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Friday, August 26, 2011

Gaddafi's Fellow Travelers
James S. Henry

(An earlier version of this appeared today as a Forbes column.)

GaddafiCartoon I recall one cold wintry Saturday evening about three years ago in Vermont,  and a dinner conversation among a small group of former business colleagues, including  HBS Professor Michael E. Porter, the eminent competitive strategist.

He’d just returned from Tripoli, where he’d been working on what he told us was a  “strategy project” for the Gaddafi regime with a raft of consultants from Monitor Group, the Cambridge-based consulting firm that he’d helped to found in the early 1980s.  

For about thirty minutes or so he shared with us how excited they all were to be working to reform the Libyan economy, and how Colonel Gaddafi and his sons now really seemed to “get it.”

Clearly Prof. Porter felt this was all pretty cool. When asPorterked about the issue of democracy and the rule of law, he rather quickly brushed aside such concerns, suggesting that they were sort of beside the point – after all, as the case of China supposedly demonstrated, all those annoying traditional liberal values sometimes just need to get out of the way of progress.

At the end of all this, there was a brief silence. I suspect that most of those at the table were slightly discomforted by Prof. Porter’s blunt, hard-nosed neoliberal analysis, and certainly by his apparent intoxication with the infamous Libyan dictator. But he was,  after all,  an eminent Harvard professor. And unlike us, he’d not only been to the country, but had met its most senior leaders personally.

Finally, however, my friend Roger Kline, a wise old McKinsey partner, broke the silence with a simple, direct, slightly impolitic question,  which would be answered only by the silence that it provoked from Professor Porter:  “Doesn’t it ever bother you at all, Michael, to be working for a terrorist?

***

As the spirit of doom hovers over the last remnants of Muammar Gaddafi’s 42-year-long dictatorship, and most Libyans are celebrating his departure with sheer delight, there is much less joy in a handful of top-tier academic and professional-class households in Cambridge, Princeton, Georgetown, Baltimore,  East Lansing, and London.Porter'sNeoliberalSoup

For Mighty Muammar has indeed struck out -- contrary to the hopes  and  expectations of some of our very best and brightest experts on  “competitive country strategy," “global democratic governance," "the idea that is America,” and “soft power.”

After all, from their perspective, whatever Gaddafi's flaws, his blood-stained but deep-pocketed regime was certainly not like that of Kim Jong Il.

Unlike Kim, Gaddafi had been willing to pay quite handsomely to PinochetDemocracyBlood hear them spout off about their pet aerie-faerie neoliberal theories of political and economic development.

 
Meanwhile, Gaddifi's  government also ordered up an expensive grab-bag of university grants, endowments, special education for Libyan police and diplomats, ginned-up degrees for his dim-witted family members, lots of slick lobbying and lawyering, plus a large number of custom press portraits by leading Western academics gurus none of whom ever bothered to disclose the fact that they were all on Brother Leader's  payroll.

This sordid tale first began to trickle out about two years ago from the Libyan opposition,  but it really picked up steam after the Revolution began in February 2011.  The interested reader can look here, here, here, here, and here for  the gory details.

But right now, just as the Gaddafis are about to take their rightful place in history’s waste bin, it is worth recalling the highlights  for several reasons.Hanfstaengl

First, we’d like to make sure that all of the leading academic   collaborateurs who helped to legitimate Gaddafi's abattoir receive their due: the  very first installment of the “Milton Friedman/ "Putzi" Hanfstaengl Iron Cross Award. Friedman_pinochet

Second, we'd like to require all these collaborateurs to donate the millions of dollars of blood money and the  thousands of frequent flier miles they accumulated as unregistered foreign agents for Gaddafi’s regime to Libya’s teeming hospitals and orphanages.

Together, these two simple steps might help to insure that this kind of totally uncool dictatorship rebranding is brought to a screeching halt.

REBRANDING GADDAFI

Images This tale really began in 2003, when the Gaddafi regime, seeking to end an annoying economic  boycott,  gave its solemn word  to swear off terrorism forever, cease dabbling in nuclear technology, pay compensation for the 1988 Pan Am 103/Lockerbie bombing, and "accept responsibility for the actions of its officials,” whatever that meant.

Not surprisingly, given Gaddafi's horrific track record, most ordinary Westerners, not to mention the hard-pressed LBUSHBLAIRBERLUSCONIibyan opposition, were deeply skeptical.

But Western leaders and policy experts were curiously much more receptive to Libya’s extraordinary effort to upgrade its image from “terror camp” to “the West’s best new pragmatic partner in the Middle East."

Indeed, it turned out to be a very fertile time for this kind of rebranding effort. First, even though Libya’s U-turn had largely been  motivated by economic self-interest, George W. Bush, Tony Blair, and Silvio Berlusconi welcomed it as a badly-needed victory in the “war on terror.”  Berlusconi and Blair even flew directly to Tripoli to welcome the “reborn” Gaddafi back into the community of nations.

BERLUSCONIGADDAFI Nor, in the US, was the welcome committee just limited to Republicans. In July  2008, Democrats Carl Levin and (now Vice President) Joe Biden played a key role in guiding S.1330 through the US Senate.

This  scurrilous bill, signed into law by President Bush, controversially granted Gaddafi complete legal immunity for the Lockerbie bombing, so long as he paid a (rather paltry) agreed-upon sum to the victims’ families.

Second, Libya’s U-turn opened the door to a whole bevy of Holy-Water merchants and academic medicine men. These instant Libyan "experts" were eager to offer Gaddafi not only absolution, but also their very latest pet theories about everything from “competitive clusters" and "strong democracy" to “the Third Way.”

They were also eager to see test such theories in Gaddafi’s living laboratory -- especially if the dictator was willing to subsidize the  clinical trials. Not since Boris Yeltsin, General Suharto, and General Pinochet have neoliberal academics had such a golden opportunity to test their theories on real live human subjects at country scale.  BLAIRGADDAFI

Third, to a large extent mainly for PR purposes,  Western experts also made much of their opportunity to "dialogue" in person with real live Libyans. Well, perhaps not so much with the nascent opposition, which was mainly abroad, in hiding,  in jail, or dead.

 Of course, according to Gaddafi & Sons, confirmed by US intelligence officials like John Negroponte – who got much of his info about Libya from his brother Nicholas, who got it from Gaddafi & Sons (see below) – the Libyan opposition consisted of radical "al Qaeda” sympathizers or the members of “dissident tribes” in Libya’s supposedly “very tribal” society, anyway.

Their received image of Libya, seen through Gaddafi-colored lens, was curiously similar to the self-image that South Africa’s apartheid regime used to project – a deeply “tribal” society that required strong-armed rule to preserve it  from the radical horde at the gates.

75px-Snake-oil In any case,  Western experts were generally quite happy to take the Gaddafis’ word -- and his moolah --  for all this, and to participate in  one-sided “dialogues” with Brother Leader  himself whenever he was able to spare the time.

This delighted Brother Leader. No doubt this was partly because of  3076876128_8511664b49_s his  deep intellectual curiousity about the very latest  economic and political theories. But, more practically, it also meant that prominent Western expert after expert had to fly  thousands of miles to Tripoli and back just to help his regime flaunt its wares on Libyan State TV and lend him unprecedented respectability.

Ultimately, you see, Gaddafi had  all these neoliberal academics pegged to the tee.

He understood from the start that many were frustrated by their powerlessness in (more) democratic Western societies.  Their secret wet dream is the absolute dictator who takes them seriously, and able and willing to test their theories on command, without the need for messy democratic processes.

Indeed, Gaddafi's personal power n Libya was so complete that he never even bothered to give himself a formal title other than "Colonel."

THE CARAVAN

Toadies_-_Mister_Love_300px From 2004 on, therefore, Tripoli became a kind of alternative Mecca for a veritable “Who’s Who” of leading Western intelligentsia. Among the key interlocutors were Professor Porter; Cambridge  University/LSE’s   “Baron” Anthony Giddens and George Joffe; LSE’s Director Sir Howard Davies (now resigned), and Professor David Held,  its leading expert on “globalization;”  and Monitor Group’s Rajeev Singh Molares (now at Alcatel), Mark Fuller (recently resigned as its Chair), and Bruce J. Allyn (formerly the head of Monitor’s Moscow office).

75px-Francis_Fukuyama Others who tagged along for the camel ride included Ann-Marie 75px-Lewis-pre Slaughter, Dean of Princeton’s Woodrow Wilson School; Princeton Professors Bernard Lewis and Andrew Moravcsik; the insidious neo-con Richard Perle (2 visits); MIT Professor Emeritus Nicholas Negroponte (several visits), brother of  US DNI John Negroponte, and the former head of the MIT Media Labs,  who was very eager to get Libyan funding for his ill-fated pet “One 75px-Voa_chinese_Joseph_Nye_03Aug10 Laptop Per Child” project; a flurry of other Harvard profs, including the Kennedy School’s Robert Putnam, Joseph Nye, and Marshall Ganz, an organizer-guru who became involved in another tidy little dictatorship, Syria; and Johns Hopkins' "end of history" champion Francis Fukuyama, who made history himself by pulling down a record $80,000 for a single audience with Brother Leader.

Perle  Nor were journalists entirely immune from the attractions of the 75x75 Libyan honeypot. Here,  the Monitor ringmasters also went for high-profile celebrities, including Al Jazeera's David Frost, who collected $91,429 for a single visit.  They also nearly  recruited several others before the project got terminated.  One Monitor project memo reports, for example,  that:

“Monitor approached (Fareed) Zakaria who said that he is very interested in travelling to Libya in order to meet with the Leader….Monitor also approached ( the New York Times’ Thomas) Friedman who said that he was interested in travelling to Libya at some point in the future.

Images-4 Collectively this respectability caravan made dozens of such Gaddafi-tour site visits, logging tens of thousands of First Class miles and receiving millions of dollars in fees to commune about the “New Libya" – all the while helping to launder the regime’s  blood-stained image.

This activity seems to have gone far beyond simply helping Libya to restructure its economy and political system along more open,  competitive lines. Indeed, it is now clear that the regime probably never seriously intended any meaningful reforms, but was mainly trying to curry influence and favors.

The experts’ punch list included such dubious activities as ghost-writing Saif Gaddafi’s PhD thesis; helping to design a “national security agency” for Libya (!), quite probably with inputs from folks like the Negropontes and Richard Dearlove, the Monitor “senior advisor” who ran the UK’s MI6 from 1999 to 2004; offering to ghost-write a puffed-up version of Brother Leader’s collected works;  and, all along, orchestrating a flurry of favorable press coverage in influential papers like the Washingon Post, the New York Times, the International Herald, and the Guardian.

All of this was done without without ever bothering (until this Spring, in the case of Monitor Company) to register as what many of these high-toned folks truly turned out to be:  foreign agents of the Government of Libya.

BETTER SAIF THAN SORRY

There are many glaring examples of outright shilling for the Gaddafis by these brown-nosing academic and consulting mercenaries, but a handful captures the essential odor.

Images-7 One good example was LSE Professor Emeritus/ Blair confidant/ Baron Anthony Gidden’s bold March 2007 speculation in the UK’s Guardian newspaper that Colonel Gaddafi’s Libya might soon turn out to be “the Norway of North Africa.” The piece mentioned Lord Giddens’ impressive academic credentials, but  it neglected to mention the fact that he had received $67,000 in fees from Libya, plus First Class round-trip travel expenses for at least two hajjs to visit with Brother Leader and his staff in Tripoli.

Another example is Rutgers Professor Emeritus Ben Barber’s even more wildly enthusiastic August 2007 Washington Post endorsement of the “surprisingly flexible and pragmatic” Gaddafi andImages-5 his “gifted son Saif.” Of course Saif is much more familiar to the rest of us now for his blood-curdling “rivers of blood” speech on February 20, 2011, which contributed mightily to the subsequent polarization and bloodshed.

Images-6 Professor Barber’s piece reminded his readers that he was a  best-selling author and a Distinguished Senior Fellow at the think-tank Demos. But it neglected to mention the fact that he’d also made multiple all-expense-paid trips to Tripoli, for which he’d been paid at least $100,000 in fees by the Libyan Government.

A third example is HBS Professor Michael E. Porter’s February 23 2007 Business Week interview, in which he reported that he had “taken on” a consulting project in Libya,  as if this were some kind of beneficent act. Gaddafi,  he maintained with a straight face, MarkFuller  wasn’t really a dictator after all: “In a sense, decision-making is widely distributed in (Libya). People [consider Libya] a dictatorship, but it really doesn't work that way. That is another reason for optimism.” (Emphasis added).

75px-Monitor.svg Prof. Porter neglected to mention the fact that he and FullerJoe1 Monitor Group, the Cambridge consulting firm that he, plus HBS grads Joe Fuller and Mark Fuller, had founded in the early 1980s, were not only earning several million dollars for their Libyan strategy work, but were also up to their proverbial eyeballs in a second multi-million dollar PR project to bolster Gaddafi’s image.

THE IMPACT

All this salacious material is interesting.  But did it really have any harmful impacts on Libya?  Or is all this merely frivolous second-guessing?

The answer is that this kind of orchestrated air-brushing of the Gaddafi regime by leading Western consultants and academics clearly was not only enormously harmful to the interests of most Libyans, but also that these negative impacts were entirely foreseeable – and, indeed, were anticipated by many critics who had the same intuitive reaction as Roger Kline (see above.)

✔ The academic white-washing helped to conceal the fact that the Gaddafi regime was enormously unpopular with its own people – that the opposition was broad based, that high-level corruption was rife, and that  the “tribal”/al Qaeda paradigm of the Libyan opposition was simplistic and dangerously misleading, not to mention self-serving for the Gaddafi clan.

Academic air-brushing also contributed to the misleading view that “reforming Libya" was mainly just a technocratic exercise for the insider-elite and their Western advisors,  to which constitutive matters like elections, rights, the rule of law, and genuine popular representation could take a back seat.

The bevy of  big-name Western intellectuals and consultants who courted the Gaddafis not only inflated their egos even larger than they already were, but also encouraged them to believe they could easily  buy influence, as well as arms, in the West -- and delay fundamental political reforms.

In short, the white-washing and the kid glove treatment of the Gaddafi regime by leading Western academics may well have discouraged that regime from pursuing deeper political reforms much earlier, and from negotiating in good faith once conflict increased.Fellowtraveler

In other words, it probably cost lives.  

 If and when the Gaddafi clan is captured and put on trial, either in  Libya or before the ICC, we hope that these courts seize the opportunity to examine the conduct and responsibilty of these  neoliberal fellow travelers of dictatorship very closely.     

***

So, in the waning hours of the Gaddafi regime,  it is important to recall that Brother Leader and his band of thugs did not simply become a menace to Libya’s people and the world on their own.

Nor was his particular brand of madness simply due to the “usual suspects:” anti-Western radicalism, liberation ideology,  Gaddafi's own imperialistic ambitions in Africa, his idiosyncratic version of political Islam, or even the fact that he spent far too much time spent frolicking in the desert sun with Ukrainian nurses.

No – while Gaddafi’s buddies in Venezuela still portray  him as a stalwart opponent of Western imperialism,  the fact is that in recent years he actually continued to increase his influence in the West only with the really quite extraordinary assistance of prominent, high-priced, incredibly smart, but ultimately quite gullible Western “friends.”

(c) JSH 2011

 

August 26, 2011 at 04:47 PM | Permalink | Comments (0)

Tuesday, April 27, 2010

THE GOLDMAN SACHS CASE
Part II: "The Crucible"
James S. Henry


Salem Whatever the ultimate legal merits of the SEC's case against Goldman Sachs -- and those appear to me to be questionable at best --  6a00d83455f15269e20133ecfd9a4b970b-580wi its most important contributions are being made right now. They are not judicial, but political. 

'Lord knows I've been about as critical as one can possibly be of Wall Street banks, as well as of unfettered free marktets. (See, for example, a, b, and c.)

However, after listing to today's  showdown hearings before  US Senator Carl M. Levin's Permanent Investigations Subcommittee,  I'm convinced that:

(1) If anyone needs the benefit of the new "financial literacy" program proposed  by S.3217, Senator Dodd's proposed financial reform bill, it is the US Senate. Many  members of the Senate -- and by extension, the House -- don't  seem to understand very basic things about  the structure and role of private capital markets, finance, and business economics, let alone global competition. In the world's largest capitalist economy, this level of ignorance  on behalf of our political elite is really mind-boggling.

Blankfein2 (2) After 18 months of intensive investigation, the US Senate's Permanent Subcommittee on Investigations  and the SEC have not so far been able to find anything that is clearly illegal to pin on Goldman Sachs.

(3) On the other hand, on the secondary trading side of Goldman's  business, Goldman traders  clearly have "market maker" ethics, not investment adviser ethics. They've grown accustomed simply to  providing market liquidity for whatever securities clients  happen to want -- or can be persuaded to want, even if Goldman is taking opposite positions at the very same time in the very same securities. 

For example, regardless of what Goldman's own sales people  felt about the terrible quality of the synthetic Goldmanlevinshorts CDOs they were selling in 2007  -- including many securities packaged out of  "stated income" mortgages --  they continued to sell anything for which there was a current price.  

Goldman's trader culture simply  doesn't  buy the notion that market makers  have any "duty to serve the best interests of their clients. In competitive world, this amoral culture may well be essential to being a successful "market  maker,"  and Goldman is one of the most successful secondary traders in the world  However, if we expect some higher standard of behavior toward clients, this is likely to require new rules; Goldman will never get there on its own.

Of course, in a highly competitive global market,  any such rnew ules might just cause  this entire business to move offshore, to London, Hong Kong, Singapore, or any number of other offshore financial centers.

Tourre2 (4) With great respect to Michael Lewis, the notion that Goldman Sachs engaged in a hugely profitable "big short" in 2007-2008, in the sense of secretly betting systematically against the same securities that it was underwriting for its clients, is easily overstated. Goldman's investment portfolio in mortgage securities turned negative in early 2007,  was net short all year long in 2007, and at times had up to $13 billion of gross shorts, the bank's net profits from all this shorting that year was $500 mllion to $1 billion. The following year, 2008, its mortgage portfolio lost $1.8 billion 

(5) There appears to be enormous pent-up rage and ressentiment in the country at large, right now, driven by the financial crisis, the slow recovery, high unemployment, and the loss of homes and pensions, on the one hand, and the widespread perception that banks not only created the crisis, but have also profited immensely from it.  Most people may not know a CDO from a dustpan, but there is a very disturbing tendency to seek scapegoats, dividing the world into villains and victims. Ironically,  the most obvious targets include companies like Goldman Sachs, one of our most successful, better-managed, if trader-ridden  companies.

(6) Compared to other major US banks, Goldman Sachs' role in the credit derivatives market, the mortgage Levin market, and bank lending in general, as well as in the roots of the most recent crisis, was minor at best. Indeed, compared with the more than $240 billion of past due/non-performing mortgage loans now on the books of the "big four" banks,  the sums involved even in Goldman's most questionable deals were trivial. Why the US Senate and the SEC decided to focus so heavily on Goldman, as compared with Citi, Bank of America, JP Morgan, and Wells Fargo, is an interesting political-economic puzzle.  

(7) On the other hand, these other major  private banks, plus Lehman  Brothers and Bear Stearns, were by far the largest players in the private mortgage market. If they  had followed Goldman's risk management, accounting, disclosure, and leverage practices, the worst of this crisis might well have been avoided.  Indeed, it appears that one reason these generally much larger firms did not adopt such practices was because -- unlike Goldman -- they genuinely believed they were "too big to fail."  

(8) Going forward, the real problem with Goldman market was not, by and large,  illegal behavior, but an excess of perfectly legal behavior that may well be socially unproductive and way under-regulated.  Especially in a world where other countries have fallen behind in the move to  update their financial regulations, dealing with this problem will require much more than lawsuits and investigative hearings.  


IN THE DARK TRUNKS...

Images Today's hearings probably came as close to fireworks  as investment banking and "structured finance"  ever gets.  In one corner there was 6a00d83455f15269e20134802d29fd970c-580wi Goldman Sach's slightly shaken,  but still-unbent  CEO Lloyd C. Blankfein (Harvard '75/ HLS '78).

 

There was also Blankfein's articulate, amiable  life-time Goldman employee David Viniar  (HBS '80); the now-notorious, side-lined 31-year old Goldman VP Fabrice P. (aka "fabulous Fab") Tourre (Stanford M.S. '01),  architect of the particular "synthetic CDO" at the heart of the SEC case;  and several other  past and present stars from the "devil bank's" specialists in mortgage banking.  

Apparently not pressent was Goldman's President and COO,  Gary D. Cohn (American U, 'whenever)  (aka "Aeolus,"). Perhaps he had flown to Athens to arrange more  cosmetic "dirty debt swaps"  for Greece,   

Article-0-092B46B6000005DC-273_233x423Ring-side support for the Goldman front line  was  provided by a hand-picked team of  very high-priced trainer/coaches.  This included former Democratic House Speaker Richard Gephardt,  former Reagan Chief of Staff Ken Duberst225px-Gary_D._Cohn_-_World_Economic_Forum_Annual_Meeting_Davos_2010ein, and Janice O'Connell (aka "Puerta Giratoria"), a former key aid to Senator Dodd.

 Senator Dodd, the retiring Chair of the Senate Banking Committee, has been working since November on  S.3217, an epic 1600-page bill that Senate Republicans (with perhaps a little help from Fed staffers who opposed the bill) have  just prevented from coming to a vote

Of course Goldman has also hired Obama's own former chief counsel Gregory Craig as a key member of its defense team.

Hedge-fund-managers-xmas-card

Once taken seriously as a "liberal" Democratic Presidential candidate, Gephardt has gone the way of all flesh, and is now  completely preoccupied with serving such worthy clients as Peabody Energy, the world's largest private coal company; NAPEO, an association of "professional employer organizations" that is trying to dis-intermediate what little remains of labor rights for outsourced workers; UnitedHealthCare, a stalwart opponent of the "public option" in health care reform; and of coursImages-2e, Goldman Sachs, which has also employed the  prosaic Missourian to pitch the (really insidious) idea of "infrastructure privatization"  all over the country to cash-strapped state and local governments.

IN THE WHITE TRUNKS.. 

In the other corner is the aging  heavyweight champion from Michigan. Senator Levin (Harvard Law '59), is a Carl_enron low-key but tenacious warrior, with a mean-right hook; Goldman would do well not to underestimate him.   He's a  veteran critic, investigator, and opponent  of  global financial chicanery, dirty banks, and tax havens -- except perhaps when it comes to GM's captive leasing shells and re-insurance companies in the Cayman Islands and Bermuda (Heh, even a Dem's  gotta eat!)  

Sen. Levin is backed up by several knowledgeable, tough cross-examiners, especially Democratic Sen. Kaufman of Delaware and Republican Senator Collins of Maine. On the other hand, Republican Senators McCain and Sen Tom Coburn  were a bit more  "understanding" of Goldman's basic amoral attitude toward market-making. 

FIRST ROUND

In handicapping this contest, some observers predicted that the best and brightest from our nation's leading  investment bank  would basically roll over the "old folks" from the Senate.

Panel In the first few hours, however, it quickly became clear that the bankers were a little under-prepared for the Senators' often-times impatient, hard-nosed tone, especially from former Prosecutor Levin, Collins, and Kaufman.

Nor were they prepared for the widespread, if perhaps naive and even "Midwestern" view  that there was just something fundamentally wrong with the lines Goldman drew between pure "market-making" and providing investment advice.

LEVIN DOG

For example, Sen. Levin  was a real rat terrier  on the question  of whether it was ethical for Goldman market-makers in 2007 to  be aggressively pushing clients like Bear Stearns  to buy a CDO security called "Timberwolf" that Goldman's own internal analysts had called  "shitty."  Meanwhile, Goldman's ABS group was shorting Bear by buying puts.  The panel of five present or former Goldman executives had trouble recognizing that there was any problem at all -- given the fact that, from a legal standpoint, Goldman had fully informed these clients about the risks they were taking.

For another $2 billion "Hudson" CLevin2DO deal that Goldman sold from its inventory, the firm's own sales people characterized the product as "junk," and indicated that more sophisticated customers might not buy it.  Yet, according to Senator Levin,  Goldman's selling documents for a portion of the sale characterized  the deal as one where Goldman's interests and the client's interests were "aligned" because Goldman retained an equity interest in the Hudson package. In Senator Levin's view, this  "retention" was misleading, simply because Goldman took time to sell down its position.

On the question of the Abacus transaction at the core of the SEC law suit,  Sen. Levin was able to establish that the  Goldman's  Tourre never told the German bank that invested in the deal that  John Paulson, the hedge fund manager who helped choose the portfolio, although he claimed to have told portfolio selection manager ACA.  Oddly enough, from what we heard about other "raw deals" today for the first time, this now appears to have been perhaps the weakest deal for SEC to attack.

Similarly, Senator Collins pressed a group of Goldman securities "market-makers"  very hard about whether  or not they felt they had a "duty" to work in the "best interests of their clients." The responses she received indicated that these Goldman executives, while insisting on the organization's high ethical standards, also simply "did not get" the point that there might be some higher ethical, let alone legal,  duties to clients, for pure market makers, beyond just providing them with legally-required disclosure.

CONTEXT

Senator Levin claimed that these hearings have been in the works for more than a year. He says that it is just sheer coincidence that they are occurring soon after the SEC decided to file its case by a narrow 3-2 party lines vote, and right when Senator Dodd's reform bill just happens to be on the verge of being introduced. 

Other sources indicate that Levin's investigation had been scheduled to continue through May, and that it was abruptly rescheduled after the SEC vote.

Furthermore, for someone who is supposedly holding hearings to gather facts and find out what was really went on,  Senator Levin had already formed quite a few strong opinions prior to hearing from any witnesses -Anti_banker_small- as shown in his latest press release.  

 But so what?  Even if  he's was a little simplistic, filled with anti-bank animus, and eager to portray the financial crisis as a kind of morality play,  and even if there's no big payoff other than the theatrics, it was definitely kind of fun to  watch the "show trial" -- finally  see someone  asking  big bankers tough questions under oath.  After all,  regardless of what  "caused" the financial crisis and its interminable aftermath,  it is pretty clear who is paying for it -- and it is certainly  was neither these Senators nor the bankers in the dock. 

( Stay tuned for Part III, which takes a closer look the Goldman Sachs case in light of these hearings, and consider the broader question of other "big bank" roles in the crisis.)

***

(c) JSHenry, SubmergingMarkets (2010)

April 27, 2010 at 07:35 AM | Permalink | Comments (1)

Thursday, April 22, 2010

THE GOLDMAN SACHS CASE
Part I: "Clowns to the Left of Me"
James S. Henry


Article PDF

Goldman Defense PDF

Monty_python_witch Bankers_1294271c Well, we no longer have to worry only about corrupt bankers in Kyrgystan. Ever since the Goldman Sachs case erupted last week,  there's been plenty of fresh banker blood in the water right here at home, with scores of financial pundits, professors-cum-prosecutors, and political piranha swirling around the wounded giants in the banking industry as if they were a herd of cattle crossing a tributary on the upper Rio Negro.

This feeding frenzy was precipitated by last Friday's surprising SEC announcement of civil fraud chargesKillerfish against Goldman Sachs -- heretofore by far the most profitable, highly-respected, and, indeed, public-spirited US investment bank.     

Despite6a00d8341c652b53ef0120a8704c30970b-120wi -- or more likely because of --  Goldman Sach's  relatively clean track record and  illustrious credentials, many commentators  have assumed a certain Madame Defarge pose, reigning  down  censure and derision from the penultimate rungs of their  mobile moral pedestals. 

Over the weekend, for example,  Huffington  featured a  half dozen vituperative columns on the subject, including  a Vanity Fair contributing editor's feverish claim that the whole affair was somehow deeply connected to one high-level Wall Street marriage, and an MSNBC host's denunciation of Goldman 356323163v_225x225_Front_padToSquare-truefor refusing to appear on his show -- his show ! There was also a plea from Madame Ariana for criminal charges.

In fact, this is a case where, as we'll see in Part III, the SEC's civil charges against Goldman Sachs are not only highly debatable, but largely beside the point.  

Kuttner Meanwhile, Bob Kuttner,  another Huffy perennial, and one of our most prolific popularizers of conventional liberal dogma, asserted  that Goldman demonstrates conclusively that Wall Street en tout  is nothing but an on-going criminal enterprise, up to its eyeballs in outright fraud

In a lurch toward financial Ludditism, Bob figuratively placed his hands on his hips, stomped his feet,  and demanded nothing less than a "radical simplification of the financial system" -- leaving it to the reader's imagination to determine just what the hell that means. 

Will we still be permitted to use ATMs, checking accounts and paper currency, or  will we all soon have to return to  wampum beads and n-party barter?    56

Elsewhere, the Daily Beast published a de facto job application  from Harvard Law's Prof. Alan Dershowitz -- otherwise well known in the legal profession as "He whose key clients are either fabulously wealthy or innocent."  

Prof. Dershowitz argues -- quite rightly -- that Goldman'  behavior, while no doubt morally reprehensible, was also by no means clearly illegal. On the other hand, he also says the law is so vague that hedge fund investor Paulson might even be charged with conspiracy to commit fraud.

Well, ok -- except for the article's faint suggestion that for a modest  fee, our country's  finest criminal lawyer may just be available to help explain all  this to a judge --  and also to argue that  "only a tiny fraction of investment bankers who abuse their clients actually commit murder."  

THE RECKONING

0506-fmi_m_0 Finally, there is the omni-present, virtually unavoidable  Simon Johnson, a Peterson Institute Fellow, MIT B-school prof, book author, "public intellectual,"  and  "contributing business editor" at Huffington.

This week has been  Prof. Johnson's heure de gloire, and he is living it to the fullest.

All week long he could be found at all hours on nearly every cable  news channel and web site, pitching his own increasingly Puritanical, if not neo-Manichean views of the banking crisis and Goldman's role in it.

At first,  Prof. Johnson merely expressed delight that the US had finally reached its "Pecora moment" --   referring to the 1933-34 US Senate investigation of Wall Street that, indeed, makes the modest $8 million  Angelides Commission look like a California '68 love-in.

But by mid-week he'd had moved on to a much harsher assessment.

Not only is Goldman guilty as sin, but  hedge fund investor John Paulson,Newalqaida one of the key parties to the Goldman transaction, deserves to be "banned for life" from the securities industry.  If necessary, Johnson says, the US Congress should even  pass an ex post facto bill of attainder!

Piranha-eat-cows-1 Now of course Prof. Johnson hails from the UK.

He may therefore not be aware that the US Constitution (Article 1, Section 9) has explicitly prohibited both ex post facto laws and bills of attainder (legislative decrees that punish  a single individual or group without trial) ever since 1788.

Just this month, a US federal  district court in New York struck down Congressional sanctions that singled out ACORN, the community organizing group on precisely these grounds. The case is now on appeal.

Indeed, even in the UK, there have been no bills of attainder since 1798

MATERIAL OMISSIONS

Despite Prof. Johnson's limited grasp of US or even UK law, and his Draconian appetites, I've  actually grown rather fond  of him lately -- or at least more understanding.

This is partly because since he left the IMF in September 2008, he's apparently had a kind of  road-to-Damacus epiphany.

He now realizes, as if for the first time, the enormous carnage that has been inflicted by a comparative handful of giant global banks, as well as  the huge potential rewards  of  decrying these outrages from the roof tops.

356509241v_225x225_Front_padToSquare-true One of only nine "former IMF Chief Economists" who still walk amongst us,  Prof. Johnson may have only served in that post briefly,  from March 2007 until September 2008. 

But that 1+ year was more than enough  time for him to leave a lasting impression at the IMF. 

He is still fondly remembered at the IMF not only for  having entirely missed the 2007-08 mortgage crisis even as it was unfolding, but also  for deciding in July 2008,     less than 3 months before the entire global financial system nearly 356322446v_225x225_Front_padToSquare-true collapsed, to sharply increase the IMF's growth forecast for both 2008 and 2009. 

That was  just one month before the otherwise-feckless Bush SEC initiated the 18-month investigation of Goldman Sachs that  ultimately led  to last week's charges. 

If and when the Goldman Sachs case ever comes to trial, therefore, it may be interesting for Goldman's attorneys --   perhaps Prof. Dershowitz -- to consider calling Prof. Johnson as a witness for the defense.

After all, he probably qualifies  as an expert on the heart-rending experience of just how difficult it was even for highly-trained experts to have clear peripheral vision, much less perfect foresight, back in the heady days of the real estate boom.

John-Paulson He may also be able to instruct the jury on the fine arts of concealing what one really believes  in order to reconcile the divergent interests of multiple clients. 

In Prof. Johnson's case, these included IMF senior management,  executive directors, and a myriad of country officials who were all pressuring the IMF to inflate its forecasts back in 2008,  just as housing markets and financial markets were beginning to crumble.

In July 2008, on Prof. Johnson's watch,  they temporarily prevailed.

From this angle, the IMF Chief Economist's role might even be compared to that of a certain young Goldman Sachs VP. 

CONSOLATIONS

Even in the dark days ahead, therefore,  Goldman Sachs execs have at least a few consolations.

First, they can remind themselves that there were very damn few heroes in this sordid tale -- journalists, politicians,  public intellectuals, and economists included. 

Indeed,  Brooklyn-born investor John Paulson may turn out to have been, if not quite a "hero," at least  one of the few relatively  straightforward and consistent players in the lot.  

At least in his own investing, he consistently opposed the systematic distortions about the housing miracle and  the exaggerate  forecasts --  dare one say frauds? -- that institutions the US Treasury, the Federal Reserve, and Prof. Johnson's own IMF employed in the final stage of the real estate bubble, in a failed attempt to achieve a 'soft landing.'  

Second, while it may be hard for us to imagine,  things might actually have turned out a whole lot worse. 

Goldman Sachs might well have relied on Prof. Johnson's sophisticated, bullish forecasts rather than on  John Paulson's intuitive short-side skepticism. 

How much money would Goldman's clients, investors, and the rest of us have lost then?

☀☀☀

© JSH, SubmergingMarkets, 2010.




April 22, 2010 at 06:43 AM | Permalink | Comments (3)

Thursday, April 01, 2010

ORDINARY INJUSTICE
Even Beyond Guantanamo, Rendition, and Torture, the US Criminal (In)Justice System Is a National Disgrace
James S. Henry

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CRIMAMERICACHART (click on graph to expand)

In 1840, Tocqueville, otherwise usually an astute observer of American society, proclaimed that “there is no 8968 country where criminal justice is administered with more kindness than in the US.” 

In the modern-day  “Law and Order”/ Perry Mason made-for-TV  version of this story, the US is still viewed by many as having,  in author Amy Bachs words,  “the world’s finest criminal justice system.”

Certainly this is the preferred self-image when, as it is wont to do, the US criticizes the quality of criminal justice in other countries.

 In this sanguine view, US prosecutors, police, investigators, and judges leave no stones unturned to see that crimes are punished, justice is done, and the  US Constitution is respected.

Juries take their independence seriously and fight tooth and claw for the truth;  parole officers and prison wardens are all deeply committed to “correction.”

Public defenders are not only thoroughly informed about  the latest nuances of criminal law,  but also work tirelessly to insure that each and every defendant has his day in court.  

MainAmy_BachRachel_Gracie Fortunately, Ms. Bach, a young New York attorney and law professor,  has provided a compelling, well-researched antidote to this conventional fairy tale. 

Her new book, the product of seven years of first-hand research in the bowels of the state and local court systems of New York, George, Mississippi, and Chicago, focuses on “ordinary injustice -- the routine failure of judges, prosecutors, and defense attorneys as a community  to deliver on the Constitution’s basic promises.

EXCEPTIONS?

Tocqueville was not alone in his naivete'. Initially, the sheer amount of attention given to criminal justice in the US Constitution as well as state constitutions led many observers to  expect that the US  really might be distinctive.

StoryIndeed, criminal rights are the subject of Article I’s explicit reiteration of habeas corpus, plus four  of the first ten amendments (known  collectively as the “Bill of Rights”), and their extension to states and non-citizens by the XIV th  Amendment.

Of  course legal scholars have long been aware of serious gaps between theory and practice  with respect to such rights.  But the gaps have usually been regarded as exceptions. 

Many of the exceptions have occurred in times of war or perceived security  threats  – for example, the Sedition Acts of 1798 and 1918, the World War II internment of Japanese-Americans, the frequent persecution of labor unions, civil rights workers,  and Left wing dissidents from the 1880s right up through the 1970s,  the 2001 Patriot Act, the NSA's illegal spying program, and the systematic mistreatment of "enemy combatants" at Guantanamo and elsewhere. 

Other exceptions have involved the application of "Jim Crow justice” to native Americans, Afro-Americans, and other minorities.

Overall,  however,  most legal scholars have treated these episodes as abnormal deviations. In the long run,  the system as a whole is supposedly always improving,  always trying to do the right thing. 

On this theory,  the US Constitution and the courts that interpret it  are a kind of homeostatic machine, with built-in stabilizers that eventually prevent any serious rights violations from becoming permanent.

THE REALITY: FAST-FOOD JUSTICE

Ccritics on the Left have long maintained that in practice, no such automatic stabilizers  exist. From this perspective,  securing human rights is not ever accomplished once and for all, but  requires a constant, repetitive struggle.

It is also conceivable that "path dependency" and "feedback loops" in the legal system may  be destabilizing. The erosion of rights in one period may increase the chance that rights continue to erode later on.

Critics of the conventional view have also argued that rich people and poor people – including the indigent defendants who now account for about 70 to 90 percent of all felony cases –  essentially confront two very different US criminal justice systems,  especially in state and local courts. 

Only a tiny fraction of mainly affluent criminal defendants ever receive   full-blown Perry Mason/ Alan Derschowitz-type adversarial trials -- and even there, as Harvey Silverglate's recent book emphasizes, even the affluent still face the hazards of vague statutes and prosecutorial zeal. 

Meanwhile, 90 percent of criminal defendants soon learn the hard way that their nominal "rights"  consist of one brief collect call from a jail cell, followed by a tango with an alliance of police, prosecutors, and public defenders whose shared objective is to talk them into pleading guilty.

As Clarence Darrow said in his 1902 address to the inmates at the Cook County Jail, “First and foremost, people are sent to jail because they are poor.” And as the American Bar Association  -- not usually aligned with wild-eyed radicals -- reiterated in 2004, “The indigent defense system in the US remains in a state of crisis.”

Gat_0000_0001_0_img0083  This pervasive “fast food”/ assembly-line plea bargain system  is hardly new, although it has recently become a much greater problem than ever before because of soaring rates of incarceration in the US, as we'll see below. 

DETAILS FROM THE FRONT

 The special merit of Ms. Bach’s book  is that she takes such pat generalizations  about “ordinary injustice” down from the shelf  and brings them to life with a series of extraordinary case studies.

