Tuesday, 30 September 2008

The free market preachers have long practised state welfare for the rich

Bailing out banks seems unprecedented, but the US government's form in subsidising big business is well established

According to Senator Jim Bunning, the proposal to purchase $700bn of dodgy debt by the US government was "financial socialism, it is un-American". The economics professor Nouriel Roubini called George Bush, Henry Paulson and Ben Bernanke "a troika of Bolsheviks who turned the USA into the United Socialist State Republic of America". Bill Perkins, the venture capitalist who took out an ad in the New York Times attacking the plan, called it "trickle-down communism".
They are wrong. Any subsidies eventually given to the monster banks of Wall Street will be as American as apple pie and obesity. The sums demanded may be unprecedented, but there is nothing new about the principle: corporate welfare is a consistent feature of advanced capitalism. Only one thing has changed: Congress has been forced to confront its contradictions.
One of the best studies of corporate welfare in the US is published by my old enemies at the Cato Institute. Its report, by Stephen Slivinski, estimates that in 2006 the federal government spent $92bn subsidising business. Much of it went to major corporations such as Boeing, IBM and General Electric.
The biggest money crop - $21bn - is harvested by Big Farmer. Slivinski shows that the richest 10% of subsidised farmers took 66% of the payouts. Every few years, Congress or the administration promises to stop this swindle, then hands even more state money to agribusiness. The farm bill passed by Congress in May guarantees farmers a minimum of 90% of the income they've received over the past two years, which happen to be among the most profitable they've ever had. The middlemen do even better, especially the companies spreading starvation by turning maize into ethanol, which are guzzling billions of dollars' worth of tax credits.
Slivinski shows how the federal government's Advanced Technology Program, which was supposed to support the development of technologies that are "pre-competitive" or "high risk", has instead been captured by big businesses flogging proven products. Since 1991, companies such as IBM, General Electric, Dow Chemical, Caterpillar, Ford, DuPont, General Motors, Chevron and Monsanto have extracted hundreds of millions from this programme. Big business is also underwritten by the Export-Import Bank: in 2006, for example, Boeing alone received $4.5bn in loan guarantees.
The government runs something called the Foreign Military Financing programme, which gives money to other countries to purchase weaponry from US corporations. It doles out grants to airports for building runways and to fishing companies to help them wipe out endangered stocks.
But the Cato Institute's report has exposed only part of the corporate welfare scandal. A new paper by the US Institute for Policy Studies shows that, through a series of cunning tax and accounting loopholes, the US spends $20bn a year subsidising executive pay. By disguising their professional fees as capital gains rather than income, for example, the managers of hedge funds and private equity companies pay lower rates of tax than the people who clean their offices. A year ago, the House of Representatives tried to close this loophole, but the bill was blocked in the Senate after a lobbying campaign by some of the richest men in America.
Another report, by a group called Good Jobs First, reveals that Wal-Mart has received at least $1bn of public money. Over 90% of its distribution centres and many of its retail outlets have been subsidised by county and local governments. They give the chain free land, they pay for the roads, water and sewerage required to make that land usable, and they grant it property tax breaks and subsidies (called tax increment financing) originally intended to regenerate depressed communities. Sometimes state governments give the firm straight cash as well: in Virginia, for example, Wal-Mart's distribution centres receive handouts from the Governor's Opportunity Fund.
Corporate welfare is arguably the core business of some government departments. Many of the Pentagon's programmes deliver benefits only to its contractors. Ballistic missile defence, for example, which has no obvious strategic purpose and is unlikely ever to work, has already cost the US between $120bn and $150bn. The US is unique among major donors in insisting that the food it offers in aid is produced on its own soil, rather than in the regions it is meant to be helping. USAid used to boast on its website that "the principal beneficiary of America's foreign assistance programs has always been the United States. Close to 80% of the USAid's contracts and grants go directly to American firms." There is not and has never been a free market in the US.
Why not? Because the congressmen and women now railing against financial socialism depend for their re-election on the companies they subsidise. The legal bribes paid by these businesses deliver two short-term benefits for them. The first is that they prevent proper regulation, allowing them to make spectacular profits and to generate disasters of the kind Congress is now confronting. The second is that public money that should be used to help the poorest is instead diverted into the pockets of the rich.
A report published last week by the advocacy group Common Cause shows how bankers and brokers stopped legislators banning unsustainable lending. Over the past financial year, the big banks spent $49m on lobbying and $7m in direct campaign contributions. Fannie Mae and Freddie Mac spent $180m in lobbying and campaign finance over the past eight years. Much of this was thrown at members of the House financial services committee and the Senate banking committee.
Whenever congressmen tried to rein in the banks and mortgage lenders they were blocked by the banks' money. Dick Durbin's 2005 amendment seeking to stop predatory mortgage lending, for example, was defeated in the Senate by 58 to 40. The former representative Jim Leach proposed re-regulating Fannie Mae and Freddie Mac. Their lobbyists, he recalls, managed in "less than 48 hours to orchestrate both parties' leadership" to crush his amendments.
The money these firms spend buys the socialisation of financial risk. The $700bn the government was looking for was just one of the public costs of its repeated failure to regulate. Even now the lobbying power of the banks has been making itself felt: on Saturday the Democrats watered down their demand that the money earned by executives of companies rescued by the government be capped. Campaign finance is the best investment a corporation can make. You give a million dollars to the right man and reap a billion dollars' worth of state protection, tax breaks and subsidies. When the same thing happens in Africa we call it corruption.
European governments are no better. The free market economics they proclaim are a con: they intervene repeatedly on behalf of the rich, while leaving everyone else to fend for themselves. Just as in the US, the bosses of farm companies, oil drillers, supermarkets and banks capture the funds extracted by government from the pockets of people much poorer than themselves. Taxpayers everywhere should be asking the same question: why the hell should we be supporting them?

