Monday, 31 March 2008

The new Brahmins

By Chan Akya

Imagine if you fancied the roulette tables in Macau, but had a nasty habit of losing US$10,000 every time you landed there. Most sane people would get some kind of psychiatric treatment that prevented them from ever getting to Macau under those circumstances. Supposing though that a rich uncle compensated you for all your losses in Macau and also paid for your travel and hotel stay. Are you likely to return to Macau after losing a whopper this week, or not?

Sitting back and absorbing the sheer scale of fraud that was perpetuated on the global financial system last week in the name of a putative rescue of Bear Stearns, I wrote "When trust goes down the drain", which laid out the sound principles of central banking as enunciated by Walter Bagehot that have been serially violated in this crisis. Even as most left-leaning commentators brush off the concerns of the so-called "moral hazard" crowd of which this author is a card-carrying member, the fact of the matter is that we are now in the middle of a transformation.

Ruminating a bit more in the morass though, especially after the eager buyer upped his price fivefold this week, it became apparent that the Ben Bernanke Fed has merely emulated its alleged bete noire, namely the Bank of Japan, whose failed policies in the 1990s caused a lost decade of growth for the country and more importantly ensured that its demographic nightmare simply accelerated.

So "kudos" indeed to the Fed for achieving in a couple of months what the Soviet Union could not muster in its seven decades of existence - namely to destroy global market capitalism, chiefly through the demise of the Anglo-Saxon system.

In rescuing Bear Stearns, the Fed was in good company, following the Bank of England and the European Central Bank (ECB) in bailing out large financial institution using taxpayers' money that they strictly did not have to account for to anyone. Yes, the details are somewhat different, namely that shareholders got different outcomes in each case and the level of oversight responsibility was different, but the inescapable conclusion from all this is that Group of Seven (G7)central bankers are utterly corrupt besides being terrifyingly incompetent.

As I wrote in a previous article ("Euro-trash, Asia Times Online, March 11, 2008), the ECB sowed the seeds for its own policy inflexibility by blithely rescuing every bank that came begging on its knees. The fractured nature of the European economy, its lack of service and system integration and mind-numbing political details all allowed the mandarins of the ECB to quietly pass favors to their constituent banks.

While on the above-referenced article, a reader wrote in to complain that I had merely misunderstood the superiority of Europe, and invited me to Sweden, which is apparently the Mecca of something called market socialism. As it turns out, the region boasts the worst record of banking losses and subsequent taxpayer rescues, with an average of 18% of gross domestic product following the 1991-92 bust.

Since the government provided assistance without taking over equity capital, tax burdens needed to be higher for longer for these countries to pay for the mess. Thus, people's natural tendency to grow and become richer was sacrificed at the altar of this demon called market socialism. The net result is that Scandinavia boasts the highest incidence of suicides in the Western world - yes, I am sure to tell the Asia Times Online reader to expect me to begin living in this paradise soon enough.

To think that the original models for the Fed actions from the middle of last year were set in the Scandinavian and Japanese crises of the last decade only makes us more puzzled, rather than less. The aftermath of those crises was to stunt the economic growth of both regions (Scandinavia and Japan) once specific extraneous influences are removed from the picture - for example, the rise in oil prices that benefited Norway and the technology bubble that helped a part of the Japanese economy in the 1990s.

The Japanese merged a bunch of banks together but refused to take the necessary steps that could have made the combined banks more efficient in terms of utilizing scarce resources such as capital and good people. Scandinavian banks attempted to split the "good" and "bad" banks, but eventually put everything back together without any serious change in industrial structure.

Meanwhile, to absorb the costs of the rescues, the governments had to issue billions in new debt, which had to be bought by the rescued banks at artificially low yields because the governments would have themselves been bankrupted by higher charges.

As the system's decline was arrested with the strong government backing, banks found themselves in new problem areas - namely that they did not know what to do with the billions in deposits that were sitting in their books. In the case of Japan, this proved to be the main reason for a slew of misadventures ranging from copper trading to the current bout of CDO (collateralized debt obligations) investment losses.

For all the protests of the Fed and its lackeys on what was done last week, it seems unavoidable that banks will not emerge as protected species, a super-caste of companies, in the new economic environment. The Fed, along with other G7 central banks, has clearly demonstrated that it will not allow any financial company to go bust.

Having rescued a financial institution that was not even under its regulatory purview, it seems only a matter of time before global central banks start rescuing other frontiers of capitalism, namely finance companies, insurance firms and investment management outfits. Thus, everything in the financial world becomes superior to all else in the system, for the sake of national cohesion or any other communist-era slogan that you care to mumble.

The banks are in turn likely to take more risk with their capital going forward, not less, now that they know that the central banks can be counted on to write them checks in perpetuity. Indeed, as Bear was merged into a commercial bank, it stands to reason that the biggest risk-takers will feel emboldened to trade their way out of billions in losses by putting on exotic bets. Like the gambler in the first paragraph, today's banks know that central banks are too afraid to call their bluff.

This super-caste of bankers get to lord it over the rest of Western capitalism for the foreseeable future. Companies will have to accept higher borrowing costs, individuals will see their credit cards shredded, all in order for society to continue paying for the sins of bankers.

In ancient India, a bunch of people pulled off very nearly the same trick. While the Brahmins of today's India face wrenching socio-political changes that have helped to turn the clock back on their dominance and allowed greater opportunities to emerge for other groups, the very opposite event has taken place in G7 countries over the course of the past 12 months. Welcome then to the new caste system that appears set to take over the global economy, led by its new Brahmins - namely the bankers.

Trust goes down the drain
By Chan Akya

Conversation from 10 years ago: relating to John Meriwether of Long Term Capital Management (LTCM) calling his friend at Bear Stearns:
Bear Stearns - How much are you down by, John?
John - Half.
Bear Stearns - You are finished.
John - But I have billions in cash, more fund raising to come, etc. Bear Stearns - John, when you are down by half, people figure you can go all the way. You are finished.

My article published on Friday (see Forget Spitzer, fire Bernanke, Asia Times Online, March 15, 2008) touched upon the unconventional rescue of a large securities firm by the Fed last Monday when it announced a new refinancing tool to help Wall Street. It appears that the firm in question was Bear Stearns, an ironic throwback to the advice given to LTCM that I quoted above.

Over the weekend, JPMorgan Chase agreed to buy Bear Stearns for US$2 per share, a fraction of the $30 or so that the company closed at on Friday, itself about 50% down for the day. The infamous rule of "down by half, finished" appears to have struck none other than the very firm that used it to measure its risk outstanding with other funds. Full credit for what happened over the weekend though must go to what the Fed did on Friday.

On Friday, the Fed announced a more direct rescue of Bear Stearns, by providing back-to-back financing through JPMorgan wherein the latter would hand over all eligible securities held by Bear Stearns to the Fed, and would pass along all Fed credit to the investment bank. Essentially, JPMorgan had the role of a middleman with the ultimate risk being held by the Fed as all financing to Bear Stearns was "without recourse" - a legal term that essentially means, once you make a loan against something, you are pretty much on your own, pal.

Glass Steagall
Following from the near collapse of the US financial system in the earlier part of the 20th century, authorities moved to separate normal banking activities from those of investment banks. The separation has become increasingly blurred in recent times, but in effect while the Fed is responsible for commercial banks, it does not have a direct role in the financing and operations of the investment banks. Each of the regional Fed banks (for example the Federal Reserve of New York, or NY Fed as its more commonly known) has responsibility for all commercial banks registered in New York, and so on. Thus, if any of these banks had a problem such as bank run, the NY Fed would step in to help that institution.

Bear Stearns, being an investment bank, did not have direct access to the Fed "window", leaving it at a competitive disadvantage to commercial banks such as Citigroup, JPMorgan and Bank of America when it came to the process of accessing liquidity. Therefore, on Monday as a first step the Fed made a concession to the very kind of collateral that investment banks were holding in large volumes, such as residential mortgage backed securities (RMBS). This kind of collateral is not a big problem for commercial banks to hold - indeed it can be argued that making mortgages to individuals is their main business - therefore there isn’t much of an issue keeping these securities on their books funded by cheap deposits left by increasingly scared individuals across the US.

Investment banks on the other hand saw their cost of funding more than triple since last year and more importantly, found that many tools for refinancing were completely shut. The process of selling mortgage-backed securities had already ground to a complete halt, even as defaults were rising on the underlying home loans - essentially a dual hit for the investment banks.

As I wrote in the above article, there was clearly a break in the system wherein many of these commercial banks refused to accept securities as collateral from investment banks even if the onward refinancing with the Fed was made available. This is potentially due to two concerns: 1. Firstly, some commercial banks would have exceeded their specific credit limits to various investment banks having provided them with ever increasing lines of credit against difficult-to-value collateral over the past 12 months. 2. Secondly, while these securities could be refinanced with the Fed, they were all "with recourse", ie if there was a problem with the quality of collateral for example through a ratings downgrade, the Fed could demand its money back from the commercial bank while the latter could possibly not hope to make a successful claim against a failing investment bank.

Matters seemed to have proceeded far faster than even I had expected since Wednesday last week when I wrote the above article. In effect, one or more commercial banks had refused to lend to the likes of Bear Stearns under "any circumstances", and even refused to accept a modicum of risk that exists in all market transactions such as buying and selling foreign exchange, settling interest rate contracts and credit derivative contracts.

Thus, on Friday, the Fed was forced to act directly to help Bear Stearns by providing it with unprecedented access to liquidity. The initial reaction to the announcement was a sharp jump in the share price of Bear Stearns in pre-market trading.

However, even equity investors are not that stupid these days. While they still can be accused of living in aerial castles with respect to the rest of the stock market, at least their view of the risks of holding stock in securities firms has matured over the past few months.

