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Middle East Roundtable
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Edition 38 Volume 6 - September 25, 2008
Aid and diplomacy: the Palestinian case
• Israel's responsibilities - Yossi Alpher
The aid situation in Gaza, particularly since the Hamas armed takeover of June 2007, is especially problematic.
• Working in the void: views from an international aid worker - Alexander Costy
The long-term effect of an aid-dominated economy is to undo mutual relationships between leaders and ordinary people.
• Aid without development - George Giacaman
The willingness to provide aid is not accompanied by any vigorous political intervention.
• The hamster wheel - Anne Le More
Diplomatic engagement requires pushing for a change in the overall policy of occupation and territorial expansion.
Israel's responsibilities
Yossi Alpher
Aid--primarily international, but also Israeli aid--has long been a fixture of Israeli-Palestinian interaction. Israel's attitude toward both forms of aid has been complex and often ambivalent. Israel, whether as occupying power or as concerned neighbor, has a strong interest in facilitating international aid to the Palestinians in the West Bank and Gaza Strip.
Back in the pre-1967 days, when Israelis contemplated the role of UNRWA in the Palestinian refugee camps across the green line in Gaza and the West Bank and in neighboring Arab countries, the impression was overwhelmingly negative. UNRWA, it was said, contributed to Palestinian incitement and violence against Israel, and by its very existence prolonged the existence of the refugee issue, hence extended the conflict. The Palestinian refugees were the only ones in the world, out of some 150 million refugees in the post-WWII era, for whom a separate UN agency was established, and the only ones allowed to pass refugee status on from one generation to the next.
After the 1967 Six-Day War and the onset of the Israeli occupation, Israeli attitudes changed. UNRWA, it was discovered, also fed, clothed and educated Palestinian refugees--functions that under international humanitarian law would have to be born by the Israeli occupier unless it cooperated with the UN organization.
At the same time, Israeli government institutions also undertook some aid efforts, particularly with regard to agricultural and medical training and attempts to thin out the population of the Gaza Strip refugee camps. The latter enterprise involved both encouraging emigration and providing of land and resources for constructing alternative housing, and had a humanitarian as well as an ulterior motive--reducing potential refugee pressure for "return" to Israel. It proved both short-lived and generally unproductive or even counterproductive.
Today, under conditions of prolonged conflict, most Israeli medical, agricultural and other aid has been radically reduced or is delivered on a commercial basis. Cooperation on specific projects--e.g.,water resources development or joint marketing of agricultural produce--is limited in scope. It generally reflects an Israeli interest in promoting joint water and environmental conservation, along with collaboration in dealing with outbreaks of livestock epidemics and the like, and a degree of agricultural interdependence that has developed over the years. Israel also maintains Palestinian infrastructure supply--electricity, water, fuel, telephone services, etc.--on a commercial basis, as well as the supply of commercial foodstuffs and other materials, and continued to do so throughout two intifadas.
Meanwhile, international aid to the Palestinians has only increased. Today, most of it takes the form of emergency humanitarian assistance. The Israeli Civil Administration for the West Bank and Gaza, which liaises with the international aid organizations, generally argues that the donors provide a service that Israel cannot provide, particularly under hostile conditions. In general, Israelis have the impression that the Palestinian Authority squandered large aid increments in the period between Oslo and late 2000, when the outbreak of the current conflict put a virtual stop to development aid.
The aid situation in Gaza, particularly since Hamas' armed takeover of June 2007, is especially problematic. Israel, with the backing of the Quartet and even Egypt and the Ramallah-based PA, has taken to restricting the supply of international donor aid as well as commercial foodstuffs as a means of leveraging Palestinian public pressure on Hamas to moderate its extreme Islamist negation of Israel and restrict terrorists that fire rockets at Israeli civilian concentrations bordering on the Strip. (In some case, supply is curtailed of necessity because terrorists target aid delivery points.) There is little evidence that this Israeli economic warfare has the desired effect, while it certainly causes extensive humanitarian hardship. At a more general level, both Israel and at times the international community have for decades viewed economic aid and investment and their denial as effective carrots and sticks for steering Palestinians toward the desired political process--with little to show for their efforts, which ignore the essentially ideological/political nature of the conflict.
Some in the aid community believe that the international organizations are, in effect, subsidizing Israel's occupation; that it is Israel's obligation, and not theirs, to attend to the welfare of the Palestinian civilian population; and that the aid community could shorten the conflict significantly by "pulling out" and forcing Israel to confront the true cost of occupation. At the opposite pole of the spectrum there are also many Israeli politicians and security officials who today consider the international aid community to be a hypercritical source of trouble for Israel--one that inevitably sides with the Palestinian "underdog" and displays little sympathy or understanding for the Israeli response to Palestinian terrorism.
In effect, Israel's historically ambivalent attitude toward aid is embodied in the contradiction between its declared relinquishment of responsibility for the Gazan population after the 2005 disengagement on the one hand, and its call for the international community to cooperate with it and to continue to prevent a humanitarian disaster there, on the other.
Only if and when disengagement reaches phase two of the Israeli plan, under which Gaza's air and sea ports and land crossing (to Egypt) are reopened and developed, could Israel legitimately make the argument that it is legally and officially absolved of responsibility for the humanitarian welfare of the Gazan population, whether through economic development or through aid. Meanwhile, regardless of the logic or legal underpinnings of the international aid effort, it will continue to be necessary and justified, and will require various forms of coordination with Israel.
Looking further into the future, a viable two-state solution to the conflict may absolve Israel of its legal obligations toward the Palestinian population--but not, in the aftermath of 100 years of conflict, its moral obligation to alleviate Palestinian suffering (even though this need not and should not imply legal responsibility for that suffering). Moreover, eventual resolution of the Palestinian refugee problem and regional water problems will almost certainly bind Israel in some sort of treaty-based aid relationship with the Palestinian state. The two countries' infrastructures will also remain linked for a long time to come.
Friction over scarce resources, particularly borderless resources like water and clean air, will almost certainly continue to involve the international aid community in the "crossfire" between Israelis and Palestinians long after peace. At the same time, future Israeli-Palestinian relations will at least in some cases also reflect a strong Arab reticence to entertain overt Israeli aid, which will be seen and characterized as colonialist and paternalistic. This points to the prospect of a long term triangular relationship between Israel, the Palestinian political entity or entities and the donor community.- Published 25/9/2008 © bitterlemons-international.org
Yossi Alpher is coeditor of the bitterlemons family of internet publications. He is former director of the Jaffee Center for Strategic Studies, Tel Aviv University.
Working in the void: views from an international aid worker
Alexander Costy
Aid workers are supposed to be the good guys in international relations. Their work is steeped in ethics. They try to do what's good for people or, at the very least, to do no harm. Yet international assistance can produce contradictions that make even the most seasoned aid professionals cringe.
As far back as the 1940s, Marshall funds meant to support civilian reconstruction in Yugoslavia were used to violently suppress opponents of the emerging Tito regime. In the 1990s, international aid enabled warring factions in Angola to divert their domestic oil and mineral revenues toward military operations, while up to two million civilians languished in a state of chronic hunger, insecurity and displacement. Aid professionals usually blame such twisted outcomes on the "politics" beyond their control.
In the occupied Palestinian territory, well over $12 billion in international assistance has been spent over the past 15 years. Yet for most Palestinians the economy is worsening and public institutions are more fractured than ever. Statehood seems more elusive today than at any time in the past. In this context, there is a standing argument that the primary function of international aid has been to subsidize Israel's occupation. Here too, well-meaning aid experts can be forgiven for wringing their hands, resorting to ready arguments about neutrality and urgent needs and for regarding, once again, "politics" with grave suspicion.
But aid needs politics in order to work. It performs best when it is allocated for clear purpose and within an agreed political framework. In the Palestinian context, the main intent has always been to support the Palestinian Authority, not Israel, to discharge social, economic and security responsibilities in the areas under the PA's jurisdiction as agreed within the political framework of the Oslo accords. Clearly, the investment has been toward a two-state solution, not continued occupation. But with the erosion of Oslo as a framework for international aid these distinctions have blurred. Sadly, Oslo has been neither revived nor replaced, and many aid managers genuinely wonder what it is, exactly, that they are working toward in the long run.
In practical terms, working in a political void has had troubling effects on the ground. A bewildering array of plans--rapid-action, early recovery, medium-term, public sector reform, emergency response, etc.--have been produced almost without respite over the past four years, often simultaneously, by the PA and international organizations. They seek to draw aid funds in this direction or that, are often at logical odds with one another and mostly serve to justify new spending where there is little real progress to show. In the meantime, new (or newly re-packaged) "boutique projects" meant to produce quick and easy wins on the ground, to "roll-out success from the bottom up", are proliferating. Because they confer visibility in the thick fog of the crisis, they may be difficult for some donors to resist. But it is difficult to tell what bearing they have on the overall logic of the conflict or on its eventual resolution.
But most worryingly, the political void has prompted a growing reliance on emergency financing instruments that function outside the very institutions that are central to the Palestinian state-building project itself. This can be seen in the rapid growth of multilateral programs in recent years: between 2004 and 2007, the size of the UN's annual humanitarian appeal for Palestine more than doubled. The overall value of UN programs grew from some $430 million in 2006 to an estimated $550 million in 2008. This represents about 30 percent of the PA's own annual budget.
There is no question that the UN is an effective and reliable implementing partner. But we are left to wonder about the state-building logic of encouraging multilateral budgets to grow as the PA's own revenue base shrinks rapidly.
Although they may openly shirk political interference, most aid professionals privately recognize the need for a decisive politics (whether they agree with it or not) to guide the aid effort. Given the deep uncertainties of the moment, this will not happen overnight. But in the meantime, foreign politicians who release large amounts of money should understand that they are not just managing a difficult crisis. The long-term effect of an aid-dominated economy is to undo mutual relationships between leaders and ordinary people. Leaders' accountabilities are diluted because key spending decisions are taken in faraway capitals. And because they can barely affect these decisions, ordinary people become disenfranchised, feeling more like refugees than potential citizens of a new state.
If this rupture deepens, it will be difficult to overcome. If anything, the post-Oslo years have shown us that without a sound political logic, aid can only provide diminishing returns over time.- Published 25/9/2008 © bitterlemons-international.org
Alexander Costy has worked in conflicts in Africa, Asia and the Middle East. From 2004 to 2007, he was head of coordination in the Office of the UN Special Coordinator for the Middle East Peace Process.
Aid without development
George Giacaman
On September 13, 1993, the Declaration of Principles, the first Oslo agreement, was signed. Two weeks later, 42 countries and donor agencies met in Washington, DC to pledge over two billion dollars in aid explicitly for the purpose of furthering this "historic political breakthrough in the Middle East".
Since then, aid to Palestinians for development and diplomacy has gone through several stages. The first ended with the breakdown of the Camp David talks in the summer of 2000. Another was introduced with the re-invasion of the West Bank by the Israeli army in March 2002. Aid was by now largely dispersed for humanitarian purposes and to keep the Palestinian Authority afloat on condition it "reforms" itself. In June of the same year, the "100-Day Reform Plan" was launched.
After several interruptions, including the formation of the short-lived first ever Hamas government in 2006 and the subsequent unity government, this year has seen nearly seven billion dollars pledged for a three-year period to support the "Annapolis process". But there has been no development and the political process is stalling.
The World Bank is very clear about why there is no development. In the several reports the Bank has issued on the issue, it ranks the Israeli closure policy in the West Bank--the more than 500 obstacles to movement, including checkpoints, barricades, roadblocks etc.--as the main reason for the lack of investment, rising unemployment and general absence of socio-economic development in the occupied Palestinian territory.
In several of her 16 visits, US Secretary of State Condoleezza Rice has prodded the Israeli government to ease the closures, but to no avail. Slightly over three months are left until the end of the year, the Annapolis target date for reaching agreement, but hardly anyone is optimistic. And even if a "shelf agreement" is reached, Ehud Olmert, the Israeli prime minister, recently declared that it would only be implemented in stages over a period of ten years. Such a formula was one of the reasons the Oslo process collapsed.
It should be clear that for aid to lead to development in the Palestinian case, a stable political solution has to be arrived at. Here there's a problem with donors: the willingness to provide aid is not accompanied by any vigorous intervention in the political process that might bring results.
The reason for this paralysis is the fact that Israel has been far too successful in warding off external pressure to end its occupation of the West Bank and Gaza even while it has continued creating "facts on the ground" that undermine any possible political settlement. This is largely due to its influence in the US Congress and on various US administrations. As a result, the Palestinian-Israeli conflict has become an issue for negotiation primarily inside the Israeli political arena where the interests of parties and politicians are electoral, local and careerist. As Jordan's King Abdullah said recently, Israel has no strategic vision for peace. This is due to the fact that the conflict has become essentially a domestic Israeli issue.
Unless the conflict is put back in its correct place as a regional and international issue, no stable peace is likely to be achieved. This is where primarily the US but also Europe have failed. And everyone will pay and continue to pay a price and not only in aid. How many years donors are willing to continue to support the existence of the PA in the absence of a credible political process is an open question. Negotiations cannot be an end in themselves. Ultimately, the PA itself will lose legitimacy and whatever credibility it still retains. In the absence of peace, aid at best is "humanitarian relief".- Published 25/9/2008 © bitterlemons-international.org
George Giacaman provides political analysis for Arab and international media. He teaches in the MA program in Democracy and Human Rights, and the Department of Philosophy and Cultural Studies at Birzeit University.
The hamster wheel
Anne Le More
On September 22, the Ad-Hoc Liaison Committee, the main donor forum charged with coordinating international assistance to the Palestinians, met in New York on the margins of the United Nations General Assembly to discuss prospects for Palestinian economic revival and development.
This is seen by the international community not only as a humanitarian imperative given the dismal socio-economic conditions of the population of the occupied Palestinian territory, but also as a key pillar of Israeli-Palestinian peacemaking and Palestinian state-building. Although economic growth will in itself not guarantee peace, widespread poverty, unemployment and despair will make the search for a solution to the Israeli-Palestinian conflict and prospects for a viable Palestinian state much more difficult.
Key issues on the AHLC agenda were: (i) status of implementation of the Palestinian reform agenda as laid out in the Reform and Development Plan the Palestinian Authority presented to donors in Paris in December last year; (ii) status of implementation of measures by the Government of Israel to remove obstacles to Palestinian economic revival notably through facilitating the movement of goods and people as well as access to key natural resources such as land and water; and (iii) the need for donors to sustain their financial engagement through continued high levels of funds in direct support of the PA budget.
Though originally envisaged as an "ad-hoc" mechanism, the AHLC has now become a permanent donor mechanism and has been meeting regularly since the beginning of the Oslo process in the early 1990s. In view of continuing Israeli occupation and lack of Palestinian national sovereignty and control over borders and natural resources, a tripartite approach to further Palestinian economic development with parallel actions to be taken the PA, Israel and the donor community has also characterized those forums from the outset.
Sadly, however, not only has the AHLC become a fixed feature of the Israeli-Palestinian donor and diplomatic landscape with a fairly predictable tripartite format, but the issues on its agendas, analyses provided at its meetings by international institutions such as the IMF, World Bank and the United Nations, and the policy recommendations made on the basis of those analyses have also been remarkably constant. In fact, they seem to have become immovable.
This is how those meetings generally go and what they say:
The PA presents its development plan and is asked to make further progress in security performance, reform of its institutions and public financial management. Over the years, a number of plans such as the PRDP have been drawn up with more or less the same mix of measures to be taken, such as ensuring law and order, containing the wage bill or reducing Palestinian fiscal deficit. And some progress has been recorded in terms of security reform, transparency and fiscal management particularly in the post-Arafat period, even if much more can always be done.
For their parts, donors are asked to provide more funds. Indeed assistance has been growing year after year although flows often lack in predictability and generally fall short of the total amount needed. Just for the first eight months of 2008, the international community has disbursed an unprecedented $1.2 billion in recurrent budget support to the PA alone. Since 1994, more than $10 billion have been given to the Palestinian population of the West Bank and Gaza, not including the funds that cover UNRWA's regular budget. This is one of the highest and longest sustained rates of per capita foreign aid in the world.
