View Full Version : 'The Economy Fell off the Cliff' - George Soros interview
12-14-2008, 11:58 AM
SPIEGEL INTERVIEW WITH GEORGE SOROS
'The Economy Fell off the Cliff'
George Soros, 78, has made billions as a hedge-fund manager and investor. SPIEGEL spoke with him about the current financial crisis, how he expects President-elect Barack Obama to respond to the economic disaster and the responsibilities borne by speculators.
SPIEGEL: Mr. Soros, in spite of massive interventions by governments and federal banks the financial crisis is getting worse. The stock markets are in free fall, millions of people could lose their jobs. More and more companies are in trouble, from General Motors in Detroit to BASF in Ludwigshafen. Have you ever seen anything like it?
Soros: Never. I find the present situation dramatic and overwhelming. In my latest book “The New Paradigm for Financial Markets: The Credit Crisis of 2008” I predicted the worst financial crisis since the 1930s. But to tell you the truth: I did not actually anticipate that it would get as bad as it did. It has gone beyond my wildest imagination.
SPIEGEL: What are your fears for the coming months?
Soros: I think that the dark comes before dawn. The financial markets are under great pressure because of the lack of leadership during the transition period. In the next two months, the markets will experience maximum pressure. Then we will see some initiatives from the Obama administration. How long the crisis lasts will depend on the success of these measures.
SPIEGEL: The markets don't seem to have much confidence in the new president -- in stark contrast to the enthusiasm in the population. Since Election Day on November 4, stocks have fallen by almost 20 percent.
Soros: I have great hopes for Barack Obama. But at the time of the election the financial community had not yet fully grasped the magnitude of the economic decline. They did not anticipate that the default of Lehman Brothers would cause cardiac arrest in the markets. The economy fell off the cliff, you begin to see mangled bodies lying at the bottom.
SPIEGEL: Was it a policy mistake to let Lehman Brothers go bankrupt?
Soros: It was a fatal mistake. I would have never expected that the authorities let such a big investment bank go.
SPIEGEL: Will there be more victims?
Soros: Possibly. CitiBank, one of the world’s largest banks, is currently at the center of attention (eds. note: The $300 billion US government plan to stabilize CitiBank had not been approved by the time of this interview). There are some other bodies lined up for potential trouble. The situation is very similar to the 1930s -- but it is going to unfold differently. We have learned not to allow the financial market to collapse. We will spend all the money in the world to prevent that from happening.
SPIEGEL: Obama is supposed to save the banks, bail out the auto industry and boost the economy in general. Can a single person ever live up to such high expectations?
Soros: Perhaps not, but the problems can be handled much better than they have been by the current administration.
SPIEGEL: Currently, Treasury Secretary Henry Paulson is in charge of the bail-out. What are your misgivings about his performance?
Soros: He reacted to problems as they arose; he had no capacity to anticipate them. When he allowed Lehman Brothers to fail, the breakdown of the financial markets found him totally unprepared. He went to Congress not with a plan but with a plan to develop a plan. And the plan he had in mind -- to purchase toxic assets -- was ill-conceived. Injecting equity capital into the banking system made much more sense and he eventually came to see that, but again he went about it in the wrong way. Then he stopped doing anything, leaving a vacuum in leadership, and the markets collapsed.
SPIEGEL: What are your expectations for the next Secretary of the Treasury?
Soros: I think we need a large stimulus package which will provide funds for state and local government to maintain their budgets -- because they are not allowed by the constitution to run a deficit. For such a program to be successful, the federal government would need to provide hundreds of billions of dollars. In addition, another infrastructure program is necessary. In total, the cost would be in the 300 to 600 billion dollar range.
SPIEGEL: In addition to the $700 billion bailout for the financial industry?
Soros: Definitely. I think this is a great opportunity to finally deal with global warming and energy dependence. The US needs a cap and trade system with auctioning of licenses for emissions rights. I would use the revenues from these auctions to launch a new, environmentally friendly energy policy. That would be yet another federal program that could help us to overcome the current stagnation.
SPIEGEL: Your proposal would be dismissed on Wall Street as "big government." Republicans might call it European-style "socialism."
Soros: That is exactly what we need now. I am against market fundamentalism. I think this propaganda that government involvement is always bad has been very successful -- but also very harmful to our society.
SPIEGEL: Would you advise the new president to say that publicly?
Soros: He has already spoken about changing the political discourse. I think it is better to have a government that wants to provide good government than a government that doesn't believe in government.
SPIEGEL: However, even a strong government can't perform miracles. It needs money from the taxpayers. There is a lot of talk in the US about the new role of the state and the government -- but no one seems to be willing to pay for it. Obama has announced to cut taxes for 95 percent of working Americans. Isn't that a contradiction?
Soros: At times of recession, running a budget deficit is highly desirable. Once the economy begins to recover, you have to balance the budget. In 2010, the Bush tax cuts will expire and we should not extend them. But we will also need additional revenues. Should the government not receive them, we will all get punished with higher interest rates.
SPIEGEL: Everybody says we have to regulate the financial markets more. That sounds good, but is it realistic? Can one really tame the markets?
Soros: Between regulators and market participants, there is a cat and mouse game going on which has been going on indefinitely…
SPIEGEL: …where often the mice, the market participants, have the upper hand.
Soros: Because they got the extra boost from market fundamentalists. But the outcome was disastrous, as we see now. I think it is better to have a cat and mouse game where the cat has the upper hand than a cat and mouse game where the mice are ruling. Because the latter means that the market participants are given free range. That was actually the big misconception of our national hero Ronald Reagan, who always talked about the magic of the market.
SPIEGEL: So you support stricter regulation and more efficient control of the markets?
Soros: Indeed. However, you have to recognize that regulations will never be completely successful and they will always be full of holes. You must constantly be ready to fill new holes. Actually regulation should be kept to a minimum, but there has to be some cooperation between market participants and authorities -- as was the case in the early postwar years. The Bank of England was a very successful regulator by cooperating with market participants. This cooperative spirit was broken by the market fundamentalists.
SPIEGEL: Not in Germany. We have many semi-private banks that largely dominate the market. Politicians serve on their supervisory boards. But they are in particularly bad shape.
Soros: These public-private partnerships are very, very dangerous. The most rotten part of the financial system in the US consisted of the government sponsored entities, Fannie Mae and Freddie Mac. They really kicked off this crisis. The state should set the rules and enforce them -- but not become involved as a market player.
SPIEGEL: You are one of the most powerful speculators in the world and have been heavily involved in your fund's activities over the past few months. How do you cope with the dilemma of being a speculator -- who often profits from a business transaction that might hurt society?
Soros: This is a false issue. I always play by the rules. At the same time, I try to improve the rules. In so doing I often suggest changes from which I would not personally benefit. I have the common interest at heart, not my personal interest.
SPIEGEL: But the perception many people have of you and your colleagues is very different. They blame speculators for the current financial crisis -- is that the reason for your decision to give billions of dollars to charity and your foundation?
SPIEGEL: Isn't there some truth to it?
Soros: No. It is a total misconception. The big events in which I participated would have occurred whether I took part in them or not. For example, whether I had been born or not, the British pound would have been forced out of the European Exchange Rate Mechanism in 1992.
SPIEGEL: But are you really such a little wheel as you claim? If you bet against grain, rice or oil, many other investors follow suit. That could hurt consumers who can no longer afford essential foodstuffs or energy. You can definitely influence markets.
Soros: Since I became a public figure, the man who allegedly "broke the Bank of England,” I have been cast as a financial guru who can influence markets. That has actually created more moral problems for me. It has forced me to impose certain self-constraints in my statements -- exactly because I can move markets, like the investor Warren Buffett. Therefore, we try to act very responsibly.
