Leonard Pitts has an excellent editorial in The Miami Herald this morning. I share his despair that this presidential election cycle, the truth has simply vanished into the thin air of competing forms of media, especially the internet, absent standards of journalism.
But the mainstream media bears a significant part of the blame, failing in its role as watchdog and, thus, losing the public's confidence. This is not a blameless exercise.
Partly, fault belongs with publishers, compensated on the basis of stock options and profitability. The result, in the pages of The Miami Herald, for instance, was the absence of news stories as the last open space and farmland in South Dade was consumed by development and suburban sprawl. It is a story that could be retold of newspapers, a hundred thousand times across the nation's fastest growing regions.
Part of the blame belongs with Congress and the White House, that consistently sides with big business in the consolidation of the media by large corporate owners. You didn't need to be a scholar to anticipate how the dumbing down of media to compete on the basis of sound bites would have a rip-roaring, hurricane like effect on representative democracy.
What we have today, with respect to the truth and facts of the presidential campaign and candidates, is a Category 5 hurricane.
Yesterday, a friend advised me on this point: calm down, everything will be alright. But it is extraordinarily difficult to be calm as the US financial system and economy teeters on the brink of chaos. We will be telling our grandchildren and great-grandchildren about these events; and for the real costs, they well may curse us.
It becomes even more complicated to be calm, when it is clear that the origins of the financial crisis-- finally being reported by the mainstream press as the worst since the Great Depression-- began in Wall Street greed that meshed like a big gear to the smaller gears and ratios of fraudulent mortgage origination and the domination of local and state legislatures by the same developers and special interests who commandeered the advertising revenue of corporate media.
The government bailout announced today of the world's largest insurance company, AIG, is a sign post along the way to something unknown in the history of American democracy: all of us, Republican and Democrat, are in uncharted waters.
We are in uncharted waters because the operation of the US economy for the past decade has been under the influence of a virulent strain of neo-conservatism, articulated by Karl Rove to the New York Times writer Ron Suskind in 2002, "(“Without a Doubt”, October 17, 2004) “… that guys like me were ''in what we call the reality-based community,'' which he defined as people who ''believe that solutions emerge from your judicious study of discernible reality.'' I nodded and murmured something about enlightenment principles and empiricism. He cut me off. ''That's not the way the world really works anymore,'' he continued. ''We're an empire now, and when we act, we create our own reality. And while you're studying that reality -- judiciously, as you will -- we'll act again, creating other new realities, which you can study too, and that's how things will sort out. We're history's actors . . . and you, all of you, will be left to just study what we do.''
Today, Karl Rove and his acolytes are in charge of the "maverick" campaign of John McCain. The only way that McCain can win-- and win he might-- is by destroying fact that lead to this point in time: fact about Obama, fact about the economy, fact about the wars in Iraq and Afghanistan.
Today, the McCain campaign is centered on "reform". But let's look at a startingly clear example from the historical record of the housing market crisis, whose political origins began right here in Miami with the coalescing of forces-- of developers and bankers and lobbyists-- with the election of Jeb Bush in 1998.
That historical record is blisteringly hot on the front page of today's Miami Herald: "Bad brokers ran wild, state admits" (Sept 17, 2008). "In a stinging critique of the state's oversight of the mortgage industry, top Florida investigators found that state regulators failed to alert police agencies to crooked mortgage brokerages, ignored citizen complaints and allowed hundreds of people with criminal records to peddle loans".
"Investigators said the agency functioned without clear guidelines, making up rules as it went along and operating at times on wrong interpretations of the law. In some instances, the office was not complying with existing governing directives, the report states." ... "Today a quarter of all reported fraudulent loans across the country are for Florida properties." ... "The newspaper found that more than 10,000 people with criminal histories-- including bank robbers and land swindlers-- were able to peddle home loans across the state this decade." ... 'The Herald's investigation also found that scores of brokers were able to commit crimes while licensed--including mortgage fraud--and stay in the business."
But here is the key fact: "The two enforcement arms-- administrative and criminal-- rarely communicated... The Herald obtained agency e-mails that showed top leaders ... opposed the licensing of loan originators and, in one case, even removed a provision in a legal draft to license them."