Finally, Israel is asked to remove economic restrictions, notably facilitating the movement of goods and people within the Palestinian territories, between the West Bank and Gaza and between the oPt and the outside world. As stated over and over again by the World Bank, without a substantial overhaul of the closure system and access to economies of scale, natural resources and an investment horizon, there will simply not be any Palestinian economic growth. On this front, and despite sporadic and partial steps, the GoI is repeatedly found not to have fulfilled its obligations. And as restrictions persist, so does economic decline, despite sustained funds provided by the international community and whatever reform progress may be achieved. In fact, ever since the beginning of the Oslo peace process, Palestinian living conditions have worsened. Since 2000, the situation has become a full-fledged humanitarian crisis.
Of course, this parallelism in actions to be undertaken by the three main stakeholders is symbolic and primarily aimed at sustaining a semblance of diplomatic cooperation. As anyone who has been working on this dossier knows all too well, the situation is deeply asymmetric. As the World Bank states in its report to the AHLC this week, "aid and reform without access are unlikely to revive the Palestinian economy." Funds only just allow the PA to stay alive, so totally aid dependent have the PA and its economy become (external aid is estimated to represent about 32 percent of Palestinian GDP this year). Budget support will also prevent the population from growing ever more destitute as people increasingly rely on the public sector in the absence of growth and private sector opportunities. Fundamentally, however, little economic progress will be achieved.
And this system of restrictions is unlikely to be alleviated as long as Israel continues its military occupation, separation of the West Bank and Gaza and settlement expansion in the West Bank. For the past 15 years, the West Bank, East Jerusalem and Gaza Strip have become less and less contiguous and evolved into a collection of increasingly narrow and confined enclaves of high Palestinian population density. These are subjected to various regimes of control, citizenship status and human rights within one de facto Israeli sovereign space from the Mediterranean to the Jordan River. These "islands" of populations are isolated and strangled by a range of obstacles such as a complex permits system, military checkpoints, roadblocks, settlements, a dual segregated by-pass road system and the separation barrier. Though Israel has legitimate security concerns, those restrictions on Palestinian movement and access that stifle Palestinian life and development have less to do with the security of Israel proper than with that of its settlements and the by-pass roads that enable settlers to move freely within the occupied territories and between them and Israel.
Diplomatic accountability is needed for all stakeholders. Without linking economic assistance to a clear set of security, political and human rights goals leading to a permanent status agreement and an evenly balanced incentive structure toward both parties and not just the Palestinians, European and Arab taxpayers' money will continue to be spent without tangible economic benefits for the Palestinians. This also means little prospect of seeing the emergence of a viable independent state and, with it, of reaching a just agreement that will at long last bring peace to Palestinians and Israelis.
Diplomatic engagement requires more than packages of limited economic measures sporadically extracted by Quartet representatives such as James Wolfensohn and now Tony Blair. It requires pushing for a change in the overall policy of occupation and territorial expansion. It also requires for international partners to foster Palestinian national reconciliation rather than exacerbate the power struggle between Fateh and Hamas by providing funds to the PA while starving Hamas in Gaza. If serious political action is not taken to that effect, we can be sure that next year's AHLC will be about the exact same issues as this week--and the past 15 years.- Published 25/9/2008 © bitterlemons-international.org
Anne Le More is an associate fellow of the Middle East Program at Chatham House, London, and the author of International Assistance to the Palestinians after Oslo: Political Guilt, Wasted Money.
Bitterlemons-international.org is an internet forum for an array of world perspectives on the Middle East and its specific concerns. It aspires to engender greater understanding about the Middle East region and open a new common space for world thinkers and political leaders to present their viewpoints and initiatives on the region. Editors Ghassan Khatib and Yossi Alpher can be reached at ghassan@bitterlemons-international.org and yossi@bitterlemons-international.org, respectively.
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Thursday, September 25, 2008
Hubris with comeuppance Arnaud de Borchgrave
Hubris with comeuppance
Arnaud de Borchgrave
Thursday, September 25, 2008
COMMENTARY:
The United States, as seen by the media in the rest in the world, is sobering up at the Just Deserts Cafe.
Norway's Aftenposten wrote, "When God is on your team, the world can be dangerously simple. Arbitrary references to the Bible is a form of intellectual terrorism. ... For the past eight years, secularized Europe has been watching with increasing astonishment a president who for the most part is guided by religion; who has had a very difficult relationship with the English language; who has systematically prioritized loyalty over competence, and who seems to be without intellectual curiosity." Hence the temptation of simplicity.
Bylined Bernt Hagtvet, the editorial said the world is now terrified at the thought of a Sarah Palin presidency: "We are risking having a woman who sees God's hands in all she does a heartbeat from the Oval Office. An unholy mix of ignorance and vulgarity."
For the Saudi Gazette, "It's hard to believe that only a week ago all anyone wanted to talk about was mooseburgers, lipstick on pigs and being able to see Russia from a remote Alaskan island. ... The election is back to where it should have been all along. ... This makes the going just a bit rougher for McCain, and it gives Obama a chance to regain the momentum. ... McCain has always been just a bit challenged by economic issues, even saying when the financial crisis broke that the economic fundamentals were strong. With major financial institutions going to the wall, everyone could clearly see that was not the case, and some may even have wondered how in touch with economic issues a man could be who does not even know how many houses he owns. ... The earthquake has put an end to the mindless clamor of the silly season. ... It's time to get serious."
Germany's Die Tageszeitung said: "Palin's naivete puts the fear of God in all of us. In her interviews she was successful in provoking worldwide horror with her views on foreign policy... they caused bewilderment because of her colossal ignorance ... anyone interested in politics should pray for John McCain to live forever ... [the same Mr. McCain] who showed the world a monumental disregard for the most powerful office in the world the day he chose his second-in-command."
France's Le Monde wrote: "The U.S. seemed to be heading for a cliff, paying cash for their years of financial debauchery and an orgy of credit. In Europe, [there was] a touch of pleasure that through a financial intermediary, [the euro], they are directly assisting in the decline of the American empire."
But instead of sinking like a stone, noted Le Monde, "the greenback climbed back at full speed ... America, contrary to what some believed, and others hope, isn't KO'd." At least, not yet, echoed the Continental smoothies.
The London Sunday Times' Andrew Sullivan said: "Palin's favorables went from plus 17 to plus 1 in six days as voters realized there was less than nothing behind the marketing and the cynicism of this sinister and philistine Manchurian Candidate. ... Now [Americans] can no longer deny the massive mess they and their leaders have put themselves in."
"Americans," Mr. Sullivan continued, "resistant to the idea their incomes cannot keep growing at the free-lunch pace of the 1940s to the 1970s, decided to get rich the easy way. They borrowed to reflate in the 1980s, played the stock market in the 1990s, and gambled on the real-estate boom in the first decade of the 21st century. ... The greed that led many ordinary Americans to take out loans they had no way of repaying and the recklessness with which banks and mortgage companies satisfied that hunger, are, in retrospect, staggering. Both banks and the borrowers deserve their comeuppance. And a truly conservative, free-market administration would be happy to let them fail."
But Bush Republicanism, Mr. Sullivan continued, is not and has never been anything like conservatism. Bush Republicanism has cut taxes regardless of fiscal reality and boosted domestic spending at a pace not seen since the Franklin Roosevelt era, concluded Mr. Sullivan. He added: "Bush has added a staggering $32 trillion to unfunded government liabilities future generations of Americans will have to bear. And he has borrowed and borrowed from the Chinese to ensure that the consequences of his fiscal madness will never come back to punish him."
But Mr. Bush failed in this, concluded the Sunday Times, "as in every other part of his disgraceful record. Just as his Iraq incompetence came back to haunt him, so his surreal economics has finally returned the favor. Watching the feckless Bush administration now is an almost perfect coda to the surreally anti-conservative policies it has pursued from the beginning."
Britain's Independent headlined, "Bush launches $700 billion rescue plan and confesses he didn't realize how severe problems were" and then quoted a congressional aide on a telephone conference call between the Federal Reserve chairman, the treasury secretary and lawmakers in which the Fed chief said, "If Congress doesn't act quickly, there will be an economic meltdown."
"Financial earthquakes, like real ones," said the Independent, "are brutal reminders of the limits of the politician's capacity to shape events. Obama is no exception. He has been a sideshow to the dramas on the trading floor, and has added nothing to the debate except some sharp partisan barbs, when the population has yearned for leadership."
The Belize News in Central America, under the headline "America goes socialist," commented, "FDR's New Deal would have been considered socialist on Wall Street a few months ago, but now Wall Street, the cradle of crazy capitalism, has been crying out like a baby for government bailouts for the same financial institutions through which they looted the United States and the world over the last three decades. ... When there is a crisis, which they themselves create, the capitalists and the speculators always take their money and run. It is left to the people to pick up the pieces."
America's Humpty Dumpty has had a great fall. But no one is betting that all the kings of Wall Street can't put Humpty together again. For the rest of the world, the Bush Doctrine's hubris got its comeuppance.
Arnaud de Borchgrave is editor at large for The Washington Times and for United Press International.
Arnaud de Borchgrave
Thursday, September 25, 2008
COMMENTARY:
The United States, as seen by the media in the rest in the world, is sobering up at the Just Deserts Cafe.
Norway's Aftenposten wrote, "When God is on your team, the world can be dangerously simple. Arbitrary references to the Bible is a form of intellectual terrorism. ... For the past eight years, secularized Europe has been watching with increasing astonishment a president who for the most part is guided by religion; who has had a very difficult relationship with the English language; who has systematically prioritized loyalty over competence, and who seems to be without intellectual curiosity." Hence the temptation of simplicity.
Bylined Bernt Hagtvet, the editorial said the world is now terrified at the thought of a Sarah Palin presidency: "We are risking having a woman who sees God's hands in all she does a heartbeat from the Oval Office. An unholy mix of ignorance and vulgarity."
For the Saudi Gazette, "It's hard to believe that only a week ago all anyone wanted to talk about was mooseburgers, lipstick on pigs and being able to see Russia from a remote Alaskan island. ... The election is back to where it should have been all along. ... This makes the going just a bit rougher for McCain, and it gives Obama a chance to regain the momentum. ... McCain has always been just a bit challenged by economic issues, even saying when the financial crisis broke that the economic fundamentals were strong. With major financial institutions going to the wall, everyone could clearly see that was not the case, and some may even have wondered how in touch with economic issues a man could be who does not even know how many houses he owns. ... The earthquake has put an end to the mindless clamor of the silly season. ... It's time to get serious."
Germany's Die Tageszeitung said: "Palin's naivete puts the fear of God in all of us. In her interviews she was successful in provoking worldwide horror with her views on foreign policy... they caused bewilderment because of her colossal ignorance ... anyone interested in politics should pray for John McCain to live forever ... [the same Mr. McCain] who showed the world a monumental disregard for the most powerful office in the world the day he chose his second-in-command."
France's Le Monde wrote: "The U.S. seemed to be heading for a cliff, paying cash for their years of financial debauchery and an orgy of credit. In Europe, [there was] a touch of pleasure that through a financial intermediary, [the euro], they are directly assisting in the decline of the American empire."
But instead of sinking like a stone, noted Le Monde, "the greenback climbed back at full speed ... America, contrary to what some believed, and others hope, isn't KO'd." At least, not yet, echoed the Continental smoothies.
The London Sunday Times' Andrew Sullivan said: "Palin's favorables went from plus 17 to plus 1 in six days as voters realized there was less than nothing behind the marketing and the cynicism of this sinister and philistine Manchurian Candidate. ... Now [Americans] can no longer deny the massive mess they and their leaders have put themselves in."
"Americans," Mr. Sullivan continued, "resistant to the idea their incomes cannot keep growing at the free-lunch pace of the 1940s to the 1970s, decided to get rich the easy way. They borrowed to reflate in the 1980s, played the stock market in the 1990s, and gambled on the real-estate boom in the first decade of the 21st century. ... The greed that led many ordinary Americans to take out loans they had no way of repaying and the recklessness with which banks and mortgage companies satisfied that hunger, are, in retrospect, staggering. Both banks and the borrowers deserve their comeuppance. And a truly conservative, free-market administration would be happy to let them fail."
But Bush Republicanism, Mr. Sullivan continued, is not and has never been anything like conservatism. Bush Republicanism has cut taxes regardless of fiscal reality and boosted domestic spending at a pace not seen since the Franklin Roosevelt era, concluded Mr. Sullivan. He added: "Bush has added a staggering $32 trillion to unfunded government liabilities future generations of Americans will have to bear. And he has borrowed and borrowed from the Chinese to ensure that the consequences of his fiscal madness will never come back to punish him."
But Mr. Bush failed in this, concluded the Sunday Times, "as in every other part of his disgraceful record. Just as his Iraq incompetence came back to haunt him, so his surreal economics has finally returned the favor. Watching the feckless Bush administration now is an almost perfect coda to the surreally anti-conservative policies it has pursued from the beginning."
Britain's Independent headlined, "Bush launches $700 billion rescue plan and confesses he didn't realize how severe problems were" and then quoted a congressional aide on a telephone conference call between the Federal Reserve chairman, the treasury secretary and lawmakers in which the Fed chief said, "If Congress doesn't act quickly, there will be an economic meltdown."
"Financial earthquakes, like real ones," said the Independent, "are brutal reminders of the limits of the politician's capacity to shape events. Obama is no exception. He has been a sideshow to the dramas on the trading floor, and has added nothing to the debate except some sharp partisan barbs, when the population has yearned for leadership."
The Belize News in Central America, under the headline "America goes socialist," commented, "FDR's New Deal would have been considered socialist on Wall Street a few months ago, but now Wall Street, the cradle of crazy capitalism, has been crying out like a baby for government bailouts for the same financial institutions through which they looted the United States and the world over the last three decades. ... When there is a crisis, which they themselves create, the capitalists and the speculators always take their money and run. It is left to the people to pick up the pieces."
America's Humpty Dumpty has had a great fall. But no one is betting that all the kings of Wall Street can't put Humpty together again. For the rest of the world, the Bush Doctrine's hubris got its comeuppance.
Arnaud de Borchgrave is editor at large for The Washington Times and for United Press International.
Paulson cannot be allowed a blank cheque By George Soros
FT.com logo
Paulson cannot be allowed a blank cheque
By George Soros
Published: September 25 2008
Hank Paulson's $700bn rescue package has run into difficulty on Capitol Hill. Rightly so: it was ill-conceived. Congress would be abdicating its responsibility if it gave the Treasury secretary a blank cheque. The bill submitted to Congress even had language in it that would exempt the secretary's decisions from review by any court or administrative agency - the ultimate fulfillment of the Bush administration's dream of a unitary executive.
Mr Paulson's record does not inspire the confidence necessary to give him discretion over $700bn. His actions last week brought on the crisis that makes rescue necessary. On Monday he allowed Lehman Brothers to fail and refused to make government funds available to save AIG. By Tuesday he had to reverse himself and provide an $85bn loan to AIG on punitive terms. The demise of Lehman disrupted the commercial paper market. A large money market fund "broke the buck" and investment banks that relied on the commercial paper market had difficulty financing their operations. By Thursday a run on money market funds was in full swing and Morgan Stanley Goldman Sachswe came as close to a meltdown as at any time since the 1930s. Mr Paulson reversed again and proposed a systemic rescue.
Mr Paulson had got a blank cheque from Congress once before. That was to deal with Fannie Mae and Freddie Mac. His solution landed the housing market in the worst of all worlds: their managements knew that if the blank cheques were filled out they would lose their jobs, so they retrenched and made mortgages more expensive and less available. Within a few weeks the market forced Mr Paulson's hand and he had to take them over.
Mr Paulson's proposal to purchase distressed mortgage-related securities poses a classic problem of asymmetric information. The securities are hard to value but the sellers know more about them than the buyer: in any auction process the Treasury would end up with the dregs. The proposal is also rife with latent conflict of interest issues. Unless the Treasury overpays for the securities, the scheme would not bring relief. But if the scheme is used to bail out insolvent banks, what will the taxpayers get in return?
Barack Obama has outlined four conditions that ought to be imposed: an upside for the taxpayers as well as a downside; a bipartisan board to oversee the process; help for the homeowners as well as the holders of the mortgages; and some limits on the compensation of those who benefit from taxpayers' money. These are the right principles. They could be applied more effectively by capitalising the institutions that are burdened by distressed securities directly rather than by relieving them of the distressed securities.