Get Hotmail on your mobile from Vodafone Try it Now

Sunday, 28 September 2008

Crisis on Wall Street and India


Notwithstanding the soothing words of the Indian Finance Minister, P. Chidambaram, Indian economy is in for a great deal of trouble. Looking back to the Great Depression of 1929-33 when the Indian economy was not so much integrated with the world economy as it is now, India's rural population suffered in an unprecedented manner. During those days very few people in the villages of Bihar and UP could tell you about America and its geographical location. Yet, slump in agricultural prices led to the failure on the part of peasantry to discharge its rent obligations, resulting in zamindars in Bihar and talukedars in Awadh foreclosing its landholdings. Powerful peasant movements, led by Swami Sahajanand in Bihar and by Baba Ramchandra in Awadh forced the British government to concede the demands of peasants. One may recall that Nehru was actively involved in Awadh peasants' struggle.
This time, the situation is radically different. Indian economy is largely integrated with the world economy, thanks to the acceptance and implementation of the ten points of the Washington Consensus. Almost two decades ago, when the Narasimha Rao government came to power India officially consigned the Nehruvian model of economic development to the garbage and there appeared experts, inspired by the Fund-Bank thinking, charging Nehru for ruining the prospects of India becoming a superpower long ago and leading India onto the path of "Hindu rate of growth". The ten points of the Washington Consensus were thought to be a panacea opening the new vistas for the country. India was advised to liberalize, privatize and globalize. Thus, the doors and windows of the economy were kept fully ajar so that foreign capital and technology could come without any hindrance to set up production facilities and make capital markets buoyant. India was advised to cater to foreign markets rather than domestic one. Nehru's mantra that India must go ahead producing largely on the basis of domestic capital, domestic labour and domestic resources for domestic market in order to create maximum incomes and employment opportunities for Indians was discarded. The leakage of, what economists call, multiplier effect was to be prevented. This, along with the aim of removing regional imbalances and income inequalities, was to pave the way to national integration and social unity, preventing the emergence of all kinds of secessionist and disruptionist forces. Now, look around and you find a big resurgence of these forces.
The increased frequency of farmers' suicides, communal riots, regional and linguistic chauvinism, Naxal movement gaining strength, and organized criminal gangs roaming around are, to a large extent, due to the new model of economic development tied to globalization, based on the Washington Consensus.
With the turmoil on the Wall Street, leading to the collapse of the 158-year old the Lehman Brothers and the Wilson-era Merrill Lynch, and the AIG being paralyzed, and the frantic efforts of the Bush administration to stop panic from spreading coming to nought, sooner or later the impact will be felt all around the globe. This time no country will escape while during the Great Depression the Soviet Union remained immune. The impact has been gathering strength ever since the sub-prime crisis, leading to insurmountable impediments in the way of the survival of Bear Stearns, JPMorgan Chase & Co., Fannie Mae and Freddie Mac and the state rushing in to rescue them.
It is surprising that the likes of the Kaushik Basus and the Raghuram Rajans, venerable professors at US universities have suddenly forgotten that this will lead to 'moral hazard'. These people were till the other day angry with the UPA government for rural loan waivers and guaranteeing jobs to the rural poor because these schemes were going to destroy fiscal discipline by encouraging moral hazard.