In doing so, she tackles one of the main challenges that confronts any investigator who seeks to understand how the criminal justice system really works. This is the fact that “ordinary injustice,” while pervasive,  is very hard to observe without detailed, painstaking field work.

 As Ms. Bach emphasizes,  this lack of transparency also prevents the public from being able to tell  just what they are getting for the hundreds of billions of  taxes  spent on the criminal justice system --  as well as  how the courts are doing with respect to delivering what is supposed to be their key product – justice. 

 One immediate benefit of Ms. Bach's field work is a rich trove of amazing real world stories about how the system actually works.

 ✔   For example,  in her book we meet a Troy New York city judge who routinely fails to inform defendants in his court Blindjustice of their rights to counsel, imposes $50,000 bails for $27 thefts and $25,000 bails for loitering, and enters guilty pleas for defendants without even bothering to tell them.  

 ✔  We meet a Georgia public defender who runs a “meet’ em, greet’em, and plead ‘em”  shop that delivers just 4 trials in 1500 cases, with guilty pleas entered in more than half of these cases without any lawyer present or any witnesses interviewed. 

 ✔  We meet Mississippi prosecutors who are so concerned about their win/loss records and reelections  that they simply “disappear” all the harder-to-prosecute cases from their files. 

  We meet a Chicago prosecutor who allows two iinnocent young people to sit in jail for 19 years before he finally works up the gumption to examine the relevant DNA evidence. This new evidence not only cleared them, but it also helped to disclose a much larger  police conspiracy.

  Ms. Bach also reminds us of the unbelievable 2001 case before the Fifth Circuit Court of Appeals (Texas)  where the court labored hard to overrule a lower court decision that would have permitted a defendant on trial for his life to receive the death sentence, despite the fact that his attorney had been fast asleep through much of the trial.  

PATTERNS

Amy Bach’s  book is more than just a series of such horror stories, however.  By doing  painstaking legal anthropology in multiple locations, she's been able to go beyond the limits of the typical one-off journalistic expose about the courts. (See, for example,  A, B, and C.) 

Bach's focus is on identifying recurrent patterns of misbehavior. These patterns were unfortunately  not “exceptional” at all,  but routine and widespread.

Prison Most important, her research underscores the fact that  ordinary injustice is not just due to isolated “bad apples.”  There is a system at work here.  Indeed, injustice thrives on a culture of tolerance for illegal practices  cultivated in whole communities of lawyers, judges, and police over many years.  This culture, and the “fast food”  plea bargaining  that  it facilitates,  are at the root of all her cases. 

Unfortunately Ms. Bach offers no real solutions to the problems that she has described so well. She ends up leaning rather heavily on a fond hope that “new metrics”  will be developed to measure how well individual courts actually deliver “justice” -- sort of the legal equivalent of "No Child Left Behind."  

There may be something to this. But in my experience,  metrics, whether in education or judicial policy,  are the last refuge of the policy wonk.  They will  undoubtedly be a  long time coming. This is  partly because of budget constraints. But  it is also because if the metrics are really worth a damn, they will  provoke stiff resistance from the  very same bureaucratic interests that Ms. Bach had to overcome  in her own research. 

Pending the dawn of this brave new world of  metrics,  I suspect that we will just have to depend on a handful of dedicated lawyers,  investigative journalists, and creative legal scholars like Ms. Bach to keep an eye on the courts,  root out what’s really going on,  and insist that all of the rights we have on paper and take for granted are  still around when we really need them.

ROOT CAUSES

So where does “ordinary injustice” come from, and what can we do about it?  Fundamentally, as noted, the kind of ordinary injustice described by Ms. Bach basically exists because of the “fast food” plea bargaining system. But as she also recognizes,  it would be a waste of time to outlaw this directly. This is  because the plea bargaining treadmill basically derives from the unsuccessful attempt to reconcile several deeply-inconsistent public demands. 

First,   9/11, the war on terror and GWB notwithstanding, most Americans still fundamentally believe in freedom.  Most of us still want to preserve the Bill of Rights --  at least on paper. 

Second,  we all want to save money – especially in these times.  Implementing the full-blown version of theCrowdedPrisons adversarial trials in  every case would be very costly. While taxpayers value human rights, they’re not all frothing to pay a whole lot for them. This is partly just because at any given point in time   their value is a little abstract --  like health insurance before you become ill.

Of course the truth is that the  “fast food” system is anything but cheap. The entire  system –  courts, prisons and police – now costs US taxpayers over $250 billion a year.  That figure has been growing like Topsy – it  is now at least three times the 1990 level.

Over  80 percent  of these costs are born by the hard-pressed state and local governments.  Most of the funds are digested by police and prisons;  courts only account for about one fifth.  Even so, it is far from clear that ordinary  taxpayers  – most of whom never expect to see the inside of a criminal court or jailhouse  themselves --  would be willing to pay anything more to help defend the poor  or curb ordinary injustice. 

Third, what US taxpayers do care about, at least until now,  is “fighting crime,” especially drug-related and lower-level  street crime. Ever since the 1970s, these have been the fastest growing contributors to system-wide criminal justice costs.

For many  taxpayers, under the influence of thirty  years of campaign propaganda from  the “war on drugs” industry and “tough-on-street crime” politicians, this has usually been reduced to  “lock ‘em up  and throw away the key, as fast as possible.” 

The result is that today, in the US, the number of inmates in our local jails and state and federal prisons is at an all-time high: over 2.3 million, 6.8 times the number in 1974.

This means the US has the highest per capita incarceration rate in the world. It is  754 per 100,000, higher than Russia (610), Cuba (531), Iran (223), and China (119),  let alone developed countries like the UK (152), Canada (116), France (96), Germany (88), and Japan (63).


  Indeed, southern states like Louisiana (1138), Georgia (1021), Texas (976),  Mississippi (955), Oklahoma (919), Alabama (890),  Florida (835), and South Carolina (830) have distinguished themselves with even higher rates -- by far the highest rates of incarceration in the world.
  This policy appears to be driven in part by the political benefits of so-called "prison gerrymandering," which permits prisoners to be counted as residents of the places where prisons are located, rather than where they come from, for purposes of allocating legislative seats. 


This alone helps to explain the fact that annual cost of all US prisons now exceeds $80 billion a year. Indeed, the annual cost of warehousing prisoners in California and New York prisons is at least $50,000 per year per prisoner – much more than the cost of providing them with full time jobs outside!  In addition, in the US, there are over 9 million former prisoners who are now outside prison. More than  5.1 million others remain under supervision, on parole or probation.

090823-prison-hmed-11a.hmedium All told,  the US now has more than 11.3 million past and present inmates. This is  the world’s largest domestic criminal population, an incredible 23.5 percent of all current prisoners in the world.  No doubt the sheer scale of our “criminal industry experience curve”   gives us at least one  clear national competitive advantage -- in crime.  

Indeed, because of our  propensity to throw people in jail regardless of what becomes of them there,  we now account for over a third of the entire world’s living past and present prisoners.  Not surprisingly, this also affords us by far the most costly judicial and corrections systems that the world has ever seen.

For all these costly incarcerations, despite the vast sums and short-cuts associated with processing all of these millions through the pipeline as rapidly as possible, there is not one speck of evidence that this system has contributed one Greek drachma to falling crime or safer streets. 

Indeed, the best evidence is just the opposite. Over two-thirds of US offenders who are released from Justice2 prison are likely to be re-arrested within three years.  Reactionary voices may argue that this just shows we should hold more of them longer, a sure recipe for system bankruptcy. What it really shows is the complete lack of  any real “correction” or retraining in most US prisons. The system that the entire criminal justice machine works so hard to get people into as fast as possible has become the world’s largest training ground for serial offenders.

In short,   if we really want to understand the roots of "ordinary injustice,"  as well as  the intense pressure that each and every player in the US criminal justice system feels to cut corners and slash costs each and every day,  we need to look no further than this self-perpetuating  failed prison state-within-a-state.

After all, this particular failed state already has a total population of current inmates and former inmates under supervision that is greater than Somalia’s!

 

***

April 1, 2010 at 04:36 AM | Permalink | Comments (1)

Monday, March 22, 2010

"WE HAVE LIFT-OFF!"
What a Difference a Day Makes to Obama's "Base"
James S. Henry

ObamaHealthCare It was altogether fitting and proper that yesterday's historic House vote on health care reform took place on the first day of Spring 2010. All across the country, progressive activists -- including many of us who worked hard for President Obama's election not only in November 2008 but in endless primaries before that --  have been  in a deep funk about the Administration's "failure to launch" on a wide range of issues, from health care and immigration reform to climate change and financial regulation, to Guantanamo and Middle East peace talks.

For months it seemed as if our two-party system had been surrendered to  a one-party veto,  that  Hill Democrats had become feckless and supine,  and that  "Si Se Puede" had somehow been translated into "Beltway" as "No Way, Jose."

Now the clouds have lifted, at least temporarily, and the first rocket soars skyward. Of course this is only the beginning. But it sure feels good for a change to be staring up at the sky, watching that baby split the clouds.

PURISTS

 Some purists on the Left are already denouncing the House bill as a handout to insurance companies that falls far short of the "single payer" or "Mao200132public option" alternatives of their dreams. Of course the bill also does not extend public subsidies to cover abortions -- although that was already the case under existing Federal law.  

 Despite these shortcomings, most progressive observers -- including Krugman, Kucinich, and Michael Moore -- see this as a critical step forward.

They realize that the only alternative to passing the House bill was a Republican victory that would not only have jeopardized the rest of the Democratic agenda for the rest of this year, but would have also led to a catastrophic defeat at the polls in November.

Short of organizing yet another doomed Third Party quest, they  also realize that there is simply no alternative to pushing for further reforms within the Democratic Party.

BAGGERS

Meanwhile, on the Right, as usual, there is Sturm, Drang, und Zorn, all of which add up to a strong primaTeabaggers3 facie case for providing free anger management coverage to qualified Republicans  in the final Senate health care bill.  

Vulture capitalist Mitt Romney, author of a not-wildly-dissimilar Massachusetts health plan, has already promised to seek to "repeal" the bill, while a group of mainly Red State attorney generals is threatening  to challenge the bill's constitutionality.

Meanwhile, the rag-tag "Tea Bag" army has completely lost control, exposing its frothing bigotry and astounding ignorance for everyone to see.

Angryright Far from being intimidated by these reactionaries, Democrats should be delighted. Not only is all the adolescent right-wing rage unappealing, but it is a sure sign that our policies are finally shaking things up.

BASE JUMP

Net net, the impact of this bill's passage on Obama's  "base" is one of its most important consequences -- in addition to  the series of health care reforms that are now much more likely to follow.

Eventually these  reforms really will help the millions of Americans who struggle each and every day with our high-cost,  minimally-efficient health care system. 

Meanwhile, this victory has an immediate short-term payoff. It reminds Obama's  "base"  that, as President Obama said last night, "Big changes are still possible in America." 

It also  reminds us of how good it feels to actually win.

Far beyond health care,  as the American Right clearly fears more than anything else, this  could provide a huge lift for many other progressive reforms.

Houston, we have lift off!

***


March 22, 2010 at 01:42 PM | Permalink | Comments (1)

Tuesday, March 09, 2010

THE ROBIN HOOD TAX

Why Doesn't Obama Support This Very Modest Progressive Tax?
Just Guess Who Opposes It!
James S. Henry

While we wait patiently for any signs whatsoever of progressive change in America, progress is still being made, deo gratis, elsewhere. Of course this is no thanks to the banker-minded Spartans who still occupy the Trojan Horse that is become the US Treasury Department.

Today the European Parliament adopted a resolution supporting the kind of global financial transactions tax that is discussed in the extraordinary performance by Bill Nighy below. For more information about the European action, please follow this link.

NGOs like Tax Justice Network International, Oxfam GB, Global Financial Integrity, Action Aid, New Rules, Christian Aid have all been working hard to support this proposal. They could use your active involvement and support -- right now.

As the Puritan minister Stephan Marshall once said in a sermon addressed to Parliament in 1641, "You have great works to do, the planting of a new heaven and a new earth among us, and great works have great enemies."

(If for some odd reason the video does not appear below, please travel here to get it.)


March 9, 2010 at 10:21 PM | Permalink | Comments (1)

Tuesday, November 10, 2009

True Unemployment: 20% and Still Rising
Send Geithner Home to Wall Street!
His Legacy: 30+ MM Underemployed, Failed Stimulus, No Bank Reform, Soaring Deficits, Sinking $$
James S. Henry

Reservearmyjsh112009 Geithner2 With official US unemployment now at 10.2 percent,  the third highest among the 29 OECD countries,  and unofficial unemployment at least two times  higher, more than 30 million American workers and their families are now being forcefully reminded  every day that "the reserve army of the unemployed" is not just pure Marxist rhetoric.  

While China and most developing countries are already recovering nicely from this First World-made debt crisis, all indications are that US unemployment is still rising, and that we will soon see a new postwar record -- -- two years after the "Great Recession," the longest and deepest since the 1930s,  began in December 2007. 

UNEMPLOYMENT:  GET REAL

To get the real unemployment picture, we need to adjust the official statistics upwards. First, as the Bureau of Labor Statistics' own data shows, the "official" rate leaves out many workers who are (a) underemployed, working only part time when they'd prefer full time jobs (9.3 million now); (b) fully unemployed,  and desirous of jobs, but not counted in the official statistics because they've given up look (2.3 to 5.6 million). Allowing for these two adjustments already boosts "underemployment" to the 17.5% figure cited in some recent press reports.

But even that figure is too low.  First,  it omits the country's 20 million "self-employed" (incorporated and unincorporated), a growing share of the labor force. All  are counted as "employed" in the official statistics, no matter how underutilized they are. Yet other surveys report that this group is also experiencing serious underemployment.

Furthermore, the official statistics also leave out  about 1.6 million who are now serving in the military, plus the record 2.33 million  US prison inmate population. Both populations are heavily young, male,  and undereducated, and would therefore experience relatively high unemployment. This is especially important for the sake of historical comparability  -- say, for comparisons with the 1930s, when the US military  and the prison populations were both tiny. 

In addition, of course, when the Great Recession started there were at least 8 to 10 million undocumented workers in the US, none of whom appear in the official statistics. Whatever we think of illegal immigration, the fact is that most of these workers have not been able to return to their homelands, and are still here, quietly suffering through this recession. Indeed, to the extent that they are unable to draw on unemployment benefits and other social programs to cushion the blow, they are being forced to compete with the rest of us more fiercely than ever.

All told, therefore, as shown in the adjacent chart (click to pop up), this makes the "real" US unemployment in October 2009 at least 20 percent or more -- twice the official rate.

TO WHOM DO WE TURN?

One might have expected this historic jobs crisis to have provoked a quick, decisive response from Washington  Unfortunately, American workers have also recently been reminded that, disturbingly, the Democratic Party can simply no longer be counted Picture-141on to put labor's interests ahead of capital's. 

This was evident to some of us when Obama's first stimulus package was being designed -- given that it was loaded up with so many Christmas goodies for special interests and so many regressive tax cuts. 

But by now it should be clear to anyone but the most bullet-headed diehard party ideologues.

Whatever else Obama's February 2009 stimulus package has accomplished, it simply hasn't created nearly enough new jobs, fast enough.

Codepinkfiregeithner-1 Nor has it provided nearly enough aid to debt-ridden homeowners --  as the continued record-setting pace of home foreclosures and bankruptcies testifies.

These basic policy shortcomings are not due to some Herbert Hoover or Ronald Reagan.  While Obama obviously inherited a mess, by now enough time has passed that his administration has become responsible for  its continuation.

How high does unemployment have to go for the Obama Administration to actually  want to do something more about it?

When FDR took office in March 1933, unemployment stood at nearly 25 percent of the labor force, and heFigure5.4 immediately took decisive action to make sure that unemployment was reduced, by establishing targeted federal job creation programs, attacking anti-competitive practices by large banks and corporations, and making sure debt relief got through to small businesses, farmers, and homeowners. 

What is it about the character of the Obama Administration that has made its response so different?

THE FIFTH COLUMN

As we've argued for some time (See "The Pseudo Stimulus," The Nation, February 3, 2009, and "Too Big Not to Fail," The Nation, February 23, 2009),  one basic problem seems to be that Obama's Administration, unlike FDR's, has been overly dependent from the get-go on pro-Wall Street insider/ fifth columnists, captained by the Supreme "Jimmy Do-little"/  Andrew Mellon of the period,  Treasury Secretary Timothy Geithner. 

Not only has Geithner  been far too slow to recognize that the first stimulus was woefully inadequate.

Unemployment-line-nyc-depression Time and again, he and his x Goldman groupies at Treasury have also piled out of the Trojan horse to defend traditional Wall Street prerogatives. They have:

  • ☛Opposed serious restrictions on executive compensation and perks for senior bank staff that are unrelated to performance;
  • ☛Opposed  clawbacks or windfall profits taxes on the hundreds of millions in stock options  granted by bailed-out banks last spring;
☛Opposed serious debt relief for homeowners, and failed to strengthen the loan modification program introduced last spring, even after it had clearly failed;

☛Failed to fight hard for "cram-down" legislation that would have required banks to accelerate loan Unemployment-1modifications;

☛Opposed   the establishment of a new independent consumer protection agency for financial products; 

☛Opposed forcing banks that have accepted US aid to accelerate lending to small business and homeowners;

☛Opposed proposals for a "Tobin tax" on financial transactions, as suggested by the UK and France, as a way of financing climate change aid;

☛Opposed G20 proposals to clean up a wide variety of tax haven abuses by major bank and companies around the globe;

☛Failed to achieve any serious reforms whatsoever  of financial regulation, more than a year after the crisis;

☛Failed to get anywhere with the vaunted "toxic asset buyback" program;

☛Insisted that any reforms leave the ultimate regulatory authority in the hands of the US Federal Reserve  -- an anti-democratic, pro-Wall Street institution if ever there was one, whose policy errors  have contributed significantly to this costly crisis. 

LOSE THE BOZO

Of course at this stage, with US budget deficits at a postwar high, and controversial measures like health care reform, climate change, Afghanistan, and immigration still in stuck in traffic, plus a mid-term Congressional election fast approaching,  it may well be too late for the Obama Administration to propose a second stimulus. If this were going to happen, it  would have needed Treasury and White House leadership already. 

Geitherobama1 It is not too late, however, for Obama to send a signal that he actually holds his own senior executives accountable.

Secretary Geithner, I'm told, already has multiple job offers from at least a half a dozen leading banks and hedge funds, so he will only profit from this exit  -- which he probably anticipated all along. 

By clearing the decks and bringing in a fresh team with some new, more progressive ideas,  more daring-do, and independence, this could  help prevent Obama from repeating Jimmy Carter's sad, rapid one-term involution. 

In any case, when the history of the Obama Administration is written, it is worth remembering that at least a few progressives warned about all this very early  --  the risks of adopting a "pseudo-stimulus," failing to aid small debtors and businesses, and failing to exert strong control over the banks.

Ultimately, that may be one of the biggest costs of this crisis --  the lost opportunity to show that Democrats really are still capable of providing the country with outstanding, disinterested economic leadership in times of crisis. 

(c) SubmergingMarkets, 2009

November 10, 2009 at 01:35 AM | Permalink | Comments (2)

Friday, October 02, 2009

Pittsburgh's State of Siege

Suppressiing Dissent With High-Priced Cop Toys

James S. Henry
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You didn't hear much about it from any major US news organizations, but there was a very disturbing case of gratuitous police-led violence and intimidation at the G20 Summit in Pittsburgh on September 23rd-25th, 2009. Perhaps the only consolation is that it allowed those of us who were there to get a close look at some of the disturbing "brave new world:  technologies for anti-democratic crowd control. These were initially developed by the US military to fight terrorists on the high seas and abroad, in places like Afghanistan, Somalia, and Iraq, but are now coming home to roost.  Indeed, ironically enough, this is one of the few remaining global growth industries where the US is still the undisputed world leader, as we'll see below.


Police2 One local newspaper account described  the events at the Pittsburgh G20  as a "clash" between the police, protesters, and college students. 

Indeed, a handful of storefronts were reportedly broken on Thursday September 24 by a  few unknown vandals. 

However, based on our own visit to the summit,  interviews with several students and other eye witnesses,  and a careful review of the significant amount of video footage that is available online, the only real "clash"  that occurred in Pittsburgh on September 23-25, 2009, was between lawless policing and the Bill of Rights. 

The most aggressive large-scale policing abuses occurred from 9 pm to 11:30 pm on Friday September 25th near Schenley Park, in the middle of the University of Pittsburgh campus. This was miles away from the downtown area where the G20 had met, and, in any case, it was hours after the G20 had ended.

This particular case of aggressive policing -- "Hammer and Anvil," as the operation was described on police scanners -- was clearly not just a matter of a few "bad apples." 

Rather, it appears to have been part of a willful, highly-organized, one-sided, rather  high-tech experiment or training exercise in very aggressive crowd control by nothing less than a really scary uniformed mob.

New York police sometimes describe their firemen counterparts, tongue in cheek, as "robbers with boots." In this case we have no hesitation at all in describing this uniformed mob in Pittsburgh as "assailants with badges."

Their actions resulted in the unlawful suppression of the civil rights of  hundreds of otherwise-peaceful students who were just "hanging out with their friends on a Friday night in Oakland," or attending a free jazz/blues concert in Schenley Park. 

Essentially they got trapped in a cyclone of conflicting and inconsistent police directives to "leave the area." The result was nearly 200 arrests, gassings, beatings, and the deployment of dogs and rubber bullets against dozens of innocent people.

In addition to the students,  this aggressive policing also assaulted the civil rights of a small number of relatively-peaceful protesters and quite a few ordinary Pittsburgh residents, most of whom were as innocent as bystanders can possibly be these days. 

Why did this occur?  In addition to whatever top-down "experiment" or training action was being conducted there appears to have been an extraordinary amojnt of pent-up police frustration and anger.  For example, one student overheard a policeman piling out of a rented Budget van near Schenley Park around 9:50 PM Friday.

The officer was heard to exclaim, "Time to kick some ass!"

This is disturbing, but perhaps not all that surprising. After all, thousands of police had  basically stood around for days in  riot gear, sweltering in the "Indian Summer" heat, dealing with  the tensions associated with potential terrorist attacks as well as all the hassles of managing large-scale protest marches, even if peaceful.There was also the inevitable tensions of social class and culture among police, Guardsman, and college students.

On the other hand, precisely because such tensions are so predictable, those in direct command or higher political office, and, indeed University officials, should have acted forcefully to corral them.

JOIN THE CLUB


ArrestedstudentposedwithpoliceAll this means that Pittsburgh  has unfortunately now joined the growing list of  cities around the world that have experienced such serious conflicts -- mainly in connection with  economic summits or national political conventions.

The list of summit frays includes this summer's G-8 in Italylast Spring's G20 in London,  the September '08 RNC in Minneapolis,  the '04 RNC in New York City, Miami's Free Trade Area of the Americas Summit (11/03),  Quebec (4/01),  Naples (3/01), Montreal (10/00),  Prague 9/00), Washington D.C. (4/00),  the  November '99 WTO "Battle in Seattle," the J18 in London (6/99), Madrid (10/1994), and Berlin (9/88).

President Obama had  originally selected Pittsburgh for the G20 because he hoped to showcase its recovery  since the 1980s, especially in the last  few years, under a Democratic Mayor, in a Democratic state that he barely carried in the 2008 Presidential contest. 

In seeking to explain such events, therefore, it alway helps to keep a firm eye on the question -- whose interests did really  this serve?

In retrospect, the failure of these leaders to control the police at the G20 has created a serious blemish on the city's reputation for good government. It may have also to some extent undermined Obama’s relations with college students and other activists  who worked so hard for his election in this key state. And it certainly did not help the reputation of the Democratic Party in Pittsburgh or Pensylvania at large.

TIANANMEN FLASHBACKS

To journalists like me who happened to have been in Beijing in May 1989, during the buildup to the June 4th massacre in Tiananmen Square,  Pittsburgh also bears an interesting resemblance. The analogy may sound a little strained, but bear with me.  

(1)  As in Beijing, there was a very large deputized police force from all over the country.  These included  over 1000 police "volunteers" (out of 4000 total police and 2500 National Guardsmen) who were ported in just for the G20.

According to the conventional wisdom, not being from the same community is likely to reduce your inhibitions when it comes to macing and kicking the crap out of unarmed, defenseless young people.

The guest policeman also included several hundred police who were under the command of Miami Police 2076 Chief John F. Timoney,  pioneer of the infamous "Miami model" for suppressing protest that was first deployed at the Miami Free Trade Area of the Americas Conference in November 2003. (Here’s the Miami model checklist, most of which was repeated in Pittsburgh.)

As one writer has observed, Timoney, who  also served as Police Chief in Philadelphia,   "(L)iterally transformed the city into a police state war zone with tanks, blockades and “non-lethal” (but severely damaging) artillery."

It is unclear to what extent he played a similar role behind-the-scenes in Pittsburgh this year, but there certainly is a strong sulfurous odor.     Scaredstudents

(2) As in Beijing, In Pittsburgh there were no identifying badges on officers' uniforms, and they also refused to provide any identifying personal information in response to questions. Several photographers also complained about receiving threats and actual damage to their cameras.

(3) As in Beijing, there was simply no  direct contest between the power of the security forces once they mobilized, and those of the unarmed students.   The only kind of victory that the students could possibly have one in both cases was a moral one -- by essentially sacrificing their bodies and their rights to a tidal wave of repression.

Indeed, the "clash" theory of these events looks even odder once we take into account the  fact that on Friday night in Pittsburgh, for example, unarmed students and protesters faced  hundreds of police in full riot gear,  armed for bear with equipped  muzzled attack dogs, gas, smoke canisters, rubber bullets, bean-bag shotguns, pepper pellets, long-range pepper spray,  at least four UH-60 Black Hawk helicopters (courtesty of New York Governor Patterson and his National Guard's 3-142nd Assault Helicopter Battalion unit),  plus several brand new "acoustic cannons" (see below). There were also probably dozens of undercover agents provocateurs -- at least three of whom were actually "outed" by the students. 

The police were also actively monitoring student communications on web sites like Twitter.

 From this angle, a key difference with Bejing  in 1989 was that the Chinese authorities felt genuinely  threatened by the growth of student power and the democracy movement, and feared being ousted,from power.  and  were therefore able to justify their brutality as part of a zero-sum game. In the case of Pittsburgh, whatever police violence occurred was entirely gratuitous.

Police6 (4) As in Beijing, the Pittsburgh police  really liked deploying loud, repetitive warnings, broadcast from sound-trucks -- like the following,  broadcast  repeatedly last Thursday and Friday: 

"I hereby declare this to be an unlawful assembly. I order all those assembled to immediately disburse. You must leave the immediate vicinity. If you remain in this immediate vicinity, you will be in violation of the Pennsylvania crimes code, no matter what your purpose is. You must leave. If you do not disburse, you may be arrested and/or subject to other police action. Other police action may include actual physical removal, the use of riot control agents, and/or less lethal munitions, which could risk of injury to those who remain."

The fact is that this warning was itself completely unlawful.  Putting on the NYCLU lawyer's hat for a moment, absent a "clear and present danger" to the public peace, these threats violated the First Amendment's explicit recognition of right to "peacefully assemble.” 

In effect, the fact is that the police and National Guard in Pittsburgh  temporarily seized control over public streets, parks, and other public spaces, and exercised it arbitrarily.  By the time the victims of these outrageous civil rights infringements have their day in court, the damage will have been long since done.

(5) As in Beijing, the police and military decided  to launch their biggest raid late at nightafter the summit had ended most major mediaPolice11 had gone home, and the courts had closed for the weekend.

Of course, there were no tanks, no real bullets, and no fatalities in Pittsburgh. Unlike the April '09 G20 and the Genoa G8 protests, no civilians died as a direct result of police actions. But the Pittsburgh students who were on the receiving end of all this unprovoked police brutality -- like one who was shot four times in the back and legs with rubber bullets, and another who was gassed and shot in the face -- may be forgiven for wondering just how close they came to emulating their peers in Europe.

GLOBAL  COP TOYS

Police behavior at all these global summits has evolved over time into a rather high-tech affair that would make Iranian crowd control experts turn  bright green with envy. 

5c6c33b0-9c3f-49e6-8ca5-d5aea8751de5_300 For example,  last week's G20 featured one of the largest US deployments ever against civilian demonstrators of  "LRADS," or acoustic cannons

These sophisticated  "phase array" device s emit a targeted 30-degree beam of 100+decibel  sound that is effective up to several hundred yards, and is potentially very harmful to the human ear. 

LRAD2Manufactured by San Diego's tiny American Technology Corporation (NASDQ: ATCO), the $37,500 so-call "500X" version of the sound cannon that was used in Pittsburg was developed at the behest of the US military, reportedly in response to the USS Cole incident in 2000,  to help the Navy repel hostile forces at sea.

The Pittsburgh units  were apparently  purchased by  local sheriffs' departments across the country with the help of recent grants from the US Department of Homeland Security. Officially the grants have been justtified in the name of improving communications with the public, by permitting clearer voice channels (!), but that's a cover story -- the true purpose is crowd control. ( Roll tape: LRAD-500X_SDCo_Sheriff1).

Other recent ATCO customers include the US Army (for "force protection" in Iraq  and Afghanistan), and  the US Navy and the navies of Japan and Singapore, for communicating with potentially-hostile vessels at sea. 

In 2008 ATCO flogged its wares at the biannual China Police Forum, Asia's largest mart for police security equipment. Obviously China would make a terrific reference customer, since it is one of the global front-runners in the brutal suppression of mass dissent.

ATCO also has a 2007 contract with the US Marine Corps' "Joint Non-Lethal Weapons Program" to develop new, even more powerful weapons, euphemistically branded  "acoustic hailing devices." Saakashvili

Police3 Until recently the most widely-publicized use of LRADS had been against Somali pirates. The devices have also been deployed against "insurgents" by the US military in Fallujah,  by the increasingly-unpopular, anything-but-democratic regime of Mikhail Saakashvili in the Republic of Georgia, and by New York City at the RNC in 2005.

Just two weeks before the Pittsburgh G20,  they turned up  in San Diego, where the Sheriff's Department provoked controversy by stationing them near a Congressional town hall forum -- just in case.

This growing  use of LRADs for domestic crowd control in theSomalis_called_pirates_while_the_West_du US is worrisome, not only because it is a potent anti-civil liberties weapon, because -- just like tasers,  rubber bullets, OC gas, and other so-called "non-lethal but actually just "less lethal" weapons" -- they can cause serious injuries to ears, and perhaps even provoke strokes. 

TECHNOLOGY BLOWBACK

For all the homeland security technology buffs in the audience, you may rest assured that LRADs are hardly the  only Military potential "less-lethal" free speech-and-assembly killers in the pipeline. 

In the last decade the non-lethal weapons arena has exploded, and the US appears to be  far ahead, assisted by ample  R&D grants and purchase contracts from organizations like the Department of Justice's "National Institute of Justice," DHS's multi-billion dollar Homeland Security Grant Program, the U.S Coast Guard, and the Security Advanced Research Projects Agency, and DOD's Joint Non-Lethal Weapons Directorate (JNLWD) Program

The industry has also been aided by key contractors like ATCO, spearheaded by legendary engineer, inventor, and entrepreneur "Woody" Norris;  and Penn State's Advanced Research Lab -- home of the Institute for Emerging Defense Technologies.   NIJ also works closely with police organizations like PERF, and international organizations like the UK's Home Office Scientific Development Branch.

In the first instance, the development of such non-lethal technologies is usually justified by their potential for providing an alternative to heavier weaponry, thereby reducing civilian casualties in combat situations.

The fact that the US military now has at least 750 military bases around the world, and has also recently  been playing an important "military policing" role in countries like Somalia, Haiti, Bosnia, Iraq, and Afghanistan, underscored DOD's rationale for these technologies.

The problem is that just as in the case of the LRAD,  once developed, it is very difficult to wall such technologies out of the US, or restrict them to "pro-civilian/pro-democratic" uses, like providing clearer amplification for outdoor announcements.  

Even aside from their technical merits, the competitive nature of the global law enforcement equipment industry  virtually insures that every tin-horn US sheriff, as well as every Chinese party boss in Urumqi, will soon have access to these very latest tools in the arsenal for suppressing dissent.  

The ultimate irony, of course, is that the first generation of all  these powerful new free speech suppressors have all been developed,  not by authoritarian China, Iran, Burma or North Korea, but by US,  ostensibly still the leader of the "Free World." 

TOYS IN THE PIPELINE

So what's in store for those who are on the front lines of popular dissent?  We assume that some of the juiciest details are classified. But even a cursory review of public sources reveals that the following new crowd-control technologies may soon be coming to an economic summit near you.  (See this recent UK review for more details.). 

"Area Denial Systems." This is a powerful new "directed-energy" device that generates a precise, targeted beam of "millimeter waves," producing an "intolerable heating sensation on an adversary's skin." 

Under development by the US military since at least the late 1980s, this class of "non-lethal" weapons is now close to field deployment. Its key advantage over LRADs is that it has about ten times the range. Raytheon is already supplying its "Silent Guardian" version of the system to the US Army.

The next step required to bring this product to the police market will be to make it smaller and more mobile. According to this week's New Scientist, a new highly-portable, battery-powered version of the system, called the "Thermal Laser," will soon become available -- though it has yet to show that demonstrate conclusively that it is within the bounds of the UN Binding Protocol on Laser Weapons.
Apple-1984

New Riot-Control Chemicals and Delivery Systems.

Subject to the dicey question of whether these new "calmative," drug-like agents are outside the boundaries of the 1993 Chemical Weapons Convention (to which the US and 187 other countries are signatories), these would not irritate their targets, unlike pepper spray or tear gas, but calm them down.

In the words of one DOD/JNLWD research director:  "We need something...like anesthetic agents, that would put everyone to sleep or in a good mood..." Or as the former Marine Corps commander of the program said," "I would like a magic dust that would put everyone in a building to sleep.." Among the delivery mechanisms considered: drinking water, aerosol spray, or rubber bullet. (Apparently the old-fashioned, tried-and-true "light up, inhale, and pass on" method is not a candidate.) The College of Medicine at Penn State's ARL, locGluegunated 135 miles east of Pittsburgh, has been especially active in advocating the advantages of such new chemical weapons.
Unfortunately for it, DOD apparently believes that the CWC and its current regulations prohibit it from funding the developing such magic dust directly, so it is working through DOJ and DOE to do so.

Glue Guns. If all else fails, UK's Home Office reports that another approach to "less- lethal" crowd control weaponry is also making progress -- a gigantic glue gun that sprays at least some 30 feet, bemingling its target audience in one huge adhesive dissident-ball.

Apparently still unsolved is the question of precisely what becomes of all those who are stuck together, or how the police avoid becoming entangled with them. But undoubtedly millions of pounds  are being devoted to solving these issues even as we speak.

SUMMARY

I went to Pittsburgh last week on behalf of  Tax Justice Network, a global NGO that is concerned about the harmful impacts that tax havens and dodgy behavior by First World banks, MNCs, lawyers, and accountants are having, especially on developing countries. I was under no illusion that the reforms we   were rather politely advocating would quickly be adopted, but at least we'd  say our piece,  if anyone cared to listen.

I came away with the depressing sense that the G20 summit, like its many predecessors,  was never intended  to be a listening post for independent, outside opinions. But even worse, it had actually become, in practice, an excuse for the criminalization of dissent in capital cities all over the globe, even in those that are nominally the most free,  by way of the vast new security measures that it requires and subsidizes,and the repressive tactics that it legitimized. 

In this day and age, of course,  we are told that almost any amount of security is too little.  And this heightened sense of insecurity  is certainly not aided by having the world's top 20 leaders regularly shuffling from pitstop to pitstop,  trying to conduct the world’s business from a traveling roadshow.

But I was struck by just how unnecessary,  senseless, and counterproductive almost all of the repressive policing tactics deployed in Pittsburgh really were -- how they ran roughshod over many of our  most precious freedoms, freedoms  that we are supposedly trying to protect.   And to what a degree whatever “terrorists” there are out there have already won, by  succeeding in creating a society that is really is often ruled by fear instead of justice, by force instead of discourse.

Rather than, say,  simply allowing the overwhelmingly non-violent demonstrators and students at that peaceful Friday night blues concert  to have their say, instead some 200 people were arrested and scores were gassed, clubbed, rubber-bulleted, and imprinted with galling memories that will last a lifetime. The City of Pittsburgh and its residents will certainly be fighting criminal cases and civil rights law suits for years to come.  I supposed we are meant to be consoled by the fact that, as the New York Times chose to emphasize this week, things are much more repressive in Guinea.

So perhaps it is time to establish a permanent location for all these global summits. Perhaps one of the Caribbean tax havens, like Antigua or St. Kitts, would do -- journalists always like the sun, and after TJN gets done with them, these havens are going to need to find a new calling anyway!  

***


   









 




October 2, 2009 at 08:47 AM | Permalink | Comments (3)

Friday, September 11, 2009

TWO MEMORABLE SEPTEMBER 11ths
James S. Henry

Many of us have our own strong private recollections of September 11, 2001.  I happened to havTwin_towers1e been at  Boston's Logan Airport that morning, boarding a prop plane for an American Eagle flight to Long Island's Islip Airport. It was leaving around 8 am from Gate 22,  at roughly the same time that Mohammed Atta and four other reputed Saudi hijackers of Flight 11 were taking off from Gate 26 at the very same terminal, along with 86 other passengers and crew.  We must have passed each other, but I didn't notice them. I do have a distinct recollection that security at the check-in  that morning was very lax, but other than that, my own flight was uneventful -- until we landed in Islip and heard the shocking news that two planes had just hit the twin towers. So "death  reached by and took another....."

My heart goes out to all who lost loved ones on that awful morning. May we redouble our efforts to establish a Truth Commission, and determine the full story, yet untold.

***

But it is important to put our 9/11 in context. This was not the only September 11th that is etched indelibly in my memory -- let alone the most important case of international terrorism.  

I also distinctly recall the Chilean coup of September 11,  1973  very clearly.  I was at­tend­ing a graduate economics course at Harvard  taught by a protégé  of  Chicago Professor Milton Friedman. One of my fellow  students was Sebastian Pinera, a member of one of Chile's oldest fami­lies, the future owner of the airline LanChile,  and right now the leading conservative candidate  in Chile's upcoming December 2009  Presidential elections

Sebastian had somehow  gotten word  halfway through  the class that Allende  had been ousted.  He was  absolutely jubilant -- We won!,”  he cheered.                                                        

The profes­sor, a prominent econometrician from the University of Chicago,  shared Sebastian's de­light. Like   many other American  econo mists, he saw the overthrow as a victory for the neoliberal doctrines preached  by leading Chicago economists like Friedman and Arnold Harberger,  who both later consulted directly for Pinochet’s  junta.