The injection of government funds would be much less problematic if it were applied to the equity rather than the balance sheet. $700bn in preferred stock with warrants may be sufficient to make up the hole created by the bursting of the housing bubble. By contrast, the addition of $700bn on the demand side of an $11,000bn market may not be sufficient to arrest the decline of housing prices.
Something also needs to be done on the supply side. To prevent housing prices from overshooting on the downside, the number of foreclosures has to be kept to a minimum. The terms of mortgages need to be adjusted to the homeowners' ability to pay.
The rescue package leaves this task undone. Making the necessary modifications is a delicate task rendered more difficult by the fact that many mortgages have been sliced up and repackaged in the form of collateralised debt obligations. The holders of the various slices have conflicting interests. It would take too long to work out the conflicts to include a mortgage modification scheme in the rescue package. The package can, however, prepare the ground by modifying bankruptcy law as it relates to principal residences.
Now that the crisis has been unleashed a large-scale rescue package is probably indispensable to bring it under control. Rebuilding the depleted balance sheets of the banking system is the right way to go. Not every bank deserves to be saved, but the experts at the Federal Reserve, with proper supervision, can be counted on to make the right judgments. Managements that are reluctant to accept the consequences of past mistakes could be penalised by depriving them of the Fed's credit facilities. Making government funds available should also encourage the private sector to participate in recapitalising the banking sector and bringing the financial crisis to a close.
The writer is chairman of Soros Fund Management
Copyright The Financial Times Limited 2008
"FT" and "Financial Times" are trademarks of the Financial Times. Privacy policy | Terms
© Copyright The Financial Times Ltd 2008.
Paulson cannot be allowed a blank cheque
By George Soros
Published: September 25 2008
Hank Paulson's $700bn rescue package has run into difficulty on Capitol Hill. Rightly so: it was ill-conceived. Congress would be abdicating its responsibility if it gave the Treasury secretary a blank cheque. The bill submitted to Congress even had language in it that would exempt the secretary's decisions from review by any court or administrative agency - the ultimate fulfillment of the Bush administration's dream of a unitary executive.
Mr Paulson's record does not inspire the confidence necessary to give him discretion over $700bn. His actions last week brought on the crisis that makes rescue necessary. On Monday he allowed Lehman Brothers to fail and refused to make government funds available to save AIG. By Tuesday he had to reverse himself and provide an $85bn loan to AIG on punitive terms. The demise of Lehman disrupted the commercial paper market. A large money market fund "broke the buck" and investment banks that relied on the commercial paper market had difficulty financing their operations. By Thursday a run on money market funds was in full swing and Morgan Stanley Goldman Sachswe came as close to a meltdown as at any time since the 1930s. Mr Paulson reversed again and proposed a systemic rescue.
Mr Paulson had got a blank cheque from Congress once before. That was to deal with Fannie Mae and Freddie Mac. His solution landed the housing market in the worst of all worlds: their managements knew that if the blank cheques were filled out they would lose their jobs, so they retrenched and made mortgages more expensive and less available. Within a few weeks the market forced Mr Paulson's hand and he had to take them over.
Mr Paulson's proposal to purchase distressed mortgage-related securities poses a classic problem of asymmetric information. The securities are hard to value but the sellers know more about them than the buyer: in any auction process the Treasury would end up with the dregs. The proposal is also rife with latent conflict of interest issues. Unless the Treasury overpays for the securities, the scheme would not bring relief. But if the scheme is used to bail out insolvent banks, what will the taxpayers get in return?
Barack Obama has outlined four conditions that ought to be imposed: an upside for the taxpayers as well as a downside; a bipartisan board to oversee the process; help for the homeowners as well as the holders of the mortgages; and some limits on the compensation of those who benefit from taxpayers' money. These are the right principles. They could be applied more effectively by capitalising the institutions that are burdened by distressed securities directly rather than by relieving them of the distressed securities.
The injection of government funds would be much less problematic if it were applied to the equity rather than the balance sheet. $700bn in preferred stock with warrants may be sufficient to make up the hole created by the bursting of the housing bubble. By contrast, the addition of $700bn on the demand side of an $11,000bn market may not be sufficient to arrest the decline of housing prices.
Something also needs to be done on the supply side. To prevent housing prices from overshooting on the downside, the number of foreclosures has to be kept to a minimum. The terms of mortgages need to be adjusted to the homeowners' ability to pay.
The rescue package leaves this task undone. Making the necessary modifications is a delicate task rendered more difficult by the fact that many mortgages have been sliced up and repackaged in the form of collateralised debt obligations. The holders of the various slices have conflicting interests. It would take too long to work out the conflicts to include a mortgage modification scheme in the rescue package. The package can, however, prepare the ground by modifying bankruptcy law as it relates to principal residences.
Now that the crisis has been unleashed a large-scale rescue package is probably indispensable to bring it under control. Rebuilding the depleted balance sheets of the banking system is the right way to go. Not every bank deserves to be saved, but the experts at the Federal Reserve, with proper supervision, can be counted on to make the right judgments. Managements that are reluctant to accept the consequences of past mistakes could be penalised by depriving them of the Fed's credit facilities. Making government funds available should also encourage the private sector to participate in recapitalising the banking sector and bringing the financial crisis to a close.
The writer is chairman of Soros Fund Management
Copyright The Financial Times Limited 2008
"FT" and "Financial Times" are trademarks of the Financial Times. Privacy policy | Terms
© Copyright The Financial Times Ltd 2008.
The future is one nation The two-state approach in the Middle East has failed. There is a fairer, more durable solution
The future is one nation
The two-state approach in the Middle East has failed. There is a fairer, more durable solution
Ghada Karmi
The Guardian,
Thursday September 25 2008
http://www.guardian.co.uk/commentisfree/2008/sep/25/middleeast
Imagine the scene: the United Nations general assembly meets to discuss a resolution to the Israel-Palestine conflict. Unlike previous resolutions, which have been based on a Jewish state in most of historic Palestine with Palestinians relegated to the remnants, this one calls for a new state, covering what is now Israel, the West Bank and Gaza, whose present and former inhabitants are equal under the law. Such a resolution has, in fact, already been drafted and discussions have begun to place it on the agenda at the UN.
The one-state solution is now part of mainstream discourse. Increasingly, Palestinians - and some Israelis - support it as the only alternative to a Palestinian state subordinate to Israel. One-state groups have sprung up and conferences and studies are under way.
A UN resolution is the logical next step, underlining the issue's global importance and exposing the inequity and dishonesty of the two-state solution, to replace it with something fairer and more durable. It would be encapsulated in the following clauses, part of the draft UN resolution for a one-state solution, which has been under discussion for six months. Its principal authors are my fellow Palestinian Karl Sabbagh and myself:
"The general assembly notes the failure of recent efforts made by regional and international parties to resolve the conflict through the creation of two states; Recalling the recent history of the former [Palestine] Mandate territory as a land where Arabs and Jews shared equal rights of habitation; Reviewing Israel's non-compliance with UN Resolution 194, requiring Israel to repatriate the Palestinian refugees, and its illegal conduct in the occupied territories.
"Calls upon representatives of Israel and Palestine to agree on behalf of their peoples to share the land between the Mediterranean and the river Jordan ... by setting up a state which is democratic and secular, in which the rights of all people living within its borders to freedom of worship, security, and equality under the law are enshrined in a new constitution, to replace the separate forms of government that apply currently in Israel, the West Bank and Gaza."
The two-state adherents will not approve. David Miliband at the Labour party conference this week continued to argue for a two-state solution. Tomorrow in New York, Mahmoud Abbas will petition George Bush for the same thing. Both are on a hiding to nothing.
The pace of Israeli colonisation, unimpeded since 1967, redoubled after the Oslo accords, demonstrating Israel's aversion to a two-state solution. By 2007, the West Bank Jewish settler population had reached 282,000. In East Jerusalem, it rose to 200,000, massively Judaising the city and precluding it as a Palestinian capital. Today the West Bank is a jigsaw of settlements, bypass roads and barriers, making an independent state impossible. Gaza is a besieged enclave. In 2006 the UN special rapporteur in the Palestinian territories concluded that "a two-state solution is unattainable". Avraham Burg, former Knesset speaker, told the Israeli daily Haaretz in June that "time was running out for the two-state solution".
Scores of others have articulated the same view. The peace process predicated on the two-state solution is stagnant, and a momentum has started towards the obvious alternative, a unitary state. This month a new forum, encompassing Palestinian personalities from the occupied territories and outside, has published a petition in the Arabic daily Al-Hayat to halt negotiations, annex the territories to Israel and demand equal rights in one state. This echoes many recent Palestinian demands to dissolve the Palestinian Authority and start an anti-apartheid campaign for equal rights.
The UN high commissioner for human rights has referred us to Robert Serry, the UN official responsible for the peace process, who stated that UN policy must conform to the Palestinian formal position, the two-state solution. A change in that position is not unthinkable. For our resolution to be discussed at the UN, a member state would have to present it, and several are privately known to support our aims.
A unitary state is inevitable. Establishing an exclusive state defined along ethnic-religious lines and excluding its previous inhabitants was unjust and ultimately unsustainable. No political acrobatics will alter this. The sooner the UN, which unwisely created Israel in the first place, takes charge of the consequences, the better it will be for Palestinians, for Israelis and for the region as a whole.
· Ghada Karmi is research fellow at the Institute of Arab and Islamic Studies, Exeter University. g.karmi@exeter.ac.uk
The two-state approach in the Middle East has failed. There is a fairer, more durable solution
Ghada Karmi
The Guardian,
Thursday September 25 2008
http://www.guardian.co.uk/commentisfree/2008/sep/25/middleeast
Imagine the scene: the United Nations general assembly meets to discuss a resolution to the Israel-Palestine conflict. Unlike previous resolutions, which have been based on a Jewish state in most of historic Palestine with Palestinians relegated to the remnants, this one calls for a new state, covering what is now Israel, the West Bank and Gaza, whose present and former inhabitants are equal under the law. Such a resolution has, in fact, already been drafted and discussions have begun to place it on the agenda at the UN.
The one-state solution is now part of mainstream discourse. Increasingly, Palestinians - and some Israelis - support it as the only alternative to a Palestinian state subordinate to Israel. One-state groups have sprung up and conferences and studies are under way.
A UN resolution is the logical next step, underlining the issue's global importance and exposing the inequity and dishonesty of the two-state solution, to replace it with something fairer and more durable. It would be encapsulated in the following clauses, part of the draft UN resolution for a one-state solution, which has been under discussion for six months. Its principal authors are my fellow Palestinian Karl Sabbagh and myself:
"The general assembly notes the failure of recent efforts made by regional and international parties to resolve the conflict through the creation of two states; Recalling the recent history of the former [Palestine] Mandate territory as a land where Arabs and Jews shared equal rights of habitation; Reviewing Israel's non-compliance with UN Resolution 194, requiring Israel to repatriate the Palestinian refugees, and its illegal conduct in the occupied territories.
"Calls upon representatives of Israel and Palestine to agree on behalf of their peoples to share the land between the Mediterranean and the river Jordan ... by setting up a state which is democratic and secular, in which the rights of all people living within its borders to freedom of worship, security, and equality under the law are enshrined in a new constitution, to replace the separate forms of government that apply currently in Israel, the West Bank and Gaza."
The two-state adherents will not approve. David Miliband at the Labour party conference this week continued to argue for a two-state solution. Tomorrow in New York, Mahmoud Abbas will petition George Bush for the same thing. Both are on a hiding to nothing.
The pace of Israeli colonisation, unimpeded since 1967, redoubled after the Oslo accords, demonstrating Israel's aversion to a two-state solution. By 2007, the West Bank Jewish settler population had reached 282,000. In East Jerusalem, it rose to 200,000, massively Judaising the city and precluding it as a Palestinian capital. Today the West Bank is a jigsaw of settlements, bypass roads and barriers, making an independent state impossible. Gaza is a besieged enclave. In 2006 the UN special rapporteur in the Palestinian territories concluded that "a two-state solution is unattainable". Avraham Burg, former Knesset speaker, told the Israeli daily Haaretz in June that "time was running out for the two-state solution".
Scores of others have articulated the same view. The peace process predicated on the two-state solution is stagnant, and a momentum has started towards the obvious alternative, a unitary state. This month a new forum, encompassing Palestinian personalities from the occupied territories and outside, has published a petition in the Arabic daily Al-Hayat to halt negotiations, annex the territories to Israel and demand equal rights in one state. This echoes many recent Palestinian demands to dissolve the Palestinian Authority and start an anti-apartheid campaign for equal rights.
The UN high commissioner for human rights has referred us to Robert Serry, the UN official responsible for the peace process, who stated that UN policy must conform to the Palestinian formal position, the two-state solution. A change in that position is not unthinkable. For our resolution to be discussed at the UN, a member state would have to present it, and several are privately known to support our aims.
A unitary state is inevitable. Establishing an exclusive state defined along ethnic-religious lines and excluding its previous inhabitants was unjust and ultimately unsustainable. No political acrobatics will alter this. The sooner the UN, which unwisely created Israel in the first place, takes charge of the consequences, the better it will be for Palestinians, for Israelis and for the region as a whole.
· Ghada Karmi is research fellow at the Institute of Arab and Islamic Studies, Exeter University. g.karmi@exeter.ac.uk
Save the world? Hank just didn't have a clue The staggering incompetence of the US Treasury Secretary is now acknowledged - and is a disaster for Geor
Save the world? Hank just didn't have a clue
The staggering incompetence of the US Treasury Secretary is now acknowledged - and is a disaster for George Bush
Anatole Kaletsky
The Emperor has no clothes. If you want to know why American capitalism is on the brink of disaster, but also want to understand what will save it, then log on to the C-Span congressional website and watch the interrogations of Henry Paulson, the US Treasury Secretary, by the Senate and House banking committees.
Until last week, I was in a minority of one in arguing that Mr Paulson was personally responsible for suddenly turning the painful but manageable credit crunch that had been grinding away 18 months in the background of the US economy into a global catastrophe. Mr Paulson's appearances on Capitol Hill, marked by the characteristic Bush-era combination of arrogance and incompetence, are turning my once-outlandish view into conventional wisdom: Henry Paulson is to finance what Donald Rumsfeld was to military strategy, Dick Cheney to geopolitics and Michael Chertoff to flood defence.
Mr Paulson may be a former chairman of Goldman Sachs, but as US Treasury Secretary he does not know what he is doing. His recent blunders, starting with the “rescue” of Fannie Mae, have triggered unintended consequences around the world, resulting in the death-spiral of financial values. But last Friday Mr Paulson outdid even these Rumsfeldian achievements, when he demanded $700 billion from Congress for a “comprehensive and fundamental” solution to the global financial crisis, without apparently having any idea of what he would actually do.
The good news - before I return to the perils of Mr Paulson - is that his blunders no longer matter very much. There will still be a huge US government bank bailout, which will probably avert a disastrous slump in the US and global economies. But because Mr Paulson has lost the political initiative, this bailout will now be led by the Democratic leadership in Congress and will be structured around its priorities - relief from mortgage foreclosures, restrictions on bankers' pay and big government shareholdings in US banks. For President Bush it is a disaster, dashing his last faint hope of having a tangible achievement to his name before he leaves office.
How did things come to such a pass? When Mr Paulson announced his $700 billion “plan” last Friday, everybody in the financial world (myself included) heaved a sigh of relief. Finally, it seemed, the US Government was going to do whatever it takes to stabilise the world financial system. The universal assumption was that Mr Paulson would present a detailed plan of action over the weekend, putting a safety net under the value of homes, mortgages and related assets. Yet all that appeared by Saturday evening was a three-page legislative outline, with no hint of the mechanisms to be used. The only substantive clause in the draft was a swaggering demand for untrammelled power: “Decisions by the Secretary pursuant to this Act are non-reviewable and may not be reviewed by any court of law or any administrative agency.”