Last year at one point, Bear Stearns’ stock was trading close to $180. At the beginning of last week, it was trading around $60, falling from $80 at the beginning of March. On Friday, after first rising a few dollars, around 10% in pre-market, the stock opened more than 10% lower and continued to fall.

Even the most gullible equity investor could no longer be fooled about the turn of events. Bear Stearns needed a rescue because it was going bust, and that was all there was to the positive spin on the story from the NY Fed, and all discussions from the company about its real book value were hollow.

Financial institutions survive purely on the confidence of investors, who after all trust them to hold significantly more assets than their capital bases would allow. A typical investment bank with a market value of $10 billion would typically have assets of over $200 billion, to give you an idea of the kind of leverage we are talking about here. I would hate to analyze the figures of Bear Stearns on these counts because many of those assets were impaired, and partially that was already reflected in the reduced stock capitalization.

Going forward
Much like a financial game of whack-the-mole, the rescue of Bear Stearns puts in question the next potential victim. As I noted in the Friday article, other investment banks may be better off for the immediate future, but all have similar existential crises in front. Why should any investor trust them to manage assets far in excess of their capital bases?

Their financial results for the first quarter ended February, due over the course of this week, will inevitably raise issues of potential downside and worst-case scenarios. No bank prepares for all its depositors to turn up on the same day to demand their money back, and neither does any investment bank.

A few weeks back, I wrote Mr Paulson, Tear Down This Wall (Street) (Asia Times Online, February 16, 2008) purely because of a deeply held personal belief that a major investment bank would go bust in 2008. I certainly did not know that it would be Bear Stearns nor that it would happen by the first quarter itself. In any event, the reason for that article was to implore US authorities not to expand the circle of trouble by bailing out investment banks because that would only make problems worse for the entire global financial system.

It appears that US financial authorities have been overly influenced by their European counterparts and have chosen to effectively nationalize troubled companies. That process did not work in Japan where banks remain moribund more than a decade after these efforts began in earnest, nor in countries like France where banks seem to lurch from one crisis to the next. Thankfully, market circuit-breakers in the US still work wherein the firms being asked to buy troubled investment banks are exerting their own pressure on price - as JPMorgan showed by offering a price of $2 per share rather than the $30 closing price (or even the $20 that the weekend press indicated).

All commercial banks accepting to purchase investment banks would put their own existence in jeopardy, not the least because of the sheer size of these companies as well as their complexity. Accounting standards and regulations are vastly different between these companies due to many decades of Glass Steagall.

The acquisition of Bear by JPMorgan means that investors cannot trust the reported book value of US financial firms anymore. If they cannot trust investment banks, can the trust of commercial banks be really all that higher? The discount to book value should tell the Fed and all other central banks an important truth namely that the bailers themselves may need to be bailed out in time.

Sunday, 30 March 2008

In Booming India, Hunger Kills


In Booming India, Hunger Kills
6,000 Kids Daily

By Mridu Bhandari

29 March, 2008

Two million children in India die and turn into statistics every year. That's about 6,000 deaths everyday. A CNN-IBN Special Investigation travelled to the rural heartlands of UP to document deaths and cases of malnutrition for a special edition of 30 Minutes. Here's the first installment from UP's Varanasi and Lalitpur districts.

Jaharunnissah lost her only son to hunger about two months ago. Four-year-old Khusbuddin was emaciated and weighed a mere 6.5 kg at the time of his death.

"Woh kuposhan ka shikar tha usko main doodh dava poora nahin kar paati thi paise ke kaaran is vajay se uski maut ho gayi. (I could not fend for his food and medicine. He died of malnutrition)," she says.

Abandoned by her husband, Jaharunnissah is trying to piece her life together. But at the end of one day of toil embroidering sarees, she is paid a meager Rs 10 or Rs 15.

"Aaj agar mere bachhe ka ilaaj ho jaata to mera bachha bach jaata is baat ka mujhe dard rehta hain ki paise na hone ke kaaran aaj maine apne bachhe ko kho diya. (I wish I hadn't lost my son. The pain of losing a child because of lack of money to feed him is unbearable)," says an inconsolable Jaharunnissah.

A few kilometers away, in another village near Varanasi, six-year-old Shamim is also battling malnutrition. Unlike other kids his age, he is neither playful nor talkative. A severe deficiency of proteins and calories has given him a bloated belly and reduced his immunity.

Says his mother, Zohra, "Isko TB aur gurde mein kharabi hai. haath per fool jata hai, saas phul jata hai (He is suffering from TB and has kidney trouble too. His limbs swell up and he faces breathing difficulty).

Nearly 60 per cent children in Lalitpur district of Uttar Pradesh are malnourished. In the last 9 months, in Talbahat block alone, 183 cases were reported, out of which 116 were categorized as "severe".

Local doctors say the biggest challenge is convincing parents that their children are undernourished.

"Pata hi nai hai unko. Yahan aake unko samjhaya jata hai ki bachcha bahut hi zyada weak hai. apko yahan treatment dene ki zaroorat hai. admit kijiye, bahut convince karke unhen yahan admit karna padta hai (They don't even realise there's something wrong. We have to tell them their child is weak and needs treatment. It takes a lot of convincing for them to realise this),"says nutrition counsellor, Community Health Centre, Shilpi Sahariya.

Very often, there are no medical facilities. Primary health centres in many places are understaffed and almost non-functional.

Says Dr Sanjeev Kumar of Primary Health Centre (Hingora), "PHC mein rehne ke liye doctors ko staff milna chahiye, ward boy hona chahiye, sweeper hona chahiye, nurses honi chahiye kuch bhi nahin hain. final toh patient ko hi face karna hoga (We need doctors, sweepers, nurses and ward boys to run a PHC. There's nothing here. Ultimately the patient has to suffer.)"
Abject poverty, lack of basic health care facilities and poor health of rural women are all killing India's underpriviledged, malnourished children. The country has consistently has let down children like Shamim and today malnutrition rates in India are even worse than Sub Saharan Africa.

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Friday, 28 March 2008

Where has all the rage gone?

March, 28 2008

By Tariq Ali
Source: The Guardian

A storm swept the world in 1968. It started in Vietnam, then blew across Asia, crossing the sea and the mountains to Europe and beyond. A brutal war waged by the US against a poor south-east Asian country was seen every night on television. The cumulative impact of watching the bombs drop, villages on fire and a country being doused with napalm and Agent Orange triggered a wave of global revolts not seen on such a scale before or since.

Students hurling projectiles against the police on the Boulevard Saint Germain, Paris, May 6 1968. Photograph: Bruno Barbey/Magnum

If the Vietnamese were defeating the world's most powerful state, surely we, too, could defeat our own rulers: that was the dominant mood among the more radical of the 60s generation.

In February 1968, the Vietnamese communists launched their famous Tet offensive, attacking US troops in every major South Vietnamese city. The grand finale was the sight of Vietnamese guerrillas occupying the US embassy in Saigon (Ho Chi Minh City) and raising their flag from its roof. It was undoubtedly a suicide mission, but incredibly courageous. The impact was immediate. For the first time a majority of US citizens realised that the war was unwinnable. The poorer among them brought Vietnam home that same summer in a revolt against poverty and discrimination as black ghettoes exploded in every major US city, with returned black GIs playing a prominent part.

The single spark set the world alight. In March 1968, students at Nanterre University in France came out on to the streets and the 22 March Movement was born, with two Daniels (Cohn-Bendit and Bensaid, Nanterre students then, and both still involved in green or leftist politics) challenging the French lion: Charles de Gaulle, the aloof, monarchical president of the Fifth Republic who, in a puerile outburst, would later describe as chie-en-lit - "shit in the bed" - the events in France that came close to toppling him. The students began by demanding university reforms and moved on to revolution.

That same month in London, a demonstration against the Vietnam war marched to the US embassy in Grosvenor Square. It turned violent. Like the Vietnamese, we wanted to occupy the embassy, but mounted police were deployed to protect the citadel. Clashes occurred and the US senator Eugene McCarthy watching the images demanded an end to a war that had led, among other things, to "our embassy in Europe's friendliest capital" being constantly besieged. Compared with the ferment elsewhere, Britain was a sideshow (" sleepy London Town there's just no place for a street fighting man," Mick Jagger sang later that year): university occupations and riots in Grosvenor Square did not pose any real threat to the Labour government, which backed the US but refused to send troops to Vietnam.

In France, the existentialist philosopher Jean-Paul Sartre was at the peak of his influence. Contrary to Stalinist apologists, he argued that there was no reason to prepare for happiness tomorrow at the price of injustice, oppression or misery today. What was required was improvement now.

By May, the Nanterre students' uprising had spread to Paris and to the trade unions. We were preparing the first issue of The Black Dwarf as the French capital erupted on May 10. Jean-Jacques Lebel, our teargassed Paris correspondent, was ringing in reports every few hours. He told us: "A well-known French football commentator is sent to the Latin Quarter to cover the night's events and reported, 'Now the CRS [riot police] are charging, they're storming the barricade - oh my God! There's a battle raging. The students are counter-attacking, you can hear the noise - the CRS are retreating. Now they're regrouping, getting ready to charge again. The inhabitants are throwing things from their windows at the CRS - oh! The police are retaliating, shooting grenades into the windows of apartments...' The producer interrupts: 'This can't be true, the CRS don't do things like that!'

" 'I'm telling you what I'm seeing...' His voice goes dead. They have cut him off."

The police failed to take back the Latin Quarter, now renamed the Heroic Vietnam Quarter. Three days later a million people occupied the streets of Paris, demanding an end to the rottenness of the state and plastering the walls with slogans: "Defend The Collective Imagination", "Beneath The Cobble- stones The Beach", "Commodities Are The Opium Of The People, Revolution Is The Ecstasy Of History".