The crisis is going to shatter the dreams of the educated young in India. All of a sudden job prospects have become bleak. The Economic Times (Sept. 20) has reported that the dreams of a great future, global business travel and meetings with top honchos have turned into a nightmare. As many as 2500 employees of Lehman Brothers' India unit and around 2.3 million young and energetic people working in India's information technology and BPO are to lose their lucrative jobs. In India, around 60 per cent of the companies operating in the IT-BPO sector have been working for American financial corporations like Goldman Sachs, Washington Mutual, Citigroup, Bank of America, Morgan Stanley and the Lehman Brothers.  Tata Consultancy Services and Satyam Computers have been working for the Merrill Lynch, and Wipro has a number of American corporations as its clients that are bruised by the present collapse. It is anybody's guess that layoffs are certain to take place in Bangalore, Hyderabad, Chennai, Gurgaon, Noida, etc.
It is reported that hiring outlook for India for the first quarter (Jan-March) of 2009 is going to dip by 23 percentage points for finance and insurance sectors and for information technology sector it will go down by 9 percentage points. Multinational companies are likely to axe 5 to 8 thousand jobs in coming months in their call centres and related activities. Hewlett-Packard that manufactures computers, printers, cartridges, etc. is to reduce the size of its staff by around 25,000 all over the world. India too is going to lose some hundreds of well-paying jobs.
This is certainly going to bring gloom to IIMs and IITs where the big corporations have been rushing every year to lure the bright ones with annual pay packages running up to 2 million rupees besides attractive perks. Frustrations, depression and so on are sure to follow. In quite a number of cases parents borrow and even mortgage their immovable assets to raise funds to finance their wards' studies. How will they discharge their obligations?
As many as 38 per cent of the Indian companies will be ousted from the billionaire club. The falling exchange value of the rupee vis-à-vis dollar and the downward trend in the bourse have reduced the number of companies with market capitalization exceeding a billion dollars to 139 from 227. Whatever the experts, daily paraded by the electronic media, may say, the fact remains that FIIs have been withdrawing their funds from Indian bourse. This trend will continue in the near future. This will obviously strengthen the bearish mood and Indian investors too will quit and go over to the bullion market and real estate where the prices will depress.
The malls, the PVRs and the producers of luxury goods like big cars, fancy clothes and shoes, plasma television sets, fashion magazines, page three of metropolitan dailies and so on too will feel the impact sooner or later in the form of declining or stagnating demands. And lay offs will be witnessed there. In other words, the contagion will be very much in evidence. Air travels will further decline and so will be the occupancy rates in five star hotels.
The Economic Times (Sep. 16) has reported: "The crisis on the Wall Street would hit the fund-raising plans of India Inc. hard." The Tata Motors have already cancelled the issue of preference shares to the tune of Rs 30,000 million. This indicates that many other Indian firms are going to shelve their plans of raising capital on the Wall Street. The Economic Times goes on to add: "Instead of capital inflow into the country, there will be higher outflow of funds from the country of $3-3.5bn in the rest of the calendar year." During 2007, there was an outflow of $7bn from the equity market.
It goes on to add: "Even at international debt markets, the rates have gone up by 200 to 300 basis points in the past one year and is expected to go up further.... No wonder, the managers of Hindalco and Tata Motors' rights issues are a nervous lot."
It is high time that there is a serious review of the strategy of development pursued by India since the early 1990s.