When further details of the Paulson plan failed to appear on Sunday it was assumed that the details were being untangled in late-night political negotiations. When there was still no plan on Monday, the view was that Mr Paulson must be holding back the details for his testimony to the Senate Banking Committee the following day. But then, to everyone's astonishment, Mr Paulson turned up to the committee on Tuesday morning with only the briefest opening statement, which simply repeated what he had already said the week before: the sky was falling and the only way to stop it was to give him authority over $700 billion in public money, to be spent in unspecified ways.
And suddenly the sky did fall down - not on the world economy, but on Mr Paulson. Consider the reactions from American politicians, including Republicans: “Stunning and unprecedented in its lack of detail”... “a $700 billion blank cheque to Wall Street”... “neither workable nor comprehensive”... “foolish waste of massive taxpayer funds”... “eerily similar to the rush to war in Iraq”. Best of all was John McCain's comment: “When we're talking about a trillion dollars of taxpayer money, ‘trust me' just isn't good enough.”
At first, nobody could quite believe Mr Paulson was incompetent. Was it really possible that the Treasury Secretary had no idea of what to do with this unprecedented financial firepower? Perhaps his silence on crucial issues such as what he would pay for the banks' “troubled assets” was just a tactical ruse.
But as the cross-examination rolled on, and Mr Paulson just waffled - “we will ask experts to advise us”, “we will get the best and brightest financiers to suggest ideas” - the terrible truth dawned. There was no such thing as a Paulson plan. Not only did Mr Paulson not know what he was doing. He did not know what he was talking about. When pressed to offer at least some basic principles for his rescue, Mr Paulson had no answers. When challenged about limits to executive remuneration and taxpayer stakes in future profits of participating banks, he brusquely rejected all such proposals - on the amazing ground that they might discourage some of the stronger banks from taking advantage of government support!
Could he really be so clueless? Surely not. Why, then, has Mr Paulson failed? His inability to think seriously about solutions to the present financial crisis probably has deep ideological roots. Just as Mr Rumsfeld could simply not believe that US foreign policy might be misguided, Mr Paulson simply cannot believe that markets can be fundamentally wrong. He therefore cannot imagine, for example, that government judgments about the value of bank securities may, in some circumstances, reflect economic realities more accurately than market prices. Since some such recognition of market failure is fundamental to any understanding of banking crises, it is not surprising that Mr Paulson finds it difficult to come up with a credible solution.
The ideological pendulum is now swinging but what is needed to avoid future crises is not necessarily more regulation. It is better-quality regulation, managed by people who understand and respect markets but do not worship them. Markets are usually right, but sometimes they are dangerously wrong - and they need to be managed with decisive and competent government intervention.
The people who do not understand the role of government should not be regulating markets any more than they should be fighting wars or managing flood defences. P.J.O'Rourke, the conservative writer, once remarked: “The Republicans are a party that says government doesn't work - and then get elected and prove it.” This should be the epitaph for the Bush Administration - and Mr Paulson.
http://www.timesonline.co.uk/tol/comment/columnists/anatole_kaletsky/article4820549.ece
The staggering incompetence of the US Treasury Secretary is now acknowledged - and is a disaster for George Bush
Anatole Kaletsky
The Emperor has no clothes. If you want to know why American capitalism is on the brink of disaster, but also want to understand what will save it, then log on to the C-Span congressional website and watch the interrogations of Henry Paulson, the US Treasury Secretary, by the Senate and House banking committees.
Until last week, I was in a minority of one in arguing that Mr Paulson was personally responsible for suddenly turning the painful but manageable credit crunch that had been grinding away 18 months in the background of the US economy into a global catastrophe. Mr Paulson's appearances on Capitol Hill, marked by the characteristic Bush-era combination of arrogance and incompetence, are turning my once-outlandish view into conventional wisdom: Henry Paulson is to finance what Donald Rumsfeld was to military strategy, Dick Cheney to geopolitics and Michael Chertoff to flood defence.
Mr Paulson may be a former chairman of Goldman Sachs, but as US Treasury Secretary he does not know what he is doing. His recent blunders, starting with the “rescue” of Fannie Mae, have triggered unintended consequences around the world, resulting in the death-spiral of financial values. But last Friday Mr Paulson outdid even these Rumsfeldian achievements, when he demanded $700 billion from Congress for a “comprehensive and fundamental” solution to the global financial crisis, without apparently having any idea of what he would actually do.
The good news - before I return to the perils of Mr Paulson - is that his blunders no longer matter very much. There will still be a huge US government bank bailout, which will probably avert a disastrous slump in the US and global economies. But because Mr Paulson has lost the political initiative, this bailout will now be led by the Democratic leadership in Congress and will be structured around its priorities - relief from mortgage foreclosures, restrictions on bankers' pay and big government shareholdings in US banks. For President Bush it is a disaster, dashing his last faint hope of having a tangible achievement to his name before he leaves office.
How did things come to such a pass? When Mr Paulson announced his $700 billion “plan” last Friday, everybody in the financial world (myself included) heaved a sigh of relief. Finally, it seemed, the US Government was going to do whatever it takes to stabilise the world financial system. The universal assumption was that Mr Paulson would present a detailed plan of action over the weekend, putting a safety net under the value of homes, mortgages and related assets. Yet all that appeared by Saturday evening was a three-page legislative outline, with no hint of the mechanisms to be used. The only substantive clause in the draft was a swaggering demand for untrammelled power: “Decisions by the Secretary pursuant to this Act are non-reviewable and may not be reviewed by any court of law or any administrative agency.”
When further details of the Paulson plan failed to appear on Sunday it was assumed that the details were being untangled in late-night political negotiations. When there was still no plan on Monday, the view was that Mr Paulson must be holding back the details for his testimony to the Senate Banking Committee the following day. But then, to everyone's astonishment, Mr Paulson turned up to the committee on Tuesday morning with only the briefest opening statement, which simply repeated what he had already said the week before: the sky was falling and the only way to stop it was to give him authority over $700 billion in public money, to be spent in unspecified ways.
And suddenly the sky did fall down - not on the world economy, but on Mr Paulson. Consider the reactions from American politicians, including Republicans: “Stunning and unprecedented in its lack of detail”... “a $700 billion blank cheque to Wall Street”... “neither workable nor comprehensive”... “foolish waste of massive taxpayer funds”... “eerily similar to the rush to war in Iraq”. Best of all was John McCain's comment: “When we're talking about a trillion dollars of taxpayer money, ‘trust me' just isn't good enough.”
At first, nobody could quite believe Mr Paulson was incompetent. Was it really possible that the Treasury Secretary had no idea of what to do with this unprecedented financial firepower? Perhaps his silence on crucial issues such as what he would pay for the banks' “troubled assets” was just a tactical ruse.
But as the cross-examination rolled on, and Mr Paulson just waffled - “we will ask experts to advise us”, “we will get the best and brightest financiers to suggest ideas” - the terrible truth dawned. There was no such thing as a Paulson plan. Not only did Mr Paulson not know what he was doing. He did not know what he was talking about. When pressed to offer at least some basic principles for his rescue, Mr Paulson had no answers. When challenged about limits to executive remuneration and taxpayer stakes in future profits of participating banks, he brusquely rejected all such proposals - on the amazing ground that they might discourage some of the stronger banks from taking advantage of government support!
Could he really be so clueless? Surely not. Why, then, has Mr Paulson failed? His inability to think seriously about solutions to the present financial crisis probably has deep ideological roots. Just as Mr Rumsfeld could simply not believe that US foreign policy might be misguided, Mr Paulson simply cannot believe that markets can be fundamentally wrong. He therefore cannot imagine, for example, that government judgments about the value of bank securities may, in some circumstances, reflect economic realities more accurately than market prices. Since some such recognition of market failure is fundamental to any understanding of banking crises, it is not surprising that Mr Paulson finds it difficult to come up with a credible solution.
The ideological pendulum is now swinging but what is needed to avoid future crises is not necessarily more regulation. It is better-quality regulation, managed by people who understand and respect markets but do not worship them. Markets are usually right, but sometimes they are dangerously wrong - and they need to be managed with decisive and competent government intervention.
The people who do not understand the role of government should not be regulating markets any more than they should be fighting wars or managing flood defences. P.J.O'Rourke, the conservative writer, once remarked: “The Republicans are a party that says government doesn't work - and then get elected and prove it.” This should be the epitaph for the Bush Administration - and Mr Paulson.
http://www.timesonline.co.uk/tol/comment/columnists/anatole_kaletsky/article4820549.ece
Dr. Frankenstein's Wall Street By Victor Davis Hanson
Dr. Frankenstein's Wall Street
By Victor Davis Hanson
When the mortgage bubble burst, Americans were "shocked" at how many Wall Street buccaneers had been gambling in a vast pyramid scheme with someone else's money. Paper fortunes were made buying and selling questionable sub-prime mortgages on the silly assumption that such gargantuan inside profiting would always expand -- even as the number of homebuyers able to buy overpriced properties was shrinking.
Now after the recent crash in sub-prime mortgages and the stock of several investment firms, a trillion dollars in "assets" could be nearly worthless. An already indebted American government must restore some sort of trust to banks and markets by either printing money or borrowing hundreds of billions of dollars from foreign creditors to guarantee loans.
All that remains of this Ponzi scheme is the election-year blame game. Republicans charge that important financial firewalls were dismantled by the Clinton administration while insider liberal senators got shady campaign donations in exchange for aiding Wall Street. Democrats counter that the laissez-faire capitalism espoused by Republicans for two decades encouraged financial piracy while tax policy favored the rich speculator over the middle-class wage earner.
But no one dares to ask what really drove the wheeler-dealer portfolio managers. Who re-elected these shady politicians of both parties? Who fostered the cash-in culture in which both Wall Street profit mongering and Washington lobbying are nourished and thrive? We citizens did -- red-state conservatives and blue-state liberals, Republicans and Democrats, alike. We may be victims of Wall Street greed -- but not quite innocent victims.
Let me explain. The profiteering was not just the result of a few thousand scoundrels on Wall Street or in Washington, as greedy and as bonus-hungry as many of them no doubt were. Look at the housing market as a sort of musical chairs in which everyone profited as long he grabbed a seat when the music stopped. Then those left standing -- with high-priced loans and negative equity when the crash came -- defaulted and stuck taxpayers with debt in the billions of dollars. But until then, most owners who had sold homes cashed out beyond their wildest dreams.
Thousands of dollars in past profits are still in sellers' bank accounts or were spent on their own consumption. If the shaky buyer at the bottom of the pyramid should not have borrowed to buy an overpriced house, then the luckier seller higher up hardly worried that the cash-strapped fool was paying him way too much with unsecured borrowed money.
We created the cultural climate for this shared madness. Television shows advised how to "flip" a house after putting in cosmetic improvements. Real-estate seminars and popular videos convinced us that homes were not places to live in and raise a family but rather no different from piles of chips on a Vegas table.
We created the phony populist creed that everyone deserved to own a house. So lawmakers got the message to relax lending standards in service to "fairness." But Americans forgot that historically nearly four in 10 of us aren't ever ready, or able, to sacrifice for a down payment, monthly mortgage bills, home maintenance and yearly taxes -- and so should stick to renting.
The problem went way beyond real-estate fantasies. Five-percent interest as a return on our money was once considered pretty good -- especially inasmuch as a factory or farm on the other side of the banking equation could not really stay in business paying 10 percent in interest to banks for its necessary borrowing.
But soon retirement-account holders and institutional investors began to expect as a given 7, 10 -- and even 20 -- percent "return" on their portfolios. Wage earners and professionals alike compared the glossy brochures that appeared in the mail, and then jumped to this 401(k) investment or that mutual fund to "maximize" retirement portfolio earnings.
How Wall Street managers, eager for more multimillion-dollar bonuses, planned to deliver on their promised sky-high returns no one asked. But it often proved to be more by hook-and-crook shell games than by financing new productive businesses or by extending credit for the production of real goods in vital plants.
In a larger sense, this zeal for quick profits and easy money reflected an oblivious too-good-to-be-true culture in which we drove larger cars but demanded more oil drilling from everyone except ourselves. We expected both expanded government entitlements and lower taxes.
Our government borrowed ever more money from foreign creditors, because it was a collective reflection of our own profligate financial habits. Of course, we should reform Wall Street and Washington -- and punish severely the crooks in both places. But Americans should remember that Frankenstein was not the name of the monster but of its creator.
Victor Davis Hanson is a classicist and historian at the Hoover Institution, Stanford University, and author, most recently, of "A War Like No Other: How the Athenians and Spartans Fought the Peloponnesian War." You can reach him by e-mailing author@victorhanson.com.
http://www.realclearpolitics.com/articles/2008/09/dr_frankensteins_wall_street.html
By Victor Davis Hanson
When the mortgage bubble burst, Americans were "shocked" at how many Wall Street buccaneers had been gambling in a vast pyramid scheme with someone else's money. Paper fortunes were made buying and selling questionable sub-prime mortgages on the silly assumption that such gargantuan inside profiting would always expand -- even as the number of homebuyers able to buy overpriced properties was shrinking.
Now after the recent crash in sub-prime mortgages and the stock of several investment firms, a trillion dollars in "assets" could be nearly worthless. An already indebted American government must restore some sort of trust to banks and markets by either printing money or borrowing hundreds of billions of dollars from foreign creditors to guarantee loans.
All that remains of this Ponzi scheme is the election-year blame game. Republicans charge that important financial firewalls were dismantled by the Clinton administration while insider liberal senators got shady campaign donations in exchange for aiding Wall Street. Democrats counter that the laissez-faire capitalism espoused by Republicans for two decades encouraged financial piracy while tax policy favored the rich speculator over the middle-class wage earner.
But no one dares to ask what really drove the wheeler-dealer portfolio managers. Who re-elected these shady politicians of both parties? Who fostered the cash-in culture in which both Wall Street profit mongering and Washington lobbying are nourished and thrive? We citizens did -- red-state conservatives and blue-state liberals, Republicans and Democrats, alike. We may be victims of Wall Street greed -- but not quite innocent victims.
Let me explain. The profiteering was not just the result of a few thousand scoundrels on Wall Street or in Washington, as greedy and as bonus-hungry as many of them no doubt were. Look at the housing market as a sort of musical chairs in which everyone profited as long he grabbed a seat when the music stopped. Then those left standing -- with high-priced loans and negative equity when the crash came -- defaulted and stuck taxpayers with debt in the billions of dollars. But until then, most owners who had sold homes cashed out beyond their wildest dreams.
Thousands of dollars in past profits are still in sellers' bank accounts or were spent on their own consumption. If the shaky buyer at the bottom of the pyramid should not have borrowed to buy an overpriced house, then the luckier seller higher up hardly worried that the cash-strapped fool was paying him way too much with unsecured borrowed money.
We created the cultural climate for this shared madness. Television shows advised how to "flip" a house after putting in cosmetic improvements. Real-estate seminars and popular videos convinced us that homes were not places to live in and raise a family but rather no different from piles of chips on a Vegas table.
We created the phony populist creed that everyone deserved to own a house. So lawmakers got the message to relax lending standards in service to "fairness." But Americans forgot that historically nearly four in 10 of us aren't ever ready, or able, to sacrifice for a down payment, monthly mortgage bills, home maintenance and yearly taxes -- and so should stick to renting.
The problem went way beyond real-estate fantasies. Five-percent interest as a return on our money was once considered pretty good -- especially inasmuch as a factory or farm on the other side of the banking equation could not really stay in business paying 10 percent in interest to banks for its necessary borrowing.
But soon retirement-account holders and institutional investors began to expect as a given 7, 10 -- and even 20 -- percent "return" on their portfolios. Wage earners and professionals alike compared the glossy brochures that appeared in the mail, and then jumped to this 401(k) investment or that mutual fund to "maximize" retirement portfolio earnings.
How Wall Street managers, eager for more multimillion-dollar bonuses, planned to deliver on their promised sky-high returns no one asked. But it often proved to be more by hook-and-crook shell games than by financing new productive businesses or by extending credit for the production of real goods in vital plants.
In a larger sense, this zeal for quick profits and easy money reflected an oblivious too-good-to-be-true culture in which we drove larger cars but demanded more oil drilling from everyone except ourselves. We expected both expanded government entitlements and lower taxes.
Our government borrowed ever more money from foreign creditors, because it was a collective reflection of our own profligate financial habits. Of course, we should reform Wall Street and Washington -- and punish severely the crooks in both places. But Americans should remember that Frankenstein was not the name of the monster but of its creator.