Bluntly, the birthmark of neo-conservatism shows up everywhere in the administrations of the Tallahassee Bush and Washington Bush operations: that regulation hinders "the free market" and is the enemy of progress. When neoconservatives could not remove regulation outright, they resorted to the same technique across the public spectrum: separate the administrators of policy from the enforcement operations. It is a way of guaranteeing that regulation will fail: it is manifest in the state of Florida in the operation of the US Army Corps of Engineers, in the Florida Department of Environmental Regulation, and the Florida Department of Health. These are all agencies that share a common threat to the "free market": they incorporate in their missions a regulatory function that neoconservatives found despicable, abhorent, and detrimental to the improvement of society.
Governor Jeb Bush, in January 2003, infused with the enthusiasm of the housing boom that rocketed him back into governor's mansion, put it very clearly and in words that are especially haunting today: “There will be no greater tribute to our maturity as a society than if we can make these buildings around us empty of workers; as silent monuments to the time when government played a larger role than it deserved or could adequately fill.”
They were code words to an appreciative audience: hands-off the wheel, the train is driving itself according to the best principles of enlightened self-interest.
The set of circumstances that lead us to today-- our nation's premier financial institutions are essentially insolvent because safeguards were abandoned so that wealth could trickle down from Wall Street executive suites to the campaign coffers of the lowliest county commissioners doing the bidding of zoning land use and permitting and those functions of government where regulations have been deformed to suite private profit.
In its essential respects, although the nation's financial institutions are in tatters, these arrangements and the ratio of gearing is still intact and secure. They are funding the presidential campaign of Senator John McCain.
Let me tell you who knew about the fraud and corruption, long years before it manifested as gangrene on the public interest and a deadweight on taxpayers: "community activists" of the sort derided at the GOP convention. Community activists whose complaints against a system of development were under-reported, if reported at all, by the mainstream media. And, often in Miami's Hispanic media, those community activists were buried by news commentators bought and paid for by lobbyists, lawyers, and industry.
None of this happened by accident: Karl Rove has said it so, himself. And today, for the same people to be campaigning on "reform" who lead us into this economic crisis is beyond the pale. They cannot advocate today for tightening regulations because their entire record is based on dismantling regulations: from public health, to consumer safety, from clean air and clean water, to the economy and the conduct of US foreign policy-- our fate has been tied to radicals and extremists masquerading as conservatives.
I have many friends who are Republicans and straight-forward conservatives. They are as horrified as anyone about what has come to pass. When AIG and Bear Stearns and Lehman Brothers fall, when Countrywide and dozens of banks fail-- believe me, a lot of that vanished equity, a lot of that cratering net worth, belonged to Republicans.
We need to make a clean break with the lies and distortions that are putting our democracy at risk. It has to happen, now.
Type the rest of the post here
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September 16, 2008
Will Lehman's Fate be America's?
US Economy: Rudderless and Reeling from Direct Hits
By PAUL CRAIG ROBERTS
We were promised a “New Economy” of high-tech tradable services to take the place of the offshored manufacturing economy. Wondering what had become of the “New Economy,” Duke University’s Offshoring Research Network searched for it and located it offshore. Yes, the activities of the “New Economy” are also outsourced offshore.
Call centers, IT operations, back-office operations, and manufacturing have long been moved offshore. Now high-value-added proprietary activities such as research and development, engineering, product development, and analytical services are being sent offshore. All that’s left is finance, and it is crumbling before our eyes.
Independent broker-dealers are disappearing: Merrill Lynch, Bear Stearns, Lehman Brothers. These venerable institutions were too thinly capitalized for the risks that they took. Merrill Lynch is now part of the Bank of America, and Lehman Brothers is history.
Ill-advised financial deregulation led to financial concentration and not to more efficient markets. Independent local banks, which focused on financing local businesses, and Saving and Loan Associations, which knew the local housing market, have been replaced with large institutions that package unanalyzed risks and sell them worldwide.
Regulation over-reached. The pendulum swung. Deregulation became an ideology and a facilitator of greed.
Deregulating electric power gave us Enron.