Get Hotmail on your mobile from Vodafone Try it Now

A Better Bailout



By Joseph E. Stiglitz

26 September, 2008
The Nation

The champagne bottle corks were popping as Treasury Secretary Henry Paulson announced his trillion-dollar bailout for the banks, buying up their toxic mortgages. To a skeptic, Paulson's proposal looks like another of those shell games that Wall Street has honed to a fine art. Wall Street has always made money by slicing, dicing, and recombining risk. This "cure" is another one of these rearrangements: somehow, by stripping out the bad assets from the banks and paying fair market value for them, the value of the banks will soar.

There is, however, an alternative explanation for Wall Street's celebration: the banks realized that they were about to get a free ride at taxpayers' expense. No private firm was willing to buy these toxic mortgages at what the seller thought was a reasonable price; they finally had found a sucker who would take them off their hands--called the American taxpayer.

The administration attempts to assure us that they will protect the American people by insisting on buying the mortgages at the lowest price at auction. Evidently, Paulson didn't learn the lessons of information asymmetry which played such a large role in getting us into this mess. The banks will pass on their lousiest mortgages. Paulson may try to assure us that we will hire the best and brightest of Wall Street to make sure that this doesn't happen. (Wall Street firms are already licking their lips at the prospect of a new source of revenues: fees from the US Treasury.) But even Wall Street's best and brightest do not exactly have a credible record in asset valuation; if they had done better, we wouldn't be where we are. And that assumes that they are really working for the American people, not their long-term employers in financial markets. Even if they do use some fancy mathematical model to value different mortgages, those in Wall Street have long made money by gaming against these models. We will then wind up not with the absolutely lousiest mortgages, but with those in which Treasury's models most underpriced risk. Either way, we the taxpayers lose, and Wall Street gains.

And for what? In the S&L bailout, taxpayers were already on the hook, with their deposit guarantee. Part of the question then was how to minimize taxpayers' exposure. But not so this time. The objective of the bailout should not be to protect the banks' shareholders, or even their creditors, who facilitated this bad lending. The objective should be to maintain the flow of credit, especially to mortgages. But wasn't that what the Fannie Mae/Freddie Mac bailout was suppose to assure us?

There are four fundamental problems with our financial system, and the Paulson proposal addresses only one. The first is that the financial institutions have all these toxic products--which they created--and since no one trusts anyone about their value, no one is willing to lend to anyone else. The Paulson approach solves this by passing the risk to us, the taxpayer--and for no return. The second problem is that there is a big and increasing hole in bank balance sheets--banks lent money to people beyond their ability to repay--and no financial alchemy will fix that. If, as Paulson claims, banks get paid fairly for their lousy mortgages and the complex products in which they are embedded, the hole in their balance sheet will remain. What is needed is a transparent equity injection, not the non-transparent ruse that the administration is proposing.

The third problem is that our economy has been supercharged by a housing bubble which has now burst. The best experts believe that prices still have a way to fall before the return to normal, and that means there will be more foreclosures. No amount of talking up the market is going to change that. The hidden agenda here may be taking large amounts of real estate off the market--and letting it deteriorate at taxpayers' expense.

The fourth problem is a lack of trust, a credibility gap. Regrettably, the way the entire financial crisis has been handled has only made that gap larger.

Paulson and others in Wall Street are claiming that the bailout is necessary and that we are in deep trouble. Not long ago, they were telling us that we had turned a corner. The administration even turned down an effective stimulus package last February--one that would have included increased unemployment benefits and aid to states and localities--and they still say we don't need another stimulus. To be frank, the administration has a credibility and trust gap as big as that of Wall Street. If the crisis was as severe as they claim, why didn't they propose a more credible plan? With lack of oversight and transparency the cause of the current problem, how could they make a proposal so short in both? If a quick consensus is required, why not include provisions to stop the source of bleeding, the millions of Americans that are losing their homes? Why not spend as much on them as on Wall Street? Do they still believe in trickle down economics, when for the past eight years money has been trickling up to the wizards of Wall Street? Why not enact bankruptcy reform, to help Americans write down the value of the mortgage on their overvalued home? No one benefits from these costly foreclosures.