Fig. 8.3. Pinochet and Kissinger Over  the next twenty years, these “Los Chicago Boys” came to       eFoto_jp12xert  a strong influence on Chilean  economic policy.   The label was  perhaps a little  un­fair  to Chicago -- there was certainly no shortage of Harvard  disciples of  brutilitarian free-market doctrines.

  For example,   Jose Pinera,   my classmate’s brother,  was also  Harvard- trained.  He eventually became one of the main architectof Pinochet's labor policies,  which included a  ban on strikes and  closed shops,  the privati­zation of all pension funds, and sharp cuts in  real wages, jobs, and  unemploy­ment benefits.  

In hindsight,  Pinochet’s little laboratory conducted the first in a Pinera series of   experiments by the New Right  that culminated in the neoliberal programs of Margaret Thatcher  and  Ronald Reagan  in the First World, Waterboard-run and a lengthy list of Third World imitators.  Among  First World democracies, their programs were  mod­er­ated  somewhat by the need for popular support. But  in countries like  Chile, Brazil, Mexico,  and Argentina,  where the lines between rich and poor were starker  and the political systems were basically rigged, much  less time was wasted on democratic  niceties.  

 To their credit, a few principled  conservatives were bothered by  the resulting dirty little al­liance between dic­tatorship and  liberal economic reform. But  many others -- including Sebastian, who opposed  holding plebiscites on Pinochet  in 1980 and 1988 --   got lost in the thorny thicket of distinctions between “authoritarian” and “totalitarian”  regimes. 

 Tail1 In Chile’s case,  the resulting repression produced at least 3197 murders, disappearances and extra-judicial killings (about the same number as 9/11 in this country). [i] There were also thou­sands of secret arrest s and tortures (including 35,000 identified victims of torture and abuse ). All told, Chile spent six­teen long  years without  free elec­tions, in what  had previously been  one of Latin America’s  most  democratic coun­tries.

Of course we now know that all this state terrorism was tolerated, supported and indeed encouraged by the Nixon Administration and its dictator friends elswhere in Latin America -- presumably on the cocka-mamie theory that othewise we'd have Fidel running Santiago.  In fact the narrowly-elected Allende would have held elections when his term was up, and he probably would have lost.

 However, these points are pretty general -- repression is very concrete. As Herr Friedman reportedly told General Pinochet at a Santiago audience in l975,  “When you cut the tail off a dog you don't cut it off inch by inch. You cut it off at the root.”  I   Victor2 remember a 1974 lecture by another Chilean economist, Orlando Letelier, who was killed  in l976 by a car bomb  planted by the DINA, Pinochet’s secret police, in Washington D.C.  And I remember  Victor Jara, a  talented Chilean guitarist whose music I greatly admired.   When the junta seized power he was arrested and transported  to a soccer stadium in Santiago where “political”  prisoners were held. The police took him out in front of the crowd  and they cut off his hands.........

***
 

 

S-allende  The overthrow of Salvador Allende's elected Popular Unity government in September  1973  was greeted with jubilation by Chile's propertied  classes.  He’d been elected with a 36 percent plurality  in l970, and  the Popular Unity coalition’s  support in­creased to 44 per­cent in the March 1973 Congressional elections. But   the  elite  was  eager for a change by any means.  From l968 to l973, at first under the Christian Democrat  Eduardo Frei Montalva and then Salvador Allende,   government spending as a share of GNP had in­creased from fifteen  to forty percent.  A third of  large farms and many  pri­vate companies had been nationalized at  low prices;   there was   700 percent infla­tion and frequent shortages of consumer goods; Chile’s foreign debt  had reached the un­precedented  level of $2.5 billion. Foreign investment dried up and  flight capital was pouring into  accounts at Bankers Trust, Chase and JPMorgan, Chile’s leading creditors.

The good old CIA, multinationals like ITT, and the USG certainly played a prominent role in 1970-73 coup activity that followed -- with a hefty dose of financial chicanery, in order to, in Nixon’s words’ “make the economy scream.” But intervention had not started there.

0001206774-07-000627_CORNING_PIX13 For example, according to former CIA agent Philip Agee, who had been stationed in Uruguay in the early 1960s, future Bush Pioneer and Presidential Library trustee John M. Hennessy, Chairman of Credit Suisse First Boston (CSFB) from 1989 to 1996, had been the Assistant Manager at Citibank’s Montevideo branch in 1964, and reportedly helped to transfer substantial funding to the campaign of Eduardo Frei Montalva,  who was running for President against Allende that year. Frei won the election, and served as President from 1964 to 1970.  In the early 1970s, Hennessy later became Assistant Secretary of the Treasury for International Affairs in the Nixon Administration, reportedly coordinating economic pressures against Allende’s government.[ii] In 1974, having succeeded at that Hennessy returned to Wall Street, where he became Managing Director of First Boston Corp., which was later acquired by Credit Suisse.    

In any case, despite the CIA’s involvement, the sufficient conditions for the 1973 coup against Allende were Jan092009victims provided by a “Francoist” alliance of military officers, the Catholic Church’s hierar­chy, the top ten percent of landowners and industrialists, and the next twenty per­cent of the income distribution, the so-called “middle class.”  Immediately after the coup  these folks began to get what they thought  they wanted.

LOS CHICAGO BOYS
 

Chicago_School_400 The junta turned to a small band of inexperienced but supremely self-righteous  economists, “los Chicago boys,” so named because their mentors University of Chicago economist and future Nobel laureate Professors Milton Friedman and  Arnold Harberger.

After Pinochet took power, there was actually a prolonged period when several different economic camps competed for the junta’s favor. But Friedman and Harberger,  who was Dean of the Chicago Economics Faculty,  seem to have tipped the balance when they visited Chile in March 1975. Since the 1950s, with the support of the Rockefeller and Ford Foundations, Harberger had developed a close relationship between the University of Chicago  and Chile’s Catholic University, where he had taught as a Visiting Professor.  With support from the Rockefeller and Ford Foundations, scholarships were provided for bright young Chileans who wanted to study economics.  Many of these Chicago-trained economists returned to Catholic University to teach, and later served in Pinochet’s government.

 Their trip was sponsored by the Chilean businessman Javier Vial, head of the business group BHC, one of the country’s largest conglomerates, the eventual owner of Banco de Chile, the country’s largest private bank at that time, and 60 other companies. He was also a very strongFOTO17120040927204441 supporter of Pinochet’s dictatorship, on personal terms with the General.[iii]  Friedman reportedly got $30,000 for the three-day trip. His wife Rose  reportedly objected to the visit because Pinochet’s hard right regime and the goose-stepping Chilean military  reminded her of Nazi Germany.  But Professor Friedman tried to assuage her guilt by requesting the release of two Jewish political prisoners who were supposed in the custody of Pinochet’s police.

 Just one month after the visit, in April 1975,  the junta introduced an orthodox monetarist “shock plan,” along the lines that Friedman and Harberger had recommended.  And Professor Friedman’s  Chicago-trained protégé Sergio de Castro replaced Fernando Leniz as Minister of the Economy. Other key neoliberals  on Pinochet’s economic team included Pablo Baraona, President of the Central Bank, Alvaro Bardon and Jorge Cauas Lama at Treasury, Rolf Lüders as Treasury Minister and Minister of the Economy, and Juan Carlos Mendez as Director of the Budget.  Unfortunately the two Jewish prisoners were never located.

 This tiny band’s shared vision of Chile’s future was one that later became common among neoliberal Third World governments -- sort of a low-wage, export-oriented  Asian tiger, complete with weak unions, low inflation, privatized pension funds, and a minimal state --  apart from the police, the military, and the national copper company, of course, whose income went to the military. 

To pursue this anti-Marxist utopia they started out with a sharp recessionary  shock. They banned strikes, abolished price con­trols for  food and housing, and slashed tariffs from 100 percent to 10 percent in just two years. The  junta also intro­duced Latin America’s most radi­cal  privatization program ever. In l973-74, more than  250 nationalized companies were re­turned to  their former owners and 200 more were sold off at bargain prices.  These were not the  mid­dle-class privatiza­tions  of France, Japan, or  the UK, where the buyers  included  millions of small investors.  Like other developing countries,  Chile had a very  thin capital market, and hard times had  made it even thinner. So the big buyers at this fire sale were a handful of closely-held   grupos  like  Javier Vial and Cruzat-Larrain, which owned most of the local banks,  and also had very strong ties to foreign  banks.[iv]

All these changes set the stage for the dictatorship’s 1977-81 phase,  which was de­scribed at the time by the Wall Street Journal’s neoconservative editorial page in even more glowing terms than it reserved for the Argentine junta --   as “the Chilean economic mira­cle.” Indeed, during this brief period, when the economy was recovering from the sharp recession that los Chicago Boys had engineered, growth averaged  5-8 percent a year. 

 But what was perhaps most miraculous was the regime’s inability to foresee  that its  economic policies -- in addition to increasing poverty and inequality --  were about to cave in on each other, completely bankrupting the country and forcing  the national­iza­tion of the entire private sector. 

THE CHICAGO ROAD TO SOCIALISM -- AND BACK
 

By l977,  the junta had wiped out  any organized political opposition  and achieved most of its early economic goals. But the neoliberal  ideologues  pushed  it on to new extremes.  Under José Pinera’s 1979 radical right “Plan Laboral,” the government abolished closed shops for unions and tried to privatize everything from  health care and pensions to education. The 1980-81 pension fund privatization, which substituted a “fully funded” system administered by privately-managed pension funds – managed by institutions like Citigroup and Aetna, which came to dominate the highly-concentrated private system -  for the old “pay-as-you-go” government system,   was probably the most successful of these reforms. [v]  Many others succeeded only  in cutting social spending, while sacred cows like mili­tary spending and the nationalized copper company were  spared. 

The copper company was fa­mous because of the uproar provoked when Allende seized it from Anaconda in 1971. But Pinochet kept it nationalized --  a secret law  gave the military  ten percent of its profits.  So even under the junta, Chile’s largest  enterprise and exporter remained “socialist.”

In any case, the junta’s most important  neoliberal experiments -- and worst mistakes -- concerned macroe­conomic policy.  Here the point man was  Sergio  de Castro,  the los Chicago Imagen_46c222b2304db Boy who became Pinochet’s second Finance Minister in l979. Like Argentina’s “Wizard”  de Hoz,  De Castro was a strict believer in the monetarist view that the best way  to fight inflation in “small” economies like Chile  was  by  eliminat­ing tar­iffs, deregulating capital and trade, and maintaining a fixed exchange rate.[vi]   So he fixed Chile’s peso at 39 pesos to the dollar and held it there  from July l979 until June l982.   With copper prices in a slump and the size of the state sec­tor shrinking,  this was only possible be­cause foreign banks were willing to lend money hand-over-fist to Chile’s private sector.  Foreign  banks were sympathetic to  Pinochet’s conservative economists, much as they had been to the Argentine junta’s de Hoz;  they were also flush with cash and  very compet­itive, given Chile’s high real domestic interest rates.  

So, just as in Argentina,  many domestic borrowers took advantage of  fixed exchange rates and the temporary generosity of their foreign bankers to make lucrative  back-to-back deals.  For example,  Javier Vial, the sponsor of Friedman’s 1975 visit, and Chile’s richest man by 1978, acquired control over Banco de Chile in the late l970s and used it as a front to borrow heavily from foreign banks like Bankers Trust and  Chase. When he was its President,  Banco de Chile, in turn, reloaned the dollars to Vial’s many other private companies, including sev­eral that were based in Panama, like Banco Andino.  All these shenanigans be­came public af­ter Vial’s empire cracked in 1983.  In 1997, after a 14 year investigation, he was sentenced to 4.5 years in jail for bank fraud, and former Economy and Treasury Minister  Rolf Lüders, who’d owed 10 percent of BHC, was sentenced to four years.[vii]  Chile had gotten  stuck with his debts when the bank failed and was nationalized.   All this was no surprise to his foreign bankers -- as one former Bankers Trust officer who had personally  handled Vial’s Panama accounts told me, “We knew he was lending to himself, but  no one wanted to pull the plug.” [viii]  

Images As a result of de Castro’s policies,   Chile’s private foreign debt boomed  during  the “miracle” years.  In  l981 alone,  $6 billion of new credits were issued by foreign banks, a huge amount for this small economy, mainly  to  the leading domestic private banks like Banco de Chile, Banco de Santiago,  Banco Internacional, and Banco Colocadora, whose grupos,  in turn, owned a huge equity stake in Chile’s private sector.  From l980 to l982, private  foreign debt doubled; by l982  the total foreign debt had ap­proached $20  billion,     two-thirds of  it private.  The Central Bank re­peatedly warned  that it was not responsible  for the  private debt, but  it  al­lowed the spree to continue.  Given   all the “cheap” dollars and low tariffs, im­ports  also soared --   luxury imports became  Chile’s equivalent of flight capi­tal.  

A NEOLIBERAL CRISIS

The whole situation  finally began to  unravel in  May  1981  when Crav, a leading sugar company, failed.  The real crunch came in the summer of l982  when the Latin American debt panic dried up new loans, forcing  Chile to devalue and tighten interest rates, a lethal combination.  By January 1983 unemploy­ment   was thirty  percent,  and the six top private banks and the country's two largest pri­vate “grupos,” Vial  and Cruzat-Larrain, had also both folded. 

At this point Finance Minister de Castro began to get  intense pressure from foreign banks  like Chase and Bankers Trust to “nationalize”  the private foreign debt.  For a while he stuck to his free-market principles, reminding them of his  earlier warnings -- that such a move  would be no more justified than Allende’s nationalizations, and that this was, after all, private foreign debt, freely contracted, presumably with compensation for the risks of default built into the interest rates.  

But  the great big banks were not concerned with  such abstract princi­ples -- any more than they are today.   In January 1983,  they  quietly cut off  all Chile’s foreign trade credit lines – to the point where oil tankers en route to Santiago started to turn around and head home.   De Castro was forced to resign, and his replacement quickly declared that, indeed, the junta would as­sume responsibility for the private foreign debt (though not its offshore flight assets!) after all.  In the words of one Chilean banker, “Pinochet achieved what Allende only dreamed of -- the complete so­cialization of  our private sector.”[ix]   

Hernan_buchi1 Nor was this  the end of the story. When Pinochet’s fourth Finance Minister, a de Castro protégé named Hernan Buchi, took office in l985, he had to em­bark on  yet another, even larger  round of privatizations, simply  to rid the government of all the debt-ridden companies that the government had just acquired through the forced nationalization.  

(To his credit, General Pinochet did support the compulsory nationalization of Chile's largest banks -- as compared with the far more generous, CEO-friendly bailouts that the US Treasury has recently employed.)

Subsequently,  foreign bankers, the World Bank, Wall Street, and the IMF all gave Buchi  and the Pinochet regime rave re­views for their brilliant privatization strategy,  designed to attract foreign investment, boost savings,  and downsize Chile’s state.  But they never seemed to acknowledge why his privatization program  had been necessary  and possi­ble  in the first place  -- because  in 1983, neoliberal policies had produced a disaster, and   the junta and Chilean taxpayers had been forced by its  foreign credi­tors to take the fall for so many bad debts.

Finally, capping it all,  whom do you suppose were the main beneficiaries of Chile’s latest round of priva­ti­za­tions?  To  avoid the insider-trading outrages that had characterized many of the 1970s privatizations – helping groups like Vial and Cruzat to grow quickly --   Buchi did offer low-cost loans to workers and pension funds to help them buy stock.  By l988 worker-owned funds owned 14 percent of the privatized shares,  not a bad achievement in worker control for an ostensibly right-wing regime.

But two other kinds of investors became even more important.  The first were  foreign  investors, especially Sergio de Castro’s old friends, the foreign banks. In l986, under the  Central Bank’s “Chapter 19” program,  they  were al­lowed to swap their  (dubious) nationalized loans for equity in state-owned companies that were  priva­tized on very  fa­vorable terms.  

 As a result,  Bankers Trust obtained forty percent  of Provida, the country’s largest pension fund, plus  Pilmaiquen, a power plant, for   half its book value;   Aetna Insurance bought the country’s second largest pension fund;   Chase, MHT, and Citibank  also acquired major  local interests. Already by 1990,  a handful of foreign-managed pension funds   controlled seventy percent of  Chile’s pension system,  its largest pool of  capital.  Alan Bond, the er­ratic  Australian investor whose  financial em­pire  later collapsed,  was even permitted to buy the fa­mous telephone company that ITT  had fought Allende so hard for.  COPEC, Chile’s oil company, which had been privatized for a song to Grupo Cruzat-Larrain in 1976, had since turned into a debt-ridden conglomeration of fishing, mining, forestry, and finance companies, including half of Banco de Santiago.   When Cruzat cratered in 1983, Chile’s government re-acquired ownership of the now-heavily indebted COPEC, which was also by then Chile’s largest private enterprise. Four years later, it reprivatized COPEC to Grupo Angelini, another leading Chilean private conglomerate, again at fire-sale prices. And so the cycle continued.....[x] 

All told, this  “Chapter 19”  debt-equity swap program was credited  by its supporters -- especially the banks -- with reducing Chile’s debt by more than $2 billion. Of course it was a little ironic for the banks to be praising this achievement. Many others saw  the program  as a dead give-away.  By assuming  all the pri­vate foreign debt in the first place, Chile had rewarded bad lending.   And after a decade of tight-fisted government  many of the  privatized assets had actually been in pretty good shape.  Except for the copper company and a few military sup­pliers, the only ones the government retained were “dogs” no one else wanted.  It made little sense to let foreigners trade du­bious loans for valuable equity  at rock-bottom prices  -- maybe even less sense than Allende’s    nationalizations.  It seems that Chile hadn’t really eliminated state intervention; it had merely inverted its class bias.

The other key investor in Buchi’s  privatizations was the good old Chilean elite -- like Sebastian and his brother.   As we’ve seen, while the government nationalized  private debts,   it didn’t touch  private foreign assets.  And Buchi now offered flight capitalists  a gener­ous tax amnesty  if they brought their money  home.  His “Chapter 18” program  allowed them to buy   debt from the banks and swap it for  government bonds or equity in state companies at very  favorable prices.  By l990,  this program had brought in another $2 billion. Again, the banks and their clients  naturally sang Chapter 18’s praises. However,  it re­warded tax evasion and effectively swapped for­eign  for domestic debt that may  well prove more costly to service in the long run. Such criticisms meant little to the  officials in charge of the program, however -- some of them even benefited  from it personally. Soon after he left government, for example, Jose Pinera be­came president of an electric utility that had been privatized. And his brother ended up owning the privatized national airline – which he proceeded to turn into quite a profitable enterprise, even while serving in Chile’s Senate.

So the  circle was complete:  having been bailed out of their foreign debts by the government,  Chile’s  elite and the foreign banks now bought back their assets at less than fifty- sixty cents on the dollar, often with the very same flight dollars  that the original loans had financed! 

Here we have one of the purest cases of abusive banking,  one that poses the ques­tion of the foreign banks’ responsibility very clearly. For  Chile’s  1983 debt crisis obviously had little  to do with  inefficient public enterprises, excessive public debts,  godless Marxists, welfare-state liberals,   or  all the other usual suspects blamed by neoliberals.   At that point, fully two-thirds of  its  foreign debt was  private, and Pinochet and Co. had long since elimi­nated much of the state’s inefficiency, not to mention the political opposition.  Yet by the end of l983,  Chile  had ended up with one of the highest per capita foreign debts in the world, as well as  one of the developing world’s largest state sectors.

And this “Chicago road to socialism,” it seems, was taken in part because there was no  political opposition, no ac­countability – no one to say “enough” to the foreign banks, the domestic elites, their unregulated domestic banks, and the generals. So perhaps democracy had its uses, after all; perhaps  “free markets” alone were not sufficient. 

One could almost imagine the righteous tail-cutters in Chicago, taking a break for a micro-second from their round-the-clock crusade for more-perfect markets, experiencing perhaps just a momentary tremor of self-doubt.

*** 

 


 

[i] As of 2001, Chile officially recognized the existence of 3197 disappearances and extrajudicial killings  between September 11, 1973 and March 11, 1990, when the elected government  of Patricio Aylwyn assumed power. See “Korean Panel To Cooperate with Chile To Reveal Truth over Mysterious Deaths,” Korean Herald, February 7, 2001.  

 

[ii] See Morton Halperin, Jerry Berman, Robert Borosage, and Christine Marwick, The Lawless State.  The crimes of the U.S. Intelligence Agencies. (New York: Penguin Books, 1976), 16.

 

 

[iii]  For more about Vial, see “La Nueva Derrota,” Que Pasa, November 10, 1997; S. Rosenfed and J.L. Marre, “Chile’s Rich,” NACLA Report on the Americas, May/June 1997.

 

 

[iv]  See “Milton Friedman: Gurú a regañadientes, “ Revista Qué Pasa, February 28, 1998.

 

This account of the l973-78 period benefited greatly from  an excellent paper by Paul E. Sigmund, “Chile: Privatization, Reprivatization, Hyperprivatization.” (Princeton University, unpublished, July 1989).

 

 

[v] See, for example, Rodrigo Acuña R. and Augusto Iglesias P., “Chile's Pension Reform After 20 Years,” The World Bank -  Social Protection Discussion Paper No. 0129, December 2001.  Chile’s pension reform, which substituted a privately-funded system for the traditional “pay as you go” government system, was enabled by the fact that its military government could simply mandate the substitution. Subsequent attempts at privatization in more democratic countries like Argentina and Uruguay proved much less successful. 

 

 

[vi] This theory, espoused by arch-monetarists like Colombia University’s  Robert Mundell, argued that this policy would constrain inflation to the world rate by making a large share of the money supply endogenous.  It basically ignored exchange rate specu­lation and capital flight.

 

 

[vii]  For Vial’s and Lüder’s October 28, 1997 sentences, see “La Nueva Derrota,” Que Pasa, November 10, 1997, available at www. quepasa.cl/revista/1386/18.html..

 

 

[viii] "Chile Military Analyst,"  Sao Paulo, 2.21.89; “Miami Banker,” 5.91.

 

 

[ix] Raul Fernandez, former Director of Public Credit for Costa Rica, International Bank of Miami,  4.22.88. 

 

 

[x] See the account of COPEC in S. Rosenfed and J.L. Marre, “Chile’s Rich,” NACLA Report on the Americas, May/June 1997.

September 11, 2009 at 04:21 AM | Permalink | Comments (0)

Saturday, February 28, 2009

TOO BIG NOT TO FAIL?
James S. Henry

(A version of the following story appeared in the Nation on February 23, 2009, here )

3195449564_c57044bb8f_o Even if a global economic recovery still eludes us, has President Obama's new team at least already achieved a stunning turnaround in US economic policy?

Or has the administration just been fighting the last war,paying far too much attention to ancient history, special interests, political correctness, and its own pre-recession agenda, in its programs to stimulate the economy, fix the banks and providing debt relief to homeowners?.

For lifelong students of the Great Depression like Federal Reserve Chairman Ben Bernanke and Larry Summers, it probably seems that Obama's economics team is on track.

In less than a month, Obama has pushed his record $787 billion stimulus bill through a highly partisan Congress. The resulting projected federal deficits will be even larger as a share of of national income than those incurred under FDR, until World War II. At a time when unemployment is rising sharply, this should be good news for the economy--- if the plan is sufficiently stimulating.

On February 10, Treasury Secretary Timothy Geithner announced a bold, if somewhat imprecise, $2.5 trillion program to relieve US banks of dodgy assets once and for all. Combined with trillions in other loans and guarantees from the US Treasury and the Federal Reserve, this is designed to avoid another costly Great Depression-type error, in which scores of banks were allowed to fail and credit markets seized up. If the plan really is expected to work, that should also be good news for the economy.

Herbert_hoover1 Bernanke also concluded from his lengthy studies of the Great Depression that the Federal Reserve had blown it way back then by keeping monetary policy too tight. So ever since last summer he's made the US money supply as loose as loose can be, ballooning the Fed's balance sheet to nearly $1 trillion and driving real interest rates down to zero, while pressuring his counterparts in Europe and Japan to folllow suit.

Obama's team also has emphasized the importance of avoiding the beggar-thy-neighbor "protectionism" of the 1930s--aside from a little "Buy American" language in the stimulus bill and a few remarks from Geithner about China. If loose monetary policy and tighter lips are sufficient for recovery, it should be just around the corner.

Finally, in the course of Obama's drive to pass the stimulus, he traveled to troubled communities in Indiana, Florida and Arizona and heard first-hand that millions of American homeowners and small businesses could use a little financial aid of their own right now. So Obama has committed $275 billion of the remaining TARP/"Financial Stability" funds to this purpose. In principle, this should also be good news for the economy--if we really believe that the plan has what it takes to stem the galloping pace of foreclosures and bankruptcies.

Obama and his team may really believe that their first month in office compares favorably with FDR's in 1933. Historical pitfalls have been avoided, and there has been no shortage of good intentions, optimism and action. The new president has also assembled a team that includes, by its own admission, the nation's brightest economists and its most experienced veterans of the Fed and the Treasury.

Fdr1 But something seems to be missing. During FDR's first few months in office, and well into his second term, he received an overwhelmingly positive response not only from the public at large but also from the stock market, despite the fact that FDR and Wall Street generally detested each other.

In contrast, the reaction of global stock markets and market analysts to Obama's flurry of policy initiatives has been overwhelmingly negative. In the past week alone, since the passage of the stimulus, the announcement of the Geithner plan and the president's new plan for mortgage relief, the stock market has declined more than 10 percent. Indeed, the country's largest banks and auto companies, which were supposed to be the beneficiaries of much of these new programs, are on the brink of bankruptcy.

So what's the problem? Actually there are several problems. The first, as I noted in part one of this series, "The Pseudo Stimulus," there really is much less to Obama's stimulus than meets the eye and far less than will be needed to head off the dramatic increase in unemployment that is fast approaching.

For reasons of political convenience and a desire to move quickly, Obama and his advisors decided to appease a handful of key Republican senators, rather than seize the bully pulpit and rally support around a larger, more direct spending package with more debt relief for homeowners.

Ultimately Obama succeeded in getting just three "moderate" Republican senators and zero HouseFDR12 Republicans to support the package. (Eleven House Democrats also voted against it.) These votes were costly. The final bill ended up slashing almost $40 billion from the package, while boosting the share of tax cuts to nearly 40 percent--including almost half of all relief provided in the critical first year when it is essential to get the downturn under control.

Most macroeconomists still believe that under conditions of excess capacity, tax cuts generate much less employment per dollar of lost revenue than almost any kind of spending, because upper-income types will save the proceeds or use them to pay down debts. Furthermore, many of the tax cuts in Obama's bill are regressive, even allowing for his favorites, "Make Work Pay," the earned income credit and child care credit. This means their impact on jobs will be even more limited.

For example, of $214 billion of individual tax cuts in the first two years, $100 billion will go to the top 20 percent, while the bottom 60 percent gets $81 billion. Indeed, for one of the largest single tax cuts in the bill, the $70 billion reduction in the "alternative minimum tax," 70 percent will go to the top 10 percent, while the bottom 60 percent--including most unemployed workers--get .5 percent. So Obama's vaunted plan relies on this premier-class AMT cut, plus another $100 billion of business tax breaks, for 27 percent of its first two years of "stimulus."

On top of this, Republicans like Arlen Specter also have shown that they give no ground to Democrats when it comes to sausage-making. I won't repeat part one's list of trinkets, except to note that almost all the worst projects survived, and indeed were only enhanced by the solons' scrutiny.

As a former Minnesotan I'm all in favor of free WiFi for each and every one of the nation's two million farmers; I've also recently written here in glowing terms about the merits of government- sponsored research and development and "green housing." But this kind of spending has little to do with putting millions of unemployed people--most of whom are in urban areas--back to work.

All told, at least $200 billion of this stimulus spending, on top of the $200 billion of wasteful tax cuts, is not remotely related to the urgent goal of creating as many jobs as possible in the next twelve to eighteen months. The cause of recovery was hijacked by a weird coalition of environmentalists, energy companies, venture capitalists, public-sector unions, state governors, tax-cut nuts and other special interests.

The stimulus program was supposed to realize Obama's declared goal of saving or creating at least 4 million new jobs by 2012--even then, at the average cost of $200,000 per job. According to the Congressional Budget Office, even that level of job creation would only reduce the US unemployment rate by an average of less than one percentage point a year by 2012, for a cumulative reduction of 2.5 to 3 percent relative to the CBO's projections of what unemployment will look like without the program.

By the time the Senate got through with it, Obama's stimulus became much weaker. So most economists now agree that it will be lucky to create or save even an extra 2.5 million jobs by 2012--about a 1.5 to 2 percentage-point cumulative reduction in the official unemployment rate by 2012, at an average cost to taxpayers of $315,000 per job.

The contrast with FDR's focus on spending programs that really did put people back to work, is striking.

THE REAL UNEMPLOYMENT RATE

Unemployment Recent trends in unemployment help us to understand just how much work we will have to do to define victory and to see how close we really may come to another Great Depression.

    All the standard measures of unemployment are woefully inadequate, but the shortcomings change with the times. In good times, with tight labor markets, conservative economists find it satisfying to remind us that the degree of "involuntary" unemployment is probably overstated, because workers can afford to game the welfare system--for example, by collecting unemployment insurance while refusing reasonable job offers.

    In hard times like these, however, official unemployment rates seriously understate the degree of slack and hardship in labor markets. For example, in addition to the 13 million people now unemployed (that's 8.5 percent of the labor force) another 7.8 million workers report that they are underemployed; at least 2.1 million to 5.9 million more (none of whom are collecting unemployment) say they're not in the labor force because they've given up looking. By another measure, the peak labor force participation rate, established when labor markets were very tight in 1999 and 2000, shows the potential supply of labor not counted as unemployed is even larger--10.6 million right now.

    All told, this means by now there are already at least 23 million to 33 million American adults who are already experiencing increased unemployment, up from 13 million to 17 million from a year ago. By the end of 2009, as the official unemployment rate passes 10 percent and the other indicators of slack labor markets grow as well, this figure will swell to 40 million American adults--at least 9 million to 18 million more under-utilized workers than we have now.

    A majority of these people have families. Furthermore, the unemployed population constantly turns over, with a median duration of joblessness that now exceeds ten weeks. This means that during the next year, up to one-third of the entire US population will personally encounter someone facing the harsh realities of involuntary unemployment, and perhaps homelessness and poverty as well.

    These figures omit several other kinds of "hidden" unemployment that are not recorded in conventional labor force and unemployment statistics: the 1.44 million people on active duty in the military and the unemployment they would face if and when they return to civilian life; the 2.3 million inmates in federal, state and local prisons, all of whom are omitted from labor force and unemployment statistics; and the estimated 8.1 million undocumented workers in the United States who are in the labor force.

    In many ways undocumented workers are the most vulnerable victims of the crisis. Most support families either abroad or home. Many also have been working hard here for years and have now lost their jobs, without any unemployment insurance, healthcare, rights to Social Security or other benefits. And since Congress has not been able to agree on a decent immigration reform bill, they may not even be able to count on achieving US citizenship, after years of working and waiting. Now they face a hard choice between remaining here, unemployed, or returning to violent, corruption-ridden "Bantustans" in Mexico, Central America, the Philippines and elsewhere.

    It's important to take these factors into account when we consider how this downturn compares with earlier financial crises. Unemployment statistics for the 1930s are difficult to compare with our current situation, given the different statistical procedures employed and the very different demographics in the two eras. But my analysis shows that it is possible that this crisis may turn out to be comparable to the situation in 1933, when unemployment peaked at roughly 25 percent of the US labor force.

    This analysis provides a context for assessing Obama's original goal of creating/saving 3 million to 4 million jobs by 2012. The fact is, even that original goal simply wasn't anywhere close to being ambitious enough--and it certainly won't be met under the sadly compromised final "stimulus" plan. The negative reaction of global stock markets markets to Obama's plans so far appears to confirm this. We're going to have to stop the political games and get serious.

    GEITHNER'S TARP II

    GEITHNER_001 What about the second leg of Obama's new post-Depression economics policy initiatives, Geithner's plan to inject yet another $2.5 trillion of ("public-private") capital into US banks to get rid of their toxic assets?

    Markets reacted negatively to the plan not because investors necessarily opposed his new toxic asset buyback scheme. Most analysts felt that his long-anticipated statement was long on rhetoric about "stress tests and transparency" but short on digestible content--like being invited to dinner and then served pictures of food.

    Indeed, like his website, FinancialStability.gov, Geithner's plan remains under construction. But critics may have missed the point--this lack of detail actually may be a political necessity. If the American people understood just how high a price the Obama adminstration may be willing to pay simply to keep our country's largest failing private banks private, we might need a few more guards at the Winter Palace.

    Tim Geithner is not a former Wall Street insider in the Paulson/Rubin mold, nor was he ever for a single PeterGeithner day a community organizer. He's an ambitious and cautious policy technocrat, whose lucrative private-sector career and board seats are still in front of him. We'd be hard-pressed to find anyone who, at age 47.5, had already punched more establishment tickets. His grandfather was a Ford Motor executive and Eisenhower adviser; his father is a Ford Foundation officer who raised Tim on three continents. He graduated from Dartmouth and Johns Hopkins, became a consultant for Kissinger Associates, a protégé of Robert Rubin and Larry Summers at Treasury in the 1990s, an IMF policy director in 2001-2003, a Council on Foreign Relations fellow and finally head of the Federal Reserve of New York. As of the end of 2008, he was still a member of the CFR, the Group of Thirty and the Economic Club of New York, organizations not routinely associated with sponsoring deep reforms in post-capitalist economies.

    Geithner has seen his share of banking crises firsthand: Mexico in 1995, when the entire banking system had to be re-nationalized; Thailand, Indonesia and Russia in 1997-98; Argentina in 2001; and now the biggest one of all right here. All of the Third World crises just noted ended badly--costly, poorly-managed fiascos that did nothing to enhance the reputations of the US Treasury and the IMF. But perhaps Geithner was just an apparatchik. He worked closely last year with Hank Paulson and Bernanke on Bear Stearns bailout, the Lehman/Merrill decisions, the AIG takeover and TARP I. So he probably understands full well not only the gory details of program design but also two fundamental political realities.

    The first is that while nationalizing top-tier global banks may be politically acceptable in places like Norway, Sweden, Chile, Iceland, Ireland and even Japan and the UK, it is still viscerally opposed by most members of the power elite in New York and Washington--including most of his former club members.

    The second is that by now, most American taxpayers have simply had it with huge Wall Street bailouts, supine members of Congress, overpaid banker chutzpadiks and high-handed Treasury secretaries. If they were ever asked, there is no way in Naraka that taxpayers would ever approve yet another open-ended injection of public capital into banks--especially one costing three times the entire "stimulus" and three-and-a-half times TARP I.

    So the trick is to not ask them. With bank stocks sinking every day, the credit crunch hampering recovery and high expectations about policy changes, Geithner had to say something. But not too much. The whole subtext of his vague announcement was to finesse the question of precisely where all the money would come from. The hope was that this would buy time to line up private capital, perhaps by negotiating some kind of insurance subsidy that would induce it to participate. The hope was that this would do enough to stem the decline in bank stock prices and redirect attention away from the new "N"-word--nationalization. 

    WELFARE FOR BIG BANKERS

    Fat_cat The public outrage is justified. Since October, more than 360 US banks (out of 8,367) have already received at least $353 billion of TARP I funds from the Treasury. This is by far the largest corporate bailout in US history, more than twenty times the original $17.4 billion auto industry bailout.

    Of this, more than half went to the top fifteen banks in the country. This includes $145 billion of capital injections awarded to Citigroup, Bank of America, JP Morgan and Wells Fargo, the top four US commercial banks; another $10 billion each for Goldman Sachs and Morgan Stanley, two worthy investment banks that decided to become commercial banks to avail themselves of federal aid; and a grand total of $84 billion to the rest of the US banks. There was also $40 billion in capital injections and $113 billion in credit in AIG, the profligate insurance company that sold so many flaky credit derivative swaps to investment banks like Goldman that it pioneered a whole new new "too fraudulent to fail" rule. In addition, by now US banks have also received at least $1.82 trillion of federal loan guarantees and $872 billion in federal loans.

    These sums need to be viewed in the context of the staggering amount of government assistance that has recently been provided to private financial institutions all over the world. By February 2008, by my reckoning, banks and insurance companies have already absorbed at least $817 billion of government capital injections, $251 billion of toxic asset purchases, $2.6 trillion of government loans and $5.9 trillion of government debt guarantees. If we added the guarantees for once quasi-private entities like Fannie Mae and Freddie Mac, the loan guarantees double to $10.9 trillion.

    To put all this in perspective, the 1980s savings and loan crisis cost taxpayers from $150 billion to $300 billlion in comparable 2007 dollars. The 1998-99 Asian banking crisis cost $400 billion. Japan's prolonged banking crisis in the 1990s cost $750 billion. And the total amount of debt relief received by all Third World countries on the $4 trillion of dodgy foreign debt that they incurred from 1970 to 2006 was just $310 billion.

    Those crises are completely over, while this one is still unfolding, so its ultimate cost is still uncertain. Already it is clear that ordinary taxpayers around the world are on the hook for total losses that will easily dwarf all the costs of all these other recent banking crises combined--including $2 trillion to $4 trillion of further bank write-offs beyond the $1 trillion of losses already recognized. Since no government on earth has the surpluses on hand needed to fund such largesse, this means that we will be paying for this bailout one way or another for the rest of our lives, and probably for our children's lives as well, through increased inflation, taxation and reduced government services.

    Never has so much been given to so few by many. Yet despite all this public generosity, much of the US banks' recent behavior been execrable. For example, in December we learned that the US Treasury got preferred securities in exchange for the first $254 billion of TARP funds that, right off the bat, were worth $78 billion less than the funds they received.

    We've also watched with amazement as they've continued to fund corporate jets and other perks, and as several of the largest recipients of TARP funds have paid extravagant bonuses to senior executives for "performance" in 2008--a year when the banking industry contributed mightily to the tanking of the entire global economy. Nor have most banks been forthcoming about what they've actually done with all the TARP money--except to to concede that they haven't done much new net lending. After all, they say, in this economic environment, with regulators suddenly breathing down their necks about leverage and toxic assets, they are not eager to take risks.

    That's all well and good at the micro level, but at the level of the overall economy, we badly need banks to swallow hard and start churning out new loans--and not just to gold-plated borrowers who don't really need the money. Since TARP I funds were not dedicated to new lending, and, indeed, since policy makers like Paulson, Bernanke and (presumably) Geithner decided to leave TARP I's use entirely up to the banks' discretion, this period of extreme largesse and low interest rates has also coincided with tight credit markets--except for well-off corporations and elite borrowers and refinancers, who have actually been the main beneficiaries of Bernanke's low-interest rate policy.