Deregulating the airlines destroyed famous American brand names such as Pan Am, shrank the number of companies, and caused a decline in service. When airlines were regulated, they could afford standby equipment, and cancelled flights were rare. Today, the bottom line prohibits standby equipment, and mechanical problems result in cancelled flights. When economists calculated the benefits of deregulation, they left out many of its costs.
There are no longer any blue chip companies, which means that investing for retirement has become a crapshoot. People realize this; thus, the privatization of Social Security has no support.
If we look realistically at the US economy, we see that what is not moved offshore is being bailed out. Last year, the US Department of Energy was authorized to make $25 billion in loans to auto manufacturing firms and suppliers of automotive parts. Last week the Secretary of the Treasury took $5 trillion dollars in Fannie Mae and Freddie Mac home mortgages under its wing.
The Congressional Budget Office says this action by the Treasury means “that the operations of Fannie Mae and Freddie Mac should be directly incorporated into the federal budget.” http://cboblog.cbo.gov/ Their revenues would be treated as federal revenues, and their expenditures as federal expenditures. If the former were greater than the latter, there would be no reason for the takeover.
The open question is: what do these new liabilities do to the Treasury’s own credit standing?
For now, this question is submerged. The traditional practice of fleeing to the US dollar and US Treasury bonds during periods of financial stress and uncertainty has boosted the dollar and kept interest rates low. But sooner or later the large US budget deficit, worsened by recession and bailouts, and the large trade deficit, which requires constant recycling of dollars held by foreigners into US financial and real assets, will result in renewed effort on the part of foreigners to lighten their dollar holdings.
When this time arrives, US interest rates will have to rise in order for the government to be able to continue to rely on foreigners to recycle the dollars acquired in trade to finance the US government’s annual budget deficit.
The current financial problems have pushed into the background the larger problems of the US budget and trade deficits. Goods and services for American markets that US corporations outsource offshore return as imports, which widen the US trade deficit. Moving production offshore reduces US GDP and employment and increases foreign GDP and employment. Moving production offshore reduces the export capacity of the US economy while raising the import bill.
Therefore, how is the trade deficit to be closed? One way is through the dollar’s loss in exchange value, which would reduce American consumers’ real incomes and leave them too poor to purchase the offshored goods and services.
How is the budget deficit to be closed when jobs are disappearing and GDP (tax base) is being relocated offshore?
Not by higher taxes. Higher taxes are problematic for a recessionary economy in which unemployment, properly measured, is already in double digits (www.shadowstats.com).
Some people have speculated that the budget deficit will be closed by dismantling entitlement programs such as Medicare. However, considering the cost of medical insurance, this would be catastrophic for tens of millions of older Americans.
The more likely avenue will be a raid on private pensions. The Clinton administration’s appointee, Alicia Munnell, as Assistant Secretary of the Treasury for Economic Policy argued that private pensions should face a capital levy to make up for the fact that their accumulation was tax free. I expect that the federal government, faced with its own bankruptcy, will resurrect this argument, as it will be preferable to printing money like a banana republic or Weimar Germany.
In the 21st century, the US economy has been kept going by debt expansion, not by real income growth. Economists have hyped US productivity growth, but there is no sign that increased productivity has raised family incomes, an indication that there is a problem with the productivity statistics. With consumers overloaded with debt and the value of their most important asset--housing--falling, the American consumer will not be leading a recovery.
A country that had intelligent leaders would recognize its dire straits, stop its gratuitous wars, and slash its massive military budget, which exceeds that of the rest of the world combined. But a country whose foreign policy goal is world hegemony will continue on the path to destruction until the rest of the world ceases to finance its existence.
Most Americans, including the presidential candidates and the media, are unaware that the US government today, now at this minute, is unable to finance its day-to-day operations and must rely on foreigners to purchase its bonds. The government pays the interest to foreigners by selling more bonds, and when the bonds come due, the government redeems the bonds by selling new bonds. The day the foreigners do not buy is the day the American people and their government are brought to reality.
This is not the financial position of a superpower.
Will what happened to Lehman Brothers today be America’s fate tomorrow?
