Economic Development, Third Way and the Bipartisan Policy Center; budget wonks like Peter Orszag, Alice Rivlin, David Walker and Douglas Holtz-Eakin; red state Democrats in Congress like Mark Warner and Kent Conrad, the bipartisan “Gang of Six” and what’s left of the Blue Dog Coalition; influential pundits like Tom Friedman and David Brooks of the New York Times, Niall Ferguson and the Washington Post editorial page; and a parade of blue ribbon commissions, most notably Bowles-Simpson, whose members formed the all-star team of the austerity class.

The austerity class testifies frequently before Congress, is quoted constantly in the media by sympathetic journalists and influences policy-makers and elites at the highest levels of power. They manufacture a center-right consensus by determining the parameters of acceptable debate and policy priorities, deciding who is and is not considered a respectable voice on fiscal matters. The “balanced” solutions they advocate are often wildly out of step with public opinion and reputable economic policy, yet their influence endures, thanks to an abundance of money, the ear of the media, the anti-Keynesian bias of supply-side economics and a political system consistently skewed to favor Wall Street over Main Street.

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Time for the U.S. to stop bankrolling Israel’s defense

Walter Pincus, in a column for the Washington Post, writes: As the country reviews its spending on defense and foreign assistance, it is time to examine the funding the United States provides to Israel.

Let me put it another way: Nine days ago, the Israeli cabinet reacted to months of demonstrations against the high cost of living there and agreed to raise taxes on corporations and people with high incomes ($130,000 a year). It also approved cutting more than $850 million, or about 5 percent, from its roughly $16 billion defense budget in each of the next two years.

If Israel can reduce its defense spending because of its domestic economic problems, shouldn’t the United States — which must cut military costs because of its major budget deficit — consider reducing its aid to Israel?

First, a review of what the American taxpayer provides to Israel.

In late March 2003, just days after the invasion of Iraq, President George W. Bush requested the approval of $4.7 billion in military assistance for more than 20 countries that had contributed to the conflict or the broader fight against terrorism. Israel, Jordan, Egypt, Afghanistan, Pakistan and Turkey were on that list.

A major share of the money, $1 billion, went to Israel, “on top of the $2.7 billion regular fiscal year 2003 assistance and $9 billion in economic loans guaranteed by the U.S. government over the next three years,” according to a 2003 study by the Congressional Research Service (CRS).

Then in 2007, the Bush administration worked out an agreement to raise the annual military aid grant, which had grown to $2.5 billion, incrementally over the next 10 years. This year, it has reached just over $3 billion. That is almost half of all such military assistance that Washington gives out each year and represents about 18 percent of the Israeli defense budget.

In addition, the military funding for Israel is handled differently than it is for other countries. Israel’s $3 billion is put almost immediately into an interest-bearing account with the Federal Reserve Bank. The interest, collected by Israel on its military aid balance, is used to pay down debt from earlier Israeli non-guaranteed loans from the United States.

Another unique aspect of the assistance package is that about 25 percent of it can be used to buy arms from Israeli companies. No other country has that privilege, according to a September 2010 CRS report.

The U.S. purchases subsidize the Israeli arms business, but Washington maintains a veto over sales of Israeli weapons that may contain U.S. technology.

Look for a minute at the bizarre formula that has become an element of U.S.-Israel military aid, the so-called qualitative military edge (QME). Enshrined in congressional legislation, it requires certification that any proposed arms sale to any other country in the Middle East “will not adversely affect Israel’s qualitative military edge over military threats to Israel.”

In 2009 meetings with defense officials in Israel, Undersecretary of State Ellen Tauscher “reiterated the United States’ strong commitment” to the formula and “expressed appreciation” for Israel’s willingness to work with newly created “QME working groups,” according to a cable of her meetings that was released by WikiLeaks.

The formula has an obvious problem. Because some neighboring countries, such as Saudi Arabia and Egypt, are U.S. allies but also considered threats by Israel, arms provided to them automatically mean that better weapons must go to Israel. The result is a U.S.-generated arms race.