    So while both the Federal Reserve and the Treasury have been busy demonstrating that they have finally taken the lessons of the Great Depression to heart, and have been setting records for generosity and loose lending, at the end of the day they still allowed the private banking system to keep its elephant in the hallway, blocking the road to recovery.

      In the four months since receiving the first TARP Installment, the US banking industry has become a supersized version of the US auto industry--on the verge of bankruptcy, kept afloat by government capital, loans and loan guarantees, with no long-run strategy other than to continue its well-funded lobbying efforts and heavy campaign contributions and to occasionally show up in DC before toothless Congressional committees for well-choreographed rituals of contrition.

      Since October 2008, the net worth of the entire US banking system-- all 8,367 domestic-owned US banks--has declined by $420 billion, to just $540 billion. In other words, TARP was one of the worst investment decisions in corporate history--the banks' net worth has declined by more one dollar of equity value for each additional dollar of TARP funds injected.

      Indeed, the net worth of two of the largest banks in the system, Citigroup and Bank of America, is now around $30 billion, less than half of the $70 billion in government capital that they have received from TARP I, on top of $424 billion of federal loan guarantees. Not only has their own "value added" during this period evidently been negative. For a fraction of the funds we've given these two banks, we could have stopped begging them to clean up their balance sheets, restructure their mortgages, stop wasting money, change their compensation plans and initiate sensible new lending programs. We could have bought a controlling share, hired new management from the droves of idle bankers now out on the street and re-privatized them at a profit for taxpayers in two to three years--just as successful "turnaround nationalization" programs have done again and again in these situations, from Norway to Chile.

      No wonder that growing numbers of critics--not just hard-core lefties and Nobel laureates like Paul Krugman and Joseph Stiglitz but even pragmatic politicians like South Carolina Republican Senator Lindsey Graham--have started to break the taboo and talk explicitly about "nationalization."

      But in an important sense the taboo had really already been shattered by TARP I, last year's expansion of FDIC deposit insurance and all the other new federal loan guarantees for the bank. In effect, these already "nationalized" the banks' debts. Now we're just talking about the other side of the balance sheet, where there might at least be some value, if only under new management.

      TOXIC ALTERNATIVES

      Geithner is hardly unaware of this short-term nationalization approach to the credit crunch, or of the Timothy_geithner_reuters success it has in many other markets. But he has apparently rejected it in favor of a much more costly and uncertain route--establishing a public-private bailout fund that will somehow entice the banks to sell off their lousy assets and still have enough equity left to survive as private entities.

      The limitations of this approach are best understood by taking another close look at Citigroup and Bank of America, two of the most troubled institutions in this story. On their most recent balance sheets reported to the FDIC, these two big banks alone accounted for $4.1 trillion of official on-balance-sheet "assets"--mostly loans and federal securities, but also a hefty amount of potentially dodgy mortgage-backed securities and other asset-based securities.

      Right off the bat, therefore, at least by the accounting numbers, these two top banks alone now account for more than 30 percent of all the assets outstanding in the entire US banking industry. Indeed, the top fifteen banks account for over 60 percent. This represents an incredible increase in banking industry concentration since the early 1990s, when Citibank and Bank of America held just 7 percent of all US bank assets, and the top fifteen banks held 21 percent.

      This increase in industry concentration was hardly an accident. It originated in the desires of bank executives to grow, boosting market share, short-term earnings, stock prices and the executive bonuses driven by those metrics. But it also reflected the gloves-off stance that Congress, regulators and antitrust enforcement took toward bank expansion during this period. And that, in turn, was probably related to the more than $1 billion contributed by the financial services industry, their lobbyists and law firms, to politicians of both major parties since 1990, which turned the Senate Banking Committee the House Financial Services Committee and other key Congressional committees, in effect, into wholly owned subsidiaries of the banking industry.

      Now how much might all these assets on the banks' balance sheets actually be worth? There is no active exchange for most bank assets, especially those that are hardest to value in this environment, like mortgage-backed securities. And by law, the banks are permitted to value the assets on their books at "fair market value"--in essence, whatever their accountants tell them they are likely to be worth, given historical experience with loan losses. But the difference between these accounting numbers and today's market value for these assets may be huge--up to half or more of book value. And the banks have a strong incentive to hold on to the loans and hope that things get better, rather than sell them off right now at whatever the market will bear. After all, as soon as they start selling down one loan bundle, they may be required to "mark to market" all similar ones. And the resulting writedowns might well be enough to wipe out all stockholder equity, leading to insolvency.

      03fed4-600 This whole situation is reminescent of the 1980s Third World debt crisis, when banks like Citibank, Morgan and Chase resisted for years the demands of policy makers and developing countries to write down or sell off the billions of overvalued loans on their books--for no other reason than, as one former Chase banker put it, "a rolling loan gathers no loss." Similar behavior occurred during the prolonged Japanese debt crisis of the 1990s, when banks stubbornly resisted the efforts to get them to "mark to market" because several of them realized they would be bankrupt and no longer with us if they did so.

      There's not really much moral culpability here. At ground level, from the standpoint of any individual bank, this behavior is understandable. After all, they have just gone through a period of careless underwriting, and are trying to reduce their loan losses and improve their capital ratios--just like most bank regulators want them to do. The larger banks have balance sheets that are best described as follows: "On the left side (assets), nothing is right; on the right side (deposits and other capital), nothing is left." And since the economy is still slipping at an unpredictable pace all around them, no loan officer is eager to take on more risks. So it is hardly surprising that in the last quarter of 2008, even as the TARP money started to flow, US bank lending suffered its sharpest decline since 1980. It also makes perfect sense for them to resist selling off its loans and securities at what may eventually turn out to have been fire-sale prices.

      While all this may be well and good for bankers, however, for rest of us it means that even after all those trillions in federal bailouts and loan guarantees, the economy is still starved for credit. The fact that major banks as a group continue to sit on all these lousy loans at book value, rather than selling them off and writing them down, means that they don't have much room on their balance sheets and in their capital/asset ratios for new loans. So the credit crunch continues. And banks that we eventually may find out were really insolvent may walk around in a trance for months or even years, like a scene from Night of the Living Dead. We're not talking about restoring the loose lending of the 2005-2007 bubble; we're talking about the essential liquidity needed to keep the wheels from coming off, stimulate demand and stem the decline in housing prices.

        The importance of all this becomes clearer when we take a close look at the composition of Citigroup's and Bank of America's $4.1 trillion of assets outstanding. It turns out that these include $1.3 trillion of real estate loans and mortgage-backed securities (22 percent of the US industry's total), $153 billion of credit card loans (38 percent of the total) and $150 billion of auto loans, student loans and other loans to individuals (25 percent). Clearly all these book values may be severely at risk in the current economic crisis.

        But these potentially troubled categories of assets only add up to about $1.6 trillion; why is Geithner Large_Geithner talking about a $2.5 trillion program? The FDIC's latest statistic a provides a clue. It reveals the dominant role that the country's top banks have also played in issuing derivatives, including not only interest rate and currency swaps, but also in more notorious debt-based over-the-counter derivatives. As of September 2008, JPMorganChase, Citigroup and Bank of America accounted for an incredible 90 percent of $7.9 trillion of these "off-balance sheet" credit derivatives that have been guaranteed by these banks themselves--including $2.6 trillion guaranteed by B of A and Citi. So when Secretary Geithner was talking about running "stress tests"--scenarios for future housing prices, default rates and interest rates--against the balance sheets of particular banks, he was not talking about First Federal of Tuscaloosa or Suffolk County National in Riverhead. They've probably never guaranteed a credit derivative in their lives, much less tucked anything away in some Cayman Island "special purpose vehicle." Clearly, Geithner had his friends on Wall Street in mind.

        REALLY A POLITICAL PROBLEM

        In short, we have a choice to make: we can spend perhaps $150 billion to $200 billion buying out the equity of a handful of leading banks that have gotten themselves in this mess and reform them. This would involve taking them over immediately, installing new managers, giving their creditors a haircut, writing down the toxic assets (which the government-owned bank could do without fear of market reactions) and then preparing them for privatization when the market recovers.

        Or we can follow Secretary Geithner's lead, fiddle around for months, throwing trillions more of government capital, loan guarantees and portfolio insurance at the problem, without any guarantee that the resulting cockamamie approach to creating a "public-private" toxic bank will ever work--while the same old troubled institutions are left standing, no longer encumbered by their dodgy assets perhaps, but still encumbered by dodgy managements.

        There are lots of technical issues to be weighed in making this choice. But after reviewing all the objections to the kind of short-term, temporary, partial nationalization, I'm convinced that the most important issues are simply political, a choice between our commitment to a failed, hands-off model of bailouts and banking regulation and decisive, FDR-like action.

        It is precisely because it is so hard to value these dodgy assets at all that we are even having this discussion. Given the absence of competitive markets for the assets, the uncertain environment and their dependence on taxpayer subsidies and insurance, the prices established are intrinsically political. Either they will be set so low that banks will have to take such massive writedowns that their shareholder equity will disappear entirely anyway, or--more likely--the prices or insurance arrangements will be set so that even more taxpayer wealth is transferred to these very same top-tier banks.

        Meanwhile, the whole economy is hostage to this decision. We have no time to waste. We should get on with it, making use of one of the clearest market signals available in this situation--the current value of Citibank and Bank of America shares.

        This argument is not at all anti-market, or necessarily even anti-bank. At their best, private markets, entrepreneurship and innovation are absolutely essential. My real objection is to a very specific kind of bank-dominated political economy. To call this "capitalism" is to have Ayn Rand and Friedrich von Hayek turning somersaults in the crypt. Time and again, this pathological form of pro-bank development has jeopardized the prosperity, stability and innovation of the small businesses, inventors and would-be savers who are the backbone of market economies. Bank-dominated political economies don't really deserve to be called "capitalism," since big bankers have never really been entrepreneurs who are content to stick to the capitalist rules of the game. Instead, they periodically demand the divine right to take unlimited risks, privatize the resulting gains and stick the rest of us with any resulting losses.

        It is time for accountability, we are told by our new president. If so, we should start by holding the world's largest banks, hedge funds, insurance companies, mortgage brokers and private equity firms, together with their many friends in accounting, law, public relations, credit rating, central banking and higher office accountable for this crisis--if in no other way than by refusing to award them this even more massive TARP II bailout, permitting them to rob us, once again, with both hands.

        ***

        February 28, 2009 at 03:09 PM | Permalink | Comments (1) | TrackBack

        Wednesday, February 04, 2009

        Obama's Pseudo-Stimulus

        (This article appeared in The Nation on February 4, 2009 here.)

        First of a three-part series on the economic crisis.

        You, telling me the things you're gonna do for me.
        I ain't blind and I don't like what I think I see.

           --Michael McDonald, The Doobie Brothers,
            "Takin' It To the Streets"

        For what is the crime of robbing a bank, compared with the crime of owning one?   --Berthold BrechImagest

        Hope-bong-743955 So now that President Obama is in office, his economic team is in place, the largest stimulus package in  US history is nearly complete, real interest rates are negative and the Treasury is about to announce a "big bang" version of TARP that provides even more capital to private banks, we're good, right?

        Lo siento, no, as shown by last week's steep stock market slide, even after his program passed the House. For once, the Republican wingnuts may be right. There really is much less to Obama's stimulus than meets the eye.

        His new plan for ridding the banks of toxic assets--"cash for trash," as economist Joseph Stiglitz has aptly described it--is also likely to be way too kind to bank executives and shareholders, and he appears to be remarkably ignorant about the indisputable successes that capitalist countries like Norway, Chile, and Japan have had with temporary, partial bank nationalizations that make the taxpayers "owners of last resort."

        There has been far too little debt relief provided to the growing number of homeowners facing foreclosure, small business owners facing bankruptcy, and other debtors. This step is urgently needed to stem the free fall in housing prices and the rising tide of layoffs among small businesses, where most of the country's jobs are.

          There are rumors afloat that Obama's team may soon announce something like this, but the numbers that we've heard from key Congressmen--$50 billion to $100 billion--are far too modest. We need to pressure the president for a "People's TARP," no less generous than the ones that the banks are receiving.

        Finally, while US policymakers have been throwing gargantuan sums of borrowed money at the wall, mollycoddling Wall Street, and dithering on debt relief for the rest of us, the global crisis has deepened. All across Europe and Asia--from Athens, Chongqging, London, Moscow, Paris and Prague, to Rekyavik, Riga, Seoul, Sofia and Vilnius--people have become completely fed up with their governments and are taking it to the streets.

        So here's a message for our new president, from someone who worked hard for his election long before it was fashionable: if you dally and temporize, the very same thing could easily happe180px-Combat_Bootstrapn here--perhaps just in the form of a massive tax strike, in solidarity with Messrs. Geithner and Daschle.

        While Americans are usually much less militant and certainly less well organized than our comrades around the world, the serious deficiencies in the first drafts that we've seen of Obama's stimulus and financial plans really do need to be corrected in short order.

        We also need to see much tougher action with the financial services industry, which bears a disproportionate share of the responsibility for this nightmare. At a minimum, this means a return to a more orthodox and tightly regulated banking system, a renewed assault on tax havens and the anarchy of the world's financial order, strict limits on executive pay plans that reward unbalanced risk-taking, and a 1930s Pecora Commission-style investigation of the industry's misbehavior--complete with subpoena power.

        In the words of FDR's first inaugural address in March 1933--which, by the way, was harder-hitting and much more memorable than Obama's--it is time for the "money changers" to be forced to flee from "their high seats in the temple of our civilization" once and for all. The only thing we have to fear is Obama's temerity.

        THE CONTEXT

        By now everyone has had just about enough bad economic news, but just to set the stage for the discussion, it is important to review the basics. 

        It's is already a cliché to describe this crisis as "the deepest global downturn since the Great Depression." Actually in many ways it threatens to become even worse--faster, sharper and far more global. Here at home there are already more than 11.1 million unemployed, close to the 11.4 million peak that was reached in 1933, when 20 percent of the population still lived on farms and, apart from the Dust Bowl and bank repossesions, could at least count on having a place to grow their own food. In 2008 alone there were already 2.3 million residential foreclosures filed and 861,664 completed in the US, compared with the 600,000 total that was recorded from 1930 to 33. Obviously, relative to the Image5_016size and wealth of the economy, conditions were worse back then, partly because the social welfare system provided less help and more bank depositors got wiped out. But in absolute terms the sheer number of our fellow citizens who are already experiencing serious hardship is really disturbing. And we are only a few months into this.

        Since October, growth rates have plummeted and unemployment has soared worldwide. Just last week, the International Monetary Fund cut its latest forecast for world growth in 2009 to .5 percent, and for the United States to negative 1.6 percent, as fourth-quarter US growth plunged by over 5 percent, apart from inventory accumulation. Other credible observers are far more gloomy.

        Each day brings news of massive layoffs, corporate losses, foreclosures, the bankruptcies of well-known brands like Waterford Wedgwood and Circuit City, continuing house price declines, bank failures, abandoned projects, soaring government deficits and bailouts and widening spreads on loans to some First World countries, not to mention financial frauds, robberies, suicides and other indexes of deep financial distress.

        Seuss-bootstrapsThis is the world's first post-globalization debt crisis, and the worldwide effects are catastrophic. From Labuan, Jakarta and Guangdong to Chicago and Detroit, London and Moscow, the ranks of the unemployed are expected to swell by 51 million by mid-2009, and of those living in dire poverty by at least 176 million. Beyond impersonal statistics, there are also innumerable tragic stories of personal hardship, involving people and families that have suddenly lost jobs, careers, businesses, homes, life savings, healthcare, scholarships and, most important, hope for the future.

        WHAT ARE WE STIMULATING?

          Given this situation, the US economy's influence on the global situation, and the importance of resetting expectations, the stakes for Obama's very first economic initiatives are enormous. Unfortunately, the first drafts already adopted by the House and under debate in the Senate are disappointing.

        Surely, at these prices we deserved a much more carefully targeted anti-Depression program. Instead, over 63 percent of Obama's $825 billion-plus in new spending and tax cuts won't even be felt for at least a year, and more than $100 billion won't show up until 2012 or beyond. Even if the plan works as advertised, it would only reduce unemployment by less than one percentage point a year, relative to the more than 9 percent baseline projection we are facing.

        But this plan will almost certainly not work as advertised. It has been weighed down with $275 billion in tax cuts that would have very modest short-term multipliers. At least 21 percent to 25 percent of Obama's tax credits would go to recipients in the top 20 percent, with incomes above $113,000. These folks are more likely to save the money than those with lower incomes--and right how what we need is spending, not saving.

        Evidently these tax cuts were included out of some broad-minded attempt to reach out to Republicans and Blue Dog Democrats. One might have thought they were already sated by a decade of record tax cuts for upper-income groups, starting with Bill Clinton's sharp reduction of capital gains taxes in 1997--even larger, by the way, than George W. Bush's. But Obama's diplomatic gesture yielded not a single Republican vote in the House last week, and also failed to win over eleven Democrats. Welcome back to Earth, Mr. President.

        Even Obama's $550 billion of extra spending will not be sufficiently stimulative. First, around $200 billion will be channeled through state aid. On average, this will have an even lower multiplier than tax cuts, because of bureaucratic delays and the fact that our political system always channels a disproportionate share of aid to less-needy states. At one end of the spectrum, six states with unemployment rates above 9 percent now account for about one-fourth of the nation's unemployment--2.8 millioAlan_Greenspan_Hotnessn people. Under Obama's program these states would get less than 20 percent of all this state-channeled aid, an average of $8,623 per jobless person. But ten mainly Western states with unemployment rates below 5 percent will get nearly $20,000 per unemployed person.

        Second, despite the sales rhetoric about promoting recovery and saving jobs, these were clearly not the plan's only--or even its most important--objectives. If they had been, there'd be far more up-front spending on direct job creation and programs with higher multipliers and faster paybacks, like unemployment benefits and populist debt relief. There'd also be more top-down control.

        Louboutin_noeudette_gisa_sandal_2 Instead what we have is a dog's breakfast of pet projects, spread across 104 federal agencies, from the Administration on Aging and the Bureau of Indian Affairs to Fish and Wildlife and the National Endowment for the Arts. Dozens of projects were evidently extracted from various liberal wish lists, dusted off and dressed up in the latest "recovery-jobs" couture. Almost anything can qualify so long as it carries a big enough price tag: digital TV conversion ($640 million, on top of the $1.3 billion already spent for this worthy cause), port security ($600 million), research on biomass and geothermal ($1.2 billion), constructing the "smart grid" ($4.4 billion), climate science ($390 million), fixing Amtrak ($800 million), developing satellites ($460 million), restoring wildlife habitats ($400 million), preserving forest health ($850 million), special education ($13.3 billion), immunization ($954 million), STD prevention ($350 million), water projects ($13.7 billion), preparing for a flu pandemic ($620 million), grants to local police ($4 billion), advanced batteries ($2 billion), wireless broadband ($6 billion), a new data center for Social Security ($400 million)...

        The overall impression is a parody of bloviated corporate liberalism. It is as if every deep-sea creature in the ocean suddenly came to the surface at the same time. There they all are, writhing and waiting for someone to make sense of the overall game plan.

        Road and bridge repair be damned! Why worry about being unemployed when there's so much else to do? Soon we'll all be firing up the clean-coal stoves and sewage-fired generators, recharging our federally subsidized Volts and the underground battery farms and heading on over to new neighborhood health centers, where we'll download some interactive broadband training on aging and avoiding STDs. Then perhaps we'll plant a tree or apply for grants to "weatherize" or found a "rural enterprise." By then it will be time to pick up Little Dorothy at Early Head Start, get her vaccinated, say hey to the new federally funded "local" police chief, artists and high school teachers, then kick back in front of the converter box with a long cool draught of federal H2O and a generous helping of nutritious cuisine from the "local" Emergency Food store--making sure that the CO2 that we generate is properly sequestered and not bubbling up through the neighbor's brand new geothermal system.

        By the laws of probability, of course, at least a few of these schemes may actually turn out to have some merit. But it is clear that Washington's finest lobbyists and law firms--second only to Wall Street in terms of sheer venality--have already been hard at work to insure that no key client has been left behind: electric utilities, the coal industry, telecoms, agribusiness, the IT industry, the teachers unions, the Asphalt Pavement Alliance, the Portland Cement Association ("we pour strength into our recovery"), commercial real estate developers and even venture capitalists, are all lined up to profit from Obama's extraordinary spending spree.

        I'm beginning to sound like a Republican wingnut. But really, at lightning speed, we've gone from booting single mothers off the dole in the interests of "personal responsibility" (saving a grand total of--what, Bill Clinton?--maybe $5 billion per year at most, while finding jobs for only half of the 60 percent who got the boot) to having almost every single key interest group in the country lining up with a tin cup, right behind the banks.

        More important, from a global perspective, Obama's program takes the eye of the ball. What the world economy desperately needs most right now from the US economy--remember, we're the ones who originated this debacle--is not "reinvention," or some hastily-assembled collection of alternative energy demonstration projects, but a good, old-fashioned healthy US market recovery.

        Once that is in place, there will be plenty of time and money to save the planet. But unless that is in place, there will be no serious worldwide attention paid to climate change, global warming or alternative energy, nor will there be necessary funds and economic incentives that are required to really fix the the problem. At a time when tens of millions are having a hard time feeding their families, these are luxury goods. I defer to no one in my hardcore environmentalism--but Obama's plan has had a little bit too much input from Al Gore's "green limousine" set, and is putting the green cart before the debt-ridden horse

        In fact, this program somehow manages to be neither reinvention nor recovery. Nor is it very thoughtful. Rather, it is a Jackson Pollack approach to social and economic policy. That kind of action painting may have been OK for hip Hamptons artists way back in the 1950s, but in these times it is dangerously blithe. It also risks discrediting everything that progressives should stand for, if we want to see government taken seriously again as an agent of social change. If we continue with this scattershot, favorite-liberal-interest-group approach, creditors like China may soon begin to wonder whether we've become just another Banana Republic--not the chain store, but the political pathology--or an aging superpower that has an acute case of ADHD.

        Of course it is easy to criticize. The real test is to come up with a superior, politically feasible alternative. Later on in this series, I'll suggest one--a combination of high-multiplier spending and serious popular debt relief that would command more support, provide a much greater direct stimulus, stem the decline in housing prices and small business closings and placate foreign creditors who are worried about our sanity. It might even permit Obama to finally win a few Republican votes for his program.

        February 4, 2009 at 12:33 PM | Permalink | Comments (0) | TrackBack

        Monday, November 03, 2008

        INVEST IN INNOVATION!!!
        Instead of Eating the Seed Corn...
        James S. Henry and Jim Manzi

        We are called the nation of inventors. And we are. We could still claim that title and wear its loftiest honors if we had stopped with the first thing we ever invented, which was human liberty."  

        -- Mark Twain

        (The following is a longer version of a piece that appeared this week in The Nation.)

        Franklin2 In the midst of our deepening recession, the US faces Bulb11_2 another  economic crisis that is less visible and dramatic than house foreclosures, bank failures, plant closings,  or stock market avalanches, but even more important in the not-really-that-long run: systematic under-investment in technology and innovation.

        Indeed, nothing less than our global economic leadership may be at stake because of this underinvestment.

        On the other hand, with a little bit of funding,  foresight, and determination, we believe that it may be possible to kick-start an innovation revival.

        Especially at the federal level, for a  modest investment,  there’s an opportunity to create a Edison_2 whole new generation of idea-growing, job-creating  technology hubs all across the country – perhaps even an “automotive Silicon Valley”  in otherwise moribund Detroit.

          This revival would not just be about investing more heavily in R&D. Especially in troubled times like these, we need to remind ourselves that innovation has always been a critical American tradition, a crucial part of our patrimony. It is as much a by-product of our political system and cultural norms as of our business and scientific practices.

        Einsteinblackboard_3 This patrimony is now at risk, not only from our failure to invest,   but also from the failure to reward and honor scientists, technicians, engineers, and inventors above lawyers, bankers, and hedge fund managers, and to recognize the central role that real innovation of all kinds has always played in our story.

        NEW IDEAS

        Rcm001_2 For more than two centuries America has led the world in innovation.  This has been true notNaismith_3 only in science and technology, but also in business management practices, the design of new approaches to service delivery, and, indeed,  sports,  political institutions and civil rights as well. Over the long haul, this consistent track record of ingenuity and invention, complemented by heavy investments in education and science, has contributed mightily to America’s leadership role in the world economy, to our democratic culture and the prosperity of our people.

        Carver Indeed, most students of economic growth now agree that the contribution of technical innovation to US national wealth has been at least as important as that of so-called “natural” resources like abundant farm-land, labor, capital, and energy.

        In the post-globalization economy, where access to such resources is being commoditized, innovation has become an even more important source of competitive advantage.  In principle, this should be good news for the US. This is not only because of its past successes, but also because innovation-based competition is  “win – win,” not “beggar thy neighbor.”  Over time, every player in the competitive game stands to benefit from  the discoveries made by others.  Hydehenrietta

        Typewriter On the other hand, if the US stakes its future on resource-based competition  -- or the kind of low-innovation, “big houses/big debts/big cars” model favored by Detroit, New York, and Houston until very recently  --   the competitive game will become “win-lose.”  And long-term competitive advantage then shifts to those countries with the largest supply of cheap resources, the lowest taxes, and the cheapest, most oppressed workers -- not a favorable formula for a healthy democracy.

        HIGH RETURNS

        Unfortunately, the US’ global leadership in innovation has been placed at risk by years of Slinky failure to invest adequate resources in R&D.

        Spraycan To begin with, virtually every analysis of the “social returns”  -- private profits and social benefits, including employment -- to R&D investments  finds these returns to be very high. They average at least 30- 50 percent per year or more in real terms, compared with the meager 5-7 percent returns typically generated by the US stock market – or the minus 46 percent returns earned by stocks earned in the last year.   

        These high returns to R&D are explained by its peculiar nature. Once discovered, new ideas  can be used over and over at low – or even zero – marginal cost. So R&D not only boosts Tape productivity in the industries that do  research; it also yields “spillover” benefits for other industries. And it speeds up  future innovations. There is NOT a finite body of good ideas sitting out there waiting to be mined. Rather, from a knowledge standpoint,  we live in an expanding universe, where each new discovery reveals whole new territories to be explored.

        First_to_fly_how_wilbur_orville_wri Consistent with this, those industries that are the most R&D intensive have also consistently achieved the highest growth rates and profitability, and have also made the largest contributions to skilled employment and high incomes. The notable exceptions -- financial services, lawyering, real estate development, accounting,  plus cartelized industries like autos, cable television, and oil and gas -- are ones where clever chicanery, market power, and anti-competitive regulations have permitted vast fortunes to be achieved without much fundamental innovation at all –- until the recent collapse.


        THE INNOVATION GAP

        Polaroidcamera These high rewards for investments in R&D also suggest the presence of a substantial Zipper innovation spending gap. This is the gap between the current level of R&D spending and the optimal level, from the standpoint of generating growth, employment, and the many other social benefits of new ideas. Indeed, we are so far from the competitive margin that the US might be able to profitably invest several times the current $370 billion per year that US industry and the federal government now spend on R&D without driving “social returns”  below the long-term (federal) cost of capital – just 1 percent these days after inflation.

        Let’s put it this way: at these interest rates, and the high expected returns, it would cost the US Government just $400 million per year in interest to double its entire current budgRefrigeratoret for civilian R&D – which might then yield an incremental $12 billion in returns. It’s about time that we realized such high multiples for the country, and not just Wall Street executives.  


        R
        ECENT TRENDS

        Yet the recent trend in US R&D investment has been in precisely the opposite direction.

        Usrdofgdp First, while US R&D spending as a share of national income has been relatively high for decades, compared to other Western countries, since the mid-1980s it has stagnated. Indeed, it now is well below the 1960s level, when the Kennedy/ Johnson Administrations’ visionary drive to reach the moon, combined with the arms race and the rise of mainframe computing, produced a sharp boost in US R&D spending.

        Federal funding is one key to this gap.  While it still accounts for about 28 percent of Safetypinanim all US R&D spending, it has recently been especially sluggish. In real terms, the federal budget for basic and applied R&D has fallen for five years in a row, and will continue to slide  next year under the budget just approved by Congress.

        This recent trend is even more disturbing, once we take into account the fact that nearly 60 percent of the Federal Government’s current $100 billion of R&D funding   is devoted to military and “national security” programs at the Pentagon, DOE, and the Department of Homeland Security.

        Realusrd53to09b The $42.6 billion left over for non-military research in FY 2009 has to fund everything from DOE’s basic research on alternative energy to the National Institute of Health’s vital medical research program for peer-reviewed science, to NASA’s entire space budget.  As a share of national income, non-military budget for R&D now amounts to a paltry .3 per cent – the lowest share since the early 1950s, and just half the average in the late 1970s.

        The $43 billion budgeted for all federal civilian R&D pales by comparison with the $700 Civvsnatsecrd_7609e billion that the US Treasury is injecting into US banks, in return for some combination of non-voting stock, very low dividends, and toxic assets. It also pales by comparison with the $29 billion bailout of Bear Stearns, the $135 billion bailout of AIG, the $200 billion bailout of Fannie Mae and Freddie Mac,  let alone the $800 billion cost (to date) of the Iraq War.

        But of course that must simply be because government R&D spending is a risky venture whose outcomes are highly uncertain! 

        DON’T LOOK BACK

        The other disturbing point about R&D spending is that American leadership has been slipping. Relative to other countries, the US has long devoted a relatively high share of national income to R&D investment. Even now it still accounts for a disproportionate share of all global R&D  -- at least 25 to 34 percent. 

        However,  while US R&D spending has recently stagnated, many other countries, including key new competitors like China and Malaysia as well as more mature ones like Korea, Singapore, and the Nordic block, have been sharply increasing R&D spending. So the gap between these leading competitors and the US in overall R&D spending is rapidly shrinking.
        Since innovation is by definition a matter of human skill and creativity, not just finance, it also matters that these new competitors have also sharply increased the share of skilled researchers and technicians in their labor forces. The US’ slippage has also been aided by the “hegemon tax” --  the fact that none of these countries spend anywhere near the 50-60 percent share of R&D that the US devotes to military R&D.

        Lrg_cover Overall, many high-growth developing countries have already grasped a Comparativerdkey point about economic national security that the US is still struggling to grasp. This is the fact that, as noted above, the global competitive marathon increasingly depends on productivity, innovation, and scientific skill, not just command over natural resources or vast pools of untutored “hewers of wood and drawers of water.” 

        Indeed, US companies that once moved offshore simply because of cheaper inputs, lower taxes, and weaker regulation are now finding that it pays to move their R&D centers offshore as well. This is partly because of the growing availability of engineering skills in places like India, China, and Singapore, but it is also because  of the higher barriers to immigration that foreign skilled workers have faced in the wake of 9/11. This policy may or may not have had much impact on terrorism, but by forcing these workers to remain at home, it has certainly had a negative impact on our economic security. 

        TROUBLED WATERS – PRIVATE R&D

        These disturbing trends in federal R&D spending haFord_model_t_henryve also been reinforced by recent trends in private sector spending. As we saw earlier, private investment now accounts for more than 70 percent of all US R&D. Unfortunately, because of the current financial crisis and the emerging recession, this funding is drying up even as we speak.

        This is especially true for venture capital funds that have relied heavily on so-called “limited partners” like pension funds and university endowments. Such investors often manage their portfolios with fixed allocations – reserving, say, 10 to 20 percent of investments to “alternative investments,” especially the “D” side of R&D-intensive ventures. Given the stock market’s steep decline, this approach to portfolio management and the need to rebalance asset allocations have virtually dictated a steep decline in private R&D funding.
        on how deep this recession is, and how much father stock markets fall, this allocation effect  will easily trim private R&D spending by 10-20 percent or more – for a budget that is already, as we’ve seen, under-funded.

        Rdbyindustryus At the same time, in uncertain times like these, many private corporations and investors become less patient. – they become much less willing to invest in the kind of  low-probability/ long-lead time projects that are the essence of basic research.  It is hard to diversify away such project risks, so private capital markets tend to demand more immediate, sure-fire payoffs just when “capitalism” is most in need of  real breakthroughs.
        In the aggregate, this helps to explain why the primitive “Capitalism R 1.0”  version of a market economy -- one  that relies exclusively on private investment to fund innovation – is likely to grow much more erratically than one that allows government to play a complementary role, stabilizing support for basic research in good times and bad.
        WHAT TO DO

        So what should we do about the innovation gap? 

        ¶ First of all, we need to make investing in innovation the  national priority that it deserves toInventors_2 be – because future US competitiveness depends on it. In the 21st century, as global competition increases, we cannot simply “Wal-Mart” our way to  prosperity. 

        At a minimum, this implies a significant boost in the current E546449b143148fb9c82239b70476d8c_2 level of R&D funding, especially in civilian funding, and perhaps increased tax credits and other incentives as well.
        Of course, such measures would require increased federal spending, precisely at a time when the federal budget is already severely strained. As we’ve seen, however, the current level of spending is so modest that the US is just “one-half bank bailout” away from the kind of increase  in R&D funding that is needed. The alternative of just continuing to stagnate should really be characterized as “eating the seed corn.”

        ¶ Second, like most enterprises, our country really needs a national technology strategy. 

        This is not a matter of “industrial policy” or “picking winners,” much less of displacing private funding with government venture capital.

        Rather, it is  matter of figuring out  creative new ways to partner with private capital – including philanthropic donors  and university endowments.  The aim is to multiply the benefits, by focusing on what the government has always done best – replenishing the “seed-corn” with fundamental longer-term research.

        This requires a fresh look at the appropriate role of government in innovation. From this angle,  the recent financial crisis is not all bad.  Given the disastrous example of excessive reliance on under-regulated markets that we’ve just seen, on the one hand, and the relatively successful long-term track record of government R&D on the other, this is an historic opportunity.


        WALKING BACKWARDS FROM SUCCESS

        ¶ Third, there’s a real opportunity to learn from our own innovation history, and use the 20060604siliconvalley lessons to propagate a nation-wide series of innovation hubs.

          It is especially instructive to walk backwards from the successes realized by several US examples of public-private collaboration in “technology hubs” like Silicon Valley, Boston, and Austin Texas.
        In all these cases, private venture capital and entrepreneurs  were crucial. But the fact is that federal dollars also played a pivotal role. For decades the federal government generously subsidized basic research in fields like engineering, biology, physics, chemistry, and computer science at premier universities like MIT, Harvard, Stanford, Carnegie Mellon, and the University of Texas.

        For example, in the case of Stanford, one of Silicon Valley’s mainstays,  the university has received enormous federal research subsidies ever since the 1940s. Combined with the Valley’s highly-competitive venture community, this provided the foundations for a technology hub that has transformed the world, with innovations like semiconductors, computer graphics,  and wireless communications, and companies like Intel, Apple, and Google.
        In the case of Boston, the National Institute of Health has recently played a key role in helping the community become a technology hub for biotech and pharma research. Boston’s new leadership in this arena is based on enormous NIH funding, channeled to peer-reviewed researchers at regional teaching hospitals. Over time, the steady provision of federal tax dollars has supplied the  grist for what has since become a self-sustaining  innovation mill. Rather than “crowd out” private funding, federal funding has actually galvanized it, providing a base load of support that allowed a strong technical community – the key to any successful hub -- to take root.

        Steinmetzedison The key issue is whether we can replicate  new “Bostons” or “Silicon Valleys” in other geographies,  targeted towards priority arenas for innovation like energy, health care, the environment, education, and transportation.

        Each of these arenas offers a wide range of subfields. For example, in the energy arena, there’s already path-breaking work under way on clean energy, new electric distribution systems, and new forms of automotive and non-automotive  transport. In health care, innovations that lower costs (e.g. EMRs) may be just as important as clinical innovations like new devices, treatments, and compounds.

        The point is not to dictate  precisely what gets worked on, but to marshal the human resources and infrastructure needed for innovation, build the partnerships with private institutions, and insist on excellence.

        In this “incubation” approach, for example, we might  ask, what conditions would be needed to yield a period of sustained innovation in the automobile sector? Why not reserve, say, just  a few percent of the $25  billion that the federal government has already committed to that sector’s “bailout” for the creation of an “automotive Silicon Valley?” In such a hub, just as in Boston and Austin,  a virtuous cycle of innovation and product development would be generated. Pockets of entrepreneurial companies would spawn each other, one after another, competing aggressively and helping to free people and capital from big, slow-moving companies. Universities, communities, and corporations would complement each other’s very different styles and skills.

        ¶ This renewed emphasis on innovation as a source of national competitive advantage also requires us to beef up our education system, in order to deliver tens of thousands of  skilled technicians and engineers.  As we’ve seen, there’s also a need for immigration reform that provides greater access to foreign-trained skills – an alternative to the current “scarce visa” system, which basically encourages our competitors to staff up their own technology-based industries. In this case, we’re not just eating the seed corn; we’re giving it away.

        Finally, the other crucial requirement of an innovation revival is a national culture that reminds young people of their innovation heritage, and encourages them to become engineers, designers, and scientists,  rather than just lawyers, accountants, and bankers -- whose preferred form of ingenuity, in Thornstein Veblen’s words, has always been “clever chicanery, or the thwarting thereof.”  As we’ve argued, now more than ever, we need to curtail all this chicanery and return to the much better American tradition, innovation on the real side of the economy.

        (c) SubmergingMarkets, 2008

        Jim Manzi was Chairman of Lotus Development Corporation, and is now Chairman of Thermo Fisher Corporation, a $10 billion life sciences company based in Waltham Massachusetts. 

        November 3, 2008 at 12:29 AM | Permalink | Comments (0) | TrackBack

        Wednesday, September 24, 2008

        BUSH SPEAKS: "HOW DID WE EVER GET IN THIS MESS? WHERE HAVE I BEEN?"
        James S. Henry

        Artbushap Last night on national television, Comrade Bush presented his own miniature 14-minute "Cliff Notes" version of the roots of the current US financial crisis, and a heart-rending appeal for the most generous act to date of his Administration, the $700 billion blank-check Wall Street bailout

        By now the man has established a bit of a pattern --  customarily trying to scare us all into granting him unlimited powers,  while arguing that there is simply no alternative to whatever bitter pill he happens to be pushing at the moment. 

        You are of course free to believe him if you like. Hundreds do.

        Stockmarketcrash1929 In fact, as we argued yesterday, there are all sorts of improvements to be made to the proposed Whale of a Bailout package.   