Victor Davis Hanson is a classicist and historian at the Hoover Institution, Stanford University, and author, most recently, of "A War Like No Other: How the Athenians and Spartans Fought the Peloponnesian War." You can reach him by e-mailing author@victorhanson.com.
http://www.realclearpolitics.com/articles/2008/09/dr_frankensteins_wall_street.html
Wednesday, September 24, 2008
How and Why Congress Should Play for Time The Financial Crisis By ROBERT WEISSMAN
How and Why Congress Should Play for Time
The Financial Crisis
By ROBERT WEISSMAN
Here's the situation: Thanks to its own inability to control itself, Wall Street is now facing a crisis unmatched since the Great Depression. Unfortunately, a collapse of the financial sector would not only hurt rich investors, it would devastate the global economy. So, government action is imperative.
Treasury Secretary Henry Paulson and Federal Reserve Chair Ben Bernanke say immediate Congressional legislation is imperative. And Congress is adjourning at the end of this week, with Members eager to get back to their districts and states to campaign.
But there is no way to handle the complexity of a $700 billion bailout in a few days.
There are some really hard questions about how to structure a Wall Street bailout program. Financial firms have to be subsidized, but they also have to feel some serious pain. Figuring out who to subsidize, and how much, is tricky. Determining how to ensure taxpayers get the best and fairest payback from the subsidized financial institutions is complicated. And developing a transparent and accountable structure to administer a $700 billion program buying and selling exotic securities is no easy matter.
Meanwhile, it would be unconscionable to bail out Wall Street but not protect homeowners and renters in homes that may be foreclosed on. Between allegedly super-sophisticated Wall Street hot shots and people who were fooled into taking bad mortgages -- or who have the misfortunate of renting from a landlord who's being foreclosed on -- it's obvious who is more deserving of government assistance. But Congress and the President have not been able to agree on plans anywhere near commensurate with the scale of the problem over the past year-plus. It's very hard to see how a proper and sufficiently scaled system of protection and assistance for homeowners and vulnerable renters is agreed upon in a few days.
The current financial mess is the outgrowth of a quarter-century rollback of regulations that controlled what financial firms could do, and protected financial titans from their own worst instincts. Wall Street is chastened right now, but it is a 100 percent certainty that the speculative culture will reemerge with a vengeance -- and in much shorter order than many now seem to believe -- unless regulatory standards are imposed to prevent a repeat of the current disaster. Legislation affording Wall Street what may be the biggest bailout in history is the time to attach new, robust regulatory rules. There are a lot of good ideas floating around about sound financial regulation, but the details are extraordinarily intricate and convoluted. It's not the kind of thing you can easily handle in a few days, even if you burn the candle at both ends.
Given the time pressure and the realities of the legislative process, is there anything Congress can do, other than make some minor adjustments to the Paulson proposal that asks Congress to give the Treasury Secretary $700 billion and trust him to make good decisions?
Yes. Congress can play for time.
Here are two ways Congress can give itself more time to do justice to the bailout legislation.
Option One: Congressional leadership commits itself publicly to doing bailout legislation. The leaders commit to a hard date -- maybe a week from Friday, maybe two weeks -- and announce that the Congress will reconvene on that date, with a guaranteed vote on the same day. They might even usher through legislation now that limits the length of debate and guarantees an up-or-down vote. The urgency to act now reflects Wall Street's crystallized panic. An assurance of pending action should quiet the panic enough for the economy to continue to function.
A variant of this idea is that Congress commit to adopt bailout legislation in a lame duck session, after the election. Even with a guaranteed vote, this option would enable more extended investigation, hearings and debate. But it would drag the process out longer, and a judgment would have to be made that the financial markets could remain calm enough, for long enough.
Option Two: Congress adopts the Paulson plan this week, with two major modifications. Instead of the requested $700 billion, Congress appropriates $100 billion. Congressional leaders commit to reconvene in a lame duck session, and guarantee a vote on the remaining $600 billion. However, the $600 billion package includes provisions that direct how the bailout is to be conducted, includes protections for homeowners, and imposes meaningful regulatory standards. The second key feature of the initial appropriating legislation is that it specifies firms benefiting from the $100 billion bailout fund agree to accept the terms imposed on the $600 billion bailout fund. That way, only the most troubled firms step up right away for bailouts, and no firm is able to escape the conditions imposed after Congress has more time to think through the implications of the bailout deal.
There is real urgency to act. But Congress still has the ability to dodge the Paulson steamroller and buy some time to do legitimate legislating.
Robert Weissman is editor of the Washington, D.C.-based Multinational Monitor and director of Essential Action.
http://www.counterpunch.org/weissman09242008.html
The Financial Crisis
By ROBERT WEISSMAN
Here's the situation: Thanks to its own inability to control itself, Wall Street is now facing a crisis unmatched since the Great Depression. Unfortunately, a collapse of the financial sector would not only hurt rich investors, it would devastate the global economy. So, government action is imperative.
Treasury Secretary Henry Paulson and Federal Reserve Chair Ben Bernanke say immediate Congressional legislation is imperative. And Congress is adjourning at the end of this week, with Members eager to get back to their districts and states to campaign.
But there is no way to handle the complexity of a $700 billion bailout in a few days.
There are some really hard questions about how to structure a Wall Street bailout program. Financial firms have to be subsidized, but they also have to feel some serious pain. Figuring out who to subsidize, and how much, is tricky. Determining how to ensure taxpayers get the best and fairest payback from the subsidized financial institutions is complicated. And developing a transparent and accountable structure to administer a $700 billion program buying and selling exotic securities is no easy matter.
Meanwhile, it would be unconscionable to bail out Wall Street but not protect homeowners and renters in homes that may be foreclosed on. Between allegedly super-sophisticated Wall Street hot shots and people who were fooled into taking bad mortgages -- or who have the misfortunate of renting from a landlord who's being foreclosed on -- it's obvious who is more deserving of government assistance. But Congress and the President have not been able to agree on plans anywhere near commensurate with the scale of the problem over the past year-plus. It's very hard to see how a proper and sufficiently scaled system of protection and assistance for homeowners and vulnerable renters is agreed upon in a few days.
The current financial mess is the outgrowth of a quarter-century rollback of regulations that controlled what financial firms could do, and protected financial titans from their own worst instincts. Wall Street is chastened right now, but it is a 100 percent certainty that the speculative culture will reemerge with a vengeance -- and in much shorter order than many now seem to believe -- unless regulatory standards are imposed to prevent a repeat of the current disaster. Legislation affording Wall Street what may be the biggest bailout in history is the time to attach new, robust regulatory rules. There are a lot of good ideas floating around about sound financial regulation, but the details are extraordinarily intricate and convoluted. It's not the kind of thing you can easily handle in a few days, even if you burn the candle at both ends.
Given the time pressure and the realities of the legislative process, is there anything Congress can do, other than make some minor adjustments to the Paulson proposal that asks Congress to give the Treasury Secretary $700 billion and trust him to make good decisions?
Yes. Congress can play for time.
Here are two ways Congress can give itself more time to do justice to the bailout legislation.
Option One: Congressional leadership commits itself publicly to doing bailout legislation. The leaders commit to a hard date -- maybe a week from Friday, maybe two weeks -- and announce that the Congress will reconvene on that date, with a guaranteed vote on the same day. They might even usher through legislation now that limits the length of debate and guarantees an up-or-down vote. The urgency to act now reflects Wall Street's crystallized panic. An assurance of pending action should quiet the panic enough for the economy to continue to function.
A variant of this idea is that Congress commit to adopt bailout legislation in a lame duck session, after the election. Even with a guaranteed vote, this option would enable more extended investigation, hearings and debate. But it would drag the process out longer, and a judgment would have to be made that the financial markets could remain calm enough, for long enough.
Option Two: Congress adopts the Paulson plan this week, with two major modifications. Instead of the requested $700 billion, Congress appropriates $100 billion. Congressional leaders commit to reconvene in a lame duck session, and guarantee a vote on the remaining $600 billion. However, the $600 billion package includes provisions that direct how the bailout is to be conducted, includes protections for homeowners, and imposes meaningful regulatory standards. The second key feature of the initial appropriating legislation is that it specifies firms benefiting from the $100 billion bailout fund agree to accept the terms imposed on the $600 billion bailout fund. That way, only the most troubled firms step up right away for bailouts, and no firm is able to escape the conditions imposed after Congress has more time to think through the implications of the bailout deal.
There is real urgency to act. But Congress still has the ability to dodge the Paulson steamroller and buy some time to do legitimate legislating.
Robert Weissman is editor of the Washington, D.C.-based Multinational Monitor and director of Essential Action.
http://www.counterpunch.org/weissman09242008.html
Mortgaging the Nation The Bitter Fruits of Deregulation By PAUL CRAIG ROBERTS
Mortgaging the Nation
The Bitter Fruits of Deregulation
By PAUL CRAIG ROBERTS
Remember the good old days when the economic threat was mere recession? The Federal Reserve would encourage the economy with low interest rates until the economy overheated. Prices would rise, and unions would strike for higher benefits. Then the Fed would put on the brakes by raising interest rates. Money supply growth would fall. Inventories would grow, and layoffs would result. When the economy cooled down, the cycle would start over.
The nice thing about 20th century recessions was that the jobs returned when the Federal Reserve lowered interest rates and consumer demand increased. In the 21st century, the jobs that have been moved offshore do not come back. More than three million U.S. manufacturing jobs have been lost while Bush was in the White House. Those jobs represent consumer income and career opportunities that America will never see again.
In the 21st century the US economy has produced net new jobs only in low paid domestic services, such as waitresses, bartenders, hospital orderlies, and retail clerks. The kind of jobs that provided ladders of upward mobility into the middle class are being exported abroad or filled by foreigners brought in on work visas. Today when you purchase an American name brand, you are supporting economic growth and consumer incomes in China and Indonesia, not in Detroit and Cincinnati.
In the 20th century, economic growth resulted from improved technologies, new investment, and increases in labor productivity, which raised consumers’ incomes and purchasing power. In contrast, in the 21st century, economic growth has resulted from debt expansion.
Most Americans have experienced little, if any, income growth in the 21st century. Instead, consumers have kept the economy going by maxing out their credit cards and refinancing their mortgages in order to consume the equity in their homes.
The income gains of the 21st century have gone to corporate chief executives, shareholders of offshoring corporations, and financial corporations.
By replacing $20 an hour U.S. labor with $1 an hour Chinese labor, the profits of U.S. offshoring corporations have boomed, thus driving up share prices and “performance” bonuses for corporate CEOs. With Bush/Cheney, the Republicans have resurrected their policy of favoring the rich over the poor. John McCain captured today’s high income class with his quip that you are middle class if you have an annual income less than $5 million.
Financial companies have made enormous profits by securitizing income flows from unknown risks and selling asset backed securities to pension funds and investors at home and abroad.
Today recession is only a small part of the threat that we face. Financial deregulation, Alan Greenspan’s low interest rates, and the belief that the market was the best regulator of risks, have created a highly leveraged pyramid of risk without adequate capital or collateral to back the risk. Consequently, a wide variety of financial institutions are threatened with insolvency, threatening a collapse comparable to the bank failures that shrank the supply of money and credit and produced the Great Depression.
Washington has been slow to recognize the current problem. A millstone around the neck of every financial institution is the mark-to-market rule, an ill-advised “reform” from a previous crisis that was blamed on fraudulent accounting that over-valued assets on the books. As a result, today institutions have to value their assets at current market value.
In the current crisis the rule has turned out to be a curse. Asset backed securities, such as collateralized mortgage obligations, faced their first market pricing in panicked circumstances. The owner of a bond backed by 1,000 mortgages doesn’t know how many of the mortgages are good and how many are bad. The uncertainty erodes the value of the bond.
If significant amounts of such untested securities are on the balance sheet, insolvency rears its ugly head. The bonds get dumped in order to realize some part of their value. Merrill Lynch sold its asset backed securities for twenty cents on the dollar, although it is
unlikely that 80 percent of the instruments were worthless.
The mark to market rule, together with the suspect values of the asset backed securities and collateral debt obligations and swaps, allowed short sellers to make fortunes by driving down the share prices of the investment banks, thus worsening the crisis. With their capitalization shrinking, the investment banks could no longer borrow. The authorities took their time in halting short-selling, and short-selling is set to resume on October 3 or thereabout.
If the mark to market rule had been suspended and short-selling prohibited, the crisis would have been mitigated. Instead, the crisis intensified, provoking the US Treasury to propose to take responsibility for $700 billion more in troubled financial instruments in addition to the Fannie Mae, Freddie Mac, and AIG bailouts. Treasury guarantees are also apparently being extended to money market funds.
All of this makes sense at a certain level. But what if the $700 billion doesn’t stem the tide and another $700 billion is needed? At what point does the Treasury’s assumption of liabilities erode its own credit standing?
This crisis comes at the worst possible time. Gratuitous wars and military spending in pursuit of US world hegemony have inflated the federal budget deficit, which recession is further enlarging. Massive trade deficits, magnified by the offshoring of goods and services, cannot be eliminated by US export capability.
These large deficits are financed by foreigners, and foreign unease has resulted in a decline in the US dollar’s value compared to other tradable currencies, precious metals, and oil.
The US Treasury does not have $700 billion on hand with which to buy the troubled assets from the troubled institutions. The Treasury will have to borrow the $700 billion from abroad.
The dependency of Treasury Secretary Paulson’s bailout scheme on foreign willingness to absorb more Treasury paper in order that the Treasury has the money to bail out the troubled institutions is heavy proof that the US is in a financially dependent position that is inconsistent with that of America’s “superpower” status.
The US is not a superpower. The US is a financially dependent country that foreign lenders can close down at will.
Washington still hasn’t learned this. American hubris can lead the administration and Congress into a bailout solution that the rest of the world, which has to finance it, might not accept.
Currently, the fight between the administration and Congress over the bailout is whether the bailout will include the Democrats’ poor constituencies as well as the Republicans’ rich ones. The Republicans, for the most part, and their media shills are doing their best to exclude the ordinary American from the rescue plan.
A less appreciated feature of Paulson’s bailout plan is his demand for freedom from accountability. Congress balked at Paulson’s demand that the executive branch’s conduct of the bailout be non-reviewable by Congress or the courts: “Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion.” However, Congress substituted for its own authority a “board” that possibly will consist of the bailed out parties, by which I mean Republican and Democratic constituencies. The control over the financial system that the bailout would give to the executive branch would mean, in effect, state capitalism or fascism.
If we add state capitalism to the Bush administration’s success in eroding both the US Constitution and the power of Congress, we may be witnessing the final death of accountable constitutional government.
The US might also be on the verge of a decision by foreign lenders to cease financing a country that claims to be a hegemonic power with the right and the virtue to impose its will on the rest of the world. The US is able to be at war in Iraq and Afghanistan and is able to pick fights with Iran, Pakistan and Russia, because the Chinese, the Japanese and the sovereign wealth funds of the oil kingdoms finance America’s wars and military budgets. Aside from nuclear weapons, which are also in the hands of other countries, the US has no assets of its own with which to pursue its control over the world.
The US cannot be a hegemonic power without foreign financing. All indications are that the rest of the world is tiring of US arrogance.
If the US Treasury’s assumption of bailout responsibilities becomes excessive, the US dollar will lose its reserve currency role. The minute that occurs, foreign financing of America’s twin deficits will cease, as will the bailout. The US government would have to turn to the printing of paper money as did Weimar Germany.
For now this pending problem is hidden from view, because in times of panic, the tradition is to flee into “safety,” that is, into US Treasury debt obligations. The safety of Treasuries will be revealed by the extent of the bailout.
Paul Craig Roberts was Assistant Secretary of the Treasury in the Reagan administration. He was Associate Editor of the Wall Street Journal editorial page and Contributing Editor of National Review. He is coauthor of The Tyranny of Good Intentions. He can be reached at: PaulCraigRoberts@yahoo.com
http://www.counterpunch.org/roberts09242008.html
The Bitter Fruits of Deregulation
By PAUL CRAIG ROBERTS
Remember the good old days when the economic threat was mere recession? The Federal Reserve would encourage the economy with low interest rates until the economy overheated. Prices would rise, and unions would strike for higher benefits. Then the Fed would put on the brakes by raising interest rates. Money supply growth would fall. Inventories would grow, and layoffs would result. When the economy cooled down, the cycle would start over.