SPIEGEL: Does the world need hedge funds?
Soros: I think that hedge funds are a very efficient way of managing money. But I clearly see the risks. Hedge funds use credit and credit is a source of instability. My conclusion is that transactions involving credit should be regulated.
SPIEGEL: Now you sound like a person who runs to a police station and tells the officers: "Please, handcuff me -- I am dangerous!"
Soros: Not really. I think there needs to be appropriate regulation of the financial markets, but it is impossible to prevent speculation. There is very little difference between speculation and investment. The only difference is basically that investments are successful speculations because if you successfully anticipate the future you make a speculative profit. I don't have a bad conscience at all. I am very proud to be a successful speculator.
SPIEGEL: Average citizens are not much impressed. They no longer trust Wall Street.
Soros: That mistrust is well placed. Those very prestigious institutions on Wall Street pursue their self-interest, and that is not identical to the common interest -- which needs to be protected.
SPIEGEL: Many people also no longer have confidence in the bailout measures taken by the Bush administration. Some critics claim that Treasury Secretary Henry Paulson is simply trying to bail out his former colleagues on Wall Street. Paulson was once the CEO of Goldman Sachs.
Soros: That may be going too far. But it is true that Paulson sees the problems too much from the perspective of a Wall Street banker.
SPIEGEL: He is also reluctant to push for salary caps for CEOs or bonus restrictions at banks receiving government aid.
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Soros: Giving government aid to a bank basically transforms it into a utility. The huge salaries in this sector are only a symptom of a more profound misalignment. The profitability of the finance industry has been excessive. For a while, 35 percent of all corporate profits in the UK and the US came from the financial sector. That was absurd.
SPIEGEL: We talked a lot about the losers of the current financial disaster. Do you also see winners?
Soros: China could easily emerge as the great winner if the Chinese leaders handle the situation well. On the other hand, they could also turn out to be the biggest losers if they handle it poorly. If the management turns out be wrong, this could lead to a political crisis in China. It's still too early to declare winners and losers.
SPIEGEL: Could Obama be the first "post-American president" -- because his country loses economic force and "soft power"?
Soros: If Obama is wise, he will find common ground with China to solve this crisis. If he wants to do it alone, we will go into a worldwide depression because America is not in a position by itself to clean up the mess it created.
SPIEGEL: Mr. Soros, thank you very much for this conversation.
Interview conducted by Mathias Müller von Blumencron, Gregor Peter Schmitz and Gabor Steingart
12-14-2008, 12:28 PM
INTERVIEW WITH BAYER CEO WERNER WENNING
'The Pursuit of Profit Is an Innate Human Trait'
In an interview with SPIEGEL, Werner Wenning, the CEO of German pharmaceutical giant Bayer, discusses the speculative excesses in the financial markets, the disastrous emphasis on short-term profit and the appropriateness of his multimillion-euro salary.
SPIEGEL: Mr. Wenning, speculative excesses have brought the financial markets to the brink of disaster. The industrialized countries are going into recession, and the reputation of executives is at an all-time low. Is capitalism in a crisis?
Werner Wenning: I'd say that's probably a bit exaggerated. In 1991, when I worked for the Treuhand agency (the government agency that privatized the former East German state-owned enterprises after the Wall came down) for a year, I realized just how inhuman socialism treated citizens. I am not familiar with any better model than the social market economy. It is the most effective system when it comes to meeting society's needs. Still, we should return to its principles.
SPIEGEL: What has been forgotten?
Wenning: We have to rediscover a balanced relationship between the interests of the capital markets and the interests of workers. The capital market seeks to achieve the highest possible return on invested assets. The worker, on the other hand, is interested in job security and fair compensation.
SPIEGEL: Can the two really be reconciled that easily?
Wenning: Those of us working in industry bear little of the blame. We have become more competitive and have done exceedingly well globally. Workers benefit from this; at least at Bayer, they share in the profits. In the financial sector, on the other hand, a number of things went wrong. For a long time, money was too cheap, and it was used irresponsibly. Banks used mathematical methods to develop products that bore no relation to the real economy. They established special-purpose entities that never appeared on any balance sheets. But what was lacking most of all was an agency tasked with supervising the market players.
SPIEGEL: You distinguish between the financial economy and the real economy. But isn't there a common cause behind the crisis -- namely, the fact that managers were too intent on maximizing
Wenning: As I see it, it's too simplistic to blame the current crisis on the supposed greed of executives. Look at the range of groups that invested in risky products: It starts with church organizations and ends with hedge funds. I believe that the pursuit of profit is an innate human trait. In fact, a little bit of "healthy" greed might also be useful and natural. It goads us and forces us to advance.
SPIEGEL: But the financial crisis is about the fatal consequences of excessive greed and about the expectation of achieving higher and higher returns within shorter and shorter periods of time. Is it even possible for an executive to escape the requirements of a form of capitalism that has in recent years become ever more dependent on the financial markets?
Wenning: I represent a company that is about to turn 146 years old. We are used to looking beyond the present. We spend research money today for products that will enter the market 10 years down the road. That's why sustainability is our top priority and is clearly more important than maximizing our short-term profits.
SPIEGEL: But you have to submit quarterly figures, and you are dependent on the capital markets.
Wenning: But the question is the degree to which you allow yourself to become dependent. We spend €2.8 billion ($3.6 billion) a year on research and development as well as €1.7 billion ($2.2 billion) on tangible assets and investments. That makes a total of €4.5 billion ($5.8 billion) in investments for the future. One could optimize a few things in the short term -- and destroy many things for the long term. That cannot be our business model.
SPIEGEL: In a sense, you embody sustainability yourself. You come from Leverkusen-Opladen (where Bayer is headquartered) and have worked at Bayer for 42 years. The new generation of managers, on the other hand, has studied at elite universities across the globe, are completely geared toward profit, and often only stay with a company for a few years. Do young high-level executives experience culture shock at Bayer?
Wenning: I hope not. But the integration of new employees is an ongoing issue for us. This was especially the case when we reorganized the group more than five years ago. Today, half of our employees have been with us for less than five years. We must make it clear to our new employees what makes Bayer what it is, namely, that the company can only be successful if it does not pay exclusive attention to short-term profit data and if it also pursues long-term goals.
SPIEGEL: Do you even have the freedom to act in a sustainable manner? These days, you aren't dealing with owners in the classic sense any more. Instead, one is faced with either hedge funds that invest in companies merely to break them apart or with gamblers out to make a quick buck.
Wenning: Of course, a hedge fund or two number among our shareholders. And, from quarter to quarter, we also have to prove that we create value. But all of that occurs as part of a long-term strategy, and it's my impression that the majority of our shareholders understand this. One has to come up with arguments to counteract the pressure for constant change that's coming from the capital market. For example, a few years ago, they were saying that farming had no future. But we continued to pursue this business sector, and now that strategy is paying off.
SPIEGEL: How would you feel if a state-run fund of a foreign country started showing an interest in Bayer?
Wenning: The German economy needs investment from abroad -- as long as it is not politically motivated. We welcome anyone who supports the long-term development of our company.
SPIEGEL: Is the stock price even the right measure of a company's success?
Wenning: It's just one measure among many. I am convinced that part of the success of a company is the extent to which its employees profit from its business. People must feel that they are being treated fairly and that their work is worthwhile. This year, the average Bayer employee has received roughly one month's salary in the form of an annual bonus.
SPIEGEL: But your salary is tied to the stock price, not to employee satisfaction.
Wenning: Wrong! My salary for 2007 was €3.3 million ($4.2 million), of which €1.1 million ($1.4 million) was fixed. The variable component is not tied to the stock price but, rather, to annual profits. It is computed based on the same criteria as for someone working on the assembly line. If Bayer does well, he or she earns more money -- and I do, too.