        These include things like, at a minimum, (1) equity investment and warrants for taxpayers, to provide some upside returns in proportion to the risks we are taking on any purchases of bank assets; (2) stronger oversight; (3) more assistance for the millions of Americans who are experiencing home foreclosures; (4) compensation ceilings, clawbacks, and stiff progressive tax rates on incomes over $1 million and estates over $10 million, to offset the cost of all this; (5) a Financial Products Safety Commission; (6) a new Treasury-backed competitive insurance market for mortgage securities,  available to banks and homeowners; (7) expanded FDIC reserve fund rather than buy "toxic" bank securities up now, set up an  -- since all the "I-banks" are commercial banks now, anyway; (8) a new installment of the 1932 Pecora Commission, complete with subpoena power, to investigate the origins of the crisis and hold people accountable.

        (For more details, here is the testimony that Dr. Brent Blackwelder, Friends of the Earth, and I submitted to Rep. Frank's House Financial Services Committee yesterday: BAILOUT.pdf)

        Even more important, the President's central claim that there is no alternative to this bitter pill is a triple whopper with cheese.    

        As the IMF -- not our favorite institution, but it does know a thing or two about recapitalizing broken banking sectors --  has suggested just this week, long-term "swaps" of mortgage-backed securities for government bonds could be used to clean up the banks' balance sheets while completely sparing  taxpayers the risks of a huge loss on the $billions of toxic assets we'll soon be owning. 

        There are also numerous other approaches  to broken-banking sector restructuring  that have been employed by governments all over the planet in more than 124 banking sector crises since 1970 -- for example, in Chile, Korea, Germany, Buffettserious75x75Mexico, and  Japan.

        Doesn't anyone else find it odd that none of this expertise is being put to use?

        Or that, with losses on complex derivative and structured securities at the core of this debacle, and thousands of "quants" from MIT and Wharton on Wall Street, we cannot design some simple security vehicles to help taxpayers reduce their personal or collective exposure to its potential costs? 

        Perhaps Bush & Co. are not familiar with the IMF or the World Bank/ IFC's "Capital Markets Group." Perhaps Secretary Paulson never bothered to understand the first thing about derivatives and options during his 32 years at Goldman Sachs.   

        For their informaDoggytion, the World Bank/ IMF/ IFC  are located at 700 19th St. NW, Washington D.C., three blocks from the White House.

        Their staffs are not especially busy at the moment -- indeed,  15 percent of the IMF's professionals are being laid off, so they may have some time to help out.

        We've been assured by the Bush Administration, however, that the IMF's assistance is not really needed at this point.

        "What are we," Bush asks,  "Some sort of two-bit corrupt, debt-ridden plutocracy  that can't manage its own affairs?"

        Indeed, the President,  Secretary Paulson, and a weird new assortment of  bottom-feeding Wall Street investors  (Omaha's Warren Buffet, Tokyo's Nomura Holdings and Mitsubishi UJF), and, of course, those who are still left on Wall Street itself are in a white heat to get this deal done, and are trying to create a stampede. 

        They are also clearly not interested in improving the bailout. They just want our money -- and a loosey-goosey, behind-closed-doors process for distributing it that hasn't even been designed yet.

        Unlike US taxpayers, Buffet, who is reportedly investing $5 billion in Goldman Sachs, was saavy enough to get prefAp_obamccain32erred shares and warrants for his money -- worth up to 8 percent of the premier bank's share.

        At that rate, just think how much Wall Street real estate our  $700 billion would buy -- if only Paulson and Bernanke and the US Congress would follow in Buffet's footsteps and insist on some equity and warrants in exchange for a bailout. 

        Meanwhile, Bush has the temerity to intermeddle (once again) with the orderly conduct of a US Presidential election, by inviting the two leading Presidential candidates to the White House just to help him close the deal with Congress. (Ralph Nader and Bob Barr are reportedly already camped out in the White House basement.)

        As if the candidates don't have anything else to do, like debate each other,  41 days before the 539w election.

        As if Secretary Paulson and Chairman Bernanke were not already the world's consummate sales team!

        Of course both Obama and McCain will accept the President's hospitality -- they have no choice.

        So both have now been roped into making this deal happen. 

        Alas,  it probably will -- minus almost all of the possible improvements noted above. The largely symbolic CEO comp limit is probably the only exception

        To those to whom much has been given, even more will be given.

        We do have one consolation, however,  as we prepare to pay the check for this lousy meal. We've located a different version of the history of this crisis that is more accurate -- and more entertaining -- in this must-see video:

        (c) SubmergingMarkets, 2008

        September 24, 2008 at 05:40 PM | Permalink | Comments (0) | TrackBack

        Tuesday, September 23, 2008

        SO, FORREST, WHAT DO WE DO NOW?
        Ten Steps to Fix the Paulson Plan and Solve the US Debt Crisis
        JS Henry and Brent Blackwelder

        Images2_3 The US Congress is busy working hard on US Treasury SecretaryTarp30198 Henry M. Paulson Jr.'s $700 billion TARP bailout plan  -- at least everyone except Alabama's Rep. Spencer Bachus, the ranking Republican on the House Financial Services Committee, who has spent much of the day explaing why a senior official in his position has the time, much less the ethical license,  to be making scores of options trades during office hours.

        While we have every confidence that Rep. Bachus and his peers will provide masterful oversight of the Secretary's proposal, it is understandable that with less than six weeks left to the November election, and Congress set to adjourn on Sept. 29, we appreciate that they may have more important things to worry about than the greatest US financial crisis since the Great Depression. 

        So it is time to help them out. Given the widespread dissatisfaction -- indeed, revulsion -- at Paulson's initial request for a $700 billion blank check  -- on top of the other $500 - $700 billion that the Treasury/ FDIC and the Federal Reserve have already committed to Fannie/ Freddie, AIG, Bear Stearns, and other banks this year -- it is clear that revisions are needed. But time is short -- not just because of election imperatives, but because global financial markets are on pins and needles, waiting for a clear solution. Wl_wish_list

        Any time there is this kind of sea-changing economic event, it tends to surface every interest group's Christmas wish list of long-delayed "essential reforms."

        In this situation, indeed, the crisis has brought forth everything from proposals for "nationalizing the banks" and new regulatory agencies to "clawbacks" in executive severance plans and income tax reform.  There are also a substantial number of people who are concerned about the implications of the initial Paulson proposal for constitutional democracy -- some have called it as nothing less than an "economc coup d'etat" by "Commandate Paulson,"   because of all the unreviewable authority it would have vested in the Secretary and his minions. 

        Given that Congress is moving at the speed of light, we need to "tier" these proposals according to their importance.  There are also a few more innovative ones that deserve immediate attention. Here's our own "Top Ten Improvements" wish list.

        WISH LIST

        1.  Equity  “Upside” and Voting Power.

        In return for the undeniable new risks that US taxpayers are taking on, and the poor management track record of leading Wall Street institutions,  it is reasonable to insist that they receive an “upside” on the value of participating financial institutions (FIs) themselves as well as on the potential increased value of acquired mortgage-backed assets.  This proposal commands widespread support in this panel.

        Technically, this could be accomplished by demanding preferred shares (with anti-dilution provisions) from any financial institutions (FIs) that receive assistance, as was routinely done by Bank of Japan in exchange for financial assistance during the Japanese bank restructuring of the 1990s, and by the Chilean government during the February 1983 bank nationalization.

        Warrants might also be used, as was done in the case of the 1979 $1.2 billion Treasury loan guarantee to Chrysler. (According to Sen. Bradley, the Federal Government eventually made money on those warrants.) We believe that while warrants are easier to implement, it is vital to insist on actually equity (including voting power). This will provide the Treasury with much more direct influence over management behavior, will be easier to value, and will also be easier to explain to the public than warrants.

        2. Clawback Provisions for Executive Severance Pay.

        The basic  principle here is that for  senior FI executives, there should be accountability for some time period even after they leave office – at a minimum, any future compensation or severance that they receive should be subject to stiff taxes or repossession in bankruptcy court. Insisting on compliance with this standard should be a condition for participation in the bailout.

        3. Share the Pain.
           
        A.  Emergency Taxes. 

        Since this very costly bailout package may severely limit the ability of the Federal Government to afford vital programs like health insurance reform and alternative energy, it is important that we deal now with the substantial “tax justice” implications of the bailout.

        One way to do this would be to start treating this as the national emergency that it really is, and help ordinary taxpayers pay for it by: (1) eliminating the carried-interest benefits for hedge fund managers; (2) cracking down on offshore havens – no FIs should be permitted to establish subs or place SPVs  in them;   (3) imposing at least a temporary increased  income tax rate on all people with incomes above $1 million and on all estates above $10 million.

        B. Compulsory Write-Down/ Debt Reduction of Residential Mortgages.

        Given the failure of this summer’s relief packages for ordinary mortgage holders to have much impact, and the fact that foreclosures are still increasing (to a record 100,000+ per month, and that housing prices are still falling in a majority of key markets, this is an another essential measure. The debt restructuring should be implemented quickly, affect large numbers of people, and be inversely proportional to mortgage size. It might also be means –tested.

        Such a measure would not only provide equitable relief to millions of would-be homeowners; it would also help to kick-start a US economy recovery.

        4. Financial Products Safety Commission.

        This would review and certify the quality of all financial products offered to the general public. Products like zero-down payment mortgages would require special labeling, and might not qualify for government incentives like interest deductibility, access to the government insurance window, and so forth.

        5.  A New US Treasury-Created Market for MBS Insurance.

        A novel idea suggested by our good friend Prof. Lawrence Kotlikoff of Boston University  is that the US Treasury might be able to use current authority to offer ABX-like insurance at a fixed price per tranche  to institutions that hold MBSs.  According to Professors Kotlikoff and Merlin, if such a government-backed insurance market were in place, backed by a significant reserve against losses, it might even obviate the need for the entire $700 billion, while creating a market-based workout alternative.

        This could be combined with #1, if FIs were allowed to pay for the insurance with  equity or warrants.  This would also have the benefit of helping to recapitalize troubled FIs.

        6.  New “Pecora Commission” (ala 1932): a congressional committee with subponae power to investigate the root causes of this crisis and recommend further steps.

         

        September 23, 2008 at 04:42 PM | Permalink | Comments (0) | TrackBack

        Saturday, September 20, 2008

        SOCIALISM FOR BANKERS, SAVAGE CAPITALISM FOR EVERYONE ELSE?
        Bailout Jeopardizes the Entire Progressive Agenda
        James S. Henry

        Classwar "“There’s class warfare, all right, but it’s my class, the rich class, that’s making war, and we’re winning.” --  Warren Buffet, June 2008

        Ladies and gentlemen: pardon my intemperance,  but it is high time for some moral outrage --  and a little good old-fashioned class warfare as well, in the sense of a return to seriously-progressive taxation and equity returns for public financing.

        After all, as this week's proposed record-setting Wall Street277_cartoon_bank_bailout_hurwitt_sm bailout with taxpayer money demonstrates once again,  those in charge of running this country have no problem whatsoever waging "class warfare" against the rest of us -- the middle classes, workers and the poor -- whenever it suits their interests.

        At a time when millions of Americans are facing bankruptcy and the risk of losing their homes without any help whatsoever from Washington DC,  the CEOs and speculators who created this mess, and the top 1 percent of households that owns at least 34 percent of financial stocks, and the top 10 percent that owns 85 percent of them, have teamed up with their "bipartisan" cronies in Congress, the US Treasury and the White House to stick us with the bill, plus all of the risk, plus none of the upside.

        Upon close inspection, the Treasury's proposal is nothing more than a bum's rush for unlimited power over hundreds of $billions, to be distributed at Secretary Paulson's discretion behind closed doors and without adequate Congressional oversight.

        This time they have gone too far.

        As discussed below, the cost of this bailout could easily jeopardize our ability to pay for the entire economic reform program that millions of ordinary citizens across both major parties have been demanding.

        Rpaulsonmedium260

        Some kind of bailout may indeed be needed from the standpoint of managing the so-called "systemic risk" to our financial system.

        However, as discussed below, the Paulson plan does not really tackle the real problem head on. Thsi is the fact that many financial institutions, including hundreds of banks, are undercapitalized, and need more equity per dollar of debt, not just fewer bad assets.

        To provide that, we may well want to mandate debt restructurings and debt swaps, or provide more equity capital .

        If private markets can't deliver and we need to inject public capital into financial services companies on a temporary basis, so be it. But it should only be in return for equity returns that compensate the pubilc for the huge risks that it is taking.

        Call that "socialism" if you wish -- I think we are already well beyond that point -- sort of like Chilean economists became in 1983, when the entire private banking sector collapsed and was nationalized -- successfully -- by the heretofore "Los Chicago Boys."

        To me, public equity investment, in combination with increased progressive taxation, should be viewed as just one possible way to get these companies the equity they need, while providing fair compensation to the suppliers of capital and participation in any "upside," if there is one.

        Absent such measures, progressives certainly have much less reason to support this plan. After all, the increased public debt burdens that it would impose are so large that they could easily jeopardize our ability to pay for the entire economic reform program that millions of ordinary citizens (across both major parties) have been demanding.

        From this angle, the Paulson program, in effect, is a cleverly-designed program to "nationalize" hundreds of billions of risky, lousy assets of  private financial institutions, without acquiring any public stake in the private institutions themselves, and without raising any tax revenue from the class of people who not only created this mess, but would now like to be bailed out. 

        Any mega-bailout should come at a high price for those who made it necessary.

        In particular, we must make sure that the butcher's bill is paid by the tiny elite that was responsible for creating this mess in the first place.

        This is not about retribution. It is about insuring taxpayers are truly rewarded for the risks that they are taking -- isn't that the capitalist way?  And it is also about making sure that this kind of thing never happens again.

        After all, the real tragedy of this bailout is its opportunity cost. Consider a well-managed $1 trillion "matching" investment in strategic growth sectors like energy and health....If we really wanted to insure our competitive health, we would not be investing $1 trillion in lousy bank portolios generated by the chicanery-prone financial services sector.

        CAPITALISTS AT THE TROUGH

        Bush_bernanke_080118_mn In financial terms, this latest Wall Street bailout is likely to cost US taxpayers at least $100-$150 billion per year of new debt service costs -- just for starters.

        This estimate is consistent with the $700 billion ("at any point in time") that President Bush and Treasury Secretary Hank Paulson are requesting from Congress this week to fund their virtually-unfettered ("unreviewable by any court") new "Troubled Asset Relief Program." (TARP)

        The sheer scale of Paulson's proposal implies that federal authorities plan to acquire at least $3 trillion of mortgage-backed securities, derivatives, and other distressed assets from private firms -- on top of Fannie/ Freddie Mac's $5.3 trillion mortgage securities portfolio. How the Fed and the Treasury actually propose to determine the fair market value of all these untrade-able assets is anyone's guess. But since  40 percent derive from the exuberant, fraud-prone days of 2006-7, they will probably all be subject to steep (60-90 percent) discounts from book value.

        27_scaredwoman_lgl That's consistent with the 78 percent  "haircut" that Merrill Lynch took on the value of  its entire mortgage-backed securities portfolio earlier this month -- actually, more like a 94.6% haircut, the portion that it received in cash.

        This implies, by the way, that if the Federal Government were required to "mark to market" their $29 billion March 2008 investment in Bear Stearns' securities, it would now have a cash value of just $1.6 billion. Not a very hopeful sign from a taxpayer's standpoint.

        Paulson's latest proposal dictates another sharp increase in the federal debt limit, to $11.313 trillion. This limit stood at just $5.8 trillion when Bush took office in 2001.  By October 2007 it stood at $9.8 trillion. Then it jumped again to $10.6 trillion in July 2008, during in the Fannie/Freddie meltdown. As of March 2008, the actual amount of Federal debt outstanding was $9.82, just six months behind the limit and gaining.   

        Newborrowing2_3

        All this new TARP debt will be on top of $200 billion of new debt that was issued to buy Fannie/Freddie's preferred stock, plus the assumed risk for their $1.7 trillion of debt and $3.1 trillion of agency mortgage-backed securities.

        It is also in addition to  the $85 billion 2-year credit line that Federal Reserve just extended to AIG, the $29 billion "non-recourse" loan provided for the Bear Stearns deal noted above; $63 billion of similar Federal Reserve lending to banks this year; $180 billion of newly-available Federal Reserve "reciprocal currency swap lines:" $5 billion of other emergency Treasury buybacks of mortgage-backed securities;  $12 billion of Treasury-funded FDIC losses on commercial bank failures this year (including IndyMac's record failure in July); perhaps another $455 billion of Federal Reserve loans already collateralized by very risky bank assets;  and the FDIC's request for up to $400 billion of Treasury-backed borrowings to handle  the many new bank failures yet to come.

        There is also the record $486+ billion budget deficit  (net of $180 billion borrowed this year from Social Security trust fund) that the Bush Administration has compiled for 2008/09, drivem in part by the continued $12-$15 billion per month cost of the Iraq and Afghan Wars and the impact of the deepening recession on tax revenues. Longer term,  there is also the projected $1.7 trillion to $2.7 trillion "long run" cost of those wars (through 2017). 

        All told, then, we're talking about borrowing at least another $1-1.4 trillion of federal debt to finance a record level of lousy banking.

        COMPARED TO WHAT?

        By comparison, Detroit's latest request for a mere $25 billion bailout looks miserly. And if we were in Vienna, we would say, "We wish we could play it on the piano!"

        Compared to other bailouts, this is by far the largest ever.

        For example, the total amount of debt relief provided to all Third World countries by the World Bank/IMF, export credit agencies, and foreign governments from 1970 to 2006 totaled just $334 billion ($2008), about 8 percent of all the loans. (Henry, 2007). Charleskeating45_2

        The savings and loan bailout in the late 1980s cost just $170 billion ($2008).

        And the FDIC's 1984 bailout of Continental Illiinois, the largest bank failure up to this year, was (in $2008) just $8 billion (eventually reduced to $1.6 billion by asset recoveries).

        Meanwhile, compared with other countries that are well on their way to building forward-looking "sovereign wealth funds" to make strategic investments all over the world, the US seems to be on a drive to create this introverted "sovereign toxic debt dump." 

        CASH COST

        No one has a very precise idea of how much all this will cost, not only because many of the securities are complex and thinly traded,  but also because their value depends to a great extent on the future of the US housing market. Housing prices  have already fallen by 20-32 percent in the top 20 markets since mid-2006, and they continue to fall in 11 out of 20  major markets, especially Florida,  southern California, and Arizona, where the roller-coaster has been the most steep.

        Failboat

        At current T-bond rates (2-4 percent for 2-10 year bonds, the most likely maturities), near-term cash cost of this year's bailu is likely to be an extra $40 to $60 billion a year in interest payments alone. 

        Furthermore, since the borrowed funds will be invested in high-risk assets, the most important potential costs involve  capital risk. There's a good chance that, as in the case of Bear Stearns, we'll ultimately get much less than $.50 for each $1 borrowed and invested. For example, Fannie and Freddie alone could easily be sitting on $500 billion of losses (=$2 trillion/$5.3 trillion* 50% default*50% asset recovery).

        This could easily make the long-run cost of this bailout to taxpayers at least $150 billion a year.   

        No wonder traders on the floor of the New York Stock Exchange reportedly broke out singing "the Internationale" when they heard about the bailout.

        But the direct financial costs of the bailout are only the beginning....

        HIJACKING THE FUTURE

        Middleclass_2 Last week's events produced terabytes of erudite discussion by an army of Wall Street journalists, prophets and pundits about short-selling rules, "covered bonds," and the structure of the financial services.

        This is absolutely par for the course, as modern financial crisis journalism is concerned -- the "story" is always told mainly from the standpoint of what's in it for the industry, the banks, the regulators, and the investors.   

        For the 90 percent of Americans who own no money-market funds, and less than 15 percent of all stocks and bonds, however, this bailout means just one thing.

        All of the money has just been spent.  And it has not been spent on you.

        For example, unless we demand an increase in taxes on the rich, big banks, and  big corporations, as well as some public equity  in exchange for the use of all this money, we can expect that the long-term costs of this bailout will "crowd out" almost all of the $140 to $160 billion of new federal programs that Barack Obama proposed. It will certainly make it impossible for Obama to finance his programs without either borrowing even more heavily, or going well beyond the  tax increases (on oil companies and the upper middle classes) that he has proposed.

        Without such changes, there will be no federal money available for comprehensive health insurance, or the reform of the health care delivery system.Obamaagendacost

        There will be no additional funding for pre-school education, child care, or college tuition.

        There will be no additional funding for investments in energy conservation, wind, or  solar power.

        There will be no additional investments in national infrastructure (e.g., the reconstruction of our aging roads, highways, and bridges to "somewhere.")

        Highway privatization and toll roads, here we come.

        There will be no money to bail out the millions of Americans who are on the brink of losing their homes.

        The supply of housing loans and other credit will remain tight, despite the bailout.

        Indeed, if the economic elite has its way,  the long-sought dream of "a home for every middle-class American family" may be abandoned as a goal of government policy.

        Meanwhile, the government-sponsored consolidation of the financial services industry will make financial services more profitable than ever.

        This is good news for the "owners of the means of finance." For the rest of us, it means steeper fees and rates.  And if we fail to keep up with the new charges, we'll  face the rough justice delivered by the latest  bankruptcy "reform," which was rammed through the Congress in 2005 with support from many top Democrats.   

        103473_f520 There will be no money to shore up the long-run drain on Social Security or Medicare.

        Indeed, ironically enough, this latest bank bailout may even increase the financial pressure to privatize these comparatively successful government programs.

        There will be no extra money to house our thousands of new homeless people,  relieve poverty, rebuild New Orleans, or support immigration reform.

        There will be no additional funds for national parks.

        Indeed, we might as well start  by privatizing our national and state parks, and drilling for oil and gas in the Arctic National Wildlife Refuge,  Yosemite,  the Grand Canyon, and right off the Santa Barbara coast. We're going to need those federal lease royalties. (Perhaps the oil barons will lend us an advance.) 

        There will be no funds available for increased homeland security.

        There will certainly be no "middle-class" tax cut.  Absent a progressive tax reform, the only "cut" the middle class is going to receive is another sharp reduction in  living standards.

        TRUMPING REAGAN

        All told, the Bush/Paulson "permissive banking/ massive bailout" model  beats even the old 1980s vintage Reagan formula, which tried to force government down-sizing with huge tax cuts. 

        Contrary to the sales pitch, those cuts never produced any incremental tax revenues, let alone any significant down-sizing.  It has simply proved too easy for the federal government to borrow. And "conservatives" can always find wars, farm subsidies, defense contractors,  and "bridges to nowhere" to spend the money on, just as fast as liberals. 

        Lately, however, it appears that US debt levels may indeed be reaching the point where they could impose a limit on increased spending.  Given the sheer size of the new federal debt obligations, foreign creditors,who have recently been supplying more than half of new Federal borrowing, have been muttering about taking their lending elsewhere. And outside the financial services industry, Main Street companies are concerned being "crowded out" by record federal borrowing.

        THE ALTERNATIVE -- THE "GET REAL" NEW DEAL

        To make sure that real economic reform is still feasible, we need to demand a "Get Real/ New Deal" from Congress right now. 

        At a minimum, this Get Real/New Deal package should consider measures like: 

        (1) The restoration of stiff progressive income and estate taxes on the top 1 percent of the population (with net incomes over $500,000 a year and estates over $5 million) -- especially on excessive CEO and hedge fund manager compensation;

        (2) Much more aggressive enforcement and tougher penalties against big-ticket corporate and individual tax dodgers;

        (3) Tougher regulation of financial institutions  -- possibly by a new agency that, unlike the US Federal Reserve, the SEC, and the US Treasury, is not "captive" to the industry;

        (4) A crackdown on the offshore havens that have been used by leading banks, corporations,  and hedge funds to circumvent our securities and tax laws;

        (5) The immediate revision of the punitive bankruptcy law that Congress enacted in 2005 at the behest of this now-bankrupt elite; and

        (6) While we are at it, stiff "pro-green" luxury taxes on mega-mansions, private jets, Land Rovers, yachts, and all other energy-inefficient upscale toys. 

        We also need (7) a National Commission to investigate the root causes of this financial crisis from top to bottom, and actually (unlike the hapless, ineffectual 9/11 Commission) hold people accountable.

        Finaily, if the pubilc is going to provide so much of the risk capital for this restructuring, we should demand (8) public equity in the private financial institutions that receive so much of our help.

        This will permit taxpayers to share in the upside of this restructuring, rather than just the downside risks.

        Along the way, this will require that we explain to Secretary Paulson that this country is not Goldman Sachs. Even after 8 years of President Bush, this is still a democracy. 

        Secretary Paulson is not going to be given unfettered discretion to hand out closet "liquidity injections" to his buddies on the street -- no matter how worthy they are. 

        Dp1774112 Over time, this progressive Real/ New Deal would help raise the hundreds of billions in new tax revenue needed to offset the costs of this bailout.

        This will be essential, if the Federal Government is to be able to afford key reforms like health insurance, clean energy, and investments in education.

        These may not matter very much to Wall Street executives, financial analysts, Treasury and Federal Reserve executives, or the more than 120-130 Members of Congress and 40-45 US Senators who earn more than $1 million a year -- and are already covered by a generous "national health care" package of their own design.

        But these  are the key "systemic risks" that ordinary Americans face. 

        These reforms may sound ambitious. So is the bailout.  And the reforms that we are discussing are only fair.

        After all, we the American people have recently been the very model of forgiveness and understanding. 

        We have tolerated and footed the bill for stolen elections,  highly-preventable terrorist attacks, gross mismanagement of "natural" disasters, prolonged, poorly conceived, costly wars, rampant high-level corruption, pervasive violations of the US Constitution,  and the systematic looting of the Treasury by politically-connected  defense contractors, oil companies, oligopolistic cable TV and telecommunications firms, hedge fund operators, big-ticket tax evaders, and our top classes in general.

        Does "class" still matter in America?  You betcha -- perhaps more than ever. But enough is enough.  Call your Congressperson now. Demand a"Get Real/ New Deal" qualifier to the bailout package before it is too late. We deserve to get much more for our money. So do our kids.

        (c) SubmergingMarkets, 2008



        September 20, 2008 at 04:41 PM | Permalink | Comments (0) | TrackBack

        Friday, September 05, 2008

        NARRATIVES, NOT IDEAS
        McCain's Contradictory, Fearful Vision of the Next Four Years
        James S. Henry

        Amygoodmanarrest82008_3 Outside the Republican convention hall, Twin City cops and National Guardsmen in full-scale battle gear were arresting credentialed journalists like Amy Goodman and pepper-spraying peaceful demonstrators -- though you didn't hear much about that from the respectable TV commentators who were safe inside, battling balloon drops.   

        Inside the hall, we were treated to an odd combination of "Naughty Librarian" Gov. Sarah Palin, John McCain trying for the nth time to appear natural while reading the teleprompter and bashing his own party, and 2380 raucous Republican delegates -- 1.5 percent black, 5 percent Hispanic, 32 percent female,  80 percent over 50, and nearly 100 percent over-fed  -- trying to appear jubilant, grinding to the heavy-metal rhythms that someone in Mccain904b_s_20080904214223the RNC hierarchy must have thought were a cool idea.   

        We also had yet another recapitulation of the Arizona Senator's horrific five years in a POW camp, after being shot down on his 23rd mission over Hanoi back in 1967.

        Indeed, if McCain somehow manages to win this election, he will have no one more to thank than Nguyen Van Dai, theAleqm5jgx4h7ojtbaavncigl6ogpzvda 68-year old retired  Vietnamese colonel who actually launched the SAM missile that downed McCain's A-4 Skyhawk on October 27, 1967.

        In any case, after watching the Republican Convention from mind-numbing start to finish, it is now crystal clear that,  apart from McCain's 41-year-old combat narrative -- supplemented by the less familiar narrative about Palin's decade-long  battle to combine procreation, small-time government, and the Assembly of God's "Plan for Alaska" -- the Republican Party has become the equivalent of the US housing industry.

        It is intellectually bankrupt, with almost no new ideas. As former Reagan speech writer Peggy Noonan correctly put it, "They went for this, excuse me, political bullshit about narratives."

        Worse than that, the Republican Party has also turned its back on many of its old favorite best ideas and brand values -- for example,  "small government," "balanWaroftheworldsced budgets," "non-intervention," "environmental protection," and "the US Constitution."

        Palin's first 15-minutes of fame temporarily blinded many commentators  to this basic fact.  But even the most faithful die-hard Republican strategists now agree that, apart from the novelty of her Bat Mitsvah,  this abbreviated convention was a gigantic, expensive messaging mess -- and, on balance,  a gift to the hapless Democrats -- who are otherwise still fully capable of losing this race, even with a full-scale political and economic gale at their backs.

        We'll explore the numerous contradictions in McCain's program below.

        (c) SubmergingMarkets, 2008

        CONTRADICTIONS EVERYWHERE

        I. CHANGE WE CAN BELIEVE IN?

        Obviously McCain is trying to jump on the "party of change"Change bandwagon. This is hardly a strategic insight,  given overwhelming popular discontent with the "country's direction" and Obama's success with this theme.

        On the level of practical policies, however, it is a little late. 

        Indeed, it has really been McCain's policy team that has been doing most of the "changing." 

        >For example,  McCain has adopted the idea, which he once opposed,  of extending Bush's tax cuts for corporations and the rich -- the $10 trillion long-run cost of which  is even larger than th $7 trillion that Bush's cost.

        Even if we abolish all future Congressional "earmarks," this scheme would cause the US deficit to soar even higher than its record $500 billion current level.

        If we have learned anything from the last eight years, it is that such tax cuts don't pay for themselves or reduce government spending; they just produce larger government deficits. 

        >McCain's gone completely quiet on the constitutional issues of torture, closing Guantanamo, and illegal surveillance.

        To some extent so has Obama. But these were supposed to be the kind of "vintage maverick" issues where McCain spoke truth to power.
        080328_mccaingramm_lerer
        >He's got nothing to offer on the deepening economic recession or the national housing crisis, beyond more of the same.

        His close friend former Senator Phil Gramm has resigned as Co-Chair of the campaign, but he is still likely to be named McCain's Secretary of the Treasury. 

        Yet he is a leading banking industry shill and an opponent of tougher regulation, whose efforts helped contribute to the lax lending policies that have produced the joint housing/banking crisis.

        > McCain's ideas about privatizing education, health insurance, Medicare and Social Security are all warmed- over versions of the same proposals the Republicans have tried and failed to implement for over a decade, despite their control of Congress for much of this period.

        Especially with the new, probably Democratic-controlled House and Senate, these proposals will be dead on arrival. We will not have "change," but four more years of stasis.

        > McCain's only ideas for solving the energy crisis are (1) drilling offshore or in 061908_nuclearpowerplant Alaska, and (2) building more nuclear power plants.

        Regardless what one thinks of them, these two tactics would both take years to have any impact.

        Even if they could overcome the substantial state and federal regulatory obstacles in their way,  they would not produce any additional energy for at least 10 to 12 years.

        In contrast, conservation and alternative energy sources like wind and solar produce benefits very quickly 

        > McCain has nothing interesting to say about a whole host of pressing international economic issues, including the faltering WTO round, addressing global poverty, and reviving the global Kyoto accords on the environment.

        >On the question of Iraq,  McCain still opposes the idea of a definite timetable for withdrawal, which even the Iraqi Government now supports.

        > On the questions of Iran and Georgia, McCain has sounded even more aggressive than VP Cheney, who wisely did not even bother to attend his own Party's convention.

        II. "ANTI-WASHINGTON?" 

        At least since Barry Goldwater, the Republican Party simply can't get enough of portraying itself as "outside the Beltway," the underdog from the hinterland, and the victim of some vast liberal media conspiracy.

        A visitor from another planet might be surprised to learn that  the Republican Party has actually won the White House 9 out of 16 times since 1948. And John McCain, in particular, has been a member of Congress since 1982.

        Furthermore, it also controlled the US House of Representatives from 1996 to 2006, and the US Senate from 2000 to the present, with enough seats to prevent any Democratic initiatives.  It  has of course controlled the White House from 2000 to the present. Along the way, it has also taken control of the US Supreme Court and the leadership of key "independent"  federal agencies, like the Federal Reserve. Jackabramoffmain

        The Republican Party has also recently compiled a record number of convictions for illegal lobbying activities -- indeed, shortly before McCain was deliver his acceptance, the legendary White House intimate Jack Abramoff was receiving a four-year jail sentence for corruption and bribery. 

        The only "change" we can be sure of will come when -- as now appears likely -- the Republican Party  loses control of all these institutions this November.

        III.  A BIPARTISAN MAVERICK? 

        Maverick As noted above,  McCain has actually become less and less of a maverick, and more and more partisan, as time goes by.

        The night before his own address to the convention, his own VP candidate could not have been more partisan in her feral attacks on Obama.

        Indeed, just by nominating this hard-right, anti-choice, anti-gay, anti-environment, anti-libertarian for VP despite her self-evident lack of credentials,  rather than choosing any number of more talented, moderate Republican women (or men), McCain has clearly helped to polarize the national debate.

        This puts paid to all the rhetoric about bipartisanship in his acceptance speech.

        IV. OPPOSED TO BIG BROTHER? 

        Romneybluffton We were amazed and delighted to hear Mitch Romney describe his party not only as "the party of ideas," but as being opposed to "Big Brother."   

        It seems that Mitch should stick to pillaging troubled companies, his forte. Is he really not aware that it is the Bush Administration that has been conducting illegal wiretaps and e-mail surveillance on millions of Americans during the last six years?

        V. NATIONAL SECURITY EXPERIENCE? WHERE'S OSAMA? 

         To listen to McCain, Bush, Giuliani, Romney, and Co., our visitor from another planet would probably conclude not only that 9/11 did  not happen on the Republican Party's watch, but also that the Iraq War was eminently justified -- indeed, in candidate Palin's memorable words, it is "a task from God".

        Sitroom20070101 According to the rhetoric at the Republican convention, the war against Osama Bin Laden and  the Taleban in Afghanistan and Pakistan (remember them?  the original perpetrators of 9/11?)  must also be going so well that we can:

        (1) Afford not to mention Osama or Afghanistan at all;

        (2) Afford to extend NATO to Georgia and the Ukraine, right on Russia's borders;

        (3) Afford to call Iran "the biggest supporter of state terrorism," and threaten it  with military force! 

        When it comes to national security, Republicans do have this praiseworthy tendency to recall over and over again great moments of courage and honor that occurred long ago -- say 41 years ago.

        But when it comes to all the shameful events that have happened on their own watch in just the last eight years,  they become forgetful.

        In my experience, Republicans are systematically incapable of apologizing for anything, even when they are grossly in the wrong.  Indeed, that is a pretty good litmus test for a Republican.

        >Lest we forget, Osama bin Laden, still safely ensconced in Pakistan (our putative ally), was the author of 9/11. Next week we'll commemorate the 7th anniversary of that date -- why has he not been brought to justice in seven years?

        > Lest we forget,   it was the Bush Administration -- especially Condi Rice and George Tenet -- that ignored numerous signals that allowed 9/11 to happen.

        > Lest we forget, Mayor Giuliani was the genius who located the World Trade Center's  Rudy_giuliani_kerik_thumb emergency command post right across from the Twin Towers with a diesel fuel tank (even though they'd been an obvious target since at least 1993),  ordered the cheap Motorola radios for NYC first- responders, and recommended the mobbed-up former Police Commissioner Bernard B. Kerik to be head of the Department of Homeland Security. 

        >Lest we forget, it was the Bush Administration -- with the so-called "maverick/military expert" John McCain toeing the party line, unlike Obama -- that took us to war in Iraq on a pack of lies.

        Osama_wherewaldoLest we forget, it was the Bush Administration that, once we got there, completely mismanaged the war effort -- for example, by choosing Kissinger protege  L. Paul Bremer to administer the situation.

        Bremer's very first decision was to disband the Iraqi Army -- alienating all those thousands of Sunnis who have recently become our best friends in the "Awakening,"  and setting the stage for Al Qaeda's first real entry into the country -- on US coat-tails!

        THE IRAQ/ AFGHAN CONUNDRUM

        Finally, returning once more to the question of Iraq, it seems as if the Republican Party is trying to pull off the same game it played with 9/11.Splash

        Rather than talking about responsibility for the original fiasco, the Republicans want to focus on claiming credit for what transpired after the event. 

        In the case of 9/11, they took credit for managing the crisis after the attack, ignoring their utter mismanagement before.

        In the case of Iraq, they are even more cynical:  McCain and the Republicans like to take credit for the progress since January 2007, ignoring the nearly four years of disastrous management after the March 2003 invasion.   

        In this spirit, McCain also likes to talk about the "surge" a lot, which he claims is a big success. 

        The surge was not his idea, but he takes credit for having supported it ever since General Petraeus and President Bush first introduced it in early 2007. 

        Obama, he says,  opposed it,  preferring a timetable that  would have "lost the war."

        In fact Obama has never insisted on such any such timetable.

        He did, however, courageously oppose entering Iraq in the first place, which would have made the surge unnecessary.

        In retrospect,  Obama's fundamental political and military judgment looks pretty astute, compared with "experienced" McCain.

        If Obama had been in charge, we might have saved $2 trillion and thousands of young lives.

        340x On the other hand, in McCain's case, despite saying that he "hates war," he has yet to ever oppose one.

        He still actually believes, like George W. Bush, that the US made a terrible mistake by withdrawing from Vietnam in 1973! 

        True, if we'd followed Obama's course, Saddam & Co. might still be in power, just like Kim Jong Il or Robert Mugabe or the tyrants in Burma (and China!)   

        But Saddam would not have any more "weapons of mass destruction" than he ever had. Under the pressures of continued isolation, backed by the UN, his own people might have overthrown him, or he might have died of a heart attack. We can never say.

        What is clear is that the main reason that the surge has "worked" is that we are now working closely with many of Saddam's former supporters among the Sunni "Awakening," who have turned on al Qaeda.

        The Sunnis have "awakened" partly just because we finally decided to pay them, and partly because they got sick of being ordered around by these fanatical extremists -- who'd never taken root in Iraq before the US invaded the country, outraged the local population, and created a seedbed for insurgency.

        It is also because many Shiites have wisely decided that the fastest way to get the US out of Iraq is to quiet down, supporting the Maliki government, probably with the backing of Iran.

        Ironically, for someone so concerned about Iran's supposed threat to the region, McCain does not acknowledge the fact that the Iraq invasion, and the continued US presence there,  have only strengthened Iran's hand.

        So it is as misleading for McCain and the Republicans to take credit for the surge as it is for them to take credit for fighting the (very incomplete) war against al Qaeda and the Taleban in Afghanistan, in the wake of 9/11.

        Once again, however, if you have no original ideas or solutions of your own, it is tempting to concentrate on telling stories about the past.