Eric Hobsbawm wrote in The Black Dwarf: "What France proves is when someone demonstrates that people are not powerless, they may begin to act again."

I had been planning to head for Paris - it was something we had been discussing at the paper - but then I received a late-night phone call. A posh voice said, "You don't know who I am, but do not leave the country till your five years here are up. They won't let you back." In those days, citizenship for Commonwealth citizens was automatic after five years. I would not complete my five years until October 1968. Already Labour cabinet ministers had been discussing in public whether or not I could be deported. Friendly lawyers confirmed I should not leave the country. Clive Goodwin, the publisher of our mag, vetoed the trip and went off himself.

I went a year later to help Alain Krivine, one of the leaders of the May 1968 revolt, in his presidential campaign, standing for the Ligue Communiste Révolutionnaire. As we touched down at Orly airport, returning from a rally in Toulouse, the French police surrounded the plane. "Hope it's you, not me," muttered Krivine. It was. I was served an order banning me from France which stayed in force until François Mitterand's election many years later.

The revolution did not happen, but France was shaken by the events. De Gaulle, with a sense of history, considered a coup d'état: in early June, he flew from a military base to Baden-Baden, where French troops were stationed, to ask whether they would support him if Paris fell to the revolutionaries. They agreed but demanded rehabilitation for the ultra-right generals whom De Gaulle had fired because they opposed pulling out of Algeria. The deal was done. Yet De Gaulle slapped down his interior minister for suggesting that Sartre be arrested: "You cannot imprison Voltaire," he ruled.

The French example did spread, worrying bureaucrats in Moscow as much as the ruling elites in the west. An unruly and undisciplined people had to be brought to heel. Robert Escarpit, a Le Monde correspondent, wrote on July 23 1968: "A Frenchman travelling abroad feels himself treated a bit like a convalescent from a pernicious fever. And how did the rash of barricades break out? What was the temperature at five o'clock in the evening of May 29? Is the Gaullist medicine really getting to the roots of the disease? Are there dangers of a relapse?... But there is one question that is hardly ever asked, perhaps because they are afraid to hear the answer. But at heart everyone would like to know, hopefully or fearfully, whether the sickness is infectious."

It was infectious. In Prague, communist reformers - many of them heroes of the anti-fascist resistance during the second world war - had that spring already proclaimed "socialism with a human face". The aim of Alexander Dubcek and his supporters was to democratise political life in Czechoslovakia. It was the first step towards a socialist democracy and was seen as such in Moscow and Washington. On August 21, the Russians sent in the tanks and crushed the reform movement.

In every west European capital there were protests. The tabloid press in Britain was constantly attacking leftists as "agents of Moscow" and was genuinely taken aback when we marched to the Soviet embassy, denouncing the invasion in strong language and burning effigies of the bloated Soviet leader, Leonid Brezhnev. Alexander Solzhenitsyn later remarked that the Soviet invasion of Czechoslovakia had been the last straw for him. Now he realised that the system could never be reformed from within but would have to be overthrown. He was not alone. The Moscow bureaucrats had sealed their own fate.

In Mexico, students took over their universities, demanding an end to oppression and one-party rule. The army was sent in to occupy the universities and did so for many months, making it the best-educated army in the world. On October 2 - with the eyes of the world on Mexico City 10 days before the Olympic games were due to begin there - thousands of students poured on to the streets to demonstrate. A massacre began at sunset. Troops opened fire on the crowd listening to speeches in one of the city's main squares - dozens were killed and hundreds more injured.

And then in November 1968 Pakistan erupted. Students took on the state apparatus of a corrupt and decaying military dictatorship backed by the US (sound familiar?). They were joined by workers, lawyers, white-collar employees, prostitutes, and other social layers, and despite the severe repression (hundreds were killed), the struggle increased in intensity and, the following year, toppled Field Marshal Ayub Khan.

When I arrived in February 1969, the mood of the country was joyous. Speaking at rallies all over the country with the poet Habib Jalib, we encountered a very different atmosphere from that in Europe. Here power did not seem so remote. The victory over Ayub Khan led to the first general election in the country's history. The Bengali nationalists in east Pakistan won a majority that the elite and key politicians refused to accept. Civil war led to Indian military intervention and that ended the old Pakistan. Bangladesh was the result of a bloody caesarean.

The glorious decade (1965-75), of which the year 1968 was only the high point, consisted of three concurrent narratives. Politics dominated, but there were two others that left a deeper imprint - sexual liberation and a hedonistic entrepreneurship from below. We had cause to be grateful for the latter. We were constantly appealing for funds from readers when I edited The Black Dwarf in 1968-69. One day a guy in overalls walked into our Soho office and counted out 25 grubby £5 notes, thanked us for producing the paper and left. He would do this every fortnight. Finally, I asked who he was and if there was a particular reason for his generosity. It turned out he had a stall on Portobello Road and, as to why he wanted to help, it was simple. "Capitalism is so non-groovy, man." It's only too groovy now and far more vicious.

In some ways, the 60s were a reaction to the 50s, and the intensity of the cold war. In the US, the McCarthyite witch-hunts had created havoc in the 50s, but now blacklisted writers could work again; in Russia, hundreds of political prisoners were released, the gulags were closed down and the crimes of Stalin were denounced by Khruschev as eastern Europe trembled with excitement and hopes of rapid reform. They hoped in vain.

The spirit of renewal infected the realm of culture as well: Solzhenitsyn's first novel was serialised in the official literary magazine, Novy Mir, and a new cinema took over most of Europe. In Spain and Portugal, ruled at the time by Nato's favourite fascists, Franco and Salazar, censorship persisted, but in Britain DH Lawrence's Lady Chatterley's Lover, written in 1928, was published for the first time in 1960. The book, in its complete form, sold two million copies.

Following Simone de Beauvoir's pioneering work in The Second Sex (1949), Juliet Mitchell fired off a new salvo in December 1966. Her lengthy essay, Women: The Longest Revolution, appeared in the New Left Review and became an immediate point of reference, summarising the problems faced by women: "In advanced industrial society, women's work is only marginal to the total economy... women are offered a universe of their own: the family. Like woman herself, the family appears as a natural object, but it is actually a cultural creation... Both can be exalted paradoxically, as ideals. The 'true' woman and 'true' family are images of peace and plenty: in actuality they may both be sites of violence and despair."

In September 1968, US feminists disrupted the Miss World competition in Atlantic City, warning shots in a women's liberation movement that would change women's lives by demanding recognition, independence and an equal voice in a male-dominated world. The cover of the January 1969 issue of Black Dwarf dedicated the year to women. Inside, we published Sheila Rowbotham's spirited feminist call to arms. (As I write this, Professor Rowbotham, now a distinguished scholar, has her job under threat from the ghastly, grey accountants who run Manchester University. We are now in an epoch of production-line universities with celebrities paid fortunes to teach eight hours a week and genuine scholars dumped in the bin.)

And, yes, there was also the pleasure principle. That the 60s were hedonistic is indisputable, but they were different from the corporatised version of today. At the time they marked a break with the hypocritical puritanism of the 40s and 50s, when censors prohibited married couples being shown on screen sharing a bed and pyjamas were compulsory. Radical upheavals challenge all social restrictions. It was always thus.

In the prefigurative London of the 18th century, sexual experiments required the cover of break-away churches such as the Moravians and surreal Swedenborgians (for whom "love for the holy" was best expressed in the "projection of semen"): both preached the virtues of combining religious and sexual ecstasy. Sexual orgies were a regular feature of Moravian ritual, according to which penetration was akin to entering the wounds in Christ's side. William Blake and his circle were heavily involved in all of this and some of his paintings depicting this world were censored at the time. I hope this does not come as too much of a shock to my old friend Tony Benn and others who sing Jerusalem without realising the hidden meaning of:

Bring me my bow of burning gold!

Bring me my arrows of desire!

Bring me my spear!

Homosexuality in Britain was decriminalised only in 1967. Gay liberation movements erupted with activists demanding an end to all homophobic legislation and Gay Pride marches were launched, inspired by the Afro-American struggles for equal rights and black pride. All the movements learned from each other. The advances of the civil rights, women's and gay movements, now taken for granted, had to be fought for on the streets against enemies who were fighting the "war on horror".

History rarely repeats itself, but its echoes never go away. In the autumn of 2004, when I was in the US on a lecture tour that coincided with Bush's re-election campaign, I noticed at a large antiwar meeting in Madison a very direct echo in a utopian bumper sticker: "Iraq is Arabic for Vietnam." The sound engineer in the hall, a Mexican-American, whispered proudly in my ear that his son, a 25- year-old marine, had just returned from a tour of duty in the besieged Iraqi city of Fallujah, the scene of horrific massacres by US soldiers, and may show up at the meeting. He didn't, but joined us later with a couple of civilian friends. He could see the room was packed with antiwar, anti-Bush activists.

The young, crewcut marine, G, recounted tales of duty and valour. I asked why he had joined the marine corps. "There was no choice for people like me. If I'd stayed here, I'd have been killed on the streets or ended up in the penitentiary serving life. The marine corps saved my life. They trained me, looked after me and changed me completely. If I died in Iraq, at least it would be the enemy that killed me. In Fallujah, all I could think of was how to make sure that the men under my command were kept safe. That's all. Most of the kids demonstrating for peace have no problems here. They go to college, they demonstrate and soon they forget it all as they move into well-paid jobs. It's not so easy for people like me. I think there should be a draft. Why should poor kids be the only ones out there? Out of all the marines I work with, perhaps four or five percent are gung-ho flag-wavers. The rest of us are doing a job, we do it well and hope we get out without being KIA [killed in action] or wounded."