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
Gimleteye writes:
It has been amusing to read some of the comments by the neo-con trolls of this blog, trying to attack my views as "leftist". Here's the latest post from NYU economist Nouriel Roubini, for illumination:
The transformation of the USA into the USSRA (United Socialist State Republic of America) continues at full speed with the nationalization of AIG
Sep 17, 2008
Last week we argued that, with the nationalization of Fannie and Freddie, comrades Bush, Paulson and Bernanke had started transforming the USA into the USSRA (United Socialist State Republic of America). This transformation of the USA into a country where there is socialism for the rich, the well connected and Wall Street (i.e. where profits are privatized and losses are socialized) continues today with the nationalization of AIG.
This latest action on AIG follows a variety of many other policy actions that imply a massive - and often flawed - government intervention in the financial markets and the economy: the bailout of the Bear Stearns creditors; the bailout of Fannie and Freddie; the use of the Fed balance sheet (hundreds of billions of safe US Treasuries swapped for junk toxic illiquid private securities); the use of the other GSEs (the Federal Home Loan Bank system) to provide hundreds of billions of dollars of “liquidity” to distressed, illiquid and insolvent mortgage lenders; the use of the SEC to manipulate the stock market (restrictions on short sales); the use of the US Treasury to manipulate the mortgage market (Treasury will now for the first time outright buy agency MBS to manipulate and prop up this market); the creation of a whole host of new bailout facilities (TAF, TSLF, PDCF) to prop and rescue banks and, for the first time since the Great Depression, to bail out non-bank financial institutions; the recent extension of the collateral available for the TSLF and PDCF facilities to a much wider range of toxic securities including equities and thus allowing the Fed to effectively manipulate even the stock market; and a whole range of other executive and legislative actions (including the recent bill to provide a public guarantee to mortgages for banks willing to reduce their face value).
So, with the nationalization today of AIG, comrades Bush, Paulson and Bernanke welcome you again to the USSRA. At least in the case of Fannie and Freddie these two institutions were semi-public to begin with as they were Government Sponsored Enterprises (GSEs). Now we get instead the first pure case of a fully private company, actually the largest insurance company in the world, being nationalized. So the US government is now the largerst insurance company in the world. So the transformation of the USA into the USSRA goes a step further...
Read more here:
http://www.rgemonitor.com/roubini-monitor/253625/the_transformation_of_the_usa_into_the_ussra_united_socialist_state_republic_of_america_continues__at_full_speed_with_the_nationalization_of_aig
I think I will move to China.
i agree with pretty much everything said here, and am surprised to see the WSJ printing something like that. interesting times, indeed.
but i want to point something out--this is partly our collective fault, too. if people put a quarter of the energy they put into things like analyzing sports into understanding how their government really functions, we'd be a long way towards having a semi-literate electorate.
we're all on this little blue globe together, and pretending otherwise is just making it worse.
a concrete proposal? pick one issue, just one, and instead of reading the sports or lifestyle pages that day, try to work it out.
nb: this doesn't apply to most of the readers of this blog but it does apply to the trolls here.
Gimleteye writes: the economists don't understand how local corruption of the public interest through land use, zoning, and permitting were the small gears sync'd to the larger gears of state legislatures and well-heeled lobbyists. They get most of it right, but not all of it. The call for regulations should begin at the level that protects communities. There should be a broad understanding that the design and layout of communities, on the ground, both feeds and is fed by financial arrangements that need to be closely supervised and that the market must have constraints to prevent the thievery that is occurring on a gargantuan scale.
Editor's note: Joseph E. Stiglitz, professor at Columbia University, was awarded the Nobel Prize in Economics in 2001 for his work on the economics of information and was on the climate change panel that shared the Nobel Peace Prize in 2008. Stiglitz, a supporter of Barack Obama, was a member and later chairman of the Council of Economic Advisers during the Clinton administration before joining the World Bank as chief economist and senior vice president. He is the co-author with Linda Bilmes of the "Three Trillion Dollar War: The True Costs of the Iraq Conflict."
Economist Joseph Stiglitz says federal regulators and executives helped create the Wall Street crisis.
NEW YORK (CNN) -- Many seem taken aback by the depth and severity of the current financial turmoil. I was among several economists who saw it coming and warned about the risks.
There is ample blame to be shared; but the purpose of parsing out blame is to figure out how to make a recurrence less likely.