        (c) SubmergingMarkets, 2008

        September 5, 2008 at 07:08 PM | Permalink | Comments (0) | TrackBack

        Thursday, September 04, 2008

        OBAMA: "PALIN/MCCAIN HAVE NOTHING TO OFFER BUT PERSONAL ATTACKS"

        September 4, 2008 at 09:06 PM | Permalink | Comments (0)

        Tuesday, September 02, 2008

        MCCAIN's MIGRAINE
        Is His VP Choice a "Natural," Or An Eagleton/Quayle Combo?
        James S. Henry and Matthew Maly

        By law the US is required to have a Vice President. Do we really want it to be this wing-nut Northern Exposure beauty queen?  

        Palinmissalaskab Many serious countries with Presidential systems -- like Finland, Germany, France, Ireland,  and South Korea -- have long since dispensed with the role of Vice President completely.

        In the wake of the uproar -- indeed, shock and awe -- provoked by John McCain's  surprising selection of 44-year old Gov. Sarah Palin of Wasilla, Alaska, on top of all the hoopla over Barack Obama's dissing of Hillary Clinton and our collective nightmare with "Darth" Cheney, some pundits have  suggested that it may be time for the US to follow the FinnisWasillah model and have no US Vice President at all.

        With each day's new revelations about Gov. Palin's complex personal life and rather extreme views, some pundits have also suggested that she is a cynical choice, who might either quickly go the way of former Missouri Senator Thomas Eagleton, who lasted just two weeks as George McGovern's VP pick in 1972 -- or perhaps worse yet for the Republicans, a reprise of the legendary Indiana lightweight, Dan Quayle.

        THEY'RE ALL WRONG

        160pxthomaseagleton Ms. Palin's nomination is actually a perfect demonstration of the incredible entertainment value that only the VP role can provide. Dan_quayle

        This is a time when our economy is in serious trouble, state and federal budget deficits are out of control,  energy costs are unaffordable, the US Constitution is under attack, tax evasion is at a record level, and we're still tied down in two major wars in Iraq and Afghanistan. Tensions are mounting with Russia and Iran, social inequality is soaring, environmental calamities abound, Freddie Mac and Fannie Mae are about to fail, our education system is broken, the drug wars continue unabated, and millions of Americans lack jobs, decent housing and health care.

        At this decisive point in our history, John McCain has decided to fill the VP slot with this Polarbearfight_2 more-or-less unknown, unknowing quantity. This adds a nice soupçon of uncertainty to the entire situation.

        It permits the whole nation to "double down" all at once, experiencing a kind of risk-taking that none of us would ever be able to achieve on our own.

        Here we have an example of vintage McCain quirkiness. And this is precisely the kind of joy-ride, fly-boy entertainment that government, at its best, is supposed to offer to the masses. 

        Indeed, Sarah's selection is bound to make our peculiar "imperial electocracy"  the envy of the entire world -- once again!  

        FINALLY A REAL BABE!

        Ms. Palin may not yet be a household name, but upon closer 23738_2examination, we believe that -- at least from the Republican vantage point --  her qualifications for the Vice Presidency --  just one bad biopsy away from the world's most powerful office -- are overwhelming.

        First and foremost, just take a look -- this woman is amazing! 

        Palinbook059 Carla Bruni, where is thy sting?  Angela Merkel, bite your knuckles!  

        To paraphrase Joe Biden, Ms. Palin is an "articulate, bright, clean,  good-looking" white woman.

        And young! Why, she was only 4 years old when 72-year old John McCain was bombing peasants from 30,000 feet, and 9 years old when he was released from the POW camp in 1973.

        Indeed, Sarah was first runner-up in the 1984 Miss Alaska beauty pageant, after being voted Wasilla Alaska's "Miss Congeniality."

        True, back then,  Wasilla only had about 5000 residents. But so long as you were not a moose or an environmentalist,  Wasillans are the most congenial people on the planet. And Ms. Sarah was the most "congenial" of them all.

        Anyone who has ever attended public high school knows what that means - abstinence-based ideology or no.

        We think we can all trust "Bomber" McCain's judgment on this one.  John may have only met his VP choice two or three times, and he may not know much about economics,  but he is a world-class expert on beauty queens.

        Sarahpalinvogue1 Alaska84 After all, his first wife Carol was a model  and  his second wife Cindy was Junior Rodeo Queen of Arizona in 1968. 

        (Just in -- McCain has also  reportedly expressed interest in naming Sherri McNealley, the real winner of the 1984 Miss Alaska contest, as his future Secretary of State, but so far she's still MIA.

        He's also expressed interest in appointing Wasilla's current mayor, Dianne M. Keller, to be his Attorney General, once she completes her law degree.)

        In any case, unfortunately,  this VP choice will probably not swing Hillary's disaffected female supporters to the McCain camp.

        Many of them are aging die-hard feminists who may have serious issues with Palin's political views -- for example,  her opposition to abortion even in the case of rape or incest, and her unsympathetic description of Hillary Clinton as a "whiner."   (Where on earth would she get such an idea?)   

        From a strictly male hormonal perspective, however, this is the best VP selection in history -- precisely the kind of candidate we need to arouse our interest and get us up off the couch.

        After years of enduring so many talented but extraordinarily plain women (and men) in national politics (viz Senators Clinton, Hutchinson, Mikulski, Boxer, and Feinstein, as well as Cheney,  for example),  finally the US Senate might be presided over by someone who still leaves something to the imagination.

        Overworkedwoman SHE'S HYPER-PRODUCTIVE!

        Sarah Palin is a doer, not a talker.  Not only is she the Hockey_364 Governor of Alaska, but she is a "hockey mom" with five children by birth (but no adopted ones, unlike the 72-year old McCain). These include an unmarried pregnant 17-year old, a son on the way to Iraq,  and a 5-month old infant with Downs Syndrome. 

        She's at least as tough as John McCain. She hunts and fishes. She eats what she kills. She been known to run 5-10 miles a day. She's fired a librarian for not censoring the books in the library, and a couple of police chiefs for not taking sides in personal vendettas.  She's stood up to the corrupt hierarchy in her own Party  --  just like Barack.  She's under investigation by Alaska's State Ethics Commission for "using her public office to settle a private score." (Who could resist doing that?)

        When Sarah was pregnant with her fifth child, her water broke while she was attending a Republican Governors' conference in Dallas. She passed up all the great hospitals in Texas  and flew all the way back to a Wasilla Alaska hospital just to have this special-needs child delivered at home.

        That's precisely the kind of crazy, death-defying, life-threatening behavior that we could all use so much more of in the highest echelons of the federal government!

        Shock-Treatment Tom (Eagleton), come back! All is forgiven!

        Adding the burden of the US Vice Presidency to this full plate will no doubt provide a shining example of just how to strike that delicate balance between family life, work life, and blind ambition -- and the many benefits of the faith-based "Just Say No" Palinfamily_2005sm approach to birth control!

        (c) Submerging Markets, 2008 

         


        SHE'S FROM A SWING STATE -- REALLY!

        Ms.Palin is also a life-longWasillaalaska resident of Wasilla,  an Anchorage suburb with 5470Bio_2 residents (as of the 2000 Census), otherwise best known as the birthplace of porn star April Flowers, and the location of (Frommer's Guide)  "the worst kind of suburban sprawl of highway-fronting shopping malls and gravel lots."

        Many Republicans may not yet have realized that so much depends on Alaska, our newest "swing state."

        After all, Alaska is a bit of an odd duck, as states go.  It is the least-densely populated state in the country, with 1.1 inhabitants per square mile,  only has 676,000 residents and 3 electoral votes. Over forty percent of its citizens live in Anchorage, the largest city, with 278,000 residents.  Nearly 16 percent of its residents are native Americans, the highest share in the country.  Sarah Palin's evangelical roots notwithstanding, less than 40 percent of its population belongs to any church.  It has not voted for a Democratic Presidential candidate since 1964. The oil and gas industry accounts for more than 80 percent of the state's GDP. It already derives so much revenue from oil and gas that the state has accumulated a $36 billion "permanent development" fund. There is no state income tax, it already has the lowest tax burden in the US, and, indeed, every Alaskan collects a dividend of about $1500 - $1800 per year from the fund just for fogging a mirror.

        But, as usual,  the utterly-unpredictable McCain believes that he sees what others do not see. In a tight election like this one, Alaska must be the lynch-pin that holds everything else together.

        SHE CAN DRIBBLE!  

        Like April Flowers and, indeed,  former Senator Bill Bradley,  Sarah Palin played high school basketball. Indeed, she was a point guard on the 1982 "Wasilla Warriors" basketball team that won Alaska's "small school" state championship. Her nickname on the team was "Sarah Barracuda," yet another testiment to her "congeniality." 

        Palinbasketball Religion aside, basketball remains at the root of Sarah's personal philosophy. As she said in 2006,

        "I know this sounds hokey, but basketball was a life-changing experience for me. It's all about setting a goal, about discipline, teamwork, and then success."

        At first glance this may strike you as mindless drivel.

        But read that statement over and over again after downing a six-pack of Alaska Smoked Porter and puffing a couple of Humboldt County Js, and you will soon begin to appreciate the true meaning of "deep drilling in the wilderness."   

        SHE KNOWS HOW TO PARTY!

        Sarah clearly also knows how to balance education, hard work, and fun. After her stunning high school basketball career and her brief run as a beauty queen,  undoubtedly she had any number of scholarship offers from Ivy League Schools.

        Never too proud, however, she courageously chose to downshift to such legendary party schools as  Hawaii Pacific College, North Idaho College, and the University of Idaho, where she finally graduated with a BA degree in 083108_bagley "communications-journalism" in 1987.

        That led to a brief career as a sports reporter for an NBC affiliate in Anchorage. 

        While there,  not only did she (as she has admitted) indulge in marijuana and booze, but her oil patch husband Todd also got arrested for a "DWI" while driving a truck back in 1986! 

        SHE KNOWS FOREIGN POLICY!

        Gov. Palin speaks no foreign languages, and has had very limited foreign travel  -- just like another recent Republican President! She only acquired her first US passport in 2006.

        On foreign policy issues ranging from the Middle East and Iraq to the WTO, Russia, Latin America, and the "war on terror," her own "issues page" is totally blank. 

        She also has zero mention of "Native American" or minority issues on her web site, but that's another matter.

        Ignorance_2

        This may be a little unfair. Sarah really is an expert of sorts. For example, in the early 1990s, before joining the Republican Party, she and her husband were leading activists and, reportedly,  registered members of the Alaskan Independence Party.

        This curious group, which has about 13,700 members, has at various times sought the abolition of all property taxes, a referendum on Alaska independence, a UN seat for Alaska, and secession, including a possible union with one of Canada's western provinces. 

        Furthermore, in the 1990s,  she and her husband were both "brigaders" for extreme right-winger Pat Buchanan, who sought the Republican Presidential nomination several times.   

        In the increasingly competitive global economy of the 21st century, where education, language skills, and international experience will be key factors for success,  this is a perfect role model for young American women!

        On the other hand, the Palins' early support for a secessionist movement in Alaska may not go down very well with the numerous pro-Georgia supporters in the McCain camp right now.

        HER VAST EXPERIENCE!

        In 1988, as noted, Sarah briefly worked as a local TV sports reporter. (View a clip of your future VP here.)

        In the 1990s, while still a member of the Alaska Independence Party,  Sarah as served two terms as a member of the Wasilla (pop <5000)  Town Council. (4 years).

        Stevensendorsespalin She then served two terms as Wasilla's (pop <5000) Mayor (4 years).  During her first term, she angered many local residents, who threatened to impeach her.

        Under her administration,  Wasilla hired a lobbyist in Washington, D.C., and from 1996 to 2002 the town procured more than $27 million in "earmarks"  with the help of Alaska Republican Senator Ted Stevens, who chaired the US Senate Appropriations Committee, and was otherwise perhaps best known for his description of the Internet as a "series of tubes." Earmarkpig

        In 2002 she ran for Lt. Governor of Alaska and lost.

        That same year she campaigned hard for Alaska Republican Governor Frank Murkowski, who reciprocated by appointing Palin to be Chairman of Alaska's Oil and Gas Commission.

        She served 11 months as head of Alaska's Oil and Gas Commission, before resigning over the Republican-led corruption she found there. (11 months).

        From 2003 to 2005, anti-corruption crusader Palin served as a director of "Ted Stevens Excellence in Public Service," a so-called "527" organization that was close to Senator Stevens. Stevens later campaigned actively for Palin in her 2006 run for the Governorship against Murkowski. In July 2008, Senator Stevens, the longest-serving Republican in the Senate,  was indicted on seven felony counts for lying about gifts he had 41999285_2 from oil companies.

        Evidently Palin has the capacity to be a bit flexible in her ethical judgments -- which we believe is a very good sign.

        In November, 2006, Sarah was elected Governor with 48.3% of the vote. She took office in mid-December 2006, and has been running Alaska every since. (20.5 months).

        By comparison, Democratic VP candidate Joe Biden has been a member of the US Senate for 35 years, since 1973, when Sarah was 9 years old. Barack Obama has been a member of the US Senate since 2004, when Sarah was 40, and a member of the Illinois Senate for 7 years before that. So some might conclude both Democrats have the edge in experience over Palin.

        Au contraire, we argue: there's simply no job in America that is anywhere near as relevant to the demands of the US Presidency as the task of running a tiny one-horse town and an overwhelmingly inaccessible, underpopulated, federal government-dominated, energy-rich state like Alaska. 

         HER TOUGH STANDS ON THE ISSUES! 

        Sarah is certainly not shy about standing up for what she believes in. Indeed, she has taken bold stands that many Americans -- especially women -- may find interesting:

        > As noted, Sarah is opposed to abortion under any circumstances except where the life of the mother is at stake, even where there has been rape or incest.  This is a position that exceeds even McCain's position.

        > She also favors requiring parental consent for teenage abortions -- as, for example, in case of her own daughter.

        > She opposes sex education in public schools, and advocates "abstinence-only" solutions for birth control -- despite the fact that birth control programs have been responsible for the her state's sharp decline in abortions and teen-age pregnancy.

        >In a fit of budget cutting in June 2008, Palin also sliced $1.1 million out of a legislative-approved $5 million bill to assist troubled teenagers. Creationism_2

        > She favors drilling for oil in Alaska's wilderness -- again, exceeding McCain's  position.

        > She also opposes listing polar bears as an endangered species, because it might inhibit oil drilling. (Her husband Todd works for BP.) 

        >Sarah's got her gun!  She's a lifetime member of the National Rifle Association, a crack shot and a moose hunterThis would at least guarantee that there would be no more untoward VP shooting incidents. (vis Cheney's facial attack on poor Harry Whittington.) When she was Mayor of Wasilla in 1997, one of the reasons she fired Police Chief Irl Stambaugh was reportedly that he opposed an NRA-backed state law that permitted concealed firearms in banks, bars, and restaurants.

        > Along these lines, she also favors permitting shooters to hunt bears and wolves out of airplanes. Presumably this does not include bombing them from 30,000 feet.

        > She supports the War in Iraq, and a new Alaska gas pipeline, saying in June 2008 that they were both God's will. 

        > Like Louisiana's Republican Governor Bobby Jindal, Sarah favors teaching creationism in high schools. In her words, "Teach both (theories). This follows the Alaska Republican Party's platform:  "We support giving Creation Science equal representation with other theories of the origin of life. If evolution is taught, it should be presented as only a theory."

        > Sarah believes that global warming is NOT man-made.  In her devout evangelical universe, presumably that means that global warming is God-made. Having created the universe, then, God has now decided to un-create it, and we mortals have no choice but to go along, gas guzzling and all. Indeed guzzling gas is like shooting wolves -- a divine right.

        > Sarah opposes gay marriage, even to the point of supporting a 1998 constitutional amendment that banned it in Alaska.

        > As for health care, Sarah favors the abolition of "certificate of need" regulation, a measure that most health care analysts would actually raise health care costs.

        > On the famous $400 million federally-funded "Bridge to Nowhere," while Palin has claimed that she opposed it, actually the truth is more complicated -- she seems to have favored it before she opposed it."

        >.....Etc. Etc. Etc.

        Across all these positions, Governor Palin has clearly demonstrated her ability to stick to her strongly-held core principles and religious beliefs even in the face of the facts -- an ability that we believe is just so unbelievably awe-inspiring, especially in a potential Commander-in-Chief!   

        SHE CLEARS THE PATH!

        While, as we've seen, Sarah Palin is an accomplished woman, she surely must realize that there are thousands upon thousands of other women in America with qualifications at least as good as hers -- women who could all perform the tasks of VP, even if, like her, they are not quite sure what those tasks are. 6965360_bg1

        What an inspiration her election would be to all these other women!  Furthermore, what an inspiration it will be to all the ordinary blue-collar men like Todd Palin, Sarah's husband! This is 21st century America, and egualitarian electo-cracy has truly arrived!   

        Actually poor Todd may deserve a little bit of sympathy.

        How did he ever let his wife put him in this situation -- with a 5-month old baby that needs breast-feeding and a pregnant 17-year old,  and the Good Governor away on the campaign trail, 6-7 days a week.

        Hilariousnessblog Todd must be especially excited about the future husband of the bride-to-be, an 18-year old named Levi Johnson, whose "MySpace" page contained this thoughtful meditation until recently:

        "I'm a fuckin' redneck who likes to snowboard and ride dirt bikes. But I live to play hockey. I like to go camping and hang out with the boys, do some fishing, shoot some shit, and just fuckin' chillin' I guess. “Ya fuck,  with me I'll kick your ass."

        Furthermore, if this happy family happens to win, just imagine Ms.Palin and her poor husband dining with, say,  the King of Jordan.

        Are they expected to read up on Jordan in advance? Which fork will Mr. Palin use first,  in front of the King?  Will the King be interested in his stories about moose gutting,  sled-dog racing, and long cold days of fishing?  Has he ever read Mark Twain's Prince and the Pauper?

        And what if, Inshallah, Madame Palin should becomeDeerinheadlights President?

        For a few brief days all this may have felt like winning the lottery.  But very soon the Palins are more likely to feel that they are outsiders looking in, impostors who are on the verge of being exposed and thrown out of the club. 

        What an inspiring ordeal for the rest of us to watch!

        We have grown so used to the polished, practiced ways of life-long professional politicians with Ivy League credentials, no particular religious beliefs, and oh so much detailed knowledge about the issues!   

        We are simply not prepared for the level of humility and honesty that will be presented in this ultimate Reality Show -- where, suddenly,  it seems as if anyone at all might suddenly become eligible for the highest office in the land! 

        What a tribute to John McCain's "maverick" spirit -- otherwise known, quite unfairly in our opinion,  as quirky impulsiveness.

        SO WHAT ABOUT THE OTHERS?

        Given the amazing range of attributes displayed by this comparative newcomer to the national scene, we should not be surprised that her rivals, and perhaps even her sponsor McCain,  are a little taken aback.

        I. POOR JOHN McCAIN

        First of all, don't we all agree that Cindy McCain looks about as unhappy as any woman in Mccainmos_468x610_3 America? And the reason is interesting: it may be the case that subconsciously, neither she, nor perhaps even her husband, really wants to win this election.

        Take the McCain's recent  "$5 million is rich" gaffe. As soon as he  made this statement, he admitted that he knew that it would be used against him. Indeed, how could it NOT be used, since it was so inaccurate? Yet  McCain never bothered to qualify the statement.

        Cindy_2 Objectively, while the man's health may be fine, he really is far too old to be seriously looking forward to 4 (much less 8) long years of incredibly-intense Presidential responsibilities. 

        The job also requires an even temper and the ability to make a calculated, balanced, well thought-out decision.  Secretly, McCain may even  realize that he may not quite trust himself to have these qualities. Over the years, he knows better than anyone just how often he has "screwed the pooch."

        In truth, one of  the most important reasons why he has acquired a reputation as a "maverick"is that he is impulsive. You be afford to be impulsive as a US Senator, when you are one out of a hundred.  For all his years of "experience," the buck has never once stopped on John McCain's desk, any more than it has stopped on Hillary's, Barack's or Joe Biden's.  Except for Sarah's 19 months, they are all SENATORS, goddamit:   by definition, THEY HAVE ALL HAD ZERO FINAL decision-making experience.

        Presidents are not like that. There is NOTHING BUT decision-making,  many decisions are final, and most have enormous implications. The President's Black Box is not for casting a vote, or for being one out of a hundred.

        Fortunately for us, it may be the case that John McCain, and at least Cindy, really does not ever want to come near that Black Box. They are running to have done so,  as a favor to his Party, and perhaps to their ancestors.   

        All the time he is running,  John McCain is secretly thinking mainly about minimizing the size of the loss that he fully expects, and indeed, might even feel the Republicans deserve.

        Certainly his own Party is quite happy for him to play the role of this year's fall guy, while it catches a breather.  And that, on top of his own "shoot from the hip, ask questions later" style,  may be  the real reason why he picked Sarah Palin.

        II. POOR HILLARY CLINTON

        While Hillary is obviously out of the running this time around, her example is a useful one, because it provides such a striking contrast to John McCain's lack of drive.

        Hilary_clinton_280_416507a You see, the Clintons are not anywhere near as wealthy as the McCain - Hensley Arizona beer clan,  but they are still successful beyond most people's wildest dreams. Yet this year  Hillary Clinton showed everyone exactly what it means to "really want to be President."

        There are millions of Americans who badly need jobs,  to feed their families, to save their homes. But even in such do-or-die situations, few show the kind of passion, determination, and tenacity that Hillary has showed  – not even close.

        The Clintons erred in assuming that practiced insincerity, calculation, ruthlessness, lots of money, and professional campaigning would work for them again, as they have always worked in the past.  It took a Barack Obama to defeat these tactics, to make Hillary look like a turtle on her back. Only Obama's unique combination of skills and imagination could have pulled that upset off.

        In any case, if one wants to know what the "will to power" really looks like, and what John McCain's haphazard campaign still lacks, study Hillary Clinton.

        Or if you wish, just sit it out and watch her run again in four years -- perhaps even against Ms. Sarah Palin!

        The real mystery to us is, if John McCain is truly a maverick, and sought the female vote,  why he did not pick Hillary Clinton to be his Vice President? Party loyalties aside, we suspect that she might well have accepted in a heartbeat, especially if he had agreed to run on a "national unity" ticket and to step down in four years. 

        Now that would have been a maverick move.

        III. JOE BIDEN

        Joe  Biden ran for President this year, for the second time in his career,  and is as ambitious as the next Senator -- perhaps Hillary and Obama aside.

        We all understand why Barack picked Joe Biden to be his VP. He is, first and foremost, Bidenbonomarkwilson trustworthy --  not like Hillary Clinton, with her backstabbing, self- aggrandizing husband more or less reluctantly by her side (Whether he stays there four more years is a good question.)  Barack also chose Biden for comfort and advice, knowing that lots of hard work lies ahead. 

        Biden, with his 35 years in the Senate,  will show him the Washington ropes, assist on foreign policy,  and free him up to be a leader.  Biden can do everything except choose a direction, which is something that only a natural leader can do. 

        He will not need any on-the-job training: his suitcase has been packed and ready for years. So Joe Biden was a good choice for Obama. It shows that Obama  is already thinking about how to tackle the impossible job of being President, once he wins. 

        Again, the contrast with Sarah Palin in staggering. It would take her a lifetime to come anywhere close to his depth, intelligence, and experience, even apart from their differences on the issues.  So while McCain is trying to avoid losing by placating the wing-nuts in his Party, Obama is thinking about governing.

        IV. OBAMA

        And finally, the Obamas. Here it helps to tell a story. One of us oBarackobamaforpresidentnce asked a
        Soviet WWII veteran how he managed to survive that war, which he'd fought for four of the most terrible and murderous years in history. (We must remind our American audience that that war started very bad for the Soviet Union.  The Nazis advanced very fast and the entire Soviet army was surrounded and decimated, with millions dead and millions  more taken prisoner.) 

        This is what the WWII veteran said:

        At the start of the war our division was completely destroyed. We did not know where the frontline was, we did not have any communication equipment, and our commanding general was dead. We did not have any weapons that could destroy German tanks, so we were just running toward Moscow, with the Germans in hot pursuit. Sometimes we had to fight them to gain time, sometimes German planes would bomb us, some of us drowned in rivers, and the injured could no longer be carried. Our numbers dwindled fast.

        First we were led by a colonel, then by a captain, then a lieutenant. Finally, we got ourselves completely surrounded, practically out of ammunition, exhausted, with nowhere to run. Then our lieutenant was killed. Without an officer, the soldiers looked at each other in panic, not knowing what to do. But then someone shouted, "Follow my orders! I am assuming command!"

        It was a private that nobody really knew. While everybody else was thinking of death, of giving up, he had been thinking of surviving and winning – and everybody immediately knew they had a commander again. It was that private that made us break through the encirclement and brought our division, and its torn and bloodied flag, across the front line where we, less then two hundred of us out of ten thousand that the division had at the start of the war, rejoined the army. This private was decorated and made an officer, and I was under his command for the entire war.

        This was how I survived.

        Now America is not encircled, out of ammunition, or in panic. But both parties agree, both candidates agree, and all the polls agree: for the last eight years, America has not been well led. It is now in serious trouble.  Natural_small

        It is at this grave moment that a "Natural" may (or may not) appear.  We are in such a dire situation that a McCain, Biden,  Clinton, Romney, Lieberman, Pelosi, Kerry, or any other conventional politicians cannot save us.

        They are all good officers, fine for parades or even conventional issues and set-piece battles, they are all but useless when you are encircled and you need to find solutions for multiple, seemingly-intractable problems all at once.

        When McCain and his advisors tell us that the US economy, with its outmoded Detroit-based, debt-ridden, China-financed, over-militarized, under-insured foundation,  is "fundamentally sound,"  or that the US should remain in Iraq til hell freezes over, or that we should consider bombing Iran willy-nilly,  they are acting like  conventional officers  who are completely surrounded, yet completely out of touch with the real perils.

        Indeed, if you owned eight houses,  the state of the US economy would not be your greatest worry, either. 

        The point is that any number of our senior statesmen might do just fine as US Presidents.  But just not at this moment.

        This is the moment for a Natural. It is easy to make fun of Ms. Palin's background and experience, but just like Obama, the fact is that she has come far, has strong leadership skills, learns quickly on the job, and commands our attention. 

        So if this is moment for a natural like Barack, why isn't it also a moment for a Natural like Ms. Sarah Palin,  from an entirely different political direction?

        Indeed, given McCain's age  and Hillary's stunning defeat,  that could be the real choice in this election -- between two very different Naturals,  two very different paths to national recovery.

        (c) Submerging Markets, 2008

        September 2, 2008 at 04:05 PM | Permalink | Comments (0) | TrackBack

        Thursday, July 24, 2008

        "ATTACK OF THE GLOBAL PIRATE BANKERS!"
        The Great White Sharks at UBS and LGT
        James S. Henry

        (Note: The following is an expanded version of our article that appeared in the July 22, 2008 online edition of The Nation, available here.)

        "For what is the crime of burgling a bank, compared with the crime of building one?"Nationlogo_5
        -- Brecht

        The Hearing

        Levin_carl060328_2 Last week in Washington we got a rare look inside the global private banking industry, whose high purpose it is to gather up the assets of the world's wealthiest people and many of its worst villains, and shelter them from tax collectors, prosecutors, creditors, disgruntled business associates, family members and each other.

        Thursday's standing-room-only hearing on tax haven banks and taxPrincehansadamii compliance was held by the US Senate's Permanent Subcommittee on Investigations, chaired by Michigan Senator Carl Levin, a regular critic of tax havens--except when it comes to offshore leasing companies owned by US auto companies. He presented the results of his Committee's six-month investigation of two of Europe's most venerable financial institutions - LGT Group, the largest bank in Liechtenstein and the personal fiefdom of Crown Prince Hans-Adam II and the royal family, with more than $200 billion in client assets; and UBS, Switzerland's largest bank and the world's largest private wealth manager, with $1.9 trillion in client assets and nearly 84,000 employees in fifty countries, including 32,000 in the United States.Kieber

        Images The theatrics included videotaped testimony by Heinrich3030_kieber Kieber, a Liechtenstein computer expert in a witness protection program with a $7 million bounty on his head, for supplying a list of at least 1,400 LGT clients - some say more than 4,500 - to tax authorities in Europe and the United States; two former American clients of LGT, who took the Fifth Amendment; Martin Liechti, head of UBS international private banking for North and South America, who'd been detained in Miami since April, and who also took the Fifth; Douglas H. Shulman, our sixth IRS commissioner in eight years, who conceded that Martinliechtiubs offshore tax evasion must be a "serious, growing" problem even though the IRS has no idea how large it is; and Mark610x1 Branson, CFO of UBS's Global Wealth Management group, who apologized profusely, pledged to cooperate with the IRS (within the limits of Swiss secrecy) and surprised the Committee by announcing that UBS has decided (for the third time since 2002) to "exit" the shady business of providing new secret Swiss accounts to wealthy Americans.

        There were also several other potential witnesses whose Cov_lowypeter_032307 importance was underscored by their absence. Peter S. Lowy, of Beverly Hills, another former LGT client who'd been subpoenaed, is a key member of the Westfield Group, the world's largest shopping mall dynasty, which has interests in and operates 55 US malls and 63 others around the world with a combined value of more than $60 billion, holds the lease for a new shopping mall at the reconstructed World Trade Center, has many other properties in Australia and Israel, and was recently awarded a L3 billion project for the UK's largest shopping mall, in time for the 2012 Olympics.

        His lawyer, the renowned Washington fixer Robert S.Srobertbennettsmall Bennett, reported that Lowy was "out of the country" and would appear later, probably also just to take the Fifth. Perhaps he traveled to Australia, where his family is also reportedly facing an LGT-related tax audit. (Bennett's law partner, David Zornow, the head of Skadden, Arps' White Collar Crime practice, represents UBS's Liechti.)

        Steven D. Greenfield, a leading New York City toy vendor and private equity investor whose business had been personally recruited by the Crown Prince's brother, went AWOL and did not bother to send a lawyer.

        LGT Group declined to follow UBS's contrite example and also failed to appear.

        Robertwolfubs Also missing from the roster were two prominent UBS executives: Robert Wolf, CEO of UBS Americas, who has reportedly raised over $500,000 for Barack Obama, bundled more than $370,850 for him this year from his bank alone, making UBS Obama's fifth-largest corporate donor, and had private dinners with the junior Senator from Illinois; and former Texas Senator Phil Gramm, vice chairman of UBS Securities LLC, a leading lobbyist for UBS until March, and until recently, John McCain's senior economics adviser. (In 1995, while preparing his own ultimately-unsuccessful race for the Republican Presidential nomination, Gramm commented memorably, "I have the most reliable friend you can have in American politics, and that's ready money.") Images2

        While neither of these UBS executives have been directly implicated in the tax scandal, both might reasonably be questioned about precisely what the rest of UBS in the States knew about the Swiss program, what it implies for US tax policy, and whether those who complain about UBS's knowing facilitation of tax fraud are just whining.

        Small_courter While they were on the subject of offshore abuses, the Senate might also have wanted to depose former top McCain fundraiser James Courter, who also resigned last week, after it was disclosed that his telecom firm, IDT, had been fined $1.3 million by the FCC for using a haven company in the Turks and Caicos to pay bribes to former Haitian President Jean-Bertrand Aristide.

        The Cases

        This crowded docket, combined with the UBS mea culpa, almost distracted us from the sordid details of the Levin Committee's actual findings.

        UBS: UBS opened its first American branch in 1939, and for all we know, has likely been facilitating tax fraud ever since, but the Senate investigation focused only on 2000 to 2007. During this period, even as UBS was sharply expanding its onshore US operations by acquiring Paine Webber, expanding in investment and retail banking, it also mounted a top-secret effort to recruit wealthy Americans, spirit their money to Switzerland and other havens and conceal their assets from the IRS.

        This program, aimed at people with a net worth of $40 million to $50 million each, was staffed by fifty to eighty senior calling officers and 1,000 client advisors. Based in Zurich, Geneva, and Lugano, each officer made two to ten surreptitious trips per year to the United States, calling on thirty to forty existing clients per visit and trying to recruit new ones by attending HNW (high net worth) watering holes like Miami's Art Basel and the UBS Regatta in Newport. By 2007, this program had garnered 20,000 American clients, with offshore assets at UBS alone worth $20 billion.

        To achieve these results, UBS established an elaborate formal training program, which coached bankers on how to avoid surveillance by US customs and law enforcement, falsify visas, encrypt communications, secretly move money in and out of the country and market security products even without broker/dealer licenses.

        Meanwhile, back in 2001, UBS had signed a formal "qualified intermediary" agreement with the US Treasury. Under this program, it agreed either to withhold taxes against American clients who had Swiss accounts and owned US stocks, or disclose their identities. However, when UBS's American clients refused to go along with these arrangements, the bank just caved in and lied to the US government. Eventually, it concealed 19,000 such clients, partly by helping to form hundreds of offshore companies. This cost the US Treasury an estimated $200 million per year in lost taxes.

        In early July 2008, a US court approved a "John Doe" subpoena for UBS, demanding the identities of these 19,000 undisclosed clients. However, as of last week's Senate hearing, UBS has refused to disclose them. While it maintains that it is no longer accepting new Swiss accounts from Americans, it is also insisting on the distinction between "tax fraud" and "tax evasion," reserving full disclosure only for cases involving criminal tax fraud, which is much harder to prove under Swiss law. This means it may be difficult to ever know whether it has kept its commitments.

        Ultimately UBS got caught, not by virtue of diligent law enforcement, much less the Senate's investigation, but by sheer accident. In late June, Bradley Birkenfeld, a senior private banker who'd worked with UBS from 2001 until late 2005 out of Switzerland, and then continued to service the same clients from Miami, pleaded guilty to helping dozens of wealthy American clients launder money. His name surfaced when his largest client, Igor Olenicoff, a Russian emigré property developer from Southern California, was accidentally discovered by the IRS to be reporting much less income tax than he needed to justify his $1.6 billion measurement on the Forbes 400 list of billionaires.

        With Birkenfeld's help, Olenicoff succeeded in parking several hundred million of unreported assets offshore--including millions in accounts controlled by a Bahamian company that he said had been set by former Russian Premier Boris Yeltsin. Ultimately, Olenicoff settled with the IRS for $52 million in back taxes, one of the largest tax evasion cases in Southern California history, and also agreed to repatriate $346 million from Switzerland and Liechtenstein. In theory he faced up to three years of jail time, but--following standard US practice of going easy on big-ticket tax evaders who have no "priors"--he received only two years probation and three weeks of community service.

        As noted, Olenicoff also gave up his UBS private bankers, including Birkenfeld, who plead guilty in June to facilitating tax fraud and is now awaiting sentencing--the first US prosecution of a foreign private banker in history. It was Birkenfeld's revelations, in turn, that led to the disclosure of UBS' program for wealthy Americans, and at least one-half of the Senate investigation.

        The most important point is that this entire program would clearly have been impossible without the knowledge and approval of the bank's most senior officials in Switzerland, and probably some senior US executives as well -- although the Committee did not press this point. As former UBS CEO Peter Wuffli once said, "A company is only as ethical as its people." From this standpoint, we have reason to be concerned that UBS's behavior may repeat itself, so long as so many of these same senior executives remain in place.

        LGT: For all its pretensions to nobility, Liechtenstein is well-known in the trade as the "place for money with the stains that won't come out," a flexible jurisdiction whose "trusts" and "foundations" are basic necessities for everyone from Colombian drug lords and the Saudi royals to the Suhartos, Marcoses, Russian oligarchs, and Sicilian mafia.

        As detailed by the Senate investigation, LGT Group has certainly lived up to this reputation in the US market. It maintained a program that was, if anything, even more sophisticated and discreet than that of UBS for large fortunes. Among its specialties: setting up conduit companies in bland places like Canada, allowing clients to transfer money without attracting attention; leaving the designation of "beneficiaries" up to corporations controlled by potential beneficiaries themselves, a neat way of avoiding "know your customer" rules; rarely visiting clients at home, let alone mailing, e-mailing, or phoning them, certainly never from a Liechtenstein post office, Internet address, or area code; shifting the names of trust beneficiaries to very old folks just before death to make it look like a repatriation of capital was an inheritance.

        In terms of precise trade craft, indeed, LGT had it all over UBS. It only really got caught red-handed when it tried to modernize and trusted Heinrich Kieber, a fellow citizen and IT expert ,who turned out to be either a valiant whistleblower, a well-paid extortionist (he was paid $7.5 million by the German IRS alone for his DVDs), or both.

        The Implications

        So what do we learn from all this? Many will consider these revelations shocking. After all, just as the US government is facing a $500 billion deficit, millions of Americans are fighting to save their homes, cars, and college educations from the consequences of predatory lending, and inequalities of wealth and income are greater than at any time since the late 1920s, we learn that for decades, the world's largest banks have been helping wealthy Americans steal billions in tax revenues from the rest of us. At the very least, this suggests that it may be time to put the issue of big-ticket tax evasion, offshore and on, back on the front burner. But we also need historical perspective. Those who have studied this subject for decades also realize that achieving reform in this arena is not a matter of a few criminal prosecutions. It is a continuous game, requiring persistence and constant adaptations to the opponents, because we are playing against some of the world's most powerful vested interests, with huge fortunes at stake.

        After all, offshore tax evasion by wealthy Americans is hardly new. For example, in May 1937, Treasury Secretary Henry Morgenthau, Jr. wrote a lengthy letter to Franklin Delano Roosevelt, explaining why tax revenues had failed to meet his expectations despite a sharp rise in tax rates. Some rich folks didn't mind paying up, given the hard times so many Americans were facing during the Depression. As Edward Filene, the Boston department store magnate, famously remarked, "Why shouldn't the American people take half their money from me? I took all of it from them." However, according to Morgenthau, many other rich people busied themselves inventing new ways to dodge taxes, notably by secreting funds offshore in brand new havens like the Bahamas, Panama, and.... Newfoundland!

        Scroll forward to the Castle Bank and Trust case of the early 1970s, when another IRS investigation of offshore banking disclosed a list of several hundred wealthy Americans who'd set up trusts in the Bahamas and Cayman Islands. Just as the investigation was picking up steam and the names were about to be publicized, a new IRS Commissioner came in and shut it down--officially because the otherwise-lawless Nixon Administration suddenly got concerned about due process. Few names on the list--a copy of which appears in my forthcoming book, Pirate Bankers, were ever investigated.

        Scroll forward now to the late 1990s, when the Organization for Economic Cooperation and Development (OECD), the European Union and the US Treasury once again became excited about offshore tax havens. As the EU launched its "savings tax directive" on cross-border interest, a Cayman banker surfaced to report that more than 95 percent of his nearly 2,000 clients were Americans, and the IRS discovered 1 million to 2 million Americans using credit cards from offshore banks. Meanwhile, the OECD's favorite tool became the "blacklist." A list of thirty-five to forty "havens" was evaluated on the basis of abstract criteria like the quality of anti-money laundering programs and the willingness to negotiate information sharing agreements.