Later, G sat on a sofa between two older men - both former combatants. On his left was Will Williams, 60, born in Mississipi, who had enlisted in the army aged 17. He was sure that, had he not left Mississippi, the Klu Klux Klan or some other racist gang would have killed him. He, too, told me that the military "saved my life". Following a stint in Germany, he was sent to Vietnam. Wounded in action, he received a Purple Heart and two bronze stars; he also began to change following a rebellion by black troops at Camranh Bay protesting racism within the US army.

Following a difficult period readjusting, Williams read deeply in politics and history. Feeling that the country was being lied to again, he and Dot, his companion of over 43 years, joined the movement opposing the war in Iraq, bringing their Gospel choir voices to rallies and demonstrations.

On G's right was Clarence Kailin, 90 years old that summer and one of the few remaining survivors of the Abraham Lincoln Brigade that had fought on the Republican side in the Spanish civil war. He, too, has been active in the movement against the war in Iraq. "Our trip was made in considerable secrecy - even from our families. I was a truck driver, then an infantry man and for a short time a stretcher-bearer. I saw the brutality of war up close. Of the five Wisconsinites who came to Spain with me, two were killed... later, there was Vietnam and this time kids from here died on the wrong side. Now we have Iraq. It's really bad, but I still believe there is an innate goodness in people, which is why so many can break with unworthy pasts."

In 2006, after another tour of duty, G could no longer accept any justification for the war. He was admiring of Cindy Sheehan and the Military Families Against the War, the most consistently active and effective antiwar group in the US.

A decade before the French Revolution, Voltaire remarked that "History is the lies we agree on". Afterwards there was little agreement on anything. The debate on 1968 was recently revived by Nicolas Sarkozy, who boasted that his victory in last year's presidential elections was the final nail in the '68 coffin. The philosopher Alain Badiou's tart response was to compare the new president of the republic to the Bourbons of 1815 and Marshal Pétain during the war. They, too, had talked about nails and coffins.

"May 1968 imposed intellectual and moral relaivism on us all," Sarkozy declared. "The heirs of May '68 imposed the idea that there was no longer any difference between good and evil, truth and falsehood, beauty and ugliness. The heritage of May 1968 introduced cynicism into society and politics."

He even blamed the legacy of May '68 for greedy and seedy business practices. The May '68 attack on ethical standards helped to "weaken the morality of capitalism, to prepare the ground for the unscrupulous capitalism of golden parachutes for rogue bosses". So the 60s generation is held responsible for Enron, Conrad Black, the subprime mortgage crisis, Northern Rock, corrupt politicians, deregulation, the dictatorship of the "free market", a culture strangled by brazen opportunism.

The struggle against the Vietnam war lasted 10 years. In 2003 people came out again in Europe and America, in even larger numbers, to try to stop the Iraq war. The pre-emptive strike failed. The movement lacked the stamina and the resonance of its predecessors. Within 48 hours it had virtually disappeared, highlighting the changed times.

Were the dreams and hopes of 1968 all idle fantasies? Or did cruel history abort something new that was about to be born? Revolutionaries - utopian anarchists, Fidelistas, Trotskyist allsorts, Maoists of every stripe - wanted the whole forest. Liberals and social democrats were fixated on individual trees. The forest, they warned us, was a distraction, far too vast and impossible to define, whereas a tree was a piece of wood that could be identified, improved and crafted into a chair or a table. Now the tree, too, has gone.

"You're like fish that only see the bait, never the line," we would mock in return. For we believed - and still do - that people should not be measured by material possessions but by their ability to transform the lives of others - the poor and underprivileged; that the economy needed to be reorganised in the interests of the many, not the few; and that socialism without democracy could never work. Above all, we believed in freedom of speech.

Much of this seems utopian now and some, for whom 1968 wasn't radical enough at the time, have embraced the present and, like members of ancient sects who moved easily from ritual debauchery to chastity, now regard any form of socialism as the serpent that tempted Eve in paradise.

The collapse of "communism" in 1989 created the basis for a new social agreement, the Washington Consensus, whereby deregulation and the entry of private capital into hitherto hallowed domains of public provision would become the norm everywhere, making traditional social democracy redundant and threatening the democratic process itself.

Some, who once dreamed of a better future, have simply given up. Others espouse a bitter maxim: unless you relearn you won't earn. The French intelligentsia, which had from the Enlightenment onwards made Paris the political workshop of the world, today leads the way with retreats on every front. Renegades occupy posts in every west European government defending exploitation, wars, state terror and neocolonial occupations; others now retired from the academy specialise in producing reactionary dross on the blogosphere, displaying the same zeal with which they once excoriated factional rivals on the far left. This, too, is nothing new. Shelley's rebuke to Wordsworth who, after welcoming the French Revolution, retreated to a pastoral conservatism, expressed it well:

In honoured poverty thy voice did weave
Songs consecrate to truth and liberty,
Deserting these, thou leavest me to grieve,
Thus having been, that thou shouldst cease to be.

Goodbye to rip-off Britain

With the crunch coming, the articial inflation in the economy will soon be exposed
Martin Samuel
28 March 2008

There is a guy, does business up town, doesn't use his car much, bit of a novice when it comes to scooting around London. Anyway, a few weeks back he has complications with late meetings so, for a couple of days, he drives in. First time, schoolboy error, he forgets to pay the congestion charge, incurs a £60 fine right there. His parking for the day comes to roughly £40 in an NCP. Next time, he remembers the congestion charge, but leaves his car on the street, doing the parking meter tango, feeding it, moving it, feeding it, moving it, £8 here, £6 there, until finally he gets really busy, overruns by five minutes and, bang, a £100 penalty. He reckons the whole experience, with petrol, of two days' motoring will have cost close to £300. He's a wealthy man, he can afford it; but suppose he was an ordinary working stiff from the sticks, bringing in the average wage? That could be his disposable income, after the mortgage, gone. For two innocent, pretty harmless, mistakes. This is why Gordon Brown is in trouble.

The economy is false. The economy is a lie. The economy is a fictional set of numbers cooked up during a boom period that is almost over, and six months from now nothing will add up. The cost of a parking ticket grew to be completely disproportionate in relation to the offence committed because everyone was sawing it off, so nobody cared. Some twerp slapped a sticker demanding one hundred notes for a minuscule oversight on your windscreen and you knew it was preposterous, but you could afford it. And now you can't. And now you are going to realise how overpriced and bogus the minutiae of British life are, and Gordon is panicking because there is no way he can make this sustainable; yet the artifice of commerce and government relies on your expanding wallet.

If, while waiting for the clampers to arrive, having paid your £100 release fee plus £60 fine plus VAT, you pop into Starbucks for a cup of coffee, you will be charged close on £2. For coffee. Think about it, because so few have. We read about sub-prime mortgage markets and global credit squeezes and receive the deep thoughts of financial experts that have caught a cold in every recession for the past 50 years, which is why the benefits from your endowment mortgage will just about cover a self-assembly greenhouse from Homebase, but nobody notices the details. Coffee, two quid. No rationalisation. No justification. In a recession, nobody can drop two quid for a hot drink three times a day, five days a week. Bottled water the same: £1.60 for 500ml to take away at Caffè Nero on Monday. And everyone has a sip. Our lives are full of inflated expenses that are propping up Brown's fairyland economy and, when the penny drops, this crash will be the mightiest ever. No wonder he looks scared.

For so long we have not given this stuff a thought. My favourite football club charges a £1.50 booking fee on each ticket, so if I take my three boys we pay an additional £6. These tickets will be placed in one envelope and sent to one address, so the charge cannot cover postage or packing. I am actually paying a ticket office extra to sell tickets. It would be like a greengrocer applying a levy for dispensing fruit and vegetables. Yet as this nonsense was introduced in high times, nobody quibbled.

When a booking fee is demanded, we should ask the person on the end of the line to send round a cheese sandwich instead. You know, do something that is not part of the job, because that would be worth a tip. Clean the windows? Yeah, I'll pay extra. But applying a surcharge so a ticket office can provide tickets? I'm not seeing the value.

Brown got away with murder because he was Chancellor in the days when chimps could make money. In May 1999, he sold half the country's gold reserves during a 20-year low in the market at an average price of $275 an ounce. Yesterday morning the price of gold was approximately $946 an ounce. Brown bought euros instead, which have done well, but even so the cost to the nation of this mistake is measured in billions; and the only reason it has not been immortalised as a catastrophe in the same way as, say, Black Wednesday is because the population has been too busy hiring personal trainers and eating fancy crisps (chardonnay wine vinegar flavour, firecracker lobster flavour, patatas bravas, have you people gone nuts?) to care.

It costs more to download music from the same supplier in the United Kingdom than it does in the United States. Consider that. No shipping, no additional overheads, no reason the cost of the service shouldn't be identical. We are so used to meeting inflated prices, it barely registers anymore. The top-of-the-range Lexus hybrid costs £83,000 in the United Kingdom and £54,145 in the United States. The wealth that keeps Brown's economy ticking over is a mirage; it cannot survive the recession. And neither can he.

Not long ago I made a reservation at my favourite Chinese restaurant in town. Bit pricey. A special occasion place, not your average local. They wanted credit card details in advance with the right to charge £35 per head in the event of any alteration to the booking. I refused. They would not reserve otherwise. I very politely asked it to be explained to the manager that there was a recession around the corner and the number of people looking to drop six figures on noodles could be about to change quite dramatically. He might want to keep those that do onside. The reservation was accepted, no credit card. He knew, you see. So does Gordon. That is why he looks worried.