MJ Rosenberg writes: Aid to Israel is virtually the only program, domestic or foreign, that is exempt from every budget cutting proposal pending in Congress. No matter that our own military is facing major cuts along with Medicare, cancer research and hundreds of other programs, Israel’s friends in Congress in both parties make sure that aid to Israel is protected at current levels.

Back when I was a Congressional staffer, I was part of the process by which aid to Israel was secured. Every member of the Congressional Appropriations Committees sent a “wish list” to the chairman of the committee telling him or her which programs he wanted funded and by what amounts. Each letter reflected the particular interest of a particular Representative or Senator and of his own district or state.

There was always one exception: aid to Israel, which apparently is a local issue for every legislator. The American Israel Public Affairs Committee (AIPAC) would provide the list of Israel’s aid requirements for the coming year and, with few if any exceptions, every letter would include the AIPAC language. Not a punctuation mark would be changed.

At the end of the process, the AIPAC wish list would become law of the land. (Woe to any Member of Congress who dared to resist the AIPAC juggernaut).

That is how it has been for decades and not even the current economic crisis is likely to change it. On this issue, Congress is hopeless and will remain so as long as its members rely so heavily on campaign contributions (PAC or individual) delivered by AIPAC.

JTA reports: Mitt Romney said he would increase defense assistance to Israel, raise the U.S. military profile near Iran and recognize Israel as a Jewish state.

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Ending the 30-year stranglehold on the human imagination

David Graeber writes: It’s becoming increasingly obvious that the real priority of those running the world for the last few decades has not been creating a viable form of capitalism, but rather, convincing us all that the current form of capitalism is the only conceivable economic system, so its flaws are irrelevant. As a result, we’re all sitting around dumbfounded as the whole apparatus falls apart.

What we’ve learned now is that the economic crisis of the 1970s never really went away. It was fobbed off by cheap credit at home and massive plunder abroad – the latter, in the name of the “third world debt crisis”. But the global south fought back. The “alter-globalisation movement“, was in the end, successful: the IMF has been driven out of East Asia and Latin America, just as it is now being driven from the Middle East. As a result, the debt crisis has come home to Europe and North America, replete with the exact same approach: declare a financial crisis, appoint supposedly neutral technocrats to manage it, and then engage in an orgy of plunder in the name of “austerity”.

The form of resistance that has emerged looks remarkably similar to the old global justice movement, too: we see the rejection of old-fashioned party politics, the same embrace of radical diversity, the same emphasis on inventing new forms of democracy from below. What’s different is largely the target: where in 2000, it was directed at the power of unprecedented new planetary bureaucracies (the WTO, IMF, World Bank, Nafta), institutions with no democratic accountability, which existed only to serve the interests of transnational capital; now, it is at the entire political classes of countries like Greece, Spain and, now, the US – for exactly the same reason. This is why protesters are often hesitant even to issue formal demands, since that might imply recognising the legitimacy of the politicians against whom they are ranged.

When the history is finally written, though, it’s likely all of this tumult – beginning with the Arab Spring – will be remembered as the opening salvo in a wave of negotiations over the dissolution of the American Empire. Thirty years of relentless prioritising of propaganda over substance, and snuffing out anything that might look like a political basis for opposition, might make the prospects for the young protesters look bleak; and it’s clear that the rich are determined to seize as large a share of the spoils as remain, tossing a whole generation of young people to the wolves in order to do so. But history is not on their side.

We might do well to consider the collapse of the European colonial empires. It certainly did not lead to the rich successfully grabbing all the cookies, but to the creation of the modern welfare state. We don’t know precisely what will come out of this round. But if the occupiers finally manage to break the 30-year stranglehold that has been placed on the human imagination, as in those first weeks after September 2008, everything will once again be on the table – and the occupiers of Wall Street and other cities around the US will have done us the greatest favour anyone possibly can.

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Global day of rage: Hundreds of thousands march against inequity, big banks as occupy movement grows

From Buenos Aires to Toronto, Kuala Lumpur to London, hundreds of thousands of people rallied on Saturday in a global day of action against corporate greed and budget cutbacks, demanding better living conditions and a more equitable distribution of wealth and resources. Protests reportedly took place in 1,500 cities, including 100 cities in the United States — all in solidarity with the Occupy Wall Street movement that launched one month ago in New York City.

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