The nice thing about 20th century recessions was that the jobs returned when the Federal Reserve lowered interest rates and consumer demand increased. In the 21st century, the jobs that have been moved offshore do not come back. More than three million U.S. manufacturing jobs have been lost while Bush was in the White House. Those jobs represent consumer income and career opportunities that America will never see again.
In the 21st century the US economy has produced net new jobs only in low paid domestic services, such as waitresses, bartenders, hospital orderlies, and retail clerks. The kind of jobs that provided ladders of upward mobility into the middle class are being exported abroad or filled by foreigners brought in on work visas. Today when you purchase an American name brand, you are supporting economic growth and consumer incomes in China and Indonesia, not in Detroit and Cincinnati.
In the 20th century, economic growth resulted from improved technologies, new investment, and increases in labor productivity, which raised consumers’ incomes and purchasing power. In contrast, in the 21st century, economic growth has resulted from debt expansion.
Most Americans have experienced little, if any, income growth in the 21st century. Instead, consumers have kept the economy going by maxing out their credit cards and refinancing their mortgages in order to consume the equity in their homes.
The income gains of the 21st century have gone to corporate chief executives, shareholders of offshoring corporations, and financial corporations.
By replacing $20 an hour U.S. labor with $1 an hour Chinese labor, the profits of U.S. offshoring corporations have boomed, thus driving up share prices and “performance” bonuses for corporate CEOs. With Bush/Cheney, the Republicans have resurrected their policy of favoring the rich over the poor. John McCain captured today’s high income class with his quip that you are middle class if you have an annual income less than $5 million.
Financial companies have made enormous profits by securitizing income flows from unknown risks and selling asset backed securities to pension funds and investors at home and abroad.
Today recession is only a small part of the threat that we face. Financial deregulation, Alan Greenspan’s low interest rates, and the belief that the market was the best regulator of risks, have created a highly leveraged pyramid of risk without adequate capital or collateral to back the risk. Consequently, a wide variety of financial institutions are threatened with insolvency, threatening a collapse comparable to the bank failures that shrank the supply of money and credit and produced the Great Depression.
Washington has been slow to recognize the current problem. A millstone around the neck of every financial institution is the mark-to-market rule, an ill-advised “reform” from a previous crisis that was blamed on fraudulent accounting that over-valued assets on the books. As a result, today institutions have to value their assets at current market value.
In the current crisis the rule has turned out to be a curse. Asset backed securities, such as collateralized mortgage obligations, faced their first market pricing in panicked circumstances. The owner of a bond backed by 1,000 mortgages doesn’t know how many of the mortgages are good and how many are bad. The uncertainty erodes the value of the bond.
If significant amounts of such untested securities are on the balance sheet, insolvency rears its ugly head. The bonds get dumped in order to realize some part of their value. Merrill Lynch sold its asset backed securities for twenty cents on the dollar, although it is
unlikely that 80 percent of the instruments were worthless.
The mark to market rule, together with the suspect values of the asset backed securities and collateral debt obligations and swaps, allowed short sellers to make fortunes by driving down the share prices of the investment banks, thus worsening the crisis. With their capitalization shrinking, the investment banks could no longer borrow. The authorities took their time in halting short-selling, and short-selling is set to resume on October 3 or thereabout.
If the mark to market rule had been suspended and short-selling prohibited, the crisis would have been mitigated. Instead, the crisis intensified, provoking the US Treasury to propose to take responsibility for $700 billion more in troubled financial instruments in addition to the Fannie Mae, Freddie Mac, and AIG bailouts. Treasury guarantees are also apparently being extended to money market funds.
All of this makes sense at a certain level. But what if the $700 billion doesn’t stem the tide and another $700 billion is needed? At what point does the Treasury’s assumption of liabilities erode its own credit standing?
This crisis comes at the worst possible time. Gratuitous wars and military spending in pursuit of US world hegemony have inflated the federal budget deficit, which recession is further enlarging. Massive trade deficits, magnified by the offshoring of goods and services, cannot be eliminated by US export capability.
These large deficits are financed by foreigners, and foreign unease has resulted in a decline in the US dollar’s value compared to other tradable currencies, precious metals, and oil.
The US Treasury does not have $700 billion on hand with which to buy the troubled assets from the troubled institutions. The Treasury will have to borrow the $700 billion from abroad.
The dependency of Treasury Secretary Paulson’s bailout scheme on foreign willingness to absorb more Treasury paper in order that the Treasury has the money to bail out the troubled institutions is heavy proof that the US is in a financially dependent position that is inconsistent with that of America’s “superpower” status.
The US is not a superpower. The US is a financially dependent country that foreign lenders can close down at will.
Washington still hasn’t learned this. American hubris can lead the administration and Congress into a bailout solution that the rest of the world, which has to finance it, might not accept.
Currently, the fight between the administration and Congress over the bailout is whether the bailout will include the Democrats’ poor constituencies as well as the Republicans’ rich ones. The Republicans, for the most part, and their media shills are doing their best to exclude the ordinary American from the rescue plan.
A less appreciated feature of Paulson’s bailout plan is his demand for freedom from accountability. Congress balked at Paulson’s demand that the executive branch’s conduct of the bailout be non-reviewable by Congress or the courts: “Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion.” However, Congress substituted for its own authority a “board” that possibly will consist of the bailed out parties, by which I mean Republican and Democratic constituencies. The control over the financial system that the bailout would give to the executive branch would mean, in effect, state capitalism or fascism.
If we add state capitalism to the Bush administration’s success in eroding both the US Constitution and the power of Congress, we may be witnessing the final death of accountable constitutional government.
The US might also be on the verge of a decision by foreign lenders to cease financing a country that claims to be a hegemonic power with the right and the virtue to impose its will on the rest of the world. The US is able to be at war in Iraq and Afghanistan and is able to pick fights with Iran, Pakistan and Russia, because the Chinese, the Japanese and the sovereign wealth funds of the oil kingdoms finance America’s wars and military budgets. Aside from nuclear weapons, which are also in the hands of other countries, the US has no assets of its own with which to pursue its control over the world.
The US cannot be a hegemonic power without foreign financing. All indications are that the rest of the world is tiring of US arrogance.
If the US Treasury’s assumption of bailout responsibilities becomes excessive, the US dollar will lose its reserve currency role. The minute that occurs, foreign financing of America’s twin deficits will cease, as will the bailout. The US government would have to turn to the printing of paper money as did Weimar Germany.
For now this pending problem is hidden from view, because in times of panic, the tradition is to flee into “safety,” that is, into US Treasury debt obligations. The safety of Treasuries will be revealed by the extent of the bailout.
Paul Craig Roberts was Assistant Secretary of the Treasury in the Reagan administration. He was Associate Editor of the Wall Street Journal editorial page and Contributing Editor of National Review. He is coauthor of The Tyranny of Good Intentions. He can be reached at: PaulCraigRoberts@yahoo.com
http://www.counterpunch.org/roberts09242008.html
$5 Trillion Cash Pool Needed to Stop Rout, Ohmae Says (Update1) By Bei Hu
$5 Trillion Cash Pool Needed to Stop Rout, Ohmae Says (Update1)
By Bei Hu
Sept. 23 (Bloomberg) -- Treasury Secretary Henry Paulson's $700 billion plan to buy devalued assets from financial companies is ``a joke'' because it doesn't go far enough to calm markets, said Kenichi Ohmae, president of Business Breakthrough Inc.
Ohmae, nicknamed ``Mr. Strategy'' during his 23 years as a McKinsey & Co. partner, called for a $5 trillion ``international facility'' to be made available to financial institutions. The system could be modeled on one used by Sweden during its banking crisis in the early 1990s, he said.
``This is a liquidity crisis,'' Ohmae said at an investor forum hosted by CLSA Asia-Pacific Markets, the regional broking arm of Credit Agricole SA, in Hong Kong yesterday. ``The liquidity has to be so big that people won't get panicky.''
Paulson's proposal to remove hard-to-sell assets clogging the financial system marks the broadest intervention since at least the Great Depression. Asian stocks fell today, following U.S. shares lower as investors questioned whether the effort is enough to prevent a recession.
The plan came after the collapse of 158-year-old Lehman Brothers Holdings Inc. and the government takeover of insurer American International Group Inc. caused financial markets to seize up last week. The calamity was the culmination of a year during which the U.S. housing market slump left banks and securities firms with more than $520 billion of asset writedowns and credit losses.
Yesterday, Paulson and lawmakers narrowed their differences on the plan and agreed that the U.S. should get equity in participating companies.
Hard to Coordinate
Ohmae, 65, is the author of management books including ``The Mind of The Strategist,'' ``The Borderless World'' and ``The End of the Nation State.'' Business Breakthrough, founded in 1998, provides online management training.
One way of funding the $5 trillion facility would be through contributions from foreign exchange reserves in China, Japan, Taiwan, the Gulf states, the European Union and Russia, Ohmae said.
An international relief effort on that scale might be difficult to coordinate, said Robert Howe, founder of Hong Kong- based hedge fund manager Geomatrix (HK) Ltd., which oversees $32 million. ``I doubt the practicality of getting international cooperation on something like this,'' he said.
Ohmae compared the current financial crisis with Japan's 15- year economic decline that began in 1989. Both started with a property bubble, which wiped out companies' equity when it burst, and like in Japan, the current one could lead to escalating bankruptcies as banks worried about their own survival rein in lending, he said.
`Viagra' Economy
The financial-market upheaval may lead to slower growth in China and the reversal of the commodity boom as ship orders are canceled and steel supply dumped, said Ohmae. What Ohmae called Japan's ``Viagra'' economy and Australia's ``dig and deliver'' boom may also fizzle as China weakens, he said.
Against the backdrop of a potential global market panic, Paulson's plan is insufficient, said Ohmae. Paulson is a former chief executive of Goldman Sachs Group Inc., the world's biggest securities firm.
``He wants to fix problems one by one as if he were still the chief executive officer of Goldman Sachs,'' he said. ``He has to take his CEO hat completely off and come up with a systemic solution as opposed to a one-by-one solution.''
To contact the reporter on this story: Bei Hu in Hong Kong at bhu5@bloomberg.netFind phone numbers fast with the New AOL Yellow Pages! .AOLWebSuite .AOLPicturesFullSizeLink { height: 1px; width: 1px; overflow: hidden; } .AOLWebSuite a {color:blue; text-decoration: underline; cursor: pointer}
By Bei Hu
Sept. 23 (Bloomberg) -- Treasury Secretary Henry Paulson's $700 billion plan to buy devalued assets from financial companies is ``a joke'' because it doesn't go far enough to calm markets, said Kenichi Ohmae, president of Business Breakthrough Inc.
Ohmae, nicknamed ``Mr. Strategy'' during his 23 years as a McKinsey & Co. partner, called for a $5 trillion ``international facility'' to be made available to financial institutions. The system could be modeled on one used by Sweden during its banking crisis in the early 1990s, he said.
``This is a liquidity crisis,'' Ohmae said at an investor forum hosted by CLSA Asia-Pacific Markets, the regional broking arm of Credit Agricole SA, in Hong Kong yesterday. ``The liquidity has to be so big that people won't get panicky.''
Paulson's proposal to remove hard-to-sell assets clogging the financial system marks the broadest intervention since at least the Great Depression. Asian stocks fell today, following U.S. shares lower as investors questioned whether the effort is enough to prevent a recession.
The plan came after the collapse of 158-year-old Lehman Brothers Holdings Inc. and the government takeover of insurer American International Group Inc. caused financial markets to seize up last week. The calamity was the culmination of a year during which the U.S. housing market slump left banks and securities firms with more than $520 billion of asset writedowns and credit losses.
Yesterday, Paulson and lawmakers narrowed their differences on the plan and agreed that the U.S. should get equity in participating companies.
Hard to Coordinate
Ohmae, 65, is the author of management books including ``The Mind of The Strategist,'' ``The Borderless World'' and ``The End of the Nation State.'' Business Breakthrough, founded in 1998, provides online management training.
One way of funding the $5 trillion facility would be through contributions from foreign exchange reserves in China, Japan, Taiwan, the Gulf states, the European Union and Russia, Ohmae said.
An international relief effort on that scale might be difficult to coordinate, said Robert Howe, founder of Hong Kong- based hedge fund manager Geomatrix (HK) Ltd., which oversees $32 million. ``I doubt the practicality of getting international cooperation on something like this,'' he said.
Ohmae compared the current financial crisis with Japan's 15- year economic decline that began in 1989. Both started with a property bubble, which wiped out companies' equity when it burst, and like in Japan, the current one could lead to escalating bankruptcies as banks worried about their own survival rein in lending, he said.
`Viagra' Economy
The financial-market upheaval may lead to slower growth in China and the reversal of the commodity boom as ship orders are canceled and steel supply dumped, said Ohmae. What Ohmae called Japan's ``Viagra'' economy and Australia's ``dig and deliver'' boom may also fizzle as China weakens, he said.
Against the backdrop of a potential global market panic, Paulson's plan is insufficient, said Ohmae. Paulson is a former chief executive of Goldman Sachs Group Inc., the world's biggest securities firm.
``He wants to fix problems one by one as if he were still the chief executive officer of Goldman Sachs,'' he said. ``He has to take his CEO hat completely off and come up with a systemic solution as opposed to a one-by-one solution.''
To contact the reporter on this story: Bei Hu in Hong Kong at bhu5@bloomberg.netFind phone numbers fast with the New AOL Yellow Pages! .AOLWebSuite .AOLPicturesFullSizeLink { height: 1px; width: 1px; overflow: hidden; } .AOLWebSuite a {color:blue; text-decoration: underline; cursor: pointer}
Tuesday, September 23, 2008
In marked contrast to attitudes in western Europe.... Russians back hardline policies By Charles Clover in Moscow
In marked contrast to attitudes in western Europe....
Russians back hardline policies
By Charles Clover in Moscow
The Financial Times
September 22 2008
In contrast to the growing international concern over Russia, public support within the country for Russia's current course is stronger than at any time since the fall of the USSR and views of the US have reached new lows, according to opinion polls taken since the war in the Caucasus.
The Russian public, which overwhelmingly supported the war, has become a bastion of support for hardline policies and may become an obstacle to the few political figures trying to reconnect with the west and maintain economic and political integration, the polls suggest.
Some 59 per cent believe their country's foreign policy is "effective" and 82 per cent believe Russia should try to be the most powerful country in the world, according to recent polls from the Public Opinion Foundation, a Moscow polling body. A majority now do not consider confrontation with the west to be a threat to internal stability, according to Valery Fedorov, director of Vtsiom, another agency. He said this view resembled the novel Nineteen Eighty-Four by George Orwell, where "war is peace".
This confidence seems to be connected to a new-found patriotism, long absent during the post-communist transition era of the 1990s. Some 60 per cent now believe their country is a superpower, while 26 per cent do not, an almost perfect inversion from 1996, when 21 per cent believed Russia to be a superpower against 68 per cent not, according to the foundation. Opinion of the west has fallen to its lowest point in years following the August conflict, but it is nuanced.
The Levada Center, another polling agency, found that 67 per cent of Russians polled in mid-September have a "bad opinion" of America, compared with 23 per cent good. Meanwhile, 45 per cent of Russians have a good opinion of Europe, compared with 39 per cent bad.
The prototypical Europhile is an 18- to 24-year-old female Muscovite with higher education and property. The prototypical "America-hater" in Russia is male, attended technical school, is over 55 and lives in a small town.
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Russians back hardline policies
By Charles Clover in Moscow
The Financial Times
September 22 2008
In contrast to the growing international concern over Russia, public support within the country for Russia's current course is stronger than at any time since the fall of the USSR and views of the US have reached new lows, according to opinion polls taken since the war in the Caucasus.
The Russian public, which overwhelmingly supported the war, has become a bastion of support for hardline policies and may become an obstacle to the few political figures trying to reconnect with the west and maintain economic and political integration, the polls suggest.