Thursday, 27 March 2008

From Global Financial Crisis to Global Recession, Part I

Precipitating the fall
By Jack Rasmus
Rasmus's ZSpace page
Last year we witnessed the emergence of the most serious financial crisis to hit the U.S. and the greater global economy since the 1930s—a crisis that has already begun to precipitate a major recession in the U.S. in 2008 and, in turn, raising the odds for a wider global downturn in 2009.

History will show a remarkable congruence between the conditions, events, and policies of the decade of the 1920s, on the one hand, and the events and policies of the past decade.

The 1920s were characterized by:

an over-extended housing and construction boom in mid-decade that imploded
a slowdown in investment in the productive economy as speculative investment steadily crowded out real investment
a Federal Reserve System that pumped up the money supply without concern for its eventual speculative impact
an increasing imbalance in world trade and currency instability
the near destruction of labor unions—to name the more notable
The progressive destruction of unions over the course of the 1920s, when combined with the radical restructuring of the tax system that provided massive tax cuts for the wealthy and corporations, resulted in a dramatic shift in income distribution toward wealthy investors and corporations from the rest of the working population. By 1928 the wealthiest households had doubled their share to 22 percent of all incomes in the country, according to IRS data. Perhaps more than any single contributory factor, the rapid and extreme growth of income inequality during the decade was eventually responsible for the ultimate financial implosion of 1929 and the consequent depression. The massive shift in incomes that fed the speculation in turn resulted in a further income shift, as super-profits were realized by the wealthy from the speculative investment frenzy. More concentration of income in turn provoked a dizzy spiral of asset price inflation, speculative profits, and a euphoric expectation the process would continue without limit.

The speculative excesses of the 1920s were assisted by a host of shady business practices—in the banking industry in particular—that were condoned by business, media, and the government. Some of the more notable practices included the explosion of buying stocks and securities on margin—or what is sometimes called leveraging. It included practices that ensured the speculation remained near invisible to average investors; practices by which private businesses, responsible for rating investments for the general public, lied to the public as a consequence of conflicts of interest. The government refusal to monitor or check the speculative excesses also contributed.

The foregoing process culminated in a stock market crash, once the cracks in the real economy began to appear and the speculative boom quickly turned to the bust of October 1929. As in all such similar speculative booms and busts, the financial crisis of 1929 in turn exacerbated and accelerated the already declining real economy by freezing up credit for investment, ensuring further corporate defaults, massive job losses, and subsequent decline. Thus, while the increasingly speculative activity was not the sole cause of the crisis, it was a critical and central development provoking the crash and the depression that followed.

As in the 1920s, in the last decade the U.S. has been lurching from one speculative bubble to the next. These include:

the Long Term Capital Management (LTCM) hedge fund bailout of 1998
the Asian debt crisis of 1998 (at the center of which were U.S. money center banks)
the dot-com technology asset bubble of 1999-2000
the recent subprime mortgage bust (the foundations for which were laid in 2003-04)
the recent rapid spread of the subprime crisis in 2007-2008 to other capital markets in the U.S.
The series of speculative bubbles from 1998-2008 in each case were temporarily contained by an unprecedented expansionary monetary policy engineered by the U.S. Federal Reserve under Alan Greenspan. The Greenspan Fed thus contributed to the series of bubbles with money injections designed to stave off the spread of liquidity crises and credit crunches. The temporary fixes did not solve the problem, but postponed the crisis for the short term. The result has been a containment each time that has bottled up pressures, which then emerged once again with subsequent greater effect.

While Federal Reserve policies have thus enabled the speculative flames, the rapid growth of income inequality since 2000 provided the kindling. A major, historic shift in incomes in the U.S. clearly began under President Reagan and continued unabated under Clinton. In recent years, under George W. Bush, that inequality has accelerated. Starting with a share of only 9 percent of total national income, for example, by 2006 the wealthiest 1 percent of households had again raised their total share to the 22 percent they enjoyed in 1928.

As in the 1920s, the rapid rise of income inequality has been driven largely by the restructuring of taxation, as more than $4 trillion of tax cuts were passed in Bush’s first term alone, 80 percent of which is projected to accrue to the wealthiest households and large corporations. Further corporate tax cuts of more than a $1 trillion were passed in his second term. Meanwhile, the rest of the population has experienced income stagnation and reduction as the decline of unions has continued, the post-World War II pension and health-care benefit systems have accelerated their collapse, the shift to part-time and temp jobs from full-time and permanent employment has continued, and millions of high paid jobs have disappeared due to neoliberal trade and offshoring.

The growth of incomes by the wealthy provided the huge pool of income and wealth with which to engage in speculative investment activity. As short term speculative activity resulted in significantly greater returns than real investment activity, more and more investment was shifted into speculative activity or from real investment in the U.S. home market to investment offshore in the so-called emerging markets—in particular, in China and Asia. In addition to the growing income imbalance and the easy money policies of the Greenspan Fed, a third critical element has been the elimination of any semblance of financial regulation and oversight, which was given a coup-de-grace in 1999 with the repeal of the 1930s-era Glass- Steagall Act. Glass-Steagall was supposed to prevent speculative and other abuses.

As Glass-Steagall was being progressively undermined under Reagan, Bush I, and Clinton, the so-called financial revolution was taking off. With that revolution in finance came a corresponding proliferation of new financial structures and relations. When combined with new technologies of computer processing power, soft technologies (e.g. quantitative modeling), networking, and the Internet, the financial system has become the first sector of economy that has been truly globalized. In turn, with globalization has come the further inability to regulate finance capital and, indeed, even to monitor its activity accurately. Thus, deregulation plus technology and globalization has meant further de facto deregulation.

In the past decade U.S. finance capital has been unleashed, as it once was in the 1920s, to do whatever it wishes and to push the speculative investing envelop as far and in whatever direction it pleases. It is therefore no coincidence that since the late 1990s the U.S. economy has veered headlong from one financial crisis to another with virtually no breathing space in between. We are now beginning to see the consequences of this concurrence of total financial deregulation, unchecked financial restructuring, accelerating income inequality, and accommodative government monetary policy which is now yielding even greater financial crisis, U.S. recession, and a threat of global instability.

Derivatives and the Securitization Revolution

If Structured Investment Vehicles (SIVs) and hedge funds are the vehicles of the new speculative and financial crisis, their products amount to a vast array of acronyms like CDOs, ABCP, CBO, CMBS, CLO, CDS, CDPO, and so on. To understand the current financial crisis it is first necessary to understand the so-called securitization revolution that the new institutional structures and financial devices represent. And the securitization revolution is based upon the granddaddy of over-leveraging called derivatives.

Derivatives involve the fictitious development of financial asset products offered for sale to investors, private and corporate. They have no intrinsic value. They derive their value from other real assets or other financial products. They have virtually no cost of production. Their costs of distribution and sale are essentially non-existent. Their market price is largely the outcome of speculative demand and, to a lesser extent, how fast financial institutions can create the original financial assets (e.g., mortgage loans) on which the derivatives are then developed. Moreover, derivatives can be created on top of derivatives in an unlimited pyramid of speculative financial offerings. Like a house of cards, the offerings may be stacked upon each other, until such time as one of the cards slips out of place and brings the rest down with it.

In today’s global economy there are more than $500 trillion in derivatives outstanding. That compares to a global annual gross domestic product for all the nations of the world of less than $50 trillion, and to the U.S. annual GDP of approximately $13 trillion. In other words, there are now more than ten times in derivative contracts than all the real goods and services produced by all economies in the world annually. The world’s wealthiest investor, Warren Buffet, has called derivatives “time bombs both for the parties that deal in them and the economic system.” They represent, according to Buffet, “financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”

Subprime mortgages represent one relatively small land mine in the panoply of “financial weapons of mass destruction” described by Buffet. Subprimes are an essential element of just one example of super speculative investment built on one form of derivative called a CDO, a Collateralized Debt Obligation. Subprime mortgages lay at the foundation of the CDO’s derivative pyramid. The mortgages themselves represent the value of a real asset—i.e., the housing product on which the mortgage is based. The mortgages are then packaged into the fictitious financial asset package called the CDO, which is then marked up by the financial institution which sells the CDO to wealthy investors, hedge funds, other funds, or corporations. The mortgages themselves are not packaged in original form in the CDO, but instead are broken up, i.e., divided into slices that may be distributed across various CDOs. Only parts of any given subprime mortgage may thus reside in any given CDO offering: parts of other assets are typically sausaged into the same CDO alongside the subprime slice as well. These other assets may themselves be fictitious in character (i.e., not based on any real physical asset) or may be based on some real asset—for example commercial paper issued by some real company to raise funds to carry on or expand its real business; or a loan issued by a bank backed by real collateral (e.g., CLO). Other forms of bundled assets may include fictitious securities issued based on expectations of future ticket sales for sports events, a rock star’s future concert royalties, or even more absurd examples of so-called bonds.

Not all CDOs have subprime mortgages bundled within their packaged market offering. Some may have slices of higher grade mortgages or what are called Alt-A mortgages. Or they may have both. Many CDOs also include what are called Asset Backed Commercial Paper (ABCP). Many companies with doubtful performance and future prospects unable to raise capital more economically from other sources have entered the ABCP market in recent years to raise cash and stave off default. Their commercial paper is then bundled with a CDO and offered to market. Thus shaky subprime mortgages may be packaged with equally shaky corporate commercial paper.

But the banks and other institutions that eventually sell the CDOs were, at least until the recent crisis began to appear in late summer 2007, not all that concerned about the quality of such derivative-CDOs. Their relative unconcern flowed from their ability to buy insurance for the CDO in the form of yet another derivative called a Credit Debt Swap or CDS. Yet another means by which banks attempted to insulate themselves from the shaky quality of speculative investments has been their creation of Secured Investment Vehicles. SIVs are in essence electronic shadow banks set up by investment and commercial banks like Morgan Stanley, Bear Stearns, Citigroup, Bank of America (and virtually every known national or regional major bank in the U.S.) to offload potentially risky CDOs from the banks’ balance sheets, where bank record keeping is subject by law to review by the U.S. Securities and Exchange Commission. With SIVs typically quickly turning over, or selling, to hedge funds and other wealthy investors and corporations, a third safety valve presumably existed.