        Unfortunately this "name and shame" approach didn't have much success. First, the OECD had no success against jurisdictions like Monaco, Andorra, and Liechtenstein that are basically shameless. Second, the OECD's definition of "haven" was highly selective. It omitted many emerging havens like Dubai, the Malaysian island of Labuan, Estonia, Singapore, and for certain purposes even Denmark, whose importance has recently increased. As we'll see, it also ignored the role of major onshore havens like London and New York, which have been very attractive to the world's non-resident rich, especially from the developing world.

        Third, blacklisting havens focused on the wrong dimension. As Senator Levin's hearing has underscored, the real problem is a global pirate banking industry that cuts across individual havens, and includes many of our largest, most influential commercial and investment banks, hedge funds, law firms, and accounting firms. From their standpoint, it doesn't much matter whether a particular haven survives, so long as others turn up to take their place in providing anonymity, security, and low-tax returns. Up to now, despite blacklisting, the supply of new tax haven vehicles has been very elastic.

        On the other hand, as the UBS and LGT cases show, the dominant players in global private banking are relatively stable institutions--which makes sense, given their clients' need for stable sanctuaries. This suggests that it makes more sense to focus on regulating institutions than regulating or blacklisting physical places.

        Until the UBS case, this seemed to be much more difficult than, say, beating up on some tiny and distant sultry island for shady people. Even now, after the Birkenfeld case supplied the first private banker prosecution, we have yet to see the first criminal prosecution of a top-tier private bank--apart from BCCI in the early 1990s, which had already failed and was hardly top-tier.

        This is not because of a shortage of despicable behavior. For example, UBS, like most of its competitors in global private banking, has a long history of engaging in perfidious behavior, apologizing for it, and then turning back to the future. This includes UBS's involvement in South Africa's apartheid debt and the accounts scandals of the 1980s involving the Marcos family; Benazir Bhutto, Mobutu Sese Seko, Holocaust victims, and Nigerian dictator Sani Abacha in the 1990s; the 2001 Enron bankruptcy, and the Menem arms-purchasing scandal in Argentina; the 2003 Parmalat scandal; the 2004-2006 Iran/ Cuba/Saddam funds transfers scandal, for which it was fined $100 million by the Federal Reserve; the 2008 Massachusetts and New York securities fraud cases, and now the Birkenfeld matter. Furthermore, as the Committee report noted, UBS has a history of violating even its own policies. From this angle, unapologetic LGT is at least not hypocritical.

        It is also well to remember that UBS and LGT are hardly the only global private banks involved in recruiting wealthy clients to move money offshore. The Committee report indicates a long list of other banks that also provided offshore services to American clients involved in the UBS and LGT cases--including Citibank (Swiss), HSBC, Barclays (Birkenfeld's original employer), Credit Suisse, Lloyds TSB, Standard Chartered, Banque du Gotthard, Centrum, Bank Jacob Safra, and Bank of Montreal. In addition, there are dozens of other non-US and US banks that are also active in the offshore US private banking market. This suggests the shortcomings of a case-by-case prosecutorial approach, and the value of designing regulations to improve behavior and provide ongoing feedback about taxpayer compliance.

        In principle, one can imagine many such improvements in regulation, assuming a compliant Congress. For example, as proposed in the "Stop Haven Abuses Act" (S-681) introduced in 2006 and revised in February 2007 by Senators Levin, Coleman, and Obama, there would be a rebuttable presumption that offshore shell corporations and trusts are owned by those who establish them. This would eliminate the "Q.I. rule" exception, which allowed hundreds of UBS clients to avoid reporting to the IRS simply by moving their assets to into shell companies.

        We could also institute many other changes, including an increase in the painfully short, three-year statute of limitations for investigating and proposing changes in offshore tax liabilities; tightening up on anti-money laundering legislation; levying withholding taxes against hedge funds; raising the penalties for abusive tax shelters, and requiring banks that open offshore entities for US clients to report them to the US Treasury.

        Key Tasks

        However, most of these proposed rule changes have the flavor of stopgaps, technical gimmicks that are still far too focused on individual taxpayers rather than the private banking industry--the advisers, enablers, and systems operators. If we're right that this industry had become an unregulated, untaxed black hole--a multi-billion-dollar global "bad"--we need to focus on two key tasks.

        The first is to create appropriate incentives for the global private banking industry to do the right thing. We need to find ways to tax the behavior of tax-evading institutions, their CEOs, senior managers, and even shareholders, to punish them for more misbehavior, and perhaps also reward them for bringing the money home with a brief one-time tax amnesty. In the short run, there have to be more Bradley Birkenfelds, more exposés, and more penalties for banks and bankers alike. Mere apologies, however heartfelt, should not be enough.

        The second challenge is to organize a global alliance around this issue. This is more difficult, although steps are already being taken. Global organizations like Tax Justice International, Oxfam GB, Friends of the Earth, Global Witness, and Christian Aid are converging on a new global campaign around the issue of havens and offshore tax evasion. They've been enlisting support for this effort from countries like Norway, Chile, Brazil, Spain, and France, organizations like the UNDP, the World Bank, and even the International Monetary Fund.

        This is very exciting, but the organizers face one critical problem--the fact there are serious conflicts of interest among developed and developing countries. The fact is that the United States, the UK and other developed countries not only lose tax revenue to haven banking; they also profit from it, because their own banks are so deeply engaged in it, especially when it involves developing countries.

        Back in April 1986, this author broke the story that Citibank was actually taking far more capital out of Latin America and other developing countries than it was lending to them, despite its reputation as the largest Third-World lender. Indeed, the business of helping Third-World elites decapitalize their own countries had become so large and lucrative that Citi's private banking group was the bank's single most profitable division.

        To achieve that feat, Citigroup resorted to skullduggery and the flouting of local laws all over the planet. This included repeatedly sending teams of private bankers undercover to countries like Brazil, Argentina, and Venezuela; helping to set up thousands of shell companies and bank accounts in offshore havens and secretly transferring funds to them; teaching its clients money-laundering tricks like mis-invoicing and back-to-back loans; designing ways to communicate with clients that kept their financial secrets safe; and overall, concealing vast sums of flight capital from Third World tax authorities (and their competitors), while lobbying Congress to insure that any foreign capital that arrived in the United States enjoyed near-zero taxes and near-Swiss secrecy. For a time the resulting tax breaks and lax banking rules that applied to "nonresident aliens" from other countries made the United States, in effect, one of the world's largest tax havens.

        In short, from the 1970s to the 1990s, banks like Citigroup, BankAmerica, and JP Morgan Chase (and UBS, Credit Suisse, RBS, Paribas and Barclays, etc.) were behaving throughout the Third World just as badly as UBS has recently been behaving here. And their very success laid the foundations for the global, private-haven banking industry with which the IRS is now struggling.

        At the time, it seemed that their behavior was hurtful mainly to the developing world, which wasn't strong enough to hold Senate hearings and put Citibankers in jail. But lately it has become clear that the system has grown large enough to consume its creators.

        In the last thirty years, fueled by the globalization of financial services, lousy lending, capital flight, and mind-boggling corruption, a relatively small number of major banks, law firms, accounting firms, asset managers, insurance companies, and hedge funds have come to launder and conceal at least $10 trillion to $15 trillion of private untaxed anonymous cross-border wealth.

        Rich people the world over, including tens of thousands of wealthy Americans, are now free to opt in to this sophisticated, secretive, utterly unprincipled global private banking industry. They can become, in effect, residents of nowhere for tax purposes, citizens of a brave new virtual country, which offers its inhabitants unprecedented freedom from the taxes, regulations, and moral restraints that the rest of us take for granted. They wield enormous political influence even without paying taxes, merely by making contributions, threatening to withhold them--or better yet, threatening to abscond with their capital unless certain conditions are met. In a sense, this is the ultimate libertarian pipe dream: representation without taxation. But it is a nightmare for the rest of us, and we must design and organize our way around it.

        Afterword

        Let me just add one paragraph for those in the audience who don’t automatically stand up and cheer every time someone figures out a new way to boost tax revenues, even through better law enforcement.

        Why should we care whether Davy Jones is clever enough to fiddle with his IRS bill, even by way of offshore banks?  Wouldn’t the funds just be wasted if they went to the government rather than to finance Davy’s yacht tender in Marbella? Or won’t the government just borrow and spend anyway, regardless of revenues?

        Well, in these  straightened times, with a gargantuan federal deficit, most state and local governments running out of debt capacity, stagflation, a weak dollar,  private debt at record levels, and rising unemployment,  just imagine that every extra dollar for that yacht tender is coming right out of  the funds available for schools, teachers, hospitals, roads, police, and fire protection – local services. The free lunches have all been mortaged, or given away in capital gains tax cuts for the same social class that is also are evading what little taxes they still have to pay.  Meanwhile,  $1 spent on a yacht tender goes right to the bottom, while $1 spent on  food, salaries, or even roads has a much greater multipler, and benefits a more deserving class. 

        Perhaps best of all, think of the difference between giving an exra $1 to the hard-working child care worker down the street, compared with $1 to some wealthy scion of a giant shopping mall dynasty who spends his life just trying to spend his inheritance.

                                                                            ***

        About James S. Henry

        James S. Henry is a New York-based investigative journalist who has written widely on the problems of tax havens, debt, and development. His most recent book, The Blood Bankers (Basic Books, 2005), examined where the money went that was loaned to eight developing nations. His forthcoming book, Pirate Bankers (2009), examines the history and structure of the global private banking industry.

        July 24, 2008 at 01:06 AM | Permalink | Comments (0) | TrackBack

        Wednesday, July 09, 2008

        "HEY OBAMA: I WANT MY $$ BACK!"
        Barack, Lieberman, Republicans, and Red-Dog Dems Vs. the U.S. Constitution
        James S. Henry

        1_61_obama_wrightToday the U.S. Senate voted 69 to 28 in favor of the FISA Amendments Act (H.R. 6304). This monstrosity not only grants complete retroactive immunity to leading telecommunications companies for violating our civil rights since 2001, but also opens the door to mass surveillance of US citizens without warrants, in blatant violation of the Fourth Amendment to the US Constitution.

        Unfortunately, for those of us who had taken Barack Obama at his word when he promised on numerous occasions to oppose -- or even filibuster -- against this completely unconstitutional bill, he decided to retreat rather than fight.

        Greatpretender In doing so, Obama broke ranks with Senators Feingold, Clinton, Schumer, Dodd, Biden,  Kerry, Reid, Byrd, Senator Kennedy if he'd been well enough to vote, and a majority of other progressive Senate Democrats, all of whom courageously voted against this horrific bill.

        Instead, Barack Obama chose to stand with belligerent warmongers and crypto-Republicans like Joe Lieberman, dim-witted carnival barkers like Diane Feinstein, Evan Bayh,  and Jay Rockefeller, plus nearly every single Republican in the Senate -- except for John McCain and Pete Sessions, who did not even bother to vote on this critical issue.

        THE OLD SOFT SHOE

        In explaining his FISA bill vote, Obama cited several arguments that turn out upon closer inspection  to be completely disingenuous arguments, evidently concocted on the fly to conceal his political motives. 

        First, he claimed the bill was an "improvement" over the original one proposed by VPWiretapping Cheney and House Republicans. This sets the bar so low that it is buried in the sand.

        Second, Obama  said he remained opposed to telecom immunity, and would vote to amend that provision in the bill -- as if this little bit of sugar excused the bitter pill left over after the amendment failed. 

        Third, and most important, Obama says that he is now convinced that unfettered wiretapping and email surveillance are needed to prevent yet another terrorist attack in the US.

        In fact, as many other commentators have argued at length elsewhere, this kind of unfettered surveillance is neither necessary nor sufficient to prevent such attacks.

        Furthermore, the very best evidence on 9/ll shows quite clearly that the Bush Administration's inability to prevent the attack had little to do with a shortage of intelligence, let alone any limitations on wiretapping powers under already-generous FISA procedures. Rather, the Bush Administration's failure to prevent 9/ll was due mainly to its incredibly incompetent -- nay, criminally negligent -- handling of abundant intelligence.

        By reviving the old false dilemma that there is an intrinsic conflict between national security and constitutional rights, Obama has, in effect, just provided the Bush Administration a get-of -out-of-jail free card, and set back the quality of discourse on this issue at least six years.

        And all this from a "professor of constitutional law!"

        MORNING-AFTER REGRETS

        This was only the latest in a series of sharp right turns and U turns that the Junior Senator from Illinois has made in the wake of his primary victory over Senator Clinton just six weeks ago.

        On issues ranging from gun control and abortion to civil liberties, campaign finance, nuclear power,  the death penalty, and government support for faith-based initiatives, many of those who have worked hard for Obama  and contributed to his campaign from very early on are now having "morning after" regrets  -- you know, that awful feeling when you wake up next to someone you barely know, someone who looked a whole lot better the night before at 2 am on the dimly-lit dance floor,  under the influence of hope, desire, grog, and Is638084 near-sightedness.

        Apparently now that Obama's the nominee-in-waiting, he pictures those of us on the Center/Left as the survivors of Oceanic Flight 815, marooned on his mysterious tropical island with nowhere else to go.

        He also probably thinks that his vote today makes it easier to convince "independents" and even some "Republicans"  that he's not "soft" on national security.

        In my experience, however,  the vast majority of people who still consider themselves "Republicans" as of 2008 are beyond redemption, at least this side of the Inferno. On the other hand,  many "independents" actually do give a hoot about the Bill of Rights.

        The one thing we thought Barack was able to do was to stand up and defend basic principles in the face of the inevitable right-wing onslaught. 

        For millions of those who  supported him because we thought he was the real "change" candidate,  this was clearly not the kind of "change" we had in mind.

        A HILLARY REVIVAL?

        Chicken_xing_thumb_640 Perhaps the Junior Senator from Illinois needs to be reminded that he is not quite yet the official Democratic Party nominee.

        There's more than a month to go before the August convention, when 800 super-delegates are entitled to vote freely for the candidate they consider to be the most worthy. 

        We've also just waked up from the six-month primary binge to learn that it may indeed be Hillary who not only has the best  positions on many of these key issues,  but also has the courage to stick by her convictions. 

        During the long primary season, I had many heated arguments with Hillary supporters about the value of her vaunted "experience."  Now I finally understand what they were talking about -- not just that she has a Graduate Degree in Government 101, but that there's a solid core of values that she's defended for decades.

        For my money, Barack, by comparison, is looking more and more like the Manchurian Candidate -- another ad hoc Madison Avenue concoction that arises out of our seemingly inexhaustible supply of hope, desire, grog, and near-sightedness.

        At the very least, all this should be enough to earn Hillary Clinton the VP slot on the Democratic Party ticket. Clearly we need her to provide a rudder for this campaign -- rather than, say, the irascible Senator Webb, the ex-Republican from Virginia who also voted today in favor of the shameless FISA betrayal.

        Qphotowethepeopleamericanconstituti Of course to many of us,  Hillary's one glaring fault was her original position on the war. Now that Obama's positions on so many issues --  perhaps even his timetable for withdrawing from Iraq --  have been shown to be,  politically speaking, up for sale, that one error in judgment does not seem quite so fatal.

        True, Barack and Michele still seem a little more personable and fresh than Hillary and Bill. But the bloom is definitely off the rose. We'll just have to see how well the charm holds up, once the Democrat Convention is over and Karl and the Rovettes open up their little bag of dirty tricks.

        What's already clear is that on this matter of fundamental principle, the US Constitution, this Great Black Hope from Chicago has just turned out to have a very broad bright yellow streak right down the middle of his bowling shirt.

        So, at least until Hillary Clinton joins him on the ticket, I for one am demanding my money back.

        Meanwhile, for those of you who still care about the Bill of Rights, here's what the ACLU has to say about today's capitulation by the Democratic Party's latest addition to the ranks of "Beltway bandits:"

         





               

        Today, elected officials in Washington sold out the Constitution -- again.

        Cowed by the Bush administration’s pre-election scare tactics, the Senate passed privacy-stealing FISA legislation undermining your Fourth Amendment rights.

        This is not a “compromise,” as some in Congress would have us believe. The only thing they compromised is your freedom. Donate to the ACLU, and stand up for your rights. (This link will open a page with your information already filled in.)

        The FISA Amendments Act allows for mass, untargeted and warrantless surveillance of all communications coming into and out of the United States. And to top it off, it hands immunity to telecom companies for their role in domestic spying. This means your phone calls can be tapped and emails read with virtually no proof of threat, and there's no chance to learn how the telecoms invaded your privacy.

        It’s outrageous, unconstitutional and un-American. That’s why the ACLU is prepared to challenge this unconstitutional law the moment President Bush signs it -- and you can rest assured they’ll be meeting our lawyers in court.

        Help the ACLU protect your privacy. Donate now to the ACLU to defend your rights.

        In one fell swoop, Congress has not only legalized the Bush administration’s secret NSA spying program, it has given the government even more power to listen to our phone calls and read our emails than even the Bush administration illegally claimed for itself under its secret program. And, by granting telecoms immunity, it greatly harmed the chances of ever learning the extent of the administration’s lawless actions.

        Stand with the ACLU in defending your rights. Support the ACLU’s lawsuit and all of our other critical work defending the Constitution.

        In defense of freedom,

        Anthony D. Romero
        Executive Director
        ACLU


        (c)SubmergingMarkets, 2008

        July 9, 2008 at 07:23 PM | Permalink | Comments (0) | TrackBack

        Tuesday, July 01, 2008

        THE EDUCATION OF DR. PHIL GRAMM
        UBS Role Raises Basic Questions About McCain's Key Economic Adviser
        James S. Henry

        "A company is only as ethical as its people." 
        -- Peter Wuffli, x UBS CEO

        John McCain has long since admitted that he has a great deal to learn when it comes to economics.  But it turns out that hisMccain own chief economic advisor,  former US Senator Dr. Phil Gramm, has also needed rather extensive retraining lately. Unfortunately this has been acquired mainly at the expense of millions of US home buyers, honest taxpayers, former Enron employees, and would-be enforcers of our (bank-driven,  loophole-ridden) anti-money laundering laws.

        GRAMM CRACKERS

        Gramm, a somewhat goofy-looking, deceptively slow-talking business economist from Georgia, spent 12 years teaching economics at Texas A&M before getting elected to Congress as a conservative Democrat in 1978. By 1982 he'd switched sides, joining the Reagan Revolution to become one of the Republican Party's most outspoken champions of deregulation, tax cuts, and spending controls -- so long as this didn't affect his pet interest groups.

        Enron In the next two decades,  Dr. Gramm was perhaps the Senate's leading proponent of  financial services deregulation, weakened restrictions commodity trading, credit cards, consumer banking, and predatory lending practices, in addition to leading the fight against Hillary Clinton's health insurance reforms. As chairman of the Senate Banking Committee from 1996 to 2000, he was a key author of legislation that eliminated most of the legal barriers between US banks, brokerages, investment banks, and insurance companies that had been in place since the 1930s.

        Phil was also a determined opponent of tougher IRS tax enforcement, and a principal author of a 2000 law that exempted companies like Enron from regulation for online energy trading activities. Of course this made sound economic sense. After all, Phil's wife Wendy was a member of Enron's board, and Enron was Phil's largest corporate contributor in the 1990s.

        In 2000-2002, both before and after 9/11, Phil also became the key opponent of tougher anti-money laundering regulations, and -- not coincidentally-- one of the largest recipients of contributions from the powerful financial services lobby. Among independent journalists, all this helped to make him known by a variety of sobriquets, including "Foreclosure Phil," "Slick Philly," and "The Personal Representative of the Bank of Antigua."

        U-BS-er

        Images This track record stood Dr. Gramm in good stead when it came time to seek new employment in 2003, after the Republicans lost control of the Senate.  Naturally enough,  he gravitated toward his friends in the global private banking industry, whose noble calling it is to gather the assets of the world's wealthiest people and protect and conceal them from taxes, regulation, and expropriation, not to mention  embittered family members, ex-lovers and business partners,  and each other.   

        Since 2002, Dr. Gramm has served as Vice Chairman of UBS Investment Bank, which is owned by UBS AG, the largest Swiss bank, the world's 16th largest commercial bank,  and the world's largest private asset manager, with more than 80,000 employees and offices in 50 countries.

        Even after joining McCain's campaign during the summer of 2007, Dr. Gramm continued to serve as a registered Washington lobbyist for UBS from 2004 until April 2008, lobbying Congress to maintain weak restrictions on sub-prime lending and predatory lending.

        BAD TIMING

        In hindsight, Dr. Gramm's recent crusade for even more financial freedom turned out to be  ill-timed,  for several reasons.

        First, this was hardly the moment for even more financial deregulation than the US had already digested in the 1990s. After 2002, on Dr. Gramm's watch, UBS became one of the most world's aggressive banks, helping to foment and finance the sub-prime lending crisis that has already cost nearly three million Americans their homes, generated more than $250 billion in bank losses, and driven a $7.7 trillion hole in global equity markets.

        Since November 2007 UBS alone has written off $37 billions in mortgage-related assets, the largest write-off for any Ubsstock62008bank.  In July 2007, UBS's McKinsey-trained CEO, Peter Wuffli, was forced to resign, and in April 2008 its $24 million -per-year Chairman, Marcel Ospel, was given the toe. Since then its stock price has plummeted more than 70 percent,  to its lowest level since 2002.

        Meanwhile, the bank also revealed itself to be curiously insensitive to US financial regulations. For example, in May 2004, it was fined $100 million by the US Federal Reserve for violating an embargo on funds transfers to countries like Iran and Cuba. 

        Finally, it now turns out that Dr.Gramm's  colleagues at the bank have also been up to their eyeballs in yet another dubious business:  helping up to 20,000 wealthy American tax cheats hide their wealth offshore and commit outright tax fraud, cheating the IRS out of tens of $billions in tax revenue.

        SWISS CHEESE

        Late last month, Bradley Birkenfield, a senior private banker who'd worked with UBS from 2001 until 2006 out of Switzerland, and then continued to service their clients out of Miami,  pleaded guilty to helpingOlenicoffincourt21 dozens of his wealthy American clients launder their money. His name had originally surfaced when  a Southern California billionaire property developer, Igor M. Olenicoff, had been discovered by the IRS to be paying much less income tax than his status on the Forbes 400 list status warranted.

        With the help of Birkenfield and other UBS private bankers, Olenicoff, who'd first established offshore accounts as early as 1992, succeeded in parking at least several hundred million of unreported assets offshore.(Download bankers-indicment-in-florida.pdf)

        Ultimately Olenicoff settled with the IRS for $52 million in back taxes, one of the largest tax evasion cases in Southern California history. He also agreed to repatriate $346 million that he had parked in Switzerland and Liechtentstein.

        In theory he also faced up to 3 years of jail time, but in practice -- following the standard US practice of going easy on big-ticket tax evaders with no priors -- his maxmum exposure was just six months under standard US sentencing guidelines. Indeed, ultimately Olenicoff only got two years probation and 3 weeks of "community service."   

        One also gets the sense that this case was a bit like the cat pulling on the sweater yarn. According to Forbes, Olenicoff reported that many of his other foreign accounts were controlled by Sovereign Bancorp Ltd., a Bahamian company that he claimed had been set by former Russian Premier Boris Yeltsin.

        Images_2 In any case, in the process of making up for lost time with the IRS,  Olenicoff also gave up his two UBS private bankers, Birkenfield, and According to Birkenfield, he was just one of more than 50 UBS private bankers who visited the US out of Switzerland each quarter. This case,  the first US prosecution of a foreign private banker ever, signals that even the Bush Administration has become fed up with the estimated $100 billion per year in lost tax revenues that such practices are costing, and has decided to make an example of Dr. Gramm's employers.

        UBS'  sin was that it took "you be us" a step too far.  Like other major global banks, UBS AG had signed a "qualified intermediary" agreement with the US Treasury in 200(x), giving its corporate word that it would either insure that its clients were not US citizens, or withhold appropriate taxes. But when UBS AG's American clients refused to go along with such arrangements, UBS just caved in and lied to the US Government. 

        As a result, despite his cooperation, Birkenfield, the former UBS private banker,  is likely get serious jail time this August. Meanwhile, the DOJ has just  issued a "John Doe" summons to UBS AG, requiring it to turn over the identify of its entire list of wealthy American clients. The head of UBS AG's Global Private Banking business unit has been arrested and detained in the US on "material witness" charges, pending resolution of this dispute.  The private banker's wealthy clients are experiencing the tender mercies of the IRS's tax fraud department as we speak -- not only from this US case, but also from the recent scandal involving Liechtenstein's largest bank, where many UBS clients were also channeled.  UBS's shareholders all over the globe must be quaking in their boots, fearing the bank could be subject to massive fines or even a corporate indictment that would prevent it from doing business in the US ever again.

        QUESTIONS FOR DR. PHIL

        The questions for Dr. Gramm arising out of these scandals are many.   

        • First,  was Dr. Gramm completely unaware that UBS AG had organized this massive illicit global campaign to elicit capital flight from the US and other "honest-tax" jurisdictions,  conceal it in low-tax havens like Liechtenstein,  and completely shelter it from the taxes that ordinary taxpayers have little choice but to pay?
        • Second, are any of these 20,000 wealthy tax cheats from Texas?  Does Dr. Phil know any of them personally? 
        • Third,  what kind of changes, if any,  in laws pertaining to "qualified intermediaries," offshore havens, private banking, and international tax havens does Dr. Gramm believe are necessary? Would he, for example, support the reform bill on foreign havens and "qualified intermediary" rules that Senators Levin and Obama have co-authored? Precisely when will John McCain sign up to endorse that legislation?
        • Fourth, what else has Dr. Phil learned from all these cases?  Has he changed any of his views on the morality of tax dodging, money laundering, and predatory lending?  Is all this just a matter of "sauve qui peut" -- of whatever we can all get away with, especially the rich?  Does John McCain agree with him on such matters?  What then remains, alas, of "patriotism" and "national sacrifice," two of McCain's favorite leitmotifs?
        • Finally, given that John McCain really does need sound advice on economic issues like the mortgage crisis, taxation, and money laundering from a "qualified intermediary" of his own,  does all this experience really qualify Dr. Phil Gramm to fill the bill?

        (c) SubmergingMarkets 2008

        July 1, 2008 at 08:41 PM | Permalink | Comments (0) | TrackBack

        Sunday, May 11, 2008

        BRINGING THE WAR BACK HOME (Part I.)
        Jordan C. Haerter, 19, Killed In Ramadi
        James S. Henry

        "To save this world, you asked this man to die.
        Would this man, could he see you now, ask why?"
        -- Auden

        Sag_harbor_3Monday April 28th was an unusually chilly wet morning in Sag Harbor, New York, even for April, our "cruelest month."  But that didn't prevent more than a third of Sag Harbor's 2,200 year-around residents from lining the flag-lined streets and filling the Old Whalers' Church to capacity to mourn the loss of  US Marine Lance Corporal Jordan C. Haerter, age 19.

        Even apart from the drizzle, there was hardly a dry eye in the38191822_2 village. The Rev. Steven Howarth offered a moving recollection of Jordan's short life, describing his popularity, impatience with book learning, determination to learn to fly at 16 and to join the military at 17, and his courage under fire. The minister asked the crowd to take comfort in the fact that Jordan would undoubtedly be granted eternal life in the after-world.

        After the service, a long cortege made its way slowly to Oakland Cemetery, where Jordan Haerter was buried with full military honors, accompanied by his family, dozens of classmates, scores of police, firemen, Marines in dress uniform,  local American Legion members, and a squadron of motorcyclists Funeral068_2from an organization called the Patriotic Guard. More than a hundred school children from Jordan's former elementary school stood in the rain across from the church, carrying little star-spangled American flags and signs that read, "We will remember." Every local newspaper, radio station, and TV station in the Hamptons carried extensive coverage of the funeral and Jordan's story.

        Everyone agreed that Jordan had behaved courageously in Iraq, and that his death was a tragic loss for the whole community.

        Standing in the rain that day, and at the wake the afternoon before, I found myself struggling with very mixed emotions about this young man's death. On the one hand, I was proud of his courage and sacrifice. On the other, I couldn't help wondering why on earth he had decided to enlist and serve in a war that for many years has been so discredited. Who was responsible for that? Was this only George Bush's war, or do we all bear some responsibility for the fact that young men and women from all across this country -- not to mention scores of Iraqis -- continue to die every day?  Given the fact that bad wars  will continue to be a reality, what special responsibility do military recruiters, high school principles, teachers, guidance counselors, religious and political leaders, veterans, and other leaders in the community bear for at least making sure that the Jordan Haerters of this world make truly-informed decisions when they enlist?   

        YET ANOTHER STATISTIC

        Less than one week earlier, Jordan had become another statistic in the seemly-interminable Iraq War. At approximately 7:30 a.m. Baghdad time on April 22nd, Jordan and another Marine had been killed by a suicide bomber at a military checkpoint in Ramadi, the capital of Anbar Province in Iraq. Two Iraqi policemen and 24 other Iraqis were also injured in the incident.

        According to military sources, Haerter, an ace rifleman -- his platoon's  "high shooter" --  was credited with shooting the driver of the bomb-laden truck before it detonated, quite possibly saving the lives of more than 30 Marines and Iraqis who were standing nearby.

        Haerter became Sag Harbor's first Iraq War casualty, and indeed, its first combat fatality since World War II. He was also the first Suffolk County resident, 31st Long Islander, 203rd New Yorker, 4053rd American soldier (plus 186 contractors), and 253rd American 19-year old to die in Iraq since the US-backed invasion in March 2003.

        Jordan had been in Iraq just one month, on his very first trip ever outside the US.

        PREPARING FOR WAR

        Obithaerter

        Jordan, a life-long Sag Harbor resident,  was  the only child of Christian Haerter and JoAnn Lyles, who had been divorced in the 1990s. Christian, 50, ran a water treatment business and JoAnn, with whom Jordan lived, worked at a building supply company. Jordan's grandfather Werner, a tool-and-die maker at the local Bulova Watch plant until  it closed in 1981, had emigrated to Sag Harbor from Germany by way of Canada in 1953. He died in 1994, when Jordan was four. 

        Jordan was reportedly a well-liked, pretty conventional teenager with average-to-good grades and a bit of a willful streak. According to local newspaper accounts, his passions were for driving a small outboard motor boat on Peconic Bay, hanging out with his friends, driving his 1991 Toyota 4Runner on muddy back-trails around Sag Harbor, and eating his grandmother Lilly Haerter's spaetzle and home-grown blueberries.

        There was also flying. According to a widely-repeated story about Jordan, at age 16, he'd started taking flying lessons on his own, even though he had not informed his parents and was not yet old enough to legally drive himself to airport.

        Jordan was just as single-minded about joining the Marines. He and a high school classmate -- Josh DiStefano, one of his closest friends --  entered the US 38220457Marine Corps together in September 2006, just three months after graduating from Sag Harbor's Pierson High School, and one month after Jordan turned 18.

        According to another close friend, Jordan had met a Marine recruiter at Pierson's annual "Career Day" that spring. Soon after, at a meeting with a high school guidance counselor, he stunned his mother with the news that he had decided to join the Marines. 

        At the time Jordan was still just 17, so his parents still had to sign off on his four-year commitment to the Marines' delayed-entry program. They did so reluctantly, but without much opposition  -- they'd always encouraged Jordan to be action-oriented and to get a "real world" education.  Jordan apparently used the enlistment bonus that he collected from the Marines to buy a new Dodge Ram pickup truck -- the same truck that his friend Josh would drive in Jordan's April 28th funeral procession.

        WHERE WERE THE WARNING LABELS?

        Jordan's reasons for joining the Marines are not entirely clear. Of course most young men his age are now avoiding military service like the plague. That is one reason why there has  been a crisis in military recruiting.

        This, in turn,  is partly because the five-year old Iraq War is by now widely regarded by most Americans as an unmitigated fiasco, none of whose official justifications -- WMDs, Saddam's supposed ties to Al Qaeda, "democratization," or even the value of controlling Iraq's oil supplies -- have held up.

        At best we are now down to a faith-based argument about whether things will be more  or less disastrous if we exit the country now rather than at some ill-defined time in the future -- not exactly an inspiring ground for enlisting.

        What is clear that Iraq is a very dangerous way to spend one's youth. Not only have there been more than 4075 US military fatalities, but there have also been at least 30,000 Americans physically wounded, 3000-5000 of whom have injuries so severe that they probably would have died in earlier wars that lacked today's rapid medical evacuations.

        According to a RAND studyPtsd1 released in April, 31.7 percent, or 520,000 of the 1.64 million American military personnel who have served in Iraq or Afghanistan since 2001 also suffer from "post-traumatic stress syndrome" (PTSD), depression, and/or "traumatic brain injury" (TBI) induced by explosive devices. These "less visible" injuries have not only contributed  to a surge in suicides by US military personnel -- an estimated 6000 suicides in 2005 alone, growing at 20 percent in 2006-2007, with more than 12,000 attempts each year. Thus the number of  Iraq-related suicide deaths in the American military far exceeds the number of combat deaths.

        These mental injuries also impose a high cost on the families and friends of returning veterans, especially given the acute shortage of psychiatric care for returning veterans and their families. The Rand study found that only about half of those with such conditions were getting treatment, and half of those who have been treated got inadequate treatment.

        Ptsdap Some cynics have even suggested that the military's understatement of these problems is partly due to the fact that the US military is so dependent on "voluntary" reenlistment that it is afraid to focus on PTSD and TBI  -- both of which are amplified by the long tours of duty that troops are facing.

        There is also evidence that such battlefield risks are systematically understated by recruiters, who are under severe pressure to fill quotas. Certainly there are is nothing comparable to the hazard warnings, "truth in lending," and SEC  anti-fraud disclosure notices attached to, say,  cigarette packages, drug prescriptions, car purchases, mortgages, and private equity investments that apply to these life-and-death enlistment decisions by 17-19 year olds. This has lead to widespread demands for new "truth in recruiting" standards, and restrictions on recruiter access to the nation's public high schools.

        Finally, from an economic standpoint, military service -- now entirely voluntary, except for the "stop-loss" orders that has affected more than 80,000 reservists -- is simply not very competitive, as discussed below. Unless a student has virtually no civilian job alternatives, and either can't get into college  at all or can't afford to go, the military is likely to be a losing economic proposition, unless it somehow plays a role in some longer-term career plan (see below).

        WHAT WAS HE THINKING?

        As noted, Jordan's family says that his decision to join the Marines came as a complete surprise.

        While other family members had served in the military, there was no tradition of volunteering for duty in Jordan's family. His grandfather Werner, whom Jordan had known as a child, had been drafted into the German Army in World War II, and his other grandfather John Lyle had been drafted into the US Army. Jordan's father Christian had never served.381918131

        He spoke no foreign languages and,  as noted, he'd never traveled outside the US. In high school, he'd shown no particular interest in world events or history. Although he appears to have supported the War after enlisting, he'd never expressed strong feelings about the Iraq War before doing so.   

        From age five on, Jordan had enjoyed playing shoot-'em-up games on the computer, which he would later actually compare with some of his experiences in the military. He'd also insisted that his Halloween costumes, meticulously designed by his mother, be accurate copies of those worn by soldiers in America's Revolutionary War. But such interests didn't differ all that much from those of any other Sag Harbor boys.

        Nor does it seem that Jordan's decision to enlist in the Marines for the minimum term of four years strictly  a matter of short-term job opportunities. True, he had probably received a small ($10,000 or less) signing bounty for enlisting. At the time of his death, however, Lance Cpl Haerter's "E-3" pay grade was earning him just  $19,044 a year before taxes, plus food and housing allowances. By his fourth year in the service, depending on his rank, that might have increased to $25,000 per year at most -- less than $12 per hour. But that wage rate should have been easy for Jordan to beat in the Hamptons.   

        A TIDY PLAN

        What appears more likely is that Jordan's decision to enlist was part of a longer-term career plan, which tended to understate the risks of being a Marine in Iraq, and overstate the chances of using military service as a stepping stone.  His family says that after hisNew_logo_19 four-year commitment to the Marines, he intended to join the Sag Harbor Village Police Department, get married, and eventually take over his father's water treatment business.

        For the first 18 months of Jordan's enlistment,  this plan appeared to be on track. He was assigned to "the Walking Dead," Alpha Company,  First Battalion, the 9th Marine Regiment out of Camp LeJeune, North Carolina.  which had served with distinction in Vietnam, Korea, and World War II. After boot camp at Parris Island in South Carolina and another year of training at Camp LeJeune and in northern Virginia and California, he was sent to Iraq in March 2008.

        Once there, things also seemed to go well at first.  On Monday April 21,  the very day before his death, Jordan's mother received a letter from him, in which Jordan reported that Iraq was "easier than I expected," and assured her that he would take care to return home safely.

        Unfortunately, as we'll discuss below,  all this overlooked just a few complexities -- the unpredictable, maniacal nature of the Iraq War, and the tensions that are deeply embedded in the US military's  "surge" strategy.....especially in Jordan's first and only Iraqi destination, Ramadi. (Continued in Part II.)

                                                 (c) SubmergingMarkets, 2008


         


        May 11, 2008 at 01:40 AM | Permalink | Comments (0) | TrackBack

        Saturday, April 26, 2008

        THE CLINTONS ARE STILL AT LARGE!
        Part I. BLACKENING OBAMA, EVEN IF IT ELECTS JOHN MCCAIN
        James S. Henry

        For six months now, partly under the influence of Senator Barack Obama's refreshingly naiveAf057b9b4af44fceaec485c9fcbe01cb_2 quest  for a higher level of discourse in American politics, we've resisted the temptation to "go negative" on his arch-rival -- "Sir Hillary" Diane Rodham Clinton, the relentless one-and-one-third term New York Senator,  two-term First Lady, five-term Arkansas Governor's wife, and life-long honorary Queen of the State of Blind, Unbridled Ambition.   

        Along the way, we've watched aghast as some of our closest associates -- people who describe themselves as "Democrats" and "Hillary supporters," but really turn out to be Obama haters who threaten to vote for John McCain in November if Hillary is not the Democratic nominee -- have tried nearly every trick in the book to tear Obama down.   

        Clinton_blackfaceBLACK FACE

        For example, on January 4, 2008,  just one day after the Iowa primary, one pundit was overheard suggesting to members of Sir Hillary's inner circle that the best way to undermine Obama's surprisingly broad appeal would be to "blacken" him. 

        At the time, Hillary's campaign was still reeling from her third-place finish in Iowa, based on the fact that Barack had done so well across conventional racial, ethnic, gender, and age boundaries.   

        Evidently the advice was taken. This helps to explain Hillary's odd, a-historical comments on January 7 in New Hampshire, when she compared Lyndon Johnson's role in securing US civil rights legislation during the 1960s to that of Martin Luther King, Jr. ("It took a President to get it done."