Some 59 per cent believe their country's foreign policy is "effective" and 82 per cent believe Russia should try to be the most powerful country in the world, according to recent polls from the Public Opinion Foundation, a Moscow polling body. A majority now do not consider confrontation with the west to be a threat to internal stability, according to Valery Fedorov, director of Vtsiom, another agency. He said this view resembled the novel Nineteen Eighty-Four by George Orwell, where "war is peace".
This confidence seems to be connected to a new-found patriotism, long absent during the post-communist transition era of the 1990s. Some 60 per cent now believe their country is a superpower, while 26 per cent do not, an almost perfect inversion from 1996, when 21 per cent believed Russia to be a superpower against 68 per cent not, according to the foundation. Opinion of the west has fallen to its lowest point in years following the August conflict, but it is nuanced.
The Levada Center, another polling agency, found that 67 per cent of Russians polled in mid-September have a "bad opinion" of America, compared with 23 per cent good. Meanwhile, 45 per cent of Russians have a good opinion of Europe, compared with 39 per cent bad.
The prototypical Europhile is an 18- to 24-year-old female Muscovite with higher education and property. The prototypical "America-hater" in Russia is male, attended technical school, is over 55 and lives in a small town.
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US citizens call for better global ties By Demetri Sevastopulo in Washington
US citizens call for better global ties
By Demetri Sevastopulo in Washington
The Financial Times
September 23 2008
A big majority of Americans think the US should concentrate on repairing its world image to help restore its global influence, according to survey results just published.
The Chicago Council on Global Affairs survey found that 83 per cent of respondents thought that improving their country's world standing should be a "very important" foreign policy goal.
This was the highest priority, ranking above the 80 per cent who saw protecting US jobs as very important.
The survey comes as John McCain, the Republican presidential candidate, and Barack Obama, his Democratic opponent, prepare to square up on Friday in the first presidential debate. The poll, conducted in July, suggests that most Americans think the US should talk to hostile states – a view more closely aligned with Mr Obama.
"It is not difficult to see why both candidates are putting so much emphasis on the theme of 'change'," said Steven Kull, director of the International Policy Attitudes programme at the University of Maryland.
"They are trying to speak to the same feelings that came through in this poll. Americans want a significant retooling of America's relations with the world."
Seventy per cent expressed support for talking to Cuba and 65 per cent for dealing with Iran. Slim majorities backed talks with the militant Shia group Hizbollah and the Palestinian Islamist group Hamas.
Only 17 per cent thought that helping to bring democracy to other nations was a "very important" goal. Twenty-four per cent saw a similar importance in protecting weaker states from outside aggression.
"Americans understand the message that is coming from the rest of the world that the US is too unilateralist," added Mr Kull.
Pakistan has complained about US military action inside its borders. But 68 per cent of respondents thought the US should target terrorists operating in Pakistan, with or without Islamabad's approval.
On the issue of Iraq, Mr Obama wants to pull out US combat troops within 16 months, while Mr McCain has resisted a timetable.
The survey found that 24 per cent backed immediate withdrawal, while 43 per cent wanted troops out within two years. But there was a significant difference depending on political affiliation: 58 per cent of Republicans favoured an open commitment, as opposed to only 9 per cent of Democrats.
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By Demetri Sevastopulo in Washington
The Financial Times
September 23 2008
A big majority of Americans think the US should concentrate on repairing its world image to help restore its global influence, according to survey results just published.
The Chicago Council on Global Affairs survey found that 83 per cent of respondents thought that improving their country's world standing should be a "very important" foreign policy goal.
This was the highest priority, ranking above the 80 per cent who saw protecting US jobs as very important.
The survey comes as John McCain, the Republican presidential candidate, and Barack Obama, his Democratic opponent, prepare to square up on Friday in the first presidential debate. The poll, conducted in July, suggests that most Americans think the US should talk to hostile states – a view more closely aligned with Mr Obama.
"It is not difficult to see why both candidates are putting so much emphasis on the theme of 'change'," said Steven Kull, director of the International Policy Attitudes programme at the University of Maryland.
"They are trying to speak to the same feelings that came through in this poll. Americans want a significant retooling of America's relations with the world."
Seventy per cent expressed support for talking to Cuba and 65 per cent for dealing with Iran. Slim majorities backed talks with the militant Shia group Hizbollah and the Palestinian Islamist group Hamas.
Only 17 per cent thought that helping to bring democracy to other nations was a "very important" goal. Twenty-four per cent saw a similar importance in protecting weaker states from outside aggression.
"Americans understand the message that is coming from the rest of the world that the US is too unilateralist," added Mr Kull.
Pakistan has complained about US military action inside its borders. But 68 per cent of respondents thought the US should target terrorists operating in Pakistan, with or without Islamabad's approval.
On the issue of Iraq, Mr Obama wants to pull out US combat troops within 16 months, while Mr McCain has resisted a timetable.
The survey found that 24 per cent backed immediate withdrawal, while 43 per cent wanted troops out within two years. But there was a significant difference depending on political affiliation: 58 per cent of Republicans favoured an open commitment, as opposed to only 9 per cent of Democrats.
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Europeans see Moscow as security threat By James Blitz in London
Europeans see Moscow as security threat
By James Blitz in London
The Financial Times
September 22 2008
The Russian military's recent incursion into Georgia means that many more west Europeans now regard Russia as a greater threat to global stability than states such as Iran, Iraq and North Korea, according to a survey for the Financial Times.
Despite this, a clear majority of people in western Europe remain firmly opposed to their governments spending more on defence and diverting resources away from public health and social programmes.
Indeed, the Harris opinion poll for the Financial Times, conducted after the conflict between Russia and Georgia last month, indicates the citizens of three west European states would strongly oppose their national armies defending east European nations from a Russian attack.
Britain, France, Germany, Italy and Spain are all legally obliged to defend their fellow Nato members Estonia, Latvia and Lithuania under the Atlantic alliance's Article 5 commitment to mutual defence.
However, in Germany, Italy and Spain, more people say they would oppose the notion of their national troops rushing to defend the Baltic states than would support the idea.
In Germany, as many as 50 per cent of people say they would oppose national troops going to the defence of the three states, compared with only 26 per cent who say they would support it. Only in Britain and France do more people support the idea of their armies defending the Baltic states than oppose it.
The contrast between Europeans' rising fears of Russia and their unwillingness to support any action to meet the challenge posed by Moscow militarily is the most striking feature of the survey. The difficulty for governments contemplating an increase in defence spending is that growing public anxiety about Russia is somehow doing little to change the debate.
Harris poll charts
Even in the UK, which has the most fraught bilateral relationship with Russia of any west European state, 49 per cent of people oppose extra spending on the military as a result of Russia's actions.
Overall, the events in Georgia have pushed Russia up the table of countries that are perceived by west Europeans to endanger world peace.
Over the past year, Harris has asked Europeans on a monthly basis which states they regard as the greatest threat to global stability. Russia has repeatedly ranked well behind China, the US, Iran and Iraq. As recently as August, before Russia's incursion into Georgia, only four per cent of west Europeans deemed Russia as the greatest threat to world stability. But the September poll shows 17 per cent of respondents putting Russia top of the list, ahead of Iran on 14 per cent and not far behind China on 21 per cent.
The number of US respondents who say Russia is the greatest threat has also soared, from two per cent in early August to 13 per cent this month.
Harris's poll, meanwhile, shows a sharp divergence between Europeans and Americans over which of the US presidential candidates are seen as better protecting Europe's interests with regard to Russia.
On this measure, Barack Obama, the Democratic presidential nominee, is overwhelmingly favoured in each of the five European countries surveyed. Only in the US is John McCain seen as being better able to protect Europe's interests – gaining 41 per cent of votes to Mr Obama's 37.
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By James Blitz in London
The Financial Times
September 22 2008
The Russian military's recent incursion into Georgia means that many more west Europeans now regard Russia as a greater threat to global stability than states such as Iran, Iraq and North Korea, according to a survey for the Financial Times.
Despite this, a clear majority of people in western Europe remain firmly opposed to their governments spending more on defence and diverting resources away from public health and social programmes.
Indeed, the Harris opinion poll for the Financial Times, conducted after the conflict between Russia and Georgia last month, indicates the citizens of three west European states would strongly oppose their national armies defending east European nations from a Russian attack.
Britain, France, Germany, Italy and Spain are all legally obliged to defend their fellow Nato members Estonia, Latvia and Lithuania under the Atlantic alliance's Article 5 commitment to mutual defence.
However, in Germany, Italy and Spain, more people say they would oppose the notion of their national troops rushing to defend the Baltic states than would support the idea.
In Germany, as many as 50 per cent of people say they would oppose national troops going to the defence of the three states, compared with only 26 per cent who say they would support it. Only in Britain and France do more people support the idea of their armies defending the Baltic states than oppose it.
The contrast between Europeans' rising fears of Russia and their unwillingness to support any action to meet the challenge posed by Moscow militarily is the most striking feature of the survey. The difficulty for governments contemplating an increase in defence spending is that growing public anxiety about Russia is somehow doing little to change the debate.
Harris poll charts
Even in the UK, which has the most fraught bilateral relationship with Russia of any west European state, 49 per cent of people oppose extra spending on the military as a result of Russia's actions.
Overall, the events in Georgia have pushed Russia up the table of countries that are perceived by west Europeans to endanger world peace.
Over the past year, Harris has asked Europeans on a monthly basis which states they regard as the greatest threat to global stability. Russia has repeatedly ranked well behind China, the US, Iran and Iraq. As recently as August, before Russia's incursion into Georgia, only four per cent of west Europeans deemed Russia as the greatest threat to world stability. But the September poll shows 17 per cent of respondents putting Russia top of the list, ahead of Iran on 14 per cent and not far behind China on 21 per cent.
The number of US respondents who say Russia is the greatest threat has also soared, from two per cent in early August to 13 per cent this month.
Harris's poll, meanwhile, shows a sharp divergence between Europeans and Americans over which of the US presidential candidates are seen as better protecting Europe's interests with regard to Russia.
On this measure, Barack Obama, the Democratic presidential nominee, is overwhelmingly favoured in each of the five European countries surveyed. Only in the US is John McCain seen as being better able to protect Europe's interests – gaining 41 per cent of votes to Mr Obama's 37.
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The US can afford to pay for this rescue - but little else
The US can afford to pay for this rescue - but little else
If Obama is elected his fiscal hands will be tied by the banks' safety net. Any new public spending will mean raising taxes
* Bill Emmott
*
o Bill Emmott
o The Guardian,
o Tuesday September 23 2008
'You can always rely on the US to do the right thing," quipped Winston Churchill, "once it has exhausted the alternatives." That is indeed why Friday's market euphoria at the US Treasury's financial rescue plan was justified: launching a rescue was the right thing to do, and the good thing about the US is that it has done it quickly, about 13 months after the credit crunch began - rather than taking seven or eight years, as Japan did after its own crunch in the 1990s.
Perhaps it takes a free market, wild-west capitalist system to know when the sheriff should be called in. Anyone wishing to see this market turmoil as somehow the denouement of deregulated "finance capitalism", the end of Thatcher-Reaganism, and proof that regulated systems work better, needs to take account of Japan, the world's second largest economy and home of the other great 1930s-style financial crash of recent decades.
Japan's banking system collapsed in the 90s, and its once-brilliant bureaucrat-regulators failed to act quickly to clean up the mess. So far, the US - helped, no doubt, by the chance to learn from Japan's example - is doing better.
But the rapture about the US needs some modification. The good news, both about the latest mega-rescue and the earlier nationalisation of Fannie Mae, Freddie Mac and AIG, is that the American government has shown that it is willing to assume responsibility for clearing up the bad debts. A safety net is thus now available to prevent more banks thudding into the ground.
The bad news, however, is that preventing any more collapses will be far from easy. The problem is that it is unclear, in such situations, what a "bad debt" really is. In the 1980s, when the US government cleaned up after the collapse of its savings and loans industry (an equivalent of building societies), it took over bankrupt firms and sold their debt. This time, it is promising to buy bad debts from banks that are still active. It will have to set some sort of price, but also haggle over the definition of eligible debts. For when an economy is sliding into recession, as the US will probably now do, a debt that is good today can turn bad tomorrow.
Consequently, no one can know how much money this rescue will cost. Numbers being bandied about range from $700bn to $1 trillion, though generally with a cheery caveat attached that the federal government could even end up making a profit by taking on bad debts and later selling them. In no calculation of the cost of this venture should that be counted upon. After all, if it looked a good bet, other governments presiding over sliding housing markets, including the UK's, would be rushing to offer their own plans to buy up dud mortgage debt. They aren't - though probably some will have to before this affair is over.
No doubt the violent mood swings in financial markets we saw last week will return at some point: new black holes will be found or suspected, and more institutions will be brought to the brink of collapse. But the US action does mark a turning point, as long as neither the White House nor Congress decides to renege on the promises to provide a safety net.
From this point, the right questions will centre on the consequences for fiscal policy and national debt, rather than on banking as such. Right at the outset of the credit crunch, in August last year, the International Monetary Fund's then new boss, Dominique Strauss-Kahn, called for a big fiscal expansion to try to support the global economy. Finally, he is going to get his way - but not in quite the form he expected.
There has been much hyperactive talk about how vast the US rescue plan is, and how earth-shattering will be the extension of government that it represents. This is misleading: the rescue is indeed very large, but so is the American economy. The federal government is already in debt to the tune of $5.4 trillion, which sounds impossibly large if you don't realise that the US's annual GDP is nearly $14 trillion. This isn't Italy, in other words: there is room to add another few trillion to the debt.
The annual cost on the budget deficit in the first year could be $700bn, larger even than the impact of the Iraq war. But that, too, is misleading if you don't realise that the US federal deficit currently is less than 3% of GDP - smaller than Britain's (3.8%). Similarly, this extra debt is unlikely, of itself, to lead to a new decline in the dollar, as some have predicted: the dollar might fall in value relative to other currencies, but only if the US economy goes into a deep and prolonged recession, which is what the rescue plan meant to avert.
No, the true impact of this expansion of public spending lies in politics, and in what this rescue will now make more difficult or perhaps impossible: the expansion of other areas of public spending, such as healthcare or public programmes for alternative energy. If Barack Obama is elected president in November, he will find his fiscal hands tied a lot tighter than he may have hoped, even with a Democratic Congress alongside him - unless, of course, he wants to raise taxes.
· Bill Emmott is a former editor of the Economist and the author of Rivals: How the Power Struggle between China, India and Japan will Shape our Next Decade.
bill@billemmott.com
If Obama is elected his fiscal hands will be tied by the banks' safety net. Any new public spending will mean raising taxes
* Bill Emmott
*
o Bill Emmott
o The Guardian,
o Tuesday September 23 2008
'You can always rely on the US to do the right thing," quipped Winston Churchill, "once it has exhausted the alternatives." That is indeed why Friday's market euphoria at the US Treasury's financial rescue plan was justified: launching a rescue was the right thing to do, and the good thing about the US is that it has done it quickly, about 13 months after the credit crunch began - rather than taking seven or eight years, as Japan did after its own crunch in the 1990s.
Perhaps it takes a free market, wild-west capitalist system to know when the sheriff should be called in. Anyone wishing to see this market turmoil as somehow the denouement of deregulated "finance capitalism", the end of Thatcher-Reaganism, and proof that regulated systems work better, needs to take account of Japan, the world's second largest economy and home of the other great 1930s-style financial crash of recent decades.
Japan's banking system collapsed in the 90s, and its once-brilliant bureaucrat-regulators failed to act quickly to clean up the mess. So far, the US - helped, no doubt, by the chance to learn from Japan's example - is doing better.
But the rapture about the US needs some modification. The good news, both about the latest mega-rescue and the earlier nationalisation of Fannie Mae, Freddie Mac and AIG, is that the American government has shown that it is willing to assume responsibility for clearing up the bad debts. A safety net is thus now available to prevent more banks thudding into the ground.
The bad news, however, is that preventing any more collapses will be far from easy. The problem is that it is unclear, in such situations, what a "bad debt" really is. In the 1980s, when the US government cleaned up after the collapse of its savings and loans industry (an equivalent of building societies), it took over bankrupt firms and sold their debt. This time, it is promising to buy bad debts from banks that are still active. It will have to set some sort of price, but also haggle over the definition of eligible debts. For when an economy is sliding into recession, as the US will probably now do, a debt that is good today can turn bad tomorrow.