Subprime mortgages, bundled within CDOs, issued by SIVs, and held off balance sheet by the big banks represent a highly profitable enterprise for the banks. First, the banks make money from fees issuing the CDO. Second, they are able to offload assets from their bank balance sheets thereby both reducing capital carrying costs as well as making available more bank reserves for loaning out at interest. Third, their SIVs make money from marking up and selling the CDOs as well as from insuring them at an additional charge with credit debt swaps. It is therefore not surprising that mainline investment and commercial banks experienced compound profit growth of more than 20 percent per year collectively for each year from 2004 through 2006—i.e., roughly the period of the most explosive growth of subprime mortgages bundled with CDOs.

The above scenario is sometimes referred to as an example of the so-called securitization revolution in finance. Securitization is the process of assembling assets on which new securities are issued and then sold to investors who are (in theory) paid from the income flow created by the assets. The more risky the assets contained within the CDOs, the lower the credit ratings but the higher the potential return. The justification for the highly speculative and high risk character of the offerings is that by slicing the CDOs into tranches, based on the degree of risk in the assets in the given CDO, the risk would be dispersed among a large population of investors. In reality, however, the result was the dispersion of contagion not dispersion of risk from the risky investments.

In 1998 the total international volume of securitized offerings amounted to less than $100 billion. By 2003 it had risen only to $200 billion, more than $500 billion in 2005, and exceeded $1 trillion in 2006.

Bursting the Subprime-CDO Bubble

Business press pundits repeatedly query about why so many subprime mortgages were issued to home buyers who clearly could not qualify for mortgage loans on any reasonable criteria or would be unable to make payments once interest rates inevitably rose to normal levels. What the pundits don’t understand is that, given the increasing trend over time toward a greater relative mix of speculative to total investment arrangements in the capitalist economy, it is quantity, not quality, of investment opportunity that takes precedence. Since 2003 the practice of banks had been to encourage mortgage loan companies to produce more loans regardless of the quality. Mortgage loan companies in turn encouraged real estate brokers to deliver more loans without consideration of quality. And real estate brokers did whatever was necessary to close the deal with home buyers.

No matter if the total volume of mortgage loans by 2005-06 were more subprime than not. The quantity of loans, not their quality now mattered most. And quantity was only part of the new profit model. Finance profitability was becoming less and less dependent on the issuance of loans per se, but increasingly on derivatives and their supporting institutions. By 2005 more than $635 billion of subprime loans were issued. In 2006 the amount was another $600 billion and the cumulative total by 2007 was more than $1 trillion.

By mid-2006 it had become clear that the subprime mortgage market was in freefall. Home buyers with subprime mortgages were now defaulting on payments at record rates and foreclosures were beginning to rise. By late summer 2007 it was estimated that there would be two to three million potential foreclosures over the next few years. The value of subprime mortgages quickly plummeted and with them many of those CDOs in which they were imbedded. The subprime mortgage market virtually shut down. It was not possible to accurately estimate the magnitude of the losses from the subprimes since they were sliced and distributed within different CDO offerings. And if the losses for the subprime elements in CDOs could not be accurately valued, the CDOs could not be accurately valued. Nor could the asset backed commercial paper often bundled with the CDOs. And so on.

The typical response of investors in such situations is to ask how much their investments were under water. When they cannot be accurately told, their next response is often “sell my investment and give me the cash remaining.” But with no markets for subprimes by late 2007 their remaining value was impossible to estimate. No sales meant no price meant no possible valuation estimate and in turn no cash out. Investors, like the banks and their SIVs, were locked together in many cases in a death spiral, unable to bail out and destined to ride the doomed vehicle into the ground.

By late 2007 various estimates place the value of expected losses from the subprime market collapse from Goldman Sachs’s low of $211 billion and the OECD’s estimate of $300 billion to estimated losses— based on the ABX Index, the official measure of subprime mortgage securities’ value—at approximately $400 billion. In stark contrast to these estimates the losses admitted by the major banks as of year end 2007 amounted to only a paltry $60 billion. More, indeed, much more in terms of bank losses and bank write-downs are yet to come in 2008.

But subprime losses and write-downs on bank balance sheets were only part of the bigger picture.

Spreading the Subprime-CDO Pain

The estimated total volume of all CDOs worldwide (not all of which have subprime mortgages bundled with them) is, according to the OECD, approximately $3 trillion in total value. Approximately half that total is held by hedge funds, a fourth by banks, and the remaining exposure by asset managers and insurers.

As noted, many of CDOs also bundled commercial paper—sometimes with subprimes and often without. But asset backed commercial paper appears equally at risk as subprime mortgages and the consequences of its collapsed are yet to be fully realized.

Like the subprime mortgage market, the ABCP market experienced a sharp run up between 2003-07 in conjunction with the acceleration of CDOs and other derivatives. Many companies in trouble financially and unable to raise capital to continue turned to the ABCP to issue commercial paper on their remaining real assets to raise cash for operations or investment purposes. Much of their risky commercial paper was bundled with CDOs. But like the subprime market, the ABCP market has virtually shut down as well since the advent of the financial crisis in late summer 2007. The ABCP market in the U.S. peaked at $1.2 trillion in August 2007 and had fallen to $700 billion by year end. By June 2008 an additional $300 billion is projected to come due. That’s another $300 billion banks may have to provide for on their balance sheets, in addition to the $400 billion in additional subprimes coming due. In Europe the commercial paper market is also declining rapidly, having fallen 44 percent by October 2007 to $172 billion from a May peak of $308 billion.

With the ABCP market largely shutting down, many corporations straining to stay in business in recent years by selling their commercial paper will likely begin to default. That means a sharp rise in business bankruptcies. For example, non-farm business debt rose by 30 percent in 2004 and continued thereafter at above average levels. Many CDOs helped hold off defaults and failures between 2003-07 by imbedding their commercial paper. But with the shutdown of the ABCP markets, pressures for corporate defaults will be released with the consequent result of sharp increases in corporate bankruptcies in 2008-09. The corporate ratings agency, Moody’s, predicts an increase in default fates between four and ten times in the period immediately ahead, the highest since the peak fallout from the dot-com bust in 2002.

How the current financial crisis has been spreading at an historically rapid rate from the subprime to other capital markets, and how the crisis is being transmitted in turn from those latter markets to the general economy in the U.S.—thereby guaranteeing a recession in the U.S. in 2008 and threatening to expand globally in 2009—will be addressed in Part II of this analysis.

From Financial Crisis to Recession, Part II
Symptoms appear of a fundamental financial instability
By Jack Rasmus
Rasmus's ZSpace page
Part I of this series appeared here in the March issue of Z Magazine


In testimony before the U.S. Congress House Financial Services Committee at the close of February 2008, U.S. Federal Reserve Bank (Fed) Chair Ben Bernanke acknowledged for the first time what many in finance, banking, and government policy circles have quietly begun to admit: that the current financial crisis is now spreading rapidly beyond the subprime residential mortgage sector to other credit markets and that monetary policy action by the Fed (i.e., lowering interest rates) appears increasingly unable to do much about either the financial crisis or the emerging recession.

As Bernanke admitted to the Committee on February 27, 2008: "The (recent) economic situation has become distinctly less favorable," with the residential mortgage market decline accelerating, non-residential construction "is likely to decelerate sharply in coming quarters," consumer spending and the business sector will both slow significantly, and general credit conditions likely to "tighten substantially." Moreover, "the risks to this outlook remain to the downside." Bernanke admitted that the Fed, despite repeatedly lowering short term interest rates since September 2007, had failed to lower long term interest rates. In fact, long term rates—which have a far greater impact on consumer and business spending and thus on the likelihood of recession—have actually begun to rise "across the board."

What follows is a description of how the financial crisis has been spreading at a rapid rate in the U.S., from the subprime mortgage to other credit markets, and how that contagion is beginning to penetrate the real (non-financial) economy, causing the deep recession now emerging in the U.S.

July-December 2007

The subprime mortgage crisis that erupted publicly in July-August 2007 did not cause the current financial crisis, but was just one of several (and now growing) symptoms of a deeper more fundamental financial instability. Speculation in subprime mortgages—fueled by the new securitization and derivatives revolutions in finance, virtual deregulation of finance capital since the late 1990s, new technological forces, and widespread corruption and fraud on numerous fronts—produced a housing asset price bubble of epic dimensions between 2003-2006. Mortgage borrowing rose more than $4 trillion between 2003-6 with $2 trillion of that issued in subprime mortgages. That's approximately $1 trillion a year for 4 consecutive years. Today, the subprime mortgage market has virtually evaporated, with much of the non-subprime market in turn rapidly coming to a standstill.

With the evaporation of the subprime market came a collapse in prices and value for subprime mortgage securities (bonds). Because of the magnitude of the speculation ($2 trillion) in subprime mortgages, the magnitude of losses by banks and financial institutions was immense as well. According to rating agencies Moody's and Standard & Poor's, by early 2008 the losses totaled a minimum of $400 billion. Other foreign bank sources estimate the potential losses from subprimes in the U.S. at $600 billion. Banks and finance institutions have thus far written off only $120 billion. That leaves $280-$480 billion to go.