SPIEGEL: Are you worth €3.3 million?
Wenning: That's an assessment I will leave up to others -- to the supervisory board and the shareholders.
SPIEGEL: Do you think that the German president's appeal to business executives to exercise moderation is justified?
Wenning: I support the effort. We have to exercise moderation, too, as there have certainly been unacceptable excesses. However, I also believe that work must be worth the effort.
SPIEGEL: But what is the right proportion? You earn about 50 times more than the average employee whose wages are regulated by collective bargaining agreements. Is that fair?
Wenning: The key criterion for me is that we have a transparent salary structure with clear criteria that everyone can understand. Our compensation model is widely praised for this very reason. The issue is not whether I earn 50 times as much or whether I earn more or less than that. It's really irrelevant. At any rate, I have not heard any criticism of my compensation in meetings with shareholders or employees.
SPIEGEL: Perhaps they have just gotten used to the lunacy.
Wenning: Oh, come on! I don't see why this should be considered lunacy when everyone shares in the profits. The employees have their share, and management has its share.
SPIEGEL: Why has the reputation of executives suffered so much recently?
Wenning: There have been isolated cases…
SPIEGEL: … like that of former Deutsche Post CEO Klaus Zumwinkel, who has been accused of tax evasion, and former Siemens CEO Heinrich von Pierer, who failed to put a stop to a bribery system.
Wenning: These are accusations that should not be levelled across the board. Still, I do think that we need to have a discussion about values. We have to put the focus back on people. And we have to explain what we do and why we do it. We have to be transparent; these are important requirements.
SPIEGEL: This certainly also applies to overcoming the global financial crisis that we're now in. Should the government play a significantly larger role in the process?
Wenning: We should be very careful about that. The government has the monopoly on imposing order. It sets the rules. It must find a suitable regulatory framework that builds on lessons learned over the last 12 months. For instance, it has to ensure that financial transactions take place in regulated markets rather than in the Cayman Islands. At the same time, we really shouldn't overestimate the abilities of government. It is certainly not capable of managing financial institutions more effectively. And it cannot succumb to the temptation to intervene in business models in a significant way by means of regulation.
SPIEGEL: Has the political establishment properly reacted to the financial crisis so far?
Wenning: What the chancellor and the finance minister did was important and fundamental. The political establishment has demonstrated that it is certainly capable of coping with crises.
SPIEGEL: Almost every day, the two are forced to answer questions in public. In the meantime, executives and business groups have been avoiding the limelight. Why are we hearing so little from them?
Wenning: Well, here I am talking to you. But I would also like to see business groups articulating themselves in a stronger way.
SPIEGEL: Would you expect some bankers to apologize or even admit to having made mistakes?
Wenning: I don't want to judge the behavior of others. It certainly wouldn't be a bad idea for everyone to think about how this situation came about and where improvements could be made. That would be good for everyone.
SPIEGEL: What lessons should we draw from the crisis?
Wenning: We need different incentive systems that are tied to substantive success. We also need stronger regulations because global markets need global regulation. And we should be careful not to use the protective shield over the banking sector to preserve structures like the state-owned Landesbank sector. Instead, we should take advantage of the opportunity to break it up.
Interview conducted by Alexander Jung and Armin Mahler
[replying to the Soros interview, I haven't read the other interview yet]
so, the markets just collapsed.
Randomly. Unpredicted. Unprecedented. Suddenly. Dramatic. Overwhelmingly.
And they teared the economy down too.
The mistakes were just psychologically important, no economical mistakes.
> At times of recession, running a budget deficit is highly desirable.
> Once the economy begins to recover, you have to balance the budget
and if not USA (and most other countries) are bankrupt
> China could easily emerge as the great winner
> America is not in a position by itself to clean up the mess it created.
no word about loss of trust, reduced bank lendings, increase of
prices of CDSs
12-14-2008, 12:56 PM
SPIEGEL INTERVIEW WITH GEORGE SOROS
'The Economy Fell off the Cliff'
George Soros is not someone from whom I would trust to provide an unbiased analysis on much of anything. This is a good reason why: http://www.aim.org/special-report/the-hidden-soros-agenda-drugs-money-the-media-and-political-power/
12-14-2008, 01:05 PM
George Soros is not someone from whom I would trust to provide an unbiased analysis on much of anything.
I agree. Soros tends to be a dramaqueen and is driven by a political agenda. There are people in Economics&Finance who unfortunately cannot be trusted to analyze finance, including Soros and Paul Krugman.
There are plenty of people who study the economy who are smart and can give more realistic assessments of the economy -- Larry Kudlow, Tom Friedman, Alan Greenspan come to mind.
12-14-2008, 01:05 PM
I don't care what an individual does - no one can do anything for society that is worth billions. He is part of the problem (even if he is using the system as it was designed).
12-14-2008, 01:33 PM
I agree. Soros tends to be a dramaqueen and is driven by a political agenda.
Soros is a cheerleader of the financial institutions as they influenced Alan Greenspan to start the deregulation of the US economic investment markets to accelerate the derivaitive market.
12-14-2008, 03:57 PM
Where now for capitalism?
State capitalist institutions [are] designed in large measure to socialise cost and risk and privatize profit, without a public voice
Stock markets are plunging and investment banks collapsing. What does this mean for the future of capitalism? Do we need more regulation or, indeed, less? Can bank mergers save the day? Leading economists, thinkers and analysts give their views.
Noam Chomsky is a philosopher, political theorist and professor of linguistics at the Massachusetts Institute of Technology.
Markets have inherent and well-known inefficiencies. One factor is failure to calculate the costs to those who do not participate in transactions. These "externalities" can be huge. That is particularly true for financial institutions.
Their task is to take risks, calculating potential costs for themselves. But they do not take into account the consequences of their losses for the economy as a whole.
Hence the financial market "underprices risk" and is "systematically inefficient," as John Eatwell and Lance Taylor wrote a decade ago, warning of the extreme dangers of financial liberalization and reviewing the substantial costs already incurred - and also proposing solutions, which have been ignored.
The threat became more severe when the Clinton administration repealed the Glass-Steagall act of 1933, thus freeing financial institutions "to innovate in the new economy," in Clinton's words - and also "to self-destruct, taking down with them the general economy and international confidence in the US banking system," financial analyst Nomi Prins adds.
The unprecedented intervention of the Fed may be justified or not in narrow terms, but it reveals, once again, the profoundly undemocratic character of state capitalist institutions, designed in large measure to socialise cost and risk and privatize profit, without a public voice.
That is, of course, not limited to financial markets. The advanced economy as a whole relies heavily on the dynamic state sector, with much the same consequences with regard to risk, cost, profit, and decisions, crucial features of the economy and political system.
Tony Benn is a former Labour member of parliament and cabinet minister
This economic crisis is a global crisis. It is more serious than the crisis in 1929.
In this climate, people get very frightened and, when they are frightened, their fear can be exploited just like Hitler did in the 1930s to get to power.
It's the end of an era when we were told to borrow and spend and keep government out.
Many people will now lose their jobs, lose their houses, lose their livelihoods.
They will say there seems to be plenty of money for war. We are bombing in Iraq and we are bombing in Afghanistan and, if we can do that, why don't we have enough money to meet our own need?
There will be a big demand for a major policy change. This is a failure of a system where we relied on the markets and excluded government. And the markets failed.
Peter Jay is an economist, Bank of England non-executive director and former BBC economics editor
Outside New Delhi, in India, stands a piece of wasteland, frequented by mangy dogs and feral urchins, in which are to be found the collected statuary of the British Raj - derelict kings, queens and viceroys staring sightlessly into the surrounding scrub.
No better metaphor could quickly be found for the apparent fate of modern-day finance capitalism on the morrow of the great crash of 2008.