Consequently, no one can know how much money this rescue will cost. Numbers being bandied about range from $700bn to $1 trillion, though generally with a cheery caveat attached that the federal government could even end up making a profit by taking on bad debts and later selling them. In no calculation of the cost of this venture should that be counted upon. After all, if it looked a good bet, other governments presiding over sliding housing markets, including the UK's, would be rushing to offer their own plans to buy up dud mortgage debt. They aren't - though probably some will have to before this affair is over.
No doubt the violent mood swings in financial markets we saw last week will return at some point: new black holes will be found or suspected, and more institutions will be brought to the brink of collapse. But the US action does mark a turning point, as long as neither the White House nor Congress decides to renege on the promises to provide a safety net.
From this point, the right questions will centre on the consequences for fiscal policy and national debt, rather than on banking as such. Right at the outset of the credit crunch, in August last year, the International Monetary Fund's then new boss, Dominique Strauss-Kahn, called for a big fiscal expansion to try to support the global economy. Finally, he is going to get his way - but not in quite the form he expected.
There has been much hyperactive talk about how vast the US rescue plan is, and how earth-shattering will be the extension of government that it represents. This is misleading: the rescue is indeed very large, but so is the American economy. The federal government is already in debt to the tune of $5.4 trillion, which sounds impossibly large if you don't realise that the US's annual GDP is nearly $14 trillion. This isn't Italy, in other words: there is room to add another few trillion to the debt.
The annual cost on the budget deficit in the first year could be $700bn, larger even than the impact of the Iraq war. But that, too, is misleading if you don't realise that the US federal deficit currently is less than 3% of GDP - smaller than Britain's (3.8%). Similarly, this extra debt is unlikely, of itself, to lead to a new decline in the dollar, as some have predicted: the dollar might fall in value relative to other currencies, but only if the US economy goes into a deep and prolonged recession, which is what the rescue plan meant to avert.
No, the true impact of this expansion of public spending lies in politics, and in what this rescue will now make more difficult or perhaps impossible: the expansion of other areas of public spending, such as healthcare or public programmes for alternative energy. If Barack Obama is elected president in November, he will find his fiscal hands tied a lot tighter than he may have hoped, even with a Democratic Congress alongside him - unless, of course, he wants to raise taxes.
· Bill Emmott is a former editor of the Economist and the author of Rivals: How the Power Struggle between China, India and Japan will Shape our Next Decade.
bill@billemmott.com
Financial Crisis And the End of American Hegemony (II)
allAfrica.com
Financial Crisis And the End of American Hegemony (II)
Daily Trust
(Abuja)
OPINION
22 September 2008
Posted to the web 23 September 2008
By Obadiah Mailafia
For America, it may not be the end of the world, but it certainly signals the end of en era. Strategic thinkers from Michael Howard to Paul Kennedy have warned that empires often self-destruct through the folly of imperial overstretch.
In over-extending herself beyond her means and her material capabilities, America has ended up alienating her allies, pursuing a unilateralist course that wise men from Franklin Roosevelt to Harry Truman and Ronald Reagan would never have dared to contemplate.
In so doing, George Bush and the neocons who govern America have exhausted the moral capital that the United States has accumulated since Woodrow Wilson's Atlantic Charter. In pursuing such misguided policies, they are threatening to also bring down the engine room of international capitalism by a combination of myopia, greed and folly. More than at any time in her illustrious history, America stands isolated and bereft of moral authority - and on the verge of bankruptcy.
In 1945, the U.S. economy accounted for 48% of world output. The Bretton Woods international financial architecture which was constructed through American leadership has ensured a worldwide expansion that has continued to our day. Through the Marshall Plan, America saved Europe from crumbling under the ashes left by the war against the Nazis.
Without American help, the development trajectories of Japan, South Korea, Taiwan and the Philippines would have been quite different from what they are today. For more than six decades, the U.S. has been the de facto global banker of last resort, with the dollar being the de facto world reserve currency. With her open economy and impregnable fortress of rules-based markets, the country has been the destination of choice for international investment capital.
It is an open secret that America is today the world's number one debtor-nation. One of the greatest achievements of the Clinton Presidency was to have eliminated the budget deficit. When the Republicans took over, the notion of balanced budgets was cast out through the window. It was further aggravated by military adventures in Afghanistan and Iraq that cost an astonishing US$1 billion daily in taxpayers' money. And we all know that those adventures have more to do with advancing the interests of oil sharks and the military-industrial complex than about fighting terrorism or spreading the ideals of democratic government.
The Bush administration has cornered itself into a classic quandary: if they remain in Iraq, they would continue to attract the hatred of the Arabs and the Islamic world while continuing to waste their national resources; if they leave, they would lose face and Iraq would most likely descend into chaos. In thus overstretching herself, the American Imperium has squandered its international goodwill whilst impoverishing its people at the same time.
To be sure, America still leads the world in high technology and innovation. But it is also a nation of spendthrifts, with a consumerist prodigality that inspires no one. Today, Asian countries hold U.S. treasury bills in excess of the magnitude of US$1 trillion. If those countries were suddenly to seek redemption of those assets, the United States economy would automatically be bankrupted. Indeed, super-investor Warren Buffett has predicted that the net ownership of American assets by foreigners would reach a staggering US$11 trillion in 2015, by which time, according to him, the country would become a nation of 'sharecroppers'.
One would have to agree with IMF Managing Director Dominique Strauss-Kahn's warning that the financial crisis is likely to portend a major slowdown in the world economy for much of the coming year. On his part, OECD secretary-general Angel Gurria believes there is a likelihood of a contagion effect, with the prospects of more banks collapsing and many more falling into 'intensive care'. The collapse of financial institutions will spread collateral damage to related industrial sectors, with the prospects of reduced output and the loss of millions of jobs.
For us in Nigeria, the current crisis could not have come at a worse time, especially when we have been facing a capital market meltdown of our own for some months now. It goes without saying that the current crisis calls for the highest qualities of prudence and economic statecraft. Whilst I welcome the effort by my former colleagues in the Central Bank in responding so robustly through the Monetary Policy Committee, it is important to point out that our own stock market crisis has more to do with internal institutional defects than from the turmoil that has erupted across the Atlantic.
Perhaps we also need to carefully consider the pros and cons of leaving our foreign reserves in dollar accounts. Part of the likely effects of the current crisis may be a massive shift of capital from North America into the Euroland area, a prospect that would further weaken the value of the dollar against other world currencies. The cognoscenti of high finance, including the great Warren Buffett, have long predicted that the almighty dollar will continue in its secular trend of decline over the coming decade.
Keeping all our reserves in dollars may be a great risk, as we may already have lost some 20% of our national wealth by sheer virtue of the dollar's decline over the last three years. For geopolitical reasons, countries such as Iran long ago took a decision to move their reserves into the Euro area. Any precipitate action in this regard would, of course, be untoward. But our monetary authorities must keep clear this possibility as an option in case the current turbulence transmutes into a cataclysm.
The months ahead will be difficult for the American people and indeed the world economy. Some have suggested that the current crisis will give Barack Obama the Presidency on a platter. Whilst this may be so, I believe that what America faces today transcends mere partisan politics. There is need for a new historic consensus to rebuild the country and to restore hope in a time of upheaval. We need no less than 'a world restored', as the young Kissinger once wrote as a doctoral student at Harvard.
But such restoration will not be possible without America retracing its moral bearings and forging a new coalition for the reconstruction of international economic order. Part of the greatness of American civilisation, if we could so call it, is its infinite capacity to reinvent itself and to adapt to new realities. In the new world that is upon us, America must eschew the arrogance of power and accept to share the responsibility for global leadership with the EU, China and India, and, shall we say, Nigeria, Brazil and other regional hegemons.
Francis Fukuyama's End of History thesis has turned out to be a rather premature verdict on the fate of the human condition in our time. The Promethean forces unleashed by technology and globalisation have created new dangers and tumults. In our age of complex interdependence, new fears and insecurities may resurrect the long-forgotten cloven hooves of history.
One of the paradoxes of our age is the emergence of an integrated world economy without the requisite multilateral governance institutions. A new Bretton Woods world is needed to address the challenges of global economic and political governance. More than ever before, we stand in need of vision and statesmanship; the kind of leadership that would effectively confront systemic challenges such as financial turbulence, global warming, the spread of infectious diseases and the nightmare of poverty which condemns half of the world's peoples to conditions akin to those of the dark Middle Ages.
It is in our collective self-interest to rally around America in her hour of crisis. Europe, Japan and China would have a major role to play in all this. When America does recover, as surely it would, her place and influence in the world would probably be a much reduced one. It is one of the iron laws of history that all empires sooner or later must come to an end. While some have crashed with a bang, others have come down with a whimper. To avoid inevitable chaos, statesmen must come together to hammer out a new framework for global economic and political governance.
The late Hedley Bull, Montague Burton Professor of International Relations at Oxford, once underlined the ethic of 'cosmopolitan enlightenment' as the moral foundation of a new international order. As an idealist without illusions, Bull was prescient enough to know that in an age of post-ideological politics, civilisation itself may be imperiled unless the nations come together to forge a new compact based on solidarity and hope.
Dr Mailafia is Chairman of the Centre for Policy and Economic Research, Abuja.
Copyright © 2008 Daily Trust. All rights reserved. Distributed by AllAfrica Global Media (allAfrica.com).
Financial Crisis And the End of American Hegemony (II)
Daily Trust
(Abuja)
OPINION
22 September 2008
Posted to the web 23 September 2008
By Obadiah Mailafia
For America, it may not be the end of the world, but it certainly signals the end of en era. Strategic thinkers from Michael Howard to Paul Kennedy have warned that empires often self-destruct through the folly of imperial overstretch.
In over-extending herself beyond her means and her material capabilities, America has ended up alienating her allies, pursuing a unilateralist course that wise men from Franklin Roosevelt to Harry Truman and Ronald Reagan would never have dared to contemplate.
In so doing, George Bush and the neocons who govern America have exhausted the moral capital that the United States has accumulated since Woodrow Wilson's Atlantic Charter. In pursuing such misguided policies, they are threatening to also bring down the engine room of international capitalism by a combination of myopia, greed and folly. More than at any time in her illustrious history, America stands isolated and bereft of moral authority - and on the verge of bankruptcy.
In 1945, the U.S. economy accounted for 48% of world output. The Bretton Woods international financial architecture which was constructed through American leadership has ensured a worldwide expansion that has continued to our day. Through the Marshall Plan, America saved Europe from crumbling under the ashes left by the war against the Nazis.
Without American help, the development trajectories of Japan, South Korea, Taiwan and the Philippines would have been quite different from what they are today. For more than six decades, the U.S. has been the de facto global banker of last resort, with the dollar being the de facto world reserve currency. With her open economy and impregnable fortress of rules-based markets, the country has been the destination of choice for international investment capital.
It is an open secret that America is today the world's number one debtor-nation. One of the greatest achievements of the Clinton Presidency was to have eliminated the budget deficit. When the Republicans took over, the notion of balanced budgets was cast out through the window. It was further aggravated by military adventures in Afghanistan and Iraq that cost an astonishing US$1 billion daily in taxpayers' money. And we all know that those adventures have more to do with advancing the interests of oil sharks and the military-industrial complex than about fighting terrorism or spreading the ideals of democratic government.
The Bush administration has cornered itself into a classic quandary: if they remain in Iraq, they would continue to attract the hatred of the Arabs and the Islamic world while continuing to waste their national resources; if they leave, they would lose face and Iraq would most likely descend into chaos. In thus overstretching herself, the American Imperium has squandered its international goodwill whilst impoverishing its people at the same time.
To be sure, America still leads the world in high technology and innovation. But it is also a nation of spendthrifts, with a consumerist prodigality that inspires no one. Today, Asian countries hold U.S. treasury bills in excess of the magnitude of US$1 trillion. If those countries were suddenly to seek redemption of those assets, the United States economy would automatically be bankrupted. Indeed, super-investor Warren Buffett has predicted that the net ownership of American assets by foreigners would reach a staggering US$11 trillion in 2015, by which time, according to him, the country would become a nation of 'sharecroppers'.
One would have to agree with IMF Managing Director Dominique Strauss-Kahn's warning that the financial crisis is likely to portend a major slowdown in the world economy for much of the coming year. On his part, OECD secretary-general Angel Gurria believes there is a likelihood of a contagion effect, with the prospects of more banks collapsing and many more falling into 'intensive care'. The collapse of financial institutions will spread collateral damage to related industrial sectors, with the prospects of reduced output and the loss of millions of jobs.
For us in Nigeria, the current crisis could not have come at a worse time, especially when we have been facing a capital market meltdown of our own for some months now. It goes without saying that the current crisis calls for the highest qualities of prudence and economic statecraft. Whilst I welcome the effort by my former colleagues in the Central Bank in responding so robustly through the Monetary Policy Committee, it is important to point out that our own stock market crisis has more to do with internal institutional defects than from the turmoil that has erupted across the Atlantic.
Perhaps we also need to carefully consider the pros and cons of leaving our foreign reserves in dollar accounts. Part of the likely effects of the current crisis may be a massive shift of capital from North America into the Euroland area, a prospect that would further weaken the value of the dollar against other world currencies. The cognoscenti of high finance, including the great Warren Buffett, have long predicted that the almighty dollar will continue in its secular trend of decline over the coming decade.
Keeping all our reserves in dollars may be a great risk, as we may already have lost some 20% of our national wealth by sheer virtue of the dollar's decline over the last three years. For geopolitical reasons, countries such as Iran long ago took a decision to move their reserves into the Euro area. Any precipitate action in this regard would, of course, be untoward. But our monetary authorities must keep clear this possibility as an option in case the current turbulence transmutes into a cataclysm.
The months ahead will be difficult for the American people and indeed the world economy. Some have suggested that the current crisis will give Barack Obama the Presidency on a platter. Whilst this may be so, I believe that what America faces today transcends mere partisan politics. There is need for a new historic consensus to rebuild the country and to restore hope in a time of upheaval. We need no less than 'a world restored', as the young Kissinger once wrote as a doctoral student at Harvard.
But such restoration will not be possible without America retracing its moral bearings and forging a new coalition for the reconstruction of international economic order. Part of the greatness of American civilisation, if we could so call it, is its infinite capacity to reinvent itself and to adapt to new realities. In the new world that is upon us, America must eschew the arrogance of power and accept to share the responsibility for global leadership with the EU, China and India, and, shall we say, Nigeria, Brazil and other regional hegemons.
Francis Fukuyama's End of History thesis has turned out to be a rather premature verdict on the fate of the human condition in our time. The Promethean forces unleashed by technology and globalisation have created new dangers and tumults. In our age of complex interdependence, new fears and insecurities may resurrect the long-forgotten cloven hooves of history.
One of the paradoxes of our age is the emergence of an integrated world economy without the requisite multilateral governance institutions. A new Bretton Woods world is needed to address the challenges of global economic and political governance. More than ever before, we stand in need of vision and statesmanship; the kind of leadership that would effectively confront systemic challenges such as financial turbulence, global warming, the spread of infectious diseases and the nightmare of poverty which condemns half of the world's peoples to conditions akin to those of the dark Middle Ages.
It is in our collective self-interest to rally around America in her hour of crisis. Europe, Japan and China would have a major role to play in all this. When America does recover, as surely it would, her place and influence in the world would probably be a much reduced one. It is one of the iron laws of history that all empires sooner or later must come to an end. While some have crashed with a bang, others have come down with a whimper. To avoid inevitable chaos, statesmen must come together to hammer out a new framework for global economic and political governance.
The late Hedley Bull, Montague Burton Professor of International Relations at Oxford, once underlined the ethic of 'cosmopolitan enlightenment' as the moral foundation of a new international order. As an idealist without illusions, Bull was prescient enough to know that in an age of post-ideological politics, civilisation itself may be imperiled unless the nations come together to forge a new compact based on solidarity and hope.
Dr Mailafia is Chairman of the Centre for Policy and Economic Research, Abuja.
Copyright © 2008 Daily Trust. All rights reserved. Distributed by AllAfrica Global Media (allAfrica.com).
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