The massive nature of the losses quickly led to the collapse of other credit markets most closely related to the subprime market. Subprimes were often bundled with other securities before being sold as repackaged deals by banks and hedge funds to investors, with commercial paper called asset backed commercial paper (ABCP). As subprimes collapsed by $600 billion in 2007, the ABCP market plummeted by about $500 billion along with it within a matter of a few months. Contagion from the subprime market also infected the non-subprime mortgage market (called Alt-A mortgages). Similarly, the ABCP market infected the non-asset backed broad commercial paper market. In turn, the commercial property mortgage market plummeted by several hundred billion dollars by the end of 2007, with projections for its likely shut down to occur by mid-2008.

The cumulative credit contraction for just these 5 inter-related markets amounted to more than $1.6 trillion, occurring in less than 6 months, with associated bank losses and write downs estimated at around $600-$800 billion.

January-February 2008

The construction (housing-commercial) and closely related commercial paper markets' decline almost immediately began to spill over to the corporate bond markets, in particular the so-called high yield corporate or junk bond market which contracted by 90 percent by January 2008 compared to January 2007, dropping by more than $900 billion. Like the ABCP market, the junk bond market is where economically shaky corporations go to raise funds by issuing and selling their unsecure bonds. With ABCP and junk bond credit markets collapsing, corporations that previously relied on them are predicted to default in record numbers. Default rates are predicted to surge from one percent to more than ten percent, according to both Moody's and Standard & Poor's. That in turn means massive further losses for banks on top of subprime and commercial property mortgage losses already occurring. It also means that as those corporations default, many going bankrupt and out of business, the result will be widespread layoffs over the next 18 months.

Rising corporate defaults and anticipated subsequent bank losses translate into rising interest rate costs for otherwise stable companies. From the corporate junk bond market, the credit contraction has spread to more mainstream business credit markets, like the commercial and industrial bank loans and short term commercial paper markets. Together, these two represent credit markets that most medium and smaller sized corporations most heavily rely upon to finance business operations. The two markets had a combined total of $3.3 trillion in outstanding credit issued to business in August 2007. By early 2008 that amount had declined by more than $300 billion.

Another credit market taking a dive by early 2008 was the leveraged buyout (LBO) market. This was a hot speculative investment area in which companies arranged loans and other financing through investment banks in order to buy out other companies or go private in order to avoid government oversight of speculative and other even more shady business practices. By early 2008 more than $200 billion in loans for leveraged buyouts were left hanging without interested buyers. This meant banks and original investors would eventually have to absorb the losses themselves.

But the even bigger news of early 2008 was the growing likelihood of bond insurer companies, like MBIA, Ambac, and others (called monolines) facing downgrading and perhaps default themselves. These companies insured other companies' bonds and loans, promising to pay investors for corporate and other bond defaults should they occur. But with combined reserves of only $20-$30 billion on hand, the half dozen bond insurers are themselves grossly underfunded. Their combined liabilities (i.e., insurance commitments) amount to more than $1.9 trillion. Moreover, they too speculated in subprimes as well as other derivative investments in the amount of $572 billion. It has become increasingly clear to investors and markets that the reserves monolines were woefully inadequate. Rating agencies had conveniently overlooked their condition during the speculative run-up. But Moody's and S&P are now threatening to downgrade the bond insurers. Should that occur, countless corporations and banks that purchased their insurance could face severe downgrades as well, resulting in further losses and defaults.

The precarious position, and potentially huge losses of the monolines prompted global financier George Soros recently to comment, "There is a growing concern about the monolines...there is also a potential problem with money market funds which could be holding doubtful assets." Soros's concern was echoed by JP Morgan CEO, Jamie Dimon, who added, "If one of these entities (bond insurers) doesn't make it, the secondary effect could be terrible." That secondary effect would be the downgrading and consequent default of hundreds of billions in corporate bonds—on top of the already projected 10 times increase in corporate defaults in 2008.

Some analysts predict that the bankruptcy or even major downgrade of one or more bond insurers could easily spill over to the $3.3 trillion money market fund market or the $2.5 trillion municipal bond market, precipitating an institutional run on the banks that would be quite unlike individual depositors' bank runs in the 1930s and before. Early indications of just such a possible scenario began to emerge in February 2008, as key sectors of the muni bond market began to dry up. With about half of municipal bonds insured by the bond insurers, the safety of muni bonds began to be questioned. Two key segments of the muni market contracted sharply—i.e., auction rate and variable rate municipal bonds, which finance around $330 billion and $500 billion, respectively. Strategically critical for state and local government funding, shrinking trades at muni markets threatened significant cost increases and funding problems for local governments. Many state and local government authorities now face excessive borrowing costs at a time of accelerating recession and lower tax revenues.

Another insurer avenue also began to come under pressure by early 2008. This was the derivatives-based credit default swaps market. Virtually nonexistent prior to 2002, outstanding credit default swaps now total more than $45 trillion, bigger than the total U.S. government bond and housing markets combined. Most securities in this market reside in a shadow banking system, itself largely a product of the post-2001 period, set up by banks to park risky assets "off balance sheet" and hidden from investors and government oversight agencies alike (an arrangement similar to that at the now defunct ENRON Corp., for which that company's senior management were indicted and jailed). Like the monolines, credit default swap derivatives are designed to insure against defaults. But if corporate bond defaults approach normal levels of 1.25 percent, Bill Gross, managing director of the world's largest bond fund, Pimco, publicly pointed out that $500 billion in credit derivative contracts would result in losses of at least $250 billion.

Perhaps an early red flag of the beginning of just such a fracturing of the $45 trillion credit derivatives market was the dramatic losses announced in January by the major French bank, Societe General, which raised the possibility that the problem was not limited to subprimes and asset backed paper, but was actually far more widespread, just as Pimco head Bill Gross had predicted.

Signs of major problems in the insurance industry also emerged in early 2008, as AIG Inc., the largest insurance company by assets, announced record losses of $11.5 billion due to credit default swaps trading. The picture by the end of February 2008 was one of a rapidly spreading credit contraction, in part the product of accelerating write downs and losses.

The losses and credit contraction do not include additional potential losses and contraction in consumer credit—in particular in areas of auto loans, credit card debt, and student loans. Evidence now appearing suggests significant losses are anticipated in these markets as well. Major credit card companies like American Express and others have announced record level loss provisioning and set asides in anticipation of consumer defaults. A growing list of public universities have announced shutting down student loan programs due to sharply rising borrowing costs. General Electric Corp. announced its intent to exit the consumer credit markets altogether. Thus, the mortgage, bank, and corporate debt problem appears by early 2008 to be infecting consumer markets. Like excessive corporate debt, total household debt from 2003-07 roughly doubled, rising by nearly $7 trillion.

Financial Crisis Is Creating Recession

How do these financial losses translate to a deepening recession in the general U.S. economy? The short answer is that financial losses have two immediate consequences. First, losses on financial institutions' balance sheets mean losses must be restored by raising additional real capital. If not, the institutions themselves may default. They can borrow from other banks, from the Federal Reserve, or, as has recently been the case, from what are called sovereign wealth funds, which are foreign government owned investment funds. The first option is a problem when banks are suspicious of each other's financial viability. Interbank borrowing thus dries up, as it almost did in late 2007. Borrowing from the Federal Reserve is the second option and has been occuring since late 2007 under especially favorable terms by the Fed. But Fed loans have thus far proved insufficient to cover the anticipated magnitude of future losses by the banks. Similarly, sovereign wealth funds located in Dubai, Singapore, and elsewhere have injected funding into the banks by purchasing partial ownership of Merrill Lynch, Citicorp, and others. But the amounts are measured in the low tens of billions, nowhere near the high hundreds of billions of losses to date and anticipated.

Given the still massive anticipated losses and likely insufficient available funding, banks turn to loan out the funds they do have. So they raise interest rates to record levels. These interest rates are not the short-term interest rates of 3 to 4 percent at which the Fed loans money to the banks. Banks' rates offered to customers are long-term interest rates—essentially bonds and long-term loans—loaned out at 7 percent, 10 percent, or more. Rising long-term rates raise the cost of borrowing by non-bank corporate customers and to consumers buying durable products like cars, furniture, homes, etc.

In an accelerating recession, banks are reluctant to lend and corporations equally reluctant to borrow. Only the most exposed companies are willing to borrow at the high rates, which means in many cases they will eventually go under—thus Moody's and S&P's predictions of a 10 times increase in corporate default rates over the next 18 months. Lower investment and business spending translates eventually into layoffs, defaults in auto, credit card, and student loans, and thus further momentum in the direction of recession.

The above process then takes on psychological dimensions at some point, which worsens the economic decline. Fear and uncertainty over still unannounced, further bank losses leads to lack of confidence in the banking system and even further reluctance to loan or borrow. Another psychological scenario is when fear of losses in the subprime mortgage market lead to concerns of losses as well in non-subprime residential mortgage, commercial property markets, and closely associated markets like asset backed commercial paper. Borrowing rates rise and investors turn away from borrowing not only in subprime and related markets, but other mortgage markets. Prices of property then nose dive across the board. This kind of debt price deflation, when spreading from an isolated to associated credit markets, is historically closely associated with depressions rather than recessions.

Another example: concerns that the bond insurers (monolines) and credit default swaps will not be able to cover anticipated defaults leads investors to withdraw in growing numbers from even safe credit markets like muni bonds, about half of which outstanding are insured. In turn state and local governments reduce spending, lay off workers, reduce benefits for others, raise property taxes and various fees, etc.—all which translate into further recessionary pressures.

A third example: rising financial institution losses translate into rising rates and to a tightening of credit terms for consumers as well as business borrowers. Credit card rates rise, terms become more onerous, banks start charging consumer customers more fees, auto loan rates rise, student loans become harder to get with higher rates, state and local governments must spend more to borrow and in turn pass on costs to citizens in higher local fees, property taxes, and lower spending (resulting in less hiring or layoffs). Increasingly, consumers default on auto, student, and credit card loans.