Like the poet Shelley's Ozymandias, king of kings, it shrieks: "Look on my works, ye Mighty, and despair".
As the greatest names on Wall Street crash to the ground, destroyed by their own arrogance and folly as well as by the most hostile financial environment in almost 80 years, we must ask: Why are we so amazed? We who were supposed to be such experts? And why did we not predict it? At least not with urgency and conviction?
The truth is uncomfortable.
We had grown cynical of Marxist talk of the contradictions of capitalism because Marxism itself had, by the 1970s, so conspicuously failed - while capitalism thrived - that its acolytes were discredited.
Those of an older generation truly believed that some combination of Walter Bagehot and J M Keynes had made it impossible for the financial system to fail and for the macro-economy to plunge into depression.
Central banks would never again allow that to happen.
I remember in the 1950s arguing this vehemently with my friend, the late Paul Foot. I want now to say to his ghost I am no longer so sure; and I'm sorry for my dogmatism half a century ago.
For the younger generation, the 1930s seem a long time ago and crises since have all ended non-catastrophically. Complacency is the price of success.
But now we must face the real possibility that the mood swings of financial markets cannot, forever, be biased to optimism; that the higher they climb, the harder they will eventually fall and that this flaw in capitalism cannot be fixed - even by Alan Greenspan - because it is embedded in unchanging human psychology.
Prof Patrick Minford is an economist at Cardiff University, and was an informal adviser to Margaret Thatcher
In all the current financial train-wreck, voices are already being raised to demand huge increases in regulation and the "curbing of capitalist excess".
It needs to be remembered firstly that, already, massive regulation is in place across banking practices under the Basle Agreements.
The trouble has been that the banks avoided them by using "special investment vehicles" away from their balance sheets.
One necessary adjustment would be to simply ensure that, in future, this avoidance is prevented.
Secondly, investment banks - such as Lehman Brothers - are virtually not regulated at all and are certainly outside Basle.
However, these animals have had a blood-bath and are unlikely to behave similarly ever again.
We must not try to stop their successors finding a new business model within normal business rules.
Capitalism has a good record of dramatically raising the world's living standards over long periods of time.
Regulation of banking, which enjoys the privilege of access to "lender of last resort" support from the taxpayer, is necessary to protect the taxpayer from abuse.
But we need a vigorous and competitive banking and financial system - this is vital for growth and the availability of financial flexibility across all parts of society.
Any adjustments to the existing regulatory framework must keep this firmly in mind.
Dr Jon Danielsson is a member of the London School of Economics' Financial Markets Group
We hear that the wave of mergers, nationalizations and bankruptcies in the financial world represents the failure of the old way of doing business, that the future of finance is a heavily regulated, 1950s type world. Nothing could be farther from the truth. The costs of preventing crises mean an economy like Cuba and North Korea.
While some banks, with the acquiescence of banking regulators, and often with the full support of governments did get into serious trouble, it is the reaction to the crisis that really matters. The financial system has so far passed that test.
While we can debate individual decisions, liquidity provisions and the rapid putting down of sick institutions is exactly the right way.
We will come out of this crisis, having learned that it is important for banks not to make assets so complicated that neither they nor anybody else understands them.
Liquidity will have a central place in both banking and the regulations of banks. We can fine-tune the existing regulatory structure and the nature of banking to deal with this.
The real tragedy would be if the official reaction to this crisis were ill thought, politically motivated, overbearing regulations. A freewheeling financial system is essential for future prosperity. Please policymakers, don't return us to 1929 or even to the 1950s.
Richard Lambert is the former editor of the Financial Times and head of the CBI
It is sad to see HBOS lose its independence in this way but we needed a good market-driven solution to deal with these speculative attacks on the bank.
This looks like the right outcome. Lloyds TSB is a strong well capitalised institution and the new entity will be well placed to withstand the current turbulence.
The government and the financial authorities also deserve credit for making it possible in a timely way.
It also good for the broader economy. The last thing we want is a sharp contraction of bank balance sheets because of the impact it would have on the availability of credit.
We must not lose sight of the fact that the British banking system is well capitalised and regulated, perhaps it is time for us all to draw breath and calm down a little.
Brendon Barber is the secretary general of the Trades Union Congress (TUC)
This is not the final crisis of capitalism, but it ought to be the end of the road for a particular version of it.
The truth is that there is no single economic model of capitalism.
There has always been a considerable difference between Europe's social market and the Anglo-Saxon version in the US - not to mention the wild-west excesses of post-communist Russia or the strange hybrid that now operates in China.
What we have seen in the last few days should rather be the last gasp of the belief that the way to secure prosperity is to let free markets rip and tear up any regulation that gets in the way of short-term profit.
Already the view that the state has no role to play has gone with the nationalisation of Freddie, Fannie and AIG in the US and Northern Rock in the UK.
The lessons that we need to draw are that we have given far too much importance to the City and neglected other sectors - not just traditional manufacturing, but new environmental jobs and the creative sector, to give just a few examples. This should be neo-liberalism RIP.
But the paradox that has yet to work its way through is what this means for politics.
Voters are shifting to the right in their voting intention, but shifting to the left in many policy preferences as they expect government to tax the rich more, regulate the energy sector and restore sensible regulatory structures in the City.
it would be interesting to see the comments of other experts
on that interview now and to see a discussion emerging
like the ones which you see on the internet-forums.
But alas, this isn't being happening in the real world, where
the search for truth is not profitable.
12-15-2008, 03:44 PM
There are plenty of people who study the economy who are smart and can give more realistic assessments of the economy -- Larry Kudlow, Tom Friedman, Alan Greenspan come to mind.
12-16-2008, 08:11 PM
Billionaire blames extreme greed for economic crisis
By Ross Marowits, THE CANADIAN PRESS
MONTREAL - Canada needs a government that provides massive stimulus to diminish the recessionary harm to the economy caused by enormous greed, billionaire investor Stephen Jarislowsky said Wednesday.
In a speech to the Montreal Board of Trade, the investment guru said the Canada must conduct massive infrastructure spending and be prepared to provide increased social support for the unemployed.
While refusing to take sides on the political battle in Ottawa over who should form the federal government - the Conservatives or the Liberal-New Democrat coalition that's seeking to replace them - Jarislowsky said an election now would be "absolutely foolish."
"What's needed now is a general coalition of all parties to deal with this economic problem," he told reporters following his speech.
"We need to have plans for a very, very tough period ahead and the government should operate on that on a non-political basis."
He said even spending $30 billion on stimulus would be totally insufficient, but declined to put his own price tag to maintain a stable economy.
"Contrary to Mr. Harper, if you don't spend that kind of amount and if you don't print that enormous amount of money, you're going to deepen the recession. So it has to be done," Jarislowsky said.
Jarislowsky said the global financial crisis, which he dubbed a balance-sheet depression, has been fuelled by extreme greed and that politicians, bankers, corporate boards and CEOs failed to learn lessons of the past.
"I feel certain, especially today, that a disconnect with the past largely explains the disaster we are now facing," Jarislowsky said, noting that bad economic times are needed every three to four years to keep greed in check.
In addition to criticizing U.S. President George W. Bush over the Iraq war, Jarislowsky said government officials deserve some of the blame for the economic crisis.
He singled out former Federal Reserve chairman Allan Greenspan for trusting market forces that created a destructive housing bubble by making it too easy and too inexpensive to borrow.
Housing prices far exceeded the long-term sustainable increases of inflation plus the productivity of a country, Jarislowsky said.
Canada's housing mess may not be as deep as in the United States, but prices are 30 per cent overvalued, he said.
Earlier Wednesday, the ReMax realtor organization said in its annual outlook that it expects Canadian housing prices will decline this year and next, resulting in a five per cent decline from 2007 levels by the end of 2009.