The administration is once again holding a gun at our head, saying, "My way or the highway." We have been bamboozled before by this tactic. We should not let it happen to us again. There are alternatives. Warren Buffet showed the way, in providing equity to Goldman Sachs. The Scandinavian countries showed the way, almost two decades ago. By issuing preferred shares with warrants (options), one reduces the public's downside risk and insures that they participate in some of the upside potential. This approach is not only proven, it provides both incentives and wherewithal to resume lending. It furthermore avoids the hopeless task of trying to value millions of complex mortgages and even more complex products in which they are embedded, and it deals with the "lemons" problem--the government getting stuck with the worst or most overpriced assets.

Finally, we need to impose a special financial sector tax to pay for the bailouts conducted so far. We also need to create a reserve fund so that poor taxpayers won't have to be called upon again to finance Wall Street's foolishness.

If we design the right bailout, it won't lead to an increase in our long term debt--we might even make a profit. But if we implement the wrong strategy, there is a serious risk that our national debt--already overburdened from a failed war and eight years of fiscal profligacy--will soar, and future living standards will be compromised. The president seemed to think that his new shell game will arrest the decline in house prices, and we won't be faced holding a lot of bad mortgages. I hope he's right, but I wouldn't count on it: it's not what most housing experts say. The president's economic credentials are hardly stellar. Our national debt has already climbed from $5.7 trillion to over $9 trillion in eight years, and the deficits for 2008 and 2009--not including the bailouts--are expected to reach new heights. There is no such thing as a free war--and no such thing as a free bailout. The bill will be paid, in one way or another.

Perhaps by the time this article is published, the administration and Congress will have reached an agreement. No politician wants to be accused of being responsible for the next Great Depression by blocking key legislation. By all accounts, the compromise will be far better than the bill originally proposed by Paulson but still far short of what I have outlined should be done. No one expects them to address the underlying causes of the problem: the spirit of excessive deregulation that the Bush Administration so promoted. Almost surely, there will be plenty of work to be done by the next president and the next Congress. It would be better if we got it right the first time, but that is expecting too much of this president and his administration.

Get Hotmail on your mobile from Vodafone Try it Now!