Contradictions of Monetary and Fiscal Policy

Both Fed monetary policy and the recent $168 billion Congressional tax cut package will prove grossly insufficient in dealing with the current financial crisis and the recession. Rapid deflation (i.e., price collapse) is now occurring in the general housing and commercial property markets and may soon spread to other non-construction markets as corporate defaults rise and additional bank losses are reported. Debt deflation in housing and property markets is the inevitable consequence of prior (housing and property) asset price inflation, which was produced by excessive speculation. Excessive speculation breeds extraordinary inflation and eventually just as extraordinary deflation. But deflation is the greater danger.

When debt deflation spreads from housing to other sectors of the economy, the real crisis begins. Companies facing rising costs and unavailability of funds to finance day to day business, turn to raising revenue on an emergency basis by selling their products below market prices. This raises immediate cash necessary to operate or even stay in business, but sets in motion a downward price spiral—i.e., deflation—that ultimately accelerates losses and the need for still further price cuts. This is what especially distinguishes depression from recession. Efforts to raise revenue by price cutting, moreover, is often accompanied with cutting costs by mass layoffs. Thus rising unemployment accompanies the deflation in parallel. The U.S. economy is approaching the cusp, heading in that direction.

Fed interest rate reductions of more than 3 percentage points by March 2008 has assisted banks' sagging profitability, but has not succeeded in heading off the general credit crisis and recession. The crisis has continued to outrun Fed actions as long term interest rates have risen and thus pushed the economy further into recession. The Fed may have even assisted the momentum toward recession by its recent lowering of short term interest rates. For example, lower rates have resulted in an accelerating decline of the U.S. dollar and a growing shift from the dollar to the Euro and other currencies as the preferred medium of global trade and financial transactions. The financial crisis is rapidly translating into a parallel currency crisis—which is also a characteristic of depressions as compared to recessions.

The fall of the dollar is also provoking another speculative price bubble, in the form of rapidly rising commodity prices—e.g., food grains, food commodities, raw material commodities, metals, and, of course, oil. As the dollar falls, OPEC and Middle Eastern oil producers have been raising their prices to offset the fall of their investments held in dollars. Oil prices have shot up over $100 a barrel. Rising commodity prices translate into U.S. consumers' reduced spending power, which in turn reduces consumption dramatically, and feeds the recession. Oil and other commodity speculators may also push up the prices of oil and food even further before it reaches the U.S. consumer, but the Fed action initiates and feeds the whole process. Thus, Fed efforts to stave off recession actually provide more impetus for recession. At some point the Fed will likely give up on lowering interest rates as a consequence. When that happens, yet another psychological effect will occur and the impact will be immense. By that action the Fed will in effect admit it cannot do anything about the crisis.

On the fiscal side, the recent $168 billion Congressional (and Bush) package to stimulate the economy will also prove ineffective. First, a good portion of the tax cut package are business tax cuts that will largely have no effect in a recessionary downturn. In a period of accelerating recession, lower tax cuts for business do not stimulate net investment. Business may absorb the tax cuts, but delay decisions to invest while actually reducing employment. A good part of the business tax cuts will also likely be shuffled to offshore expansion by corporations that will have no effect on U.S. economic conditions, a trend that has been occurring for several years now. Finally, what business spending does occur as a direct consequence of tax cuts will be more than offset by mass industry layoffs coming later this year.

Little of the consumer tax rebate will translate into new spending. Many consumers, now deeply in debt, will use rebates to pay off record debt. Perhaps only a third of the $168 billion will constitute actual new consumer spending. And that consumer spending will be largely offset by reductions in spending and higher fees by state and local government, as tax revenues plummet due to recession while costs of borrowing rise significantly. Before the November 2008 election it will become increasingly clear that the recent Congress-Bush fiscal package was a classic example of too little too late.

Should the crisis and recession continue to accelerate, new solutions will be required. As during the Depression of the 1930s, new solutions may require a major overhaul of the Federal Reserve System, the return of something like the Reconstruction Finance Corp. government agency of that period, and a fundamental re-regulation of the financial sector in the U.S., and reversal of policies since the 1980s that have resulted in a massive redistribution of income that has fed the speculative excesses of recent decades—to name just a few.

Scenario 2008-09

Fundamental structural and in some cases radical reform of the U.S. political economy will be necessary to deal with the economic crisis. This crisis may include some of the following features:

Widespread corporate defaults and mass layoffs occurring later in 2008 and into 2009
Continuing revelations of further losses by banks and financial institutions
The collapse of one or more of the mainstream banks in the U.S., setting off a major stock market correction of an additional 20-30 percent
A further decline of 10-20 percent of the dollar in international currency markets
Continued rise in oil and commodity prices as offshore speculators continue to take advantage of the U.S.'s worsening dual financial-devaluation crisis
Deflation spreading from housing and other asset investments in the U.S. to goods and services. Record U.S.
(unified) budget deficits of $700 billion plus
Growing general awareness that traditional monetary and fiscal policies are increasingly ineffective in addressing financial crisis and recession
Whomever is president in 2009 will almost certainly have to confront the growing reality that the rest of the global economy is also slipping, along with the U.S., into a synchronized downturn.



Jack Rasmus is the author of The War At Home: The Corporate Offensive From Ronald Reagan to George W. Bush (2006) and The Trillion Dollar Income Shift: Essays on Income Inequality in America (forthcoming).

Wednesday, 26 March 2008

Who is the State working for: the banks or the public?

Who is the State working for: the banks or the public?

In many respects, the ongoing international financial crisis throws into sharp relief the deceit and denials of those who promote financial globalization, whether they sit on the board of the big private banks or move in the higher spheres of the State. Over recent years, the dominant discourse was that all was fine on the debt front: with the introduction of new products, such as the securitization of debts, the risk had been spread among a number of players. No crisis could be expected, profits were astronomical and growth was sustained. 

Today, the edifice is crumbling. How could it be otherwise, when big banks conduct huge operations off the books, erect a house of cards with dubious credit and contribute to the creation of a speculative real estate bubble that eventually bursts? Far from spreading the risk, the system achieved the contrary, with the big banks having accumulated its weaknesses. Each of them then tried to pass the hot potato to its already troubled neighbor.

Instead of acknowledging their mistakes and assuming the consequences, the big banks sought help from the State -- whose actions they are normally quick to disparage. They did not hesitate to seek strong public intervention from the same State they usually consider as too interventionist. In fact, the big banking lobbies have always insisted that the public authorities must respect market forces -- the sole mechanism able to efficiently distribute resources and fix prices at their real values.

Like obedient underlings, the US and European authorities did as they were asked: you do not refuse a favor to the directors of the big banks that support the main presidential candidates and who move in the same close-knit circles... Thus, the rulers quickly came to the rescue of private interests. On the menu: nationalization of the troubled banks, exchange of devalued and distressed debt securities for fresh cash (to the tune of 200 billion dollars in the US), cash injection, rescue plans, decreased interest rates...

In Britain, one of the spearheads of neoliberal globalization, the crisis floored the bank Northern Rock in September 2007, leading to its nationalization in February 2008. Once the ship has been steadied at public expense, it will pass back into private hands. Similarly, in the United States, when Bear Stearns, the country's fifth most important investment bank, found itself short of credit on 13 March, the financial authorities organised a rescue with the help of JP Morgan Chase, which subsequently bought Bear Stearns at a bargain price.

This crisis clearly proves that when management of the world economy is ruled by the logic of maximum profit, society pays an enormous price. The banks have gambled with the savings and cash deposits of hundreds of millions of individuals. Their mistakes have led to huge losses and human tragedy, as was the case with the bankruptcy of the Enron multinational in 2001. Around 25,000 Enron employees found themselves with a paltry pension because the company's pension fund had been diluted by the directors, who had quietly sold their shares for nearly a billion dollars.[1]

In terms of North and South, the similarities are striking. In the South, the debt crisis of the early 1980s was caused by the unilateral increase of interest rates by the United States, leading to a massive hike in the repayments of Third World countries that the banks had encouraged to take out loans at variable interest rates. Simultaneously, the plummeting prices of raw materials and oil prevented them from coping, forcing them ever deeper into a crisis. The International Monetary Fund (IMF), remote-controlled by the United States and the other great powers, then imposed drastic structural adjustment programs on developing countries. The recipe, as in countries of the North, was as follows: a decrease in social spending, complete and immediate economic liberalization, an end to control over the flow of capital, complete opening of the market, massive privatizations. However, contrary to what is taking place in the North, the states of the South have been prevented from reducing interest rates and giving credit to banks, causing serial bankruptcies and severe recessions. Finally, just like today, the State was forced to bail out the troubled banks before privatizing them, usually to the benefit of the major North American and European banking multinationals. In Mexico, the cost of rescuing the banks, in the second half of the 1990s, represented 15% of the Gross Domestic Product (GDP). In Ecuador, a similar manoeuvre in 2000 cost the country 25% of its GDP. Everywhere, the internal public debt rose massively because the cost of the rescue plan for the banks was borne by the State.

The economic deregulation of the last decades has been a fiasco. The only constructive solution would be a complete reversal of priorities: strict constraints on private companies, massive public investments in sectors that can ensure fundamental human rights and protection of the environment, the recovery by public powers of the decision-making levers to favor the general interest.

If the neoliberal train pursues its wild journey, a crash is guaranteed. Those who have set it in motion would like to see it go even faster. The most recent proof: after the last elections in France, the government of Nicolas Sarkozy announced its intention to accelerate the reforms, while the electorate had clearly rejected the current choices. Undoubtedly, a major international economic turnaround is impossible without a massive popular mobilization. Forty years after May 68, such a move is increasingly urgent if capitalism as such is finally to be challenged.

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