Jarislowsky said Canada need not wait for the incoming U.S. administration to develop a realistic plan to combat various possible scenarios that may surface.
Bailing out auto manufacturers like General Motors doesn't make sense unless it's accompanied by union wage concessions, he said. Supporting banks is necessary, however, to maintain public confidence in the institutions and avoid massive withdrawal of funds.
While Canadian banks are much stronger than their global peers, the health of the world banking system is difficult to know because the type of investments isn't clear, he said.
Jarislowsky said the greatest act of terrorism has been in the economy with the destruction of the financial system through the lack of proper regulations.
Some derivative products should never have been allowed to be sold without oversight that is required even to sell pharmaceutical drugs. He also decried the elimination of rules on short-selling.
A strong critic of excessive executive pay, he accused chief executives of being paid like gladiators and leaving with enormous golden parachutes.
And he added that excessive consumerism prompted Canadians and Americans to chase low prices and send manufacturing jobs to China.
The 83-year-old billionaire plans to bequeath his fortune to charity. While that fortune may now be somewhat smaller, he said his losses are probably not as large as fellow investment icon Warren Buffett.
With stocks taking a beating, Jarislowsky counsels Canadians to preserve cash until a sign of a recovery comes when inflation begins to take hold in a few years.
"If he keeps spending he will do the economy a favour but if he pulls in his horns he will do himself a favour."
12-20-2008, 10:33 AM
Great Depression of the 21st Century: Collapse of the Real Economy
by Michel Chossudovsky - Professor of Economics at the University of Ottawa
November 15, 2008
The financial crisis is deepening, with the risk of seriously disrupting the system of international payments.
This crisis is far more serious than the Great Depression. All major sectors of the global economy are affected. Recent reports suggest that the system of Letters of Credit as well as international shipping, which constitute the lifeline of the international trading system, are potentially in jeopardy.
The proposed bank "bailout" under the so-called Troubled Asset Relief Program (TARP) is not a "solution" to the crisis but the "cause" of further collapse.
The "bailout" contributes to a further process of destabilization of the financial architecture. It transfers large amounts of public money, at taxpayers expense, into the hands of private financiers. It leads to a spiraling public debt and an unprecedented centralization of banking power. Moreover, the bailout money is used by the financial giants to secure corporate acquisitions both in the financial sector and the real economy.
In turn, this unprecedented concentration of financial power spearheads entire sectors of industry and the services economy into bankruptcy, leading to the layoff of tens of thousands of workers.
The upper spheres of Wall Street overshadow the real economy. The accumulation of large amounts of money wealth by a handful of Wall Street conglomerates and their associated hedge funds is reinvested in the acquisition of real assets.
Paper wealth is transformed into the ownership and control of real productive assets, including industry, services, natural resources, infrastructure, etc.
Collapse of Consumer Demand
The real economy is in crisis. The resulting increase in unemployment is conducive to a dramatic decline in consumer spending which in turn backlashes on the levels of production of goods and services.
Exacerbated by neoliberal macro-economic policy, this downward spiral is cumulative, ultimately leading to an oversupply of commodities.
Business enterprises cannot sell their products, because workers have been laid off. Consumers, namely working people, have been deprived of the purchasing power required to fuel economic growth. With their meager earnings, they cannot afford to acquire the goods produced.
Overproduction Triggers a String of Bankruptcies
Inventories of unsold goods pile up. Eventually, production collapses; the supply of commodities declines through the closing down of production facilities, including manufacturing assembly plants.
In the process of plant closure, more workers become unemployed. Thousands of bankrupt firms are driven off the economic landscape, leading to a slump in production.
Mass poverty and a Worldwide decline in living standards is the result of low wages and mass unemployment. It is the outcome of a preexisting global cheap labor economy, largely characterized by low wage assembly plants in Third World countries.
The current crisis extends the geographic contours of the cheap labor economy, leading to the impoverishment of large sectors of the population in the so-called developed countries (including the middle classes).
In the US, Canada and Western Europe, the entire industrial sector is potentially in jeopardy.
We are dealing with a long-term process of economic and financial restructuring. In its earlier phase, starting in the 1980s during the Reagan Thatcher era, local and regional level enterprises, family farms and small businesses were displaced and destroyed. In turn, the merger and acquisition boom of the 1990s led to the concurrent consolidation of large corporate entities both in the real economy as well as in banking and financial services.
In recent developments, however, the concentration of bank power has been at the expense of big business.
What is distinct in this particular phase of the crisis, is the ability of the financial giants (through their overriding control over credit) not only to create havoc in the production of goods and services, but also to undermine and destroy large corporate entities of the real economy.
Bankruptcies are occurring in all major sectors of activity: Manufacturing, telecoms, consumer retail outlets, shopping malls, airlines, hotels and tourism, not to mention real estate and the construction industry, victims of the subprime mortgage meltdown.
General Motors has confirmed that "it could run out of cash within a few months, which could prompt one of the biggest bankruptcy filings in U.S. history". (USNews.com, November 11, 2008)) In turn this would backlash on a string of related industries. Estimates of job losses in the US auto industry range from 30,000 to as much as 100,000.(Ibid).
Collapse of General Motors Share Price
In the US, consumer retail companies are in difficulty: the share prices of JC Penney and Nordstrom department store chains have collapsed. Circuit City Stores Inc. filed for Chapter 11 protection. The shares of Best Buy, the electronics retail chain, have plunged.
The Vodafone Group PLC, the world's biggest mobile phone company not to mention InterContinental Hotels PLC are in difficulty, following the collapse of stock values. (AP, Nov 12, 2008). Worldwide, over two dozen airlines have gone under in 2008, adding to a string of airline bankruptcies in the course of the last five years. (Aviation and Aerospace News, 30 October 2008). Denmark's Second commercial airline Stirling has declared bankruptcy. In the US, a growing list of real estate companies have already filed for bankruptcy protection.
InterContinental Hotels PLC
In the last two months, there have been numerous plant closures across America leading to the permanent layoff of tens of thousands of workers. These closures have affected several key areas of economic activity including the pharmaceutical and chemical industries, the automobile industry and related sectors, the services economy, etc.
US factory orders have declined dramatically. Research firm Autodata reported in October that "sales of cars and light trucks in September had declined 27 percent compared with a year earlier."(Washington Post, October 3, 2008)
According to the US Bureau of Labor Statistics, an additional 240,000 jobs were lost during the month of October alone:
"Nonfarm payroll employment fell by 240,000 in October, and the unemployment rate rose from 6.1 to 6.5 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. October's drop in payroll employment followed declines of 127,000 in August and 284,000 in September, as revised. Employment has fallen by 1.2 million in the first 10 months of 2008; over half of the decrease has occurred in the past 3 months. In October, job losses continued in manufacturing, construction, and several service-providing industries...
Among the unemployed, the number of persons who lost their job and did not expect to be recalled to work rose by 615,000 to 4.4 million in October. Over the past 12 months, the size of this group has increased by 1.7 million." (Bureau of Labor Statistics, November, 2008)
The official figures do not describe the seriousness of the crisis and its devastating impact on the labor market, since many of the job losses are not reported.
The situation in the European Union is equally disturbing. A recent British report points to the potential plight of mass unemployment in North Eastern England. In Germany, a report published in October, suggests that 10-15% of all automotive jobs in Germany could be lost.
Job cuts have also been announced at General Motors and Nissan-Renault plants in Spain. Sales of new cars in Spain plummeted by 40 percent in October in relation to sales in the same month last year.
Workers of Nissan automaker protest in front of the Japanese company's building in Barcelona (AFP)
Bankruptcies and Foreclosures: A Money-spinning Operation for the Financial Giants
Among the companies on the verge of bankruptcy are some highly lucrative and profitable operations. The important question: who takes over the ownership of bankrupt giant industrial corporations?