Saturday, 27 September 2008

In praise of free markets



Published: September 25 2008 19:02 | Last updated: September 25 2008 19:02
The financial system has reached the point of maximum peril. After years of profligacy, banks have all but stopped lending to each other as the US Congress decides whether to extend support. If the unravelling of the banking system continues, the economic consequences will be dire. Yet there is an even greater risk: that the politicians now contemplating Wall Street's follies draw the wrong conclusions and take the wrong decisions, losing their confidence in markets altogether.
It would not be the first time. After the Wall Street Crash, markets were deemed to have failed and US lawmakers attempted to regulate short-cuts through the crisis. The widely-copied Smoot-Hawley Tariff Act quadrupled the effective tax rate on thousands of imports and deepened the "Great Contraction" of 1929 to 1933. The price of popular anti-market sentiment was much higher in some of Europe's fledgling democracies: fascism.
Despite the severity of the current crisis, such extreme reactions remain very unlikely. Yet there is plenty of room for policymakers to compound the damage already inflicted by the irresponsible conduct of the financial sector. It is time, then, to remember what open markets have achieved, and what lies in wait for societies that suppress them.
It is no help that some of the loudest critics have little interest in what went wrong, less in how to fix it, and none at all in safeguarding against problems in future. Rowan Williams, the archbishop of Canterbury, this week applauded the UK government's ban on short selling. His colleague, John Sentamu, declared that the short sellers of bank shares were "clearly bank robbers and asset strippers". These are the words of a well-meaning man who can see no moral or practical difference between a car thief, a scrap-yard mechanic, and a person who insures a car and thus profits if it is stolen.
Andrew Cuomo, New York's Attorney General, went one step further – "looters after a hurricane" was his ill-judged analogy. Are short sellers also to be shot by the National Guard?
The trouble with such sentiments is that they solve nothing. Criticise in metaphors – "unbridled capitalism"; "unfettered greed" – and you duck the tiresome task of specifying what bridles and fetters you have in mind.
Consider the Washington rescue package first. Why should taxpayers bail-out millionaire bankers, and what should we force them to give back in return? Those are natural questions but not the only ones. We should also ask whether taxpayers will profit, directly or indirectly, from spending money to shore up the banking system. The answer is "yes". The system is close to collapse, and the consequences of collapse would be misery for Main Street. Profitable businesses and creditworthy consumers would suffer. A successful rescue would prevent that and there is even a small chance that it would be profitable in its own right. That is the justification for the rescue. Congress was right to scrutinise it – especially its lack of oversight – but has become distracted by a desire to clip Wall Street's wings.
The case for more effective regulation is nevertheless undeniable. It is hard to defend a system where top banking executives walk away with millions in compensation when their businesses are, in retrospect, fundamentally flawed. This looks like a reward for failure. We have witnessed two financial crises – the dotcom crash and the current banking disaster – in the first decade of this century. That is hardly a record which inspires confidence in the current efficiency of capital markets or their transparency.
The current crisis is routinely described as a symptom of deregulation, but it is equally the child of earlier, ill-fated interventions. Subprime mortgages grew because the prime mortgage sector was dominated by Fannie Mae and Freddie Mac, two institutions founded, regulated and effectively underwritten by the government. Securitisation was an effort to sidestep capital requirements. But it also created instruments that few could understand and, in Warren Buffett's prophetic words, really were "financial weapons of mass destruction".
Capital markets clearly need better regulation but policymakers should guard against unintended consequences. Markets are places of trial and, very frequently, error. Their genius is not perfect efficiency, but the rewarding of success and the weeding out of failure. No better alternative has ever presented itself.
This is a difficult time to defend free markets. Nevertheless they must be defended, not only on their matchless record when it comes to raising living standards, but on the maxim that it is wise to let adults exercise their own judgment.
Market freedom is not a "fundamentalist religion". It is a mechanism, not an ideology, and one that has proved its value again and again over the past 200 years. The Financial Times is proud to defend it – even today.

Win £3000 to spend on whatever you want at Uni! Click here to WIN!

Friday, 26 September 2008

Oh, Henry! The 700 Billion

By Niranjan Ramakrishnan

25 September, 2008

When the Economic Stimulus of 2008 was being discussed early this year, I suggested that they save themselves the trouble of mailing out the checks to the American taxpayer, and mail the whole sum directly to China. After all, that was where it would fetch up anyhow when Americans, who were given the money in hopes they would spend it, did so.

Though no economist my guess was right; the stimulus went nowhere. And now the economy is said to be in the worst crisis since the Great Depression.

Democrats, just as they supported the stimulus package above, are again falling for the administration's cry of crisis. It is all too reminiscent of an old saying about software projects, "We don't have time to do it right, but we will have time to do it over". Here we have a political establishment that cannot muster the resources to provide subsidised health insurance, free college education, or secure borders. But we do have a bipartisan leadership happy to spend 150 billion dollars a year on foreign wars, and ask for 700 billion more to plug a problem created with open eyes.

The 700 billion dollars will not solve the problem, just as the stimulus package did not. The reason is quite simple. The housing crisis was not a matter of lending alone. After all, home ownership is not dramatically higher today than it was, say, 10 years ago (65% in 1996, 68.9% in 2005, see this website). So what is different today?

The real answer is the loss of jobs. In software design they talk of a black box approach: clarity is achieved at each level by ignoring the inner complexities of a system and examining the inflows and outflows. In such a view, if wages are stagnating or dropping, and jobs are fleeing the country, how can people afford to maintain or buy new homes? In this situation, even if you gave people the most favorable loan terms, how would they be able to repay? Clearly the housing market would have to drop. This much was clear to anyone with half an eye open. But not, evidently, to Mr. Paulson, or to Mr. Greenspan.

American wages have been under assault from two fronts, illegal immigration on one and outsourcing on the other. Curiously, the right favors both and the left half-heartedly opposes one. The governing meme in the last 30 years has been to foster both, with an imbecilic worship of false idols like globalism and diversity. So steeped are we in shibboleths that not even this so called Great Crisis of this week has forced a discussion of the true ills afflicting the land.

