Submerging Markets™

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

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.

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, Mexico, 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 information, 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 preferred 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 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

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

The US Congress is busy working hard on US Treasury Secretary 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.

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.

 

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

"“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 Street 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.

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

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.

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.   

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).

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.

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

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.

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.   

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. 

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

NARRATIVES, NOT IDEASMcCain's Contradictory, Fearful Vision of the Next Four YearsJames S. Henry

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 the 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, the 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," "balanced 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" 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.

>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 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.

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? 

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? 

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".

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  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.

Lest 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.

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.

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

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