Bankruptcies and foreclosures are a money-spinning operation. With the collapse in stock market values, listed companies experience a major collapse of the price of their stock, which immediately affects their creditworthiness and their ability to borrow and/ or to renegotiate debts ( which are based on the quoted value of their assets).
The institutional speculators, the hedge funds, et al have cashed in on their windfall loot.
They trigger the collapse of listed companies through short selling and other speculative operations. They then cash in on their large scale speculative gains.
According to a report in the Financial Times, there is evidence that the plunge of the US automobile industry was in part the result of manipulation: "General Motors and Ford lost 31 per cent to $3.01 and 10.9 per cent to $1.80 despite hopes that Washington may save the industry from the brink of collapse. The fall came after Deutsche Bank set a price target of zero on GM." (FT, November 14, 2008, emphasis added)
The financiers are on a shopping-spree. America's Forbes 400 billionaires are waiting in limbo.
Once they have consolidated their position in the banking industry, the financial giants including JP Morgan Chase, Bank of America, et al will use their windfall money gains and bailout money provided under TARP, to further extend their control over the real economy.
The next step consists in transforming liquid assets, namely money paper wealth, into the acquisition of real economy assets.
In this regard, Warren Buffett's Berkshire Hathaway Inc. is a major shareholder of General Motors. More recently, following the collapse in stock values in October and November, Buffett boosted his stake in oil producer ConocoPhillips, not to mention Eaton Corp, whose price on the NYSE tumbled by 62% in relation to its December 2007 high (Bloomberg).
The target of these acquisitions are the numerous highly productive industrial and services sector companies, which are on the verge of bankruptcy and/or whose stock values have collapsed.
The money managers are picking up the pieces.
Ownership of the Real Economy
As a result of these developments, which are directly related to the financial meltdown, the entire ownership structure of real economy assets is in turmoil.
Paper wealth accumulated through insider trading and stock market manipulation is used to acquire control over real economic assets, displacing the preexisting ownership structures.
What we are dealing with is an unsavory relationship between the real economy and the financial sector. The financial conglomerates do not produce commodities. They essentially make money through the conduct of financial transactions. They use the proceeds of these transactions to take over bona fide real economy corporations which produce goods and services for household consumption.
In a bitter twist, the new owners of industry are the institutional speculators and financial manipulators. They are becoming the new captains of industry, displacing not only the preexisting structures of ownership but also instating their cronies in the seats of corporate management.
No Reform Possible under the Washington-Wall Street Consensus
The November 15 G-20 Financial Summit in Washington upholds the Washington-Wall Street consensus.
While formally presenting a project to restore financial stability, in practice, the hegemony of Wall Street remains unscathed. The tendency is towards a unipolar monetary system dominated by the United States and upheld by US military superiority.
The architects of financial disaster under the 1999 Gramm-Leach-Bliley Financial Services Modernization Act (FSMA) have been entrusted with the task of mitigating the crisis, which they themselves created. They are the cause of financial collapse.
The G20 Financial Summit doesn't question the legitimacy of the hedge funds and the various instruments of derivative trade. The final Communiqué includes an imprecise and blurred commitment "to better regulate hedge funds and create more transparency in mortgage-related securities in a bid to halt a global economic slide."
A solution to this crisis can only be brought about through a process of "financial disarmament", which forcefully challenges the hegemony of the Wall Street financial institutions including their control over monetary policy. "Financial disarmament" would also require freezing the instruments of speculative trade, dismantling the hedge funds and democratizing monetary policy. The term "financial disarmament" was initially coined by John Maynard Keynes in the 1940s.
Obama Endorses Financial Deregulation
Barack Obama has embraced the Washington-Wall Street consensus. In a bitter twist, former Congressman Jim Leach, a Republican who sponsored the 1999 FSMA in the House of Representatives is now advising Obama on formulating a timely solution to the crisis.
Jim Leach, Madeleine Albright and former Treasury Secretary Larry Summers, who also played a key role in pushing through the FSMA legislation, were in attendance at the November 15 G-20 Financial Summit, as part of President-elect Barack Obama's advisory team:
"President-elect Barack Obama and Vice President-elect Joe Biden announced that former Secretary of State Madeleine Albright and former Republican Congressman Jim Leach would be available to meet with delegations at the G-20 summit on their behalf. Leach and Albright are holding these unofficial meetings to seek input from visiting delegations on behalf of the president-elect and vice president-elect. (mlive.com, November 15, 2008)
Who are the Architects of Economic Collapse?
Will an Obama Administration Reverse the Tide?
- by Michel Chossudovsky - 2008-11-09
The engineers of financial disaster are being considered by President-Elect Barack Obama for the position of Treasury Secretary.
12-20-2008, 11:04 AM
Great Depression of the 21st Century: Collapse of the Real Economy
by Michel Chossudovsky - Professor of Economics at the University of Ottawa
November 15, 2008
Unfortunately not much to argue about in that analysis.
Come Spring we will know who's thesis is correct.
12-20-2008, 11:17 PM
Who are the Architects of Economic Collapse?
by Michel Chossudovsky - Professor of Economics at the University of Ottawa
November 9, 2008
Most Serious Economic Crisis in Modern History
The October 2008 financial meltdown is not the result of a cyclical economic phenomenon. It is the deliberate result of US government policy instrumented through the Treasury and the US Federal Reserve Board.
This is the most serious economic crisis in World history.
The "bailout" proposed by the US Treasury does not constitute a "solution" to the crisis. In fact quite the opposite: it is the cause of further collapse. It triggers an unprecedented concentration of wealth, which in turn contributes to widening economic and social inequalities both within and between nations.
The levels of indebtedness have skyrocketed. Industrial corporations are driven into bankruptcy, taken over by the global financial institutions. Credit, namely the supply of loanable funds, which constitutes the lifeline of production and investment, is controlled by a handful of financial conglomerates.
With the "bailout", the public debt has spiraled. America is the most indebted country on earth. Prior to the "bailout", the US public debt was of the order of 10 trillion dollars. This US dollar denominated debt is composed of outstanding treasury bills and government bonds held by individuals, foreign governments, corporations and financial institutions.
"The Bailout": The US Administration is Financing its Own Indebtedness
Ironically, the Wall Street banks --which are the recipients of the bailout money-- are also the brokers and underwriters of the US public debt. Although the banks hold only a portion of the public debt, they transact and trade in US dollar denominated public debt instruments Worldwide.
In a bitter twist, the banks are the recipients of a 700+ billion dollar handout and at the same time they act as creditors of the US government.
We are dealing with an absurd circular relationship: To finance the bailout, Washington must borrow from the banks, which are the recipients of the bailout.
The US administration is financing its own indebtedness.
Federal, State and municipal governments are increasingly in a straightjacket, under the tight control of the global financial conglomerates. Increasingly, the creditors call the shots on government reform.
The bailout is conducive to the consolidation and centralization of banking power, which in turn backlashes on real economic activity, leading to a string of bankruptcies and mass unemployment.
Will an Obama Administration Reverse the Tide?
The financial crisis is the outcome of a deregulated financial architecture.
Obama has stated unequivocally his resolve to address the policy failures of the Bush administration and "democratize" the US financial system. President-Elect Barack Obama says that he is committed to reversing the tide:
"Let us remember that if this financial crisis taught us anything, it’s that we cannot have a thriving Wall Street while Main Street suffers. In this country, we rise or fall as one nation, as one people." (President-elect Barack Obama, November 4, 2008, emphasis added)
The Democrats casually blame the Bush administration for the October financial meltdown.
Obama says that he will be introducing an entirely different policy agenda which responds to the interests of Main Street:
"Tomorrow, you can turn the page on policies that put the greed and irresponsibility of Wall Street before the hard work and sacrifice of men and women all across Main Street. Tomorrow you can choose policies that invest in our middle class and create new jobs and grow this economy so that everybody has a chance to succeed, from the CEO to the secretary and the janitor, from the factory owner to the men and women who work on the factory floor.( Barack Obama, election campaign, November 3, 2008, emphasis added)
Is Obama committed to "taming Wall Street" and "disarming financial markets"?
Ironically, it was under the Clinton administration that these policies of "greed and irresponsibility" were adopted.
The 1999 Financial Services Modernization Act (FSMA) was conducive to the the repeal of the Glass-Steagall Act of 1933. A pillar of President Roosevelt’s "New Deal", the Glass-Steagall Act was put in place in response to the climate of corruption, financial manipulation and "insider trading" which resulted in more than 5,000 bank failures in the years following the 1929 Wall Street crash.
Bill Clinton signs into law the Gramm-Leach-Bliley Financial Services Modernization Act, November 12, 1999
Under the 1999 Financial Services Modernization Act, effective control over the entire US financial services industry (including insurance companies, pension funds, securities companies, etc.) had been transferred to a handful of financial conglomerates and their associated hedge funds.
The Engineers of Financial Disaster
Who are the architects of this debacle?
In a bitter irony, the engineers of financial disaster are now being considered by President-Elect Barack Obama's Transition Team for the position Treasury Secretary:
Lawrence Summers played a key role in lobbying Congress for the repeal of the Glass Steagall Act. His timely appointment by President Clinton in 1999 as Treasury Secretary spearheaded the adoption of the Financial Services Modernization Act in November 1999. Upon completing his mandate at the helm of the US Treasury, he became president of Harvard University (2001- 2006).
Paul Volker was chairman of the Federal Reserve Board in the l980s during the Reagan era. He played a central role in implementing the first stage of financial deregulation, which was conducive to mass bankruptcies, mergers and acquisitions, leading up to the 1987 financial crisis.
Timothy Geithner is CEO of the Federal Reserve Bank of New York, which is the most powerful private financial institution in America. He was also a former Clinton administration Treasury official. He has worked for Kissinger Associates and has also held a senior position at the IMF. The FRBNY plays a behind the scenes role in shaping financial policy. Geithner acts on behalf of powerful financiers, who are behind the FRBNY. He is also a member of the Council on Foreign Relations (CFR)
Jon Corzine is currently governor of New Jersey, former CEO of Goldman Sachs.
Larry Summers (left) and Timothy Geithner
At the time of writing, Obama's favorite is Larry Summers, front-runner for the position of Treasury Secretary.
Harvard University Economics Professor Lawrence Summers served as Chief Economist for the World Bank (1991–1993). He contributed to shaping the macro-economic reforms imposed on numerous indebted developing countries. The social and economic impact of these reforms under the IMF-World Bank sponsored structural adjustment program (SAP) were devastating, resulting in mass poverty.
Larry Summer's stint at the World Bank coincided with the collapse of the Soviet Union and the imposition of the IMF-World Bank's deadly " economic medicine" on Eastern Europe, the former Soviet republics and the Balkans.
In 1993, Summers moved to the US Treasury. He initially held the position of Undersecretary of the Treasury for international affairs and later Deputy Secretary. In liaison with his former colleagues at the IMF and the World Bank, he played a key role in crafting the economic "shock treatment" reform packages imposed at the height of the 1997 Asian crisis on South Korea, Thailand and Indonesia.
The bailout agreements negotiated with these three countries were coordinated through Summers office at the Treasury in liaison with the Federal Reserve Bank of New York and the Washington based Bretton Woods institutions. Summers worked closely with IMF Deputy Managing Director Stanley Fischer, who was later appointed Governor of the Central Bank of Israel.
Larry Summers became Treasury Secretary in July 1999. He is a protégé of David Rockefeller. He was among the main architects of the infamous Financial Services Modernization Act, which provided legitimacy to inside trading and outright financial manipulation.
Larry Summers and David Rockefeller
"Putting the Fox in Charge of the Chicken Coop"
Summers is currently a Consultant to Goldman Sachs and managing director of a Hedge fund, the D.E. Shaw Group, As a Hedge Fund manager, his contacts at the Treasury and on Wall Street provide him with valuable inside information on the movement of financial markets.
Putting a Hedge Fund manager (with links to the Wall Street financial establishment) in charge of the Treasury is tantamount to putting the fox in charge of the chicken coop.
The Washington Consensus
Summers, Geithner, Corzine, Volker, Fischer, Phil Gramm, Bernanke, Hank Paulson, Rubin, not to mention Alan Greenspan, al al. are buddies; they play golf together; they have links to the Council on Foreign Relations and the Bilderberg; they act concurrently in accordance with the interests of Wall Street; they meet behind closed doors; they are on the same wave length; they are Democrats and Republicans.
While they may disagree on some issues, they are firmly committed to the Washington-Wall Street Consensus. They are utterly ruthless in their management of economic and financial processes. Their actions are profit driven. Outside of their narrow interest in the "efficiency" of "markets", they have little concern for "living human beings". How are people's lives affected by the deadly gamut of macro-economic and financial reforms, which is spearheading entire sectors of economic activity into bankruptcy.
The economic reasoning underlying neoliberal economic discourse is often cynical and contemptuous. In this regard, Lawrence Summers' economic discourse stands out. He is known among environmentalists for having proposed the dumping of toxic waste in Third World countries, because people in poor countries have shorter lives and the costs of labor are abysmally low, which essentially means that the market value of people in the Third World is much lower. According to Summers, this makes it far more "cost effective" to export toxic materials to impoverished countries. A controversial 1991 World Bank memo signed by of Chief Economist Larry Summers reads as follows (excerpts, emphasis added):
DATE: December 12, 1991 TO: Distribution FR: Lawrence H. Summers Subject: GEP
"'Dirty' Industries: Just between you and me, shouldn't the World Bank be encouraging MORE migration of the dirty industries to the Less Developed Countries? I can think of three reasons:
1) The measurements of the costs of health impairing pollution depends on the foregone earnings from increased morbidity and mortality.... From this point of view a given amount of health impairing pollution should be done in the country with the lowest cost, which will be the country with the lowest wages. I think the economic logic behind dumping a load of toxic waste in the lowest wage country is impeccable and we should face up to that.
2) The costs of pollution are likely to be non-linear as the initial increments of pollution probably have very low cost. I've always though that under-populated countries in Africa are vastly UNDER-polluted, their air quality is probably vastly inefficiently low compared to Los Angeles or Mexico City. Only the lamentable facts that so much pollution is generated by non-tradable industries (transport, electrical generation) and that the unit transport costs of solid waste are so high prevent world welfare enhancing trade in air pollution and waste.
3) The demand for a clean environment for aesthetic and health reasons is likely to have very high income elasticity. [the demand increases when income levels increase]. The concern over an agent that causes a one in a million change in the odds of prostrate cancer is obviously going to be much higher in a country where people survive to get prostrate cancer than in a country where under 5 mortality is is 200 per thousand.... "
Summers stance on the export of pollution to developing countries had a marked impact on US environmental policy:
In 1994, "virtually every country in the world broke with Mr. Summers' Harvard-trained "economic logic" ruminations about dumping rich countries' poisons on their poorer neighbors, and agreed to ban the export of hazardous wastes from OECD to non-OECD [developing] countries under the Basel Convention. Five years later, the United States is one of the few countries that has yet to ratify the Basel Convention or the Basel Convention's Ban Amendment on the export of hazardous wastes from OECD to non-OECD countries. (Jim Valette, Larry Summers' War Against the Earth, Counterpunch, undated)
The 1997 Asian Crisis: Dress Rehearsal for Things to Come
In the course of 1997, currency speculation instrumented by major financial institutions directed against Thailand, Indonesia and South Korea was conducive to the collapse of national currencies and the transfer of billions of dollars of central bank reserves into private financial hands. Several observers pointed to the deliberate manipulation of equity and currency markets by investment banks and brokerage firms.