President Bush famously said, a little while ago, that the problem is simple: Too many houses were built. Yes, but the answer is too simplistic: Why did that happen?
One can say the Fed failed twice, both as a regulator and in the conduct of monetary policy. Its flood of liquidity (money made available to borrow at low interest rates) and lax regulations led to a housing bubble. When the bubble broke, the excessively leveraged loans made on the basis of overvalued assets went sour.
For all the new-fangled financial instruments, this was just another one of those financial crises based on excess leverage, or borrowing, and a pyramid scheme.
The new "innovations" simply hid the extent of systemic leverage and made the risks less transparent; it is these innovations that have made this collapse so much more dramatic than earlier financial crises. But one needs to push further: Why did the Fed fail?
First, key regulators like Alan Greenspan didn't really believe in regulation; when the excesses of the financial system were noted, they called for self-regulation -- an oxymoron.
Second, the macro-economy was in bad shape with the collapse of the tech bubble. The tax cut of 2001 was not designed to stimulate the economy but to give a largesse to the wealthy -- the group that had been doing so well over the last quarter-century.
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The coup d'grace was the Iraq War, which contributed to soaring oil prices. Money that used to be spent on American goods now got diverted abroad. The Fed took seriously its responsibility to keep the economy going.
It did this by replacing the tech bubble with a new bubble, a housing bubble. Household savings plummeted to zero, to the lowest level since the Great Depression. It managed to sustain the economy, but the way it did it was shortsighted: America was living on borrowed money and borrowed time.
Finally, at the center of blame must be the financial institutions themselves. They -- and even more their executives -- had incentives that were not well aligned with the needs of our economy and our society.
They were amply rewarded, presumably for managing risk and allocating capital, which was supposed to improve the efficiency of the economy so much that it justified their generous compensation. But they misallocated capital; they mismanaged risk -- they created risk.
They did what their incentive structures were designed to do: focusing on short-term profits and encouraging excessive risk-taking.
This is not the first crisis in our financial system, not the first time that those who believe in free and unregulated markets have come running to the government for bail-outs. There is a pattern here, one that suggests deep systemic problems -- and a variety of solutions:
1. We need first to correct incentives for executives, reducing the scope for conflicts of interest and improving shareholder information about dilution in share value as a result of stock options. We should mitigate the incentives for excessive risk-taking and the short-term focus that has so long prevailed, for instance, by requiring bonuses to be paid on the basis of, say, five-year returns, rather than annual returns.
2. Secondly, we need to create a financial product safety commission, to make sure that products bought and sold by banks, pension funds, etc. are safe for "human consumption." Consenting adults should be given great freedom to do whatever they want, but that does not mean they should gamble with other people's money. Some may worry that this may stifle innovation. But that may be a good thing considering the kind of innovation we had -- attempting to subvert accounting and regulations. What we need is more innovation addressing the needs of ordinary Americans, so they can stay in their homes when economic conditions change.
3. We need to create a financial systems stability commission to take an overview of the entire financial system, recognizing the interrelations among the various parts, and to prevent the excessive systemic leveraging that we have just experienced.
4. We need to impose other regulations to improve the safety and soundness of our financial system, such as "speed bumps" to limit borrowing. Historically, rapid expansion of lending has been responsible for a large fraction of crises and this crisis is no exception.
5. We need better consumer protection laws, including laws that prevent predatory lending.
6. We need better competition laws. The financial institutions have been able to prey on consumers through credit cards partly because of the absence of competition. But even more importantly, we should not be in situations where a firm is "too big to fail." If it is that big, it should be broken up.
These reforms will not guarantee that we will not have another crisis. The ingenuity of those in the financial markets is impressive. Eventually, they will figure out how to circumvent whatever regulations are imposed. But these reforms will make another crisis of this kind less likely, and, should it occur, make it less severe than it otherwise would be.
A few days ago the WSJ thought is was as bad as 1929 and said so.
Obama will be much the same, and given his hedge fund supporters he is already showing a willingness to protect them.
Now is the time to nationalize corporations, esp health insurancers in the people's interest when they financialy weak and politically needy. That is how the Wagner Act got past, in the middle of the night and that is the only way we are going to reform our health care system by draging it out of the Victorian age.
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