Instead, we have Thomas Friedman writing a letter to Iraq (in George Bush's name), telling them that we now need to attend to America, as we can no longer afford to spend our wealth in Iraq. It is hard to say which is more staggering, the man's arrogance, or his lack of shame. The Iraqis did not invite us. We went there, egged on by Thomas Friedman and his Flat Earth crowd, dismantled the state and instituted mayhem. We have the blood of several million people on our hands. Barack Obama's grouse these days is that Iraqis have 80 billion dollars sitting in New York banks (maybe he thinks they should move them to Zurich) while we're spending so much money on Iraq. Perhaps someone should remind Sen. Obama of his numerous votes authorizing exactly this expenditure. And recall that all he wants to do is spend it in Afghanistan instead.

Come home, America, said George McGovern during Vietnam. It has been the only sensible prescription for several years now. But America is a land of plenty in all things, it would seem, except common sense. Writing of George Bush's prime time address on the current 'crisis', Gail Collins captured our plight when she wrote this morning, 'Bush has arrived at that unhappy point in American public life when a famous person begins to look like a celebrity impersonator.'

But the old song from the Hindi film Tere Mere Sapne (1971) still says it best: Andhi Praja, Andha Raja, Taka Ser Bhaji, Taka Ser Khaja. (Meaning: A Blind People, led by a Blind King, A country devoid of discrimination, that would price a pound of vegetable the same as a pound of dates). Let us not forget just how special we are; the only country in the world that would have given a president like Mr. Bush a second term, and one that discusses lipstick, pigs, and the crumbling of its economy -- all with equal attention.

Love: The old, old story - the cooling of desire

It's the fact of life they rarely teach you when you're growing up: the slow, inevitable cooling of desire that creeps up on us with age. Should we welcome it – or rage against the dying of sexual intoxication? Thomas Sutcliffe reflects on love and time

Friday, 26 September 2008

Two memories from childhood – both of them related to the descending curve that would result if you were to plot the sharpness of sexual desire against advancing age. The first memory is, I suppose, my first intimation that there's a conventional wisdom about such matters at all, though it takes years for that fact to become clear.

I am six or seven, at a Sunday lunch that has pulled together three or four young families, and suddenly the children become aware that the grown-ups are talking about putting coins into a bottle. We know that grown-ups don't have piggy banks, so we ask what they're talking about and they laugh and say we're too young to understand and – more laughter – that we'll find out one day. And, as it happens, I remember the incident a few years on and ask whether I'm old enough now for an explanation. What was being talked about, it turns out, was the idea that if a married couple put a coin into a bottle for every time they have sex in the first year of their marriage, and take a coin out for every subsequent occasion, they'll never get round to emptying the bottle. This wasn't a joke, exactly, or an accepted truth, but the kind of received opinion that is generally covered by the phrase "You know what they say, don't you?" And the merriness of that first gathering, their shout of laughter at the idea, suggests that they were all still young enough to think themselves exempt from "their" law of waning sexual desire.

The second memory – one of my own personal plot points on that universal graph – dates from a few years later. I am doodling on an exercise book, on which I draw a pudendal triangle, its apex pointing downwards. I fill it in with black ink and draw a line directly downwards from the point, and then – a little above the horizontal line of the top of the triangle two small round dots, placed roughly where the nipples should be. The pictogram I have produced bears about the same relation to a real naked woman as a red dot on a yellow stick bears to the beak of a maternal herring gull, but, as Niko Tinbergen famously discovered, the sophistication of a stimulus may be immaterial when it comes to certain biological imperatives.

And a 14-year-old boy is as helplessly in thrall to his hormones as a herring gull chick is to its innate instincts. The pictogram does the trick. I have to shift a little awkwardly in my chair. Had I known at the time how long it was going to be before I could move from theory to practice I would probably have hung myself – but even so this strikes me as a good candidate for an apogee of sexual responsiveness. If an equilateral triangle can get you going, it's fair to say that you're on a hair trigger.