While the Asian bailout agreements were formally negotiated with the IMF, the major Wall Street commercial banks (including Chase, Bank of America, Citigroup and J. P. Morgan) as well as the "big five" merchant banks (Goldman Sachs, Lehman Brothers, Morgan Stanley and Salomon Smith Barney) were "consulted" on the clauses to be included in the Asian bail-out agreements. [Note: These are 1997 denominations of major financial institutions]
The US Treasury in liaison with Wall Street and the Bretton Woods institutions played a central role in negotiating the bailout agreements. Both Larry Summers and Timothy Geithner, were actively involved on behalf of the US Treasury in the 1997 bailout of South Korea:
[In 1997] "Messrs. Summers and Geithner worked to persuade Mr. Rubin to support financial aid to South Korea. Mr. Rubin was wary of such a move, worrying that providing money to a country in dire straits might be a losing proposition..." (WSJ, November 8, 2008)
What happened in Korea under advice from Deputy Treasury Secretary Summers et al, had nothing to do with "financial aid".
The country was literally ransacked. Undersecretary of the Treasury David Lipton was sent to Seoul in early December 1997. Secret negotiations were initiated. Washington had demanded the firing of the Korean Finance Minister and the unconditional acceptance of the IMF "bailout".
A new finance minister, who happened to be former IMF and World Bank official, was appointed and immediately rushed off to Washington for "consultations" with his former IMF colleague Deputy Managing Director Stanley Fischer.
"The Korean Legislature had met in emergency sessions on December 23. The final decision concerning the 57 billion dollar deal took place the following day, on Christmas Eve December 24th, after office hours in New York. Wall Street’s top financiers, from Chase Manhattan, Bank America, Citicorp and J. P. Morgan had been called in for a meeting at the Federal Reserve Bank of New York. Also at the Christmas Eve venue, were representatives of the "big five" New York merchant banks including Goldman Sachs, Lehman Brothers, Morgan Stanley and Salomon Smith Barney. And at midnight on Christmas Eve, upon receiving the green light from the banks, the IMF was allowed "to rush 10 billion dollars to Seoul to meet the avalanche of maturing short-term debts".
The coffers of Korea’s central Bank had been ransacked. Creditors and speculators were anxiously awaiting to collect the loot. The same institutions which had earlier speculated against the Korean won were cashing in on the IMF bailout money. It was a scam. (See Michel Chossudovsky, The Recolonization of Korea, subsequently published as a chapter in The Globalization of Poverty and the New World Order, Global Research, Montreal, 2003.)
"Strong economic medicine" is the prescription of the Washington Consensus. "Short term pain for long term gain" was the motto at the World Bank during Lawrence Summers term of as World Bank Chief Economist. (See IMF, World Bank Reforms Leave Poor Behind, Bank Economist Finds, Bloomberg, November 7, 2000)
What we dealing with is an entire " old boys network" of officials and advisers at the Treasury, the Federal Reserve, the IMF, World Bank, the Washington Think Tanks, who are in permanent liaison with leading financiers on Wall Street.
Whoever is chosen by Obama's Transition team will belong to the Washington Consensus.
The 1999 Financial Services Modernization Act
What happened in October 1999 is crucial.
In the wake of lengthy negotiations behind closed doors, in the Wall Street boardrooms, in which Larry Summers played a central role, the regulatory restraints on Wall Street’s powerful banking conglomerates were revoked "with a stroke of the pen".
Larry Summers worked closely with Senator Phil Gramm (1985-2002),chairman of the Senate Banking committee, who was the legislative architect of the the Gramm-Leach-Bliley Financial Services Modernization Act, signed into law on November 12, 1999 (See Group Photo above). (For Complete text click US Congress: Pub.L. 106-102). As Texas Senator, Phil Gramm was closely associated with Enron.
In December 2000 at the very end of the Clinton mandate, Gramm introduced a second piece of legislation, the so-called Gramm-Lugar Commodity Futures Modernization Act, which paved the way for the speculative onslaught in primary commodities including oil and food staples.
"The act, he declared, would ensure that neither the sec nor the Commodity Futures Trading Commission (cftc) got into the business of regulating newfangled financial products called swaps—and would thus "protect financial institutions from overregulation" and "position our financial services industries to be world leaders into the new century." (See David Corn, Foreclosure Phil, Mother Jones, July August 2008)
Phil Gramm was McCain's first choice for Secretary of the Treasury.
Under the FSMA new rules – ratified by the US Senate in October 1999 and approved by President Clinton – commercial banks, brokerage firms, hedge funds, institutional investors, pension funds and insurance companies could freely invest in each others businesses as well as fully integrate their financial operations.
A "global financial supermarket" had been created, setting the stage for a massive concentration of financial power. One of the key figures behind this project was Secretary of the Treasury Larry Summers, in liaison with David Rockefeller. Summers described the FSMA as "the legislative foundation of the financial system of the 21th century". That legislative foundation is among the main causes of the 2008 financial meltdown.
There can be no meaningful solution to the crisis, unless there is a major reform in the financial architecture, implying inter alia the freezing of speculative trade and the "disarming of financial markets". The project of disarming financial markets was first proposed by John Maynard Keynes in the 1940s as a means to the establishment of a multipolar international monetary system. (See J.M. Keynes, Activities 1940-1944, Shaping the Post-War World: The Clearing Union, The Collected Writings of John Maynard Keynes, Royal Economic Society, Macmillan and Cambridge University Press, Vol. XXV, London 1980, p. 57).
Main Street versus Wall Street
Where are Obama's "Main Street appointees"? Namely individuals who respond to the interests of people across America. There are no labor or community leaders on Obama's list for key positions.
The President-elect is appointing the architects of financial deregulation.
Meaningful financial reform cannot be adopted by officials appointed by Wall Street and who act on behalf of Wall Street.
Those who set the financial system ablaze in 1999, have been called back to turn out the fire.
The proposed "solution" to the crisis under the "bailout" is the cause of further economic collapse.
There are no policy solutions on the horizon.
The banking conglomerates call the shots. They decide on the composition of the Obama Cabinet. They also decide on the agenda of the Washington Financial Summit (November 15, 2008) which is slated to lay the groundwork for the establishment of a new "global financial architecture".
The Wall Street blueprint has already been discussed behind closed doors: the hidden agenda is to establish a unipolar international monetary system, dominated by US financial power, which in turn would be protected and secured by US military superiority.
Neoliberalism with a "Human Face"
There is no indication that Obama will break his ties to his Wall Street sponsors, who largely funded his election campaign.
Goldman Sachs, J. P. Morgan Chase, Citigroup, Bill Gates' Microsoft are among his main campaign contributors.
Warren Buffett, among the the world's richest individuals, not only supported Barak Obama's election campaign, he is a member of his transition team, which plays a key role deciding the composition of Obama's cabinet.
Unless there is a major upheaval in the system of political appointments to key positions, an alternative Obama economic agenda geared towards poverty alleviation and employment creation is highly unlikely.
What we are witnessing is continuity.
Obama provides a " human face" to the status quo. This human face serves to mislead Americans on the nature of the economic and political process.
The neoliberal economic reforms remain intact.
The substance of these reforms including the "bailout" of America's largest financial institutions ultimately destroys the real economy, while spearheading entire areas of manufacturing and the services economy into bankruptcy.
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