        (Actually it took a mass protest movement, based on years of organization and lots of blood, sweat, and tears, to get it done. Hillary's inaccurate recollections about that period may be have been due to the fact that in 1964, at age 17, she had spent her time campaigning actively for Barry Goldwater, the Republican Presidential candidate who opposed the US Civil Rights Act.) Queenhillary

        This cynical tactic also helps to explain Bill Clinton's patronizing remarks in South Carolina on January 26, when he compared Obama's campaign to the Rev. Jesse Jackson's 1984 and 1988 Presidential bids -- as if Obama were just another "black niche" candidate. 

        The point is that these statements were deliberately made,  regardless of their merit, because the Clinton camp wanted to provoke rebuttals from prominent black celebrities like the Rev. Jackson, the Rev. Al Sharpton, and Spike Lee.

        Bill and Hillary probably knew full well that this might well cost them votes in a handful of states like South Carolina, where blacks are a majority of registered Democrats. Indeed, they were both widely criticized for their remarks.

        However,  in their cynical calculus, what really mattered was that the official black response would remind white voters elsewhere that  while Senator Obama might seem to be "articulate and bright and clean" (in Joe Biden's memorable description),  he's really just (as one anonymous Clinton campaign adviser put it) "the black candidate."

        DIE HARDISM...OR WORSE?

        In the short term, many observers thought that such cynical tactics had backfired. Indeed they may have. Contrary to Hillary's best laid plans, Barack not only survived "Super Tuesday" on February 5, but went on to acquire a commanding lead in delegates.

        Even after the most recent machine-state primary in Pennsylvania, Barack still leads by at least 133 delegates. If the latest polls in the remaining nine primaries hold up,  Hillary would need  to capture at least 73 percent of the remaining unpledged "super delegates" to win. (Click on the chart below.)Chartone4262008_2

        Unfortunately, this situation appears to have only redoubled the Clintons' willingness to engage in McCarthyite tactics, including  race-baiting and "guilt by association,"  regardless of the impact on the Democratic Party's chances in November.

        The Clintons are notorious for pursuing their own interests at the expense of the Party (just ask Bill Bradley, Al Gore, and John Kerry). But this spectacle is setting new records.

        These tactics include trying to smear Senator Obama with the radical views of the Rev. Wright, the Rev. James Meeks, or even the Rev. Louis Farrakhan; reminding people of the Senator's admitted occasional drug use 25 years ago (as compared with Gov. Bill Clinton's denied, much heavier use of cocaine during the same period); and attacking Obama for having a few corrupt contributors in Chicago ("...NOT Chicago!!!") like Antoin "Tony" Rezko (compared with the Clintons' legions of corrupt contributors); and associating Obama with former Weatherman and now Distinguished University of Chicago Prof. William Ayers, who was never convicted of anything (while Bill Clinton had sought fit to pardon two formerRezkojpg_20080125_08_09_45_4128240 Weathermen who'd been convicted of involvement in terror-related crimes.)

        The tactics also include promoting the idea that Obama can't possibly appeal to white working -class voters, Hispanics, Jews, or Catholics in battleground states, simply because.... well, you see, the country may just not be "ready" for a "black" President -- whatever those terms mean.

        Of course the Clintons argue that dwelling on such material now is justified because Karl Rove and the Republicans would only focus on it later. Furthermore, Obama's prolonged side-show with his former pastor appears to have done a perfectly job of undermining his campaign without much help from them.

        This is mostly self-serving flim-flam. The fact is that Hillary & Co. have run a terrible campaign, and are now reduced to relying on hyping bogus issues like Rev. Wright rather than talking about real issues.

        If the Clintons had not underestimated Obama so badly, they would have At this point, if they believe that the Democratic Party will reject Obama and opt for Hillary, they are delusional -- such a move would only lead the majority of Party activists that has supported Obama overwhelmingly to sit this election out.  By continuing to battle Obama down all the way to the convention, the Clinton machine is wasting precious attention and resources that ought to be devoted to attacking the real enemy.

        THE AGENDA

        So why are the Clintonistas employing these Die-Hard, polarizing, kamikaze-style tactics?

        Well, first, the hard-core stormtroopers down in the Bunker actually still hope to achieve a "Hail Mary" knock-out in the last few primaries,  shocking the super-delegates into a wholesale defection from Obama. They simply can't admit that it is far too late for anything other than an Obama candidacy.

        Taking Second, Clinton supporters have spent hundreds of millions of dollars on this battle, and many of them have been preparing for it literally for decades. Many of them genuinely resent Obama's upstart campaign, and feel entitled to reclaim their White House.

        Third,  many (highly-paid) Clinton campaign operatives are not exactly looking forward to seeking real jobs in the midst of a recession.

        Fourth,  key Clinton supporters desperately fear being left out in the cold if Obama wins the nomination, let alone the Presidency, for as much as another eight years. Especially for those in Hillary's "boomer" generation, that's an eternity.

        Finally, and most cynically of all, if 72-year old John McCain wins the Presidency, the odds are that he will only last one term. That would give Hillary another shot in four years.

        Whereas if 47-year old Obama wins, he might well last two terms -- by which time Hillary will be approaching dotage and Bill Clinton will be in a retirement community for sexual predators. 

        From the standpoint of naked Clinton self-interest, therefore,  the cynical calculus prevails again.

        You see, it is a far far better thing to go after one's fellow Democrat with all the malevolence that one can muster, even at the risk of ruining his chances this November, than to withdraw now and help his chances.

        Naturally this kind of cynical strategy has attracted all kinds of miscreants, Republicans-in-sheeps' clothing, stragglers, pimps, shills, camp followers, and hangers-on.

        There ought to be a special place in Hell for such people. 

        But if there is not, we should endeavor to create one right here on Earth.

        (c) SubmergingMarkets, 2008




        April 26, 2008 at 04:29 AM | Permalink | Comments (0) | TrackBack

        Thursday, April 17, 2008

        SNATCHING VICTORY?
        The Democrats Descend Into the Politics of Mutually-Assured Destruction
        James S. Henry

        On an occasion of this kind, it becomes more than a moral duty to speak one's mind. It becomes a pleasure.

        -- Oscar Wilde

        Isn't this a pretty picture?  080204news_election_3

        On the one hand, after seven long years of catastrophic incompetence in Washington, our country is literally begging for new ideas and leadership, especially from the erstwhile Party of the Opposition.

        Recent polls show that an unprecedented 81 percent of Americans believe their country is "on the wrong track," while President Bush's approval rating has sunk to an all-time low of 28 percent. There is a growing popular demand for decisive government action on any number of issues that have been festering while "Nero" Bush and "Imperator" Cheney have been fiddling.

        THE DEMAND FOR CHANGE

        John "McSame's" feisty personality notwithstanding, this is not the ideal moment to be plumping for free-market solutions, let alone more tax cuts for the extremely rich,  hands-off deregulation for our wondrous mortgage banking, health care, automotive, airlines, handgun, coal-fired utility, and social insurance industries, and the unending prospect of more unilateral, open-ended wars.

        No -- this is a time that cries out for smart, can-do, progressive, and -- yes -- youthful government.

        Its precise slogan should be:  Yes, we had better -- or else.

         
        REAL ISSUES

        At the risk of depressing our readers, among the many tough issues that demand this  pragmatic approach right now are the following:

        >Containing the mortgage crisis and the deep recession that it has produced.
        >
        Withdrawing from Iraq as soon as possible, while discouraging Iran from filling the void.
        >
        Intensifying the hunt for Bin Laden, without losing Pakistan and Afghanistan to a Taleban revival.
        >
        Protecting our nation against the genuine on-going global terrorist menace.
        >
        Fixing our high-cost, inhumane health insurance system once and for all.
        >
        Biting the bullet on climate change and global warming.1101940404_400_2
        >
        Rebuilding public education and college assistance
        .
        >
        Guaranteeing the financial integrity of Social Security and Medicare.
        >
        Restoring civil liberties and reversing the drift toward a state of siege.
        >
        Reviving American's reputation in the world and its relations with key allies.

        20080404_poll_graphic190> Revising our increasingly disfunctional "free trade" agreements.
        >Reviving efforts to prosecute corrupt politicians, war profiteers, and big-ticket tax evaders to the limits of the law, as opposed to granting them Presidential pardons.
        >Slashing government waste, especially the bloated $800+billion "total war"  budget and the huge agro-industry subsidies that are literally wiping out poor farmers all over the world. 

        All together,  this adds up to a demand for nothing less than at least a decade of intense regime change right here at home.

        THE SUPPLY OF CHANGE ?

        Is the Party of the Opposition up to this challenge?  Unfortunately, the habitually ham-handed Democratic Party,  as well as much of broadcast journalism,  have responded to the soaring demand for substantive change and attention to real issues by focusing on.....Well, what, exactly?

        Hilarydailynews Let's see.  If last night's televised debate in Philadelphia is any indication, both candidate Hillary Clinton and the news media -- or at least pro-Hillary flacks like ABC News' George Stephanopoulos and the ponderous, self-important Charles Gibson --  are far more concerned with (1) Obama's Rev. Wright's alleged relationships with Rev. Farrakhan and a visiting Hamas associate, (2) Obama's even more tangential relationship with an obscure former Chicago "Weatherman" named Ayers, (3)his recent (really quite defensible) "Bittergate" comments about the roots of working-class culture, and (4) the torturous question of whether or not the Junior Senator from Illinois should demonstrate his patriotism by wearing a flag pin on his lapel.

        >>As if Hillary and Bill have not accumulated a long list of even more dubious relationships,  several of whom had to be pardoned.

        >>As if  Stephanopolous did not get his questions about Ayers directly from Fox News' mad-hatter host Sean Hannity the day before the debate.

        >> As if there were not -- by definition -- quite a few other black males at Louis Farrakhan's  rather successful 1995 "Million Man March" in Washington, D.C.  -- at least 670,000 to 1 million, according to one careful aerial survey.

        >>As if one could find a single photo on the Internet of John McCain wearing a flag pin -- although George W. Bush wears one all the time. George_w_bush

        >>As if Gibson and his sidekick did not tilt so far to starboard in their questioning that one Washington Post journalist titled his review,  "In Pa. Debate, The Clear Loser Is ABC."

        LAST GASP

        This attempt to focus on a series of jaundiced Obama "gotchas" is actually a sign of Hillary's increasing desperation. 

        Obviously she is furious at having been repeatedly up-staged and out-campaigned over the past year -- despite her vast experience, wealth, and connections with wealthy donors and lobbyists, not to mention Bill. The smooth-talking Chicago upstart with the Harvard Law degree and the Bill Clinton-like hard luck story is actually trying to deprive her of her rightful place in history!

        Hillary's focus on character assassination also reflects her sheer frustration at the fact that Obama now clearly has the inside track for the nomination.

        This has not been a pleasant month for Ms.Clinton. She's just fired her long-time campaign strategist, after firing her campaign manager. She's just been caught in a bald-face lie about coming under fire in Tuzla. Her lead in Pennsylvania has dropped to five points. With just 10 primaries left to go, Obama is now at least 139 delegates ahead. Even if Hillary captures, as expected, more than half of the delegates elected in these primaries, she will still need to win two-thirds of the remaining 319 uncommitted "superdelegates."  Obama just needs 125. (Click on chart.)Slideone_2

        That's a pretty large gap for Hillary to overcome -- especially considering the fact that Obama's fund-raising machine allows him to outspend his rival by two-to-one in key states.

        This explains Hillary's increasing reliance on negative advertising in Pennsylvania and the other primary states, her endless repetitions of the Rev. Wright and "Bittergate" story, and her grasping at all those other petty straws in last night's debate -- even while conceding that Obama, with all his flaws, could still beat John McCain in November.

        In short, those of us who long for probing discussions of serious issues will probably have to look elsewhere than Hillary, let alone ABC News.  And we should certainly not expect to hear much about them until Hillary faces facts and does the right thing -- which, just to spell it out for her clearly, is not to remain in this race "until the last dog dies."

        (c) SubmergingMarkets, 2008      

          

         




         

         

         


         

        April 17, 2008 at 05:01 AM | Permalink | Comments (0) | TrackBack

        Tuesday, February 12, 2008

        John McCain: "No We Can't"
        Reviving The "Daisy" Strategy in 2008
        James S. Henry

        Mccain_bomb_4 My friends:  we have spent far too much time and treasure on the prolonged, intense, but ultimately intra-familial and largely issues-free beauty contest between Hillary Clinton and Barack Obama.   

        Now that that contest is finally drawing to a close, it is time for us to focus like a gamma-ray laser on the real enemy in the fast-approaching November 2008 Presidential election -- Senator John McCain, the bellicose 5'7" septuagenarian fly-boy from Arizona.  

        What is it about Air Force-trained Republican Senators from Arizona, anyway? 

        Mccain_bushhug767929_3 In many respects this year's race recalls 1964, when Senator Barry Goldwater, another war-mongering, outspoken, short-tempered Air Force veteran and Republican Presidential candidate from Arizona,  scared the B'Jesus out of the entire country with his threats to use nuclear weapons preemptively ("Let's lob a nuclear bomb into the men's room at the Kremlin").

        Usually such pro-war designs are kept well hidden until after the election, as the Bush Administration did in 2000 --  and, indeed, as President Lyndon Johnson did in the 1964 election, when he made Goldwater out to be a mad-man (the "Daisy" strategy," after the notorious political ad by that name: Download 20_johnson_64.mov). Johnson conveniently failed to tell the public during the election campaign that he was also a mad-man, already planning to park more than 500,000 US troops in Vietnam within a year.   

        In any case, not since 1964 have the Democrats faced a Republican candidate who is as openly pro-war as John McCain is. This should provide them with  a remarkable opportunity for party unity,  a clear brand, and victory in November.     

        Gopteam_071664r1 However, it is very important to reunite the Party and get moving. McCain is already attracting fuzzy-minded support from  moderate Democrats and independents who are beguiled by his tough-guy "maverick" image -- especially lower middle-class white males who are (a) bearing the brunt of this year's  economic downturn, and (b) not entirely comfortable with voting for either  Barack  ("the black guy"_ or ("that woman") Hillary. Oddly enough, many of these folks also claim to be anti-war.

        Partly because the Democrats have been so distracted by their own interminable (..19 debates??!...six months of primaries?) nominating process, the most  telling criticisms of John McCain have so far been provided by his enemies among the Very Far Right Ranters (VFRRs), including leading professional ranters  like Anne Coulter, Rush Limbaugh, and James C. Dodson. This crew complains that McCain doesn't quite pass muster on pet right issues like undocumented immigration, gay marriage, and tax cuts. Ironically, Barry Goldwater himself would have also failed these same litmus tests. Indeed, if the 1964 Presidential election had been fought on social issues and the economy rather than on war and peace, the former Air Force Major General from Arizona would most likely have carried many more states than the 6 that he did carry. Defeating Goldwater in 1964 may not have absolutely required the war-mongering issue, but it certainly helped.  

        Some conservatives have also criticized McCain's preference for voluptuous office assistants and fly-boy-style socializing.  From their angle, he also lacks appropriate Christian zeal, was once involved in the shady "Keating Five" savings-and-loan scandal,  and has an intermittent work ethic.

        Indeed, in the last five Congresses he missed an incredible 21 percent of all Senate votes, including 56 percent in the current 110th Congress. This high rate of absenteeism is also no doubt partly due to the Presidential race, McCain's long-standing battle with cancer, and the fact that at age 71.5,  he is already the oldest living leading Presidential candidate ever, having already lived longer than over half of all US Presidents.

        Images_2 The real problem for Democrats and independents, however, should not be McCain's lack of religious fervor, moldy old rumors about the Keating Five or extra-marital relationships, his age, or even his absenteeism, unless that is due to health problems.

        And after this year's endless bouts of the smooth-talking ignoramus the Rt. Reverend Huckabee, the lack of religious zeal and ideological purity in a leading Republican candidate is really rather refreshing.

        No -- our core problems with John McCain are twofold. First,  whenever he actually manages to show up in the Senate and legislate, the  results are usually far to the right of what most Democrats, independents, and sensible people in general stand for  -- and what both Barack and Hillary, in particular,  stand for.

        For example,  while Barack and Hillary have both earned lifetime voting scores from the American Conservative Union (ACU) of just 8 percent, McCain's  lifetime score is 82. While this may be insufficient for VFRRs like Limbaugh and Coulter, it is well above the tail end of the Republican Senate distribution.

        McCain may have mellowed slightly in recent years -- in 2006, for example, his ACU score was just 65.  However, this is still higher than any Senate Democrat, and it is more than three times the 17 rating scored by McCain's turncoat friend Joe Lieberman.  Indeed, on a wide range of key issues that progressives and independents should really care about --  from Supreme Court nominations and extending Bush's tax cuts for the rich to the State Children's Health Insurance program, setting a timetable for withdrawal from Iraq, and  bankruptcy reform, and even on his own trademark issues like campaign finance, immigration, the definition of torture, and the Bush tax cuts, the senior Senator from the Grand Canyon state is usually a big disappointment.   

        20071113_mccain Second, and even more important, on the most crucial issue of our time, the conduct of present and future wars,  McCain appears to have quite frankly gone completely off the rails.

        Misguided Democratic Party strategists like John Podesta, Mark Penn, and Bob Schrum notwithstanding,  this issue of the war, and not just "the economy" or "health care," should be at center stage for this election. 

        This is precisely because, on the one hand,  military affairs are supposed to be McCain's core competence, and because, on the other hand, he has gotten this central issue completely wrong.      

        As discussed below, while millions of Iraqis continue to vote with their feet and either flee abroad or stay there, McCain just keeps repeating the big lie that "the surge is working."

        In fact the main reasons that US military casualties,  and, to a lesser extent, Iraqi civilian casualties have dropped is not because of "the surge," but because (a) Baghdad has been ethnically cleansed, and is now a sharply divided, Shiite-dominated enclave;  (b) Sunni insurgents, fed up with al-Qaeda, have decided temporarily to ally with the "occupiers" and assert control over the "foreign terrorists;" and (c) Iran has temporarily decided to cut down on its support for attacks on US troops, in the interests of undermining the "neocon" coalition in the US, Saudi Arabia, and Israel that is plumping for a McCain-style bombing. (See the video below).

        None of this implies that the surge has achieved anything more than a kind of stop-gap temporary stabilization of this very ill patient's condition -- a Bush Adminstration effort that just happens to coincide with a Presidential election year. Since it is unlikely that the surge is sustainable, in terms of troops and dollars, and since its benefits are likely to be temporary, McCain should be compelled to explain on every possible occasion whether the slim increased chance that a Republican president will get elected is really worth the price.

        466284925_964c617f1f_oBut McCain is at least consistent. Apparently he also still believes that the Vietnam War could have been won with just a little more persistence and less interference from Washington.
         

        For all his putative military experience, therefore,  in the grand tradition of Major General/ Senator Goldwater and Air Force General Curtis {"Bombs Away") LeMay,  in his 20 hours of flight time over North Vietnam, and his five years of captivity, apparently John McCain never 250pxcurtis_lemay_usaf managed to learn the fundamental lesson that millions of ground troops have learned the hard way -- that guerrilla wars, and, indeed, wars on terror,  are ultimately won or lost by political and economic development, not by military tactics. And, furthermore,  that the blind over-application of military force to a hostile civilian population by an occupying army and Air Force can actually increase enemy resistance much faster than it can be controlled.

        Far from repeating the 2004 Kerry campaign's central mistake and focusing this campaign only on the US economy, therefore, it will be vital for us to keep McCain's extraordinary appetite for war in plain view.

        The more general question of why so many Air Force professionals -- including, for example, the Israeli General who was widely blamed for mismanaging last year's conflict with Hezbollah in Lebanon -- tend to systematically overestimate the efficacy of military power, will be left for another time. Plainly this is not just an Arizona malady.

         For the interested reader, the following is a smattering of sundry provocative materials with respect to Senator McCain. Not all of it is worth taking seriously --- some of it even resembles the scurrilous attacks on John Kerry's war record in 2004,  when McCain, it should be recalled, came to Kerry's defense.  We've presented it here in the interests of of airing it out and redirecting our attention to the clear and present danger of a Republican Party that, even in its death throes,  may still be able to unite around this "great white hawk" from Arizona. 

         

        The "Surge" Is Working?"
        "100 More Years in Iraq?"

        ""MIA Cover-Up Artist?""

        ""War Hero?""

         

        From VietnamVeteransAgainstJohnMcCain:

        FACT SHEET:  Military record of John Sidney McCain

        "Both McCain III’s father and grandfather were Admirals in the United States Navy.  His father Admiral  John S. ”Junior” McCain was commander of U.S. forces in Europe - later commander of American forces in Vietnam while McCain III was being held prisoner of war. His grandfather John S. McCain, Sr. commanded naval aviation at the Battle of Okinawa in 1945. McCain III, like his father and grandfather, also attended the United States Naval Academy.  McCain III finished near the bottom of his graduating class in 1958.

        McCain III lost five U.S. Navy aircraft: Images_2

        1 - Student pilot McCain III lost jet number one in 1958 when he plunged into Corpus Christi Bay while practicing landings.

        2 - Pilot McCain III lost another plane two years later while he was deployed in the Mediterranean. ”Flying too low over the Iberian Peninsula, he took out some power lines  which led to a spate of newspaper stories in which he was predictably identified as the son of an admiral.

        3 - Pilot McCain III lost number three in 1965 when he was returning from flying a Navy trainer solo to Philadelphia for an Army-Navy football game.  McCain III radioed, ”I’ve got a flameout” and ejected at one thousand feet. The plane crashed to the ground and McCain III floated to a deserted beach.

        4 - Combat pilot McCain III lost his fourth on July 29, 1967, soon after he was assigned to the USS Forrestal as an A-4 Skyhawk combat pilot. While waiting his turn for takeoff, an accidently fired rocket slammed into McCain Jr’s. plane. He escaped from the burning aircraft, but the explosions that followed killed 134 sailors, destroyed at least 20 aircraft, and threatened to sink the ship.

        5 - Combat pilot McCain III lost a fifth plane three months later (Oct. 26, 1967) during his 23rd mission over North Vietnam when he failed to avoid a surface-to-air missile. McCain III ejected from the plane breaking both arms and a leg in the process and subsequently parachuted into Truc Bach Lake near Hanoi. After being pulled from the lake by the North Vietnamese, McCain III was bayoneted in his left foot and shoulder and struck by a rifle butt. He was then transported to the Hoa Lo Prison, also known as the Hanoi Hilton.

        Mccain1 The 1973 New York Daily News labeled POW McCain III a “PW Songbird” On McCain III’s fourth day of being denied medical treatment, slapped, and threatened with death by the communist (they were demanding military information in exchange for medical treatment), McCain III broke and told his interrogator, ”O.K., I’ll give you military information if you will take me to the hospital.” U.S. News and World Report, May 14, 1973 article written by former POW John McCain.

        It was then that the communist learned that McCain III’s father was Admiral John S. McCain, the soon-to-be commander of all U.S. Forces in the Pacific. The Vietnamese rushed McCain III to Gai Lam military hospital (U.S. government documents), a medical facility normally unavailable for U.S. POWs. By Nov. 9, 1967 (U.S. government documents) Hanoi press was quoting McCain III describing his mission including the number of aircraft in his flight, information about rescue ships, and the order of which U.S. attacks would take place. 

        While in still in North Vietnam’s military hospital, McCain III gave an interview to prominent French television reporter Francois Chalais for a series titled Life in Hanoi. Chalais’ interview with McCain III was aired in Europe. Vietnamese doctors operated on McCain’s Leg in early December, 1967. Six weeks after he was shot down, McCain was taken from the hospital and delivered to a U.S. POW camp, In May of 1968,  McCain III allowed himself to be interviewed by two North Vietnamese generals at separate times.”  May 14, 1973 article written by former POW John McCain In August 1968, other POWs learned for the first time that John McCain III had been taken prisoner. Mccain_bush_hug

        On June 5, 1969,  the New York Daily News  reported  in  a article headlined  Reds Say PW Songbird Is Pilot Son of Admiral,   “ . . . Hanoi has aired a broadcast in which the pilot son of  United States Commander in the Pacific, Adm. John McCain, purportedly admits to having  bombed civilian targets in North Vietnam and praises medical treatment he has received since being taken prisoner . . .” 

        The Washington Post explained McCain III’s broadcast: “The English- Language broadcast beamed at South Vietnam was one of a series using American prisoners. It was in response to a plea by Defense Secretary Melvin S. Laird, May 19, that North Vietnam treat prisoners according to the humanitarian standards set forth by the Geneva Convention.”

        Mcaincu1 In 1970, McCain III agreed to an interview with Dr. Fernando Barral, a Spanish psychiatrist who was living in Cuba at the time. The meeting between Barral and McCain III (which was photographed by the Vietnamese) took place away from the prison at the office of the Committee for Foreign Cultural Relations in Hanoi (declassified government document). During the meeting, POW McCain sipped coffee and ate oranges and cakes with the Cuban. While talking with Barral, McCain III further seriously violated the military Code of Conduct by failing to evade answering questions ”to the utmost of his ability” when he, according government documents, helped Barral by answering questions in Spanish, a language McCain had learned in school. The interview was published  in January 1970.

        McCain III was released from North Vietnam March 15, 1973 In 1993, during one of his many trips back to Hanoi, McCain asked the Vietnamese not to make public any records they hold pertaining to returned U.S.  POWs.  McCain III claims, that while a POW, he tried to kill himself.

        McCain III was awarded “medals for valor” equal to nearly a medal-and-a-half for each hour he spent in combat For 23 combat missions (an estimated 20 hours over enemy territory), the U.S. Navy awarded McCain III, the son of famous admirals, a Silver Star, a Legion of Merit Mcain_bu2 for Valor, a Distinguished Flying Cross, three Bronze Stars, two Commendation medals plus two Purple Hearts and a dozen service medals.

        McCain had roughly 20 hours in combat,” explains Bill Bell, a veteran of Vietnam and former chief of the U.S. Office for POW/MIA Affairs -- the first official U.S. representative in Vietnam since the 1973 fall of Saigon. “Since McCain got 28 medals,” Bell continued, “that equals to about a medal-and-a-half for each hour he spent in combat.  There were infantry guys -- grunts on the ground -- who had more than 7,000 hours in combat and I can tell you that there were times and situations where I’m sure a prison cell would have looked pretty good to them by comparison. The question really is how many guys got that number of medals for not being shot down.”

        For years, McCain has been an unchecked master at manipulating an overly friendly and biased news media. The former POW turned Congressman, turned U.S. Senator, has managed to gloss over his failures as a pilot and his collaborations with the enemy to become America’s POW-hero presidential candidate."

        Another Bellicose Wack-a-Doodle?

        "Legendary Temper Could Undermine McCain" Friday, May 25, 2007  By RALPH VARTABEDIAN and MICHAEL FINNEGAN

        SPECIAL FROM THE LOS ANGELES TIMES

        0_12_300_227_mccain_lieberman" An angry, profane exchange between Sen. John McCain, R-Ariz., and another Republican senator last week prompted a new round of questions about whether McCain's legendary temper is becoming a liability in his campaign for the presidency. In a private meeting just off the Senate floor, McCain got into a shouting match with Sen. John Cornyn, R-Texas, over details of a compromise on immigration legislation. Cornyn accused McCain of being too busy with his campaign to take part in the negotiations, prompting McCain to utter, "F... you." McCain spokesman Danny Diaz acknowledged that a "spirited exchange" took place but said media reports over the weekend had exaggerated its intensity. McCain's political handlers have plenty of experience in explaining McCain's salty language and strident attacks. His temper has ranged far and wide, directed at other members of the Senate, congressional staffers, heads of government agencies, corporate chieftains, high-ranking military officers and teenage campaign volunteers.

        McCain has shouted at people for any number of reasons, including errors of judgment, disagreements on public policy and even how to set up a podium. "In McCain's world, there aren't legitimate differences of opinions," said David Keene, chairman of the American Conservative Union, which differs with McCain on some conservative issues. "There is his way and there is evil. That is how he approaches issues. That is one of the reasons for conservative nervousness about him." His temper has been an issue for years. In the 2000 presidential primaries, McCain was dubbed "Senator Hothead" by Newsweek.

        That year, he won endorsement from only a few Senate colleagues, not so much because of his conservative credentials but because of his frequent attacks and volatile personality. "McCain notes," which offer apologies after heated words, are held by many members of Congress. McCain has written about what he describes as his impatience in three books. "Although I try to refrain from being intentionally discourteous, I am demonstrative in showing my displeasure. I am often impatient and can speak and act abruptly," he wrote in "Why Courage Matters" in 2004. In a 1999 interview with the Los Angeles Times, McCain admitted, "I do everything I can to keep my anger under control. I wake up daily and tell myself, 'You must do everything possible to stay cool, calm and collected today.' "

        One bureaucrat who felt McCain's wrath was former NASA administrator Daniel Goldin, who was called in by McCain in 1999, not long after a $125 million probe crashed on Mars because of confusion over the use of metric units. McCain's Senate Commerce Committee had oversight over NASA. "McCain went ballistic the moment Goldin walked into McCain's office," said a participant in the meeting. "He was shouting and using profanity, saying he was sick of NASA's screw-ups. It went on for a few minutes and then he kicked Goldin out of the office." Goldin started walking down the hallway but was summoned back to the senator's office by a McCain aide. "When he came back in, McCain started yelling at Goldin all over again. And then McCain kicked Goldin out a second time, before he ever said a word," the source said.

        Julian Zelizer, a history and politics professor at Boston University, said the spectacle of a senator getting into "yelling matches with his colleague" undermines his leadership image. "It is an issue he needs to be cautious with," Zelizer said. Until the latest flap, McCain had managed lately to quell the image that he is easily angered. His campaign leadership took sharp exception to the entire matter, characterizing it as political theater. "If something is written every time members of Congress and leading politicians, behind closed doors, try to get the other's attention, and tempers flare, you'd run out of ink," said John Weaver, McCain's chief campaign strategist. Nonetheless, the issue was used effectively in the 2000 primaries by opponents who planted rumors that he was unstable because of his years as a prisoner of war in North Vietnam. Although some ex-POWs did have psychological problems, McCain came through the experience in good psychological shape, said Navy doctors.

        As for his temper, "John McCain is John McCain," said Dr. Bob Hain, director of the Navy's Robert E. Mitchell Center for Prisoner of War Studies. Meanwhile, Democrats said McCain was in deep trouble on the matter. "Apparently, John McCain's do-anything-to-win campaign strategy doesn't include anger management classes," said Damien LaVera, Democratic National Committee spokesman. "We have had eight years of cowboy diplomacy and McCain is even more of a cowboy than the current president," said Roger Salazar, a Democratic political consultant who worked for John Edwards in 2004. "The public wants somebody who is strong but can sit across from allies and adversaries without lunging at them."

        (c) SubmergingMarkets, 2008

        February 12, 2008 at 03:45 PM | Permalink | Comments (0) | TrackBack

        Monday, January 01, 2007

        REMEMBERING THE GENERAL
        Part I: Overview
        James S. Henry

        Mascaras1_small_1


        I was born a Chilean,  I am a Chilean,
        I will die a Chilean.
        They, the fascists, were born traitors,
        live as traitors, and will be remembered forever as fascist traitors.

        -- Orlando Letelier, 1932-76


        Both Chile's General AugustoPinocaaaa_1 Pinochet and Saddam Hussein, two formerly US-backed dictators, have at last had to confront Higher Authorities that they were unable to intimidate, compromise, or evade.

        Hang31__1However, unlike Saddam, who was hanged in the middle of a night on December 30, 2006, by a nervous Iraqi Government tribunal,  Pinochet managed to escape human justice for his crimes, and died of natural causes at the age of 91. 

        How does the General deserve to be remembered? Did he not richly deserve the same fate as Saddam? And how did he manage to avoid it? 

        Was he simply a ruthless, corrupt right-wing tyrant, the puppet of foreign interests and their handmaidens, like ITT,  Nixon, Kissinger, the CIA, George H.W. Bush, Margaret Thatcher, and Reagan?   

        Giulianipinochet1_2 Or was he, as many of his defenders still maintain,  an essential bulwark against the Leftist Horde in Latin America?

        If perhaps not exactly the world's staunchest defender of political liberalism, was he at least -- as Thatcher, some neoliberal  economists, The Wall Street Journal, and even supposedly "liberal" newspapers like The Washington Post now maintain --  a staunch defender of  "free markets" who deserves much of the credit for Chile's economic performance since the 1970s?

        As we'll see,  most conventional portraits of General Pinochet are flat-out wrong, not only with respect to his alleged role in combating Soviet expansionism, but also with respect to his regime's alleged beneficial influence on Chile's economy.

        First,  Pinochet was at best only a non-essential bit player in the anti-Soviet struggle.  Allende's broad-based social democratic "revolution" was never taken seriously by Moscow or Havana. Nor was it strong enough to mount a Cuban-style revolution, or even to precipitate a civil war. Left to its own devices, Allende's "leftish" alliance would probably have burned itself out by the next election or plebiscite in 1974.

        Images10Furthermore, even if Chile's leftists had somehow managed to create a "Soviet Republic of Patagonia," tiny Chile was already completely surrounded by other countries that had much greater strategic importance to the West.

        By 1973, they either already had their own right-wing dictatorships (Brazil, Paraguay, and Bolivia), or were well on the way (Argentina and Uruguay).

        Images11In short,  killing off Chile's long-standing democracy was gratuitous -- the political equivalent of exaggeratinging Iraq's "slam dunk" WMD threat
        .

        All the repression was for nothing.

        Fig_74_milton_friedman_5On the economic front, Pinochet's interregnum was also a costly, needless detour. 

        Indeed, one key reason why Chile's so-called "economic miracle" has proved to be so successful in the long run -- with great help from human capital finally brought back home by many well-educated returning "Leftists" who were  driven out of country in 1973-90 -- was precisely because Pinochet's first decade of experiments with "Los Chicago economics" proved to be so disastrous. Giving Pinochet credit for the subsequent corrective reforms is like crediting Leonid Brezhnev with last decade's revival of economic growth in Eastern Europe.

        (For more details, see Parts II and III...)

         

           


        January 1, 2007 at 01:52 PM | Permalink | Comments (0) | TrackBack

        Thursday, November 30, 2006

        ASSASSINATION POLITICS
        Learning the Lessons from Decades of "Conspiracies"
        James S. Henry

        Gemayelglass_416body_afp_1 Conspiracy buffs of the world, rejoice!   High-stakes political assassinations and the_42343976_litvinenko_pa203b  inscrutable tales of intrigue that inevitably accompany them are back in the headlines!

        In the last few months we've had  new evidence surfacing about old cases like RFK and JFK that have been unresolved for decades.

        We also have many exciting new cases emerging from places like London, Beirut, Moscow, and Gaza -- cases that promise to be unresolved for decades to come. 

        It cetainly won't  be possible to resolve all these cases here, though a few winks and Jfkbobby_1 nods toward our favorite theories will be hard to resist.

        However, there are some very important implications to be drawn from examining  these political assassination cases side-by-side  -- especially for the bloodless abstractions put forth by the tiny, vocal group of unabashed neoimperialists at the Council on Foreign Relations, the Harvard Law Schoolthe National Review, and the American Enterprise Institute who have  been trying to rehabilitate assassination as an acceptable tool of US foreign policy.      

        Andrei_kozlovUPSURGE

        In recent weeks we've been treated to a flurry of assassination news, including the dramatic polonium -210Anna_politkov_1 poisoning of former KGB agent and Putin critic Alexander Litvinenko in London;  the gangland-style slayings of investigative journalist Anna Politkovskaya and Andrei Kozlov, Deputy Governor of the Russian Central Bank, in Moscow; the fatal ambush of the Lebanese Christian Falangist leader Pierre Gemayel in Beirut; and UN approval for an international tribunal to pursue another Lebanese case, the February 2005 slaying of Prime Minister Rafik Hariri.

        _42342514_rafik_ap203bodyWhile players like the Russian mafia and other "private enemies" cannot be completely ruled out in these cases, it is suspected that most of them were "political assassinations," in the sense that the perpetrators were sponsored by hostile states or key factions within them, which were motivated by the  desire to eliminate politically-influentlal enemies -- often across international borders.

        In principle such political assassinations are to be distinguished from purely-terrorist attacks, as well as from attempts to eliminate "military" leaders  -- for example, the_41844670_newspaper_b203_ap1 June 2006 US Predator attack on Abu Musab Al-Zarqawi,  the July 2006 explosion that killed the Chechnyan rebel Shamil Basayev, and Israel's innumerable targeted assassinations in the West Bank and Gaza.

        BasayevIn practice these distinctions often break down, given the fact that assassinations also terrorize, and that leaders like Basayev, Sheik Yassin, and  Al-Zarqawi have also played important political roles in insurgent organizations.

        But part of the price of being an insurgent from a state-less organization, rather than a conventional politician, journalist,  agent of the state, or crusading bishop (Romero) is that one's enemies find it much more legally and socially acceptable, as well as more useful, to kill quite openly, and to take credit for the achievement.

        This kind of official credit-taking rarely occurs for the type of cases cited earlier. Even if the targets happen to be corrupt politicians or blood-stained former KGB agents, they are deemed to be more "respectable" than the typical insurgent; indeed, conspiring to eliminate them is usually against the law. So responsibility must be hidden -- in many cases, for decades.

        CASE REOPENED?

        Images1_4This brings us to the other recent events that have brought this subject back to the surface. These include the 43rd anniversary of the (by now faintly-observed) assassination of JFK on November 22, 1963 in Dallas, and the recent release of "Bobby," a feature film about events at the Ambassador Hotel in Los Angeles on RFK's last day, June 5, 1968.

        They also include a striking news report that aired on BBC 2 on November 20,Images_5 highlighting the new findings of filmmaker Shane O'Sullivan about the RFK assassination. According to O'Sullivan, a careful reexamination of photos taken of the crowd that fateful night at the Ambassador has disclosed the presence, in proximity,  of at least three long-time CIA covert operatives who had already become notorious among JFK "assassination buffs" (we wear that label proudly)  for other reasons. The men in question were not  random associates -- they had all held senior positions in 1962-64 at JM/WAVE, the huge Miami CIA station that was heavily involved in anti-Castro plots and the recruitment of allies among Cuban exiles, US veterans, and the Mafia.

        Ciamorales1According to O'Sullivan, these were Gordon Campbell, the former Deputy Director of  JM/WAVE; George Joannides, the former Director of Psychology Warfare at JM/WAVE;  and most interesting of all, David Sanchez Morales, a senior assassinations and sabotage expert who also worked for the CIA in Venezuela, Uruguay, Laos, and Vietnam, and also reportedly developed a close relationship with Chicago mob boss John Rosseli. Roselli's body ended up in an oil drum off the coast of Miami, a week before he was supposed to testify before the House Select Committee on Assassination that was reinvestigating the JFK case.  

           

        November 30, 2006 at 03:58 AM | Permalink | Comments (0) | TrackBack