It wouldn't work now, I suppose I should be glad to say. And not just because the real thing leaves an equilateral triangle looking decidedly flat. Blood chemistry has done its bit too, I take it – leaching the spikes of testosterone out of the system – not to mention the body's increasing indifference to your desires once it's got what it really wants from you – which is much younger bodies to carry the process on. Most men of a certain age carry about their own impudent marker of advancing age, a fuel-gauge pointer that steadily falls towards empty.

What pointed skyward in youth, as taut as a whippet's hamstring, gets a little more heavy-headed in age as the suspensory ligament loses its elastic zip. There's life in the old dog yet, they'll reassure you hastily, but there's no gainsaying that it's an older dog than it was – it's obedience to command just a little more sluggish. And I say, "I suppose I should be glad" because the collective wisdom has it that there is a compensatory trade-off for such slackening. Vigour and readiness may decline but as it does so increasing wisdom notionally stands a fighting chance against the importunities of the flesh. As Hamlet puts it to Gertrude: "You can't call it love; for at your age/ The hey-day in the blood is tame, it's humble/ And waits upon the judgement".

It's a very young man's remark that – likely to be received with a rueful snort by those old enough to know that the blood remains perfectly capable of surprise insurrections until very late in life. But it's also a designedly cruel remark, which works only because it touches on a half-acknowledged and uncomfortable truth. Who really wants to be called tame, however much wisdom or serenity comes with it?

What Hamlet is saying – and goes on to say more bitterly and more pointedly, is that Gertrude is past it, that appetite in her has become unseemly and, more terrifying still, redundant. And while there is no shortage of consolations in the proverbial armoury for this alteration, many of them betray an ambivalence about what's been lost.

Take "settled down", for one Рthat unnerving cliché for those who have withdrawn from sexual contest. What settles is silt in a tank. And settling Рas the joke underlines Рis the deflated deal you do with reality when you can't get what you first asked for. When you hear indisputable truths about waning sexual urgency Рthe relief from the hurly-burly of the chaise-longue, the quieter pleasures of companionable sex, the extra reading time Рyou should also be able to hear a faint whistling in the dark Рthe sound of people who know that they are being sidelined from where the action is.

This is because we correctly understand desire to be reciprocal thing, only truly meaningful when it is reflected back at us. Otherwise, it's just hopeless pining. And to put it crudely, as you grow older you sense that you're steadily fading from the realm of the conceivable shag – growing a little more transparent with every passing day, until you're barely visible at all in the mirror of desirable people's eyes.

It isn't just the age you are that has a bearing on this, of course, it's also the age you're in. And the received opinion on that would seem to be that we've never had it better – or for longer, or more often. The men among us (and men may need it more than women) even have a solution for those who require chemical assistance to restore the "hey-day in the blood". Coleman Silk, the protagonist of Philip Roth's The Human Stain, sings a hymn of praise to it when he explains how he's been rescued from the sexual diminuendo that would, as a matter of course, been the lot of a 71-year-old man born 50 years earlier.

"Without Viagra I would have the dignity of an elderly gentleman free from desire who behaves correctly. I would not be doing something that makes no sense... Without Viagra I could continue, in my declining years, to develop the broad impersonal perspective of an experienced and educated honourably discharged man who has long ago given up the sensual enjoyment of life... instead of having put myself back into the perpetual state of emergency that is sexual intoxication."

In his polite sarcasms Silk neatly skewers the fantasies of "dignity", but he then misplaces the credit for his transformation: what's actually given him desire again is his 34-year-old mistress (a cure for flagging ardour that even the Romans knew about). Viagra – a mechanical aid, not an aphrodisiac – merely enables him to act upon it a lot more often than he would otherwise be able to do. And Roth understands that it is really appetite rather than consummation that is singing in the blood of his character – what makes him declaim, with a giddy collapse in articulacy, "I'm back in the tornado. Because this is what it is with a capital isness".

I can't help wondering whether exclusion from the tornado now hits harder than at any time in human history, in part because our expectations of sexual lifespan have expanded so enormously. Everything in the culture now enjoins us to postpone sexual retirement or sexual rallantando. We know we're expected to be swinging from the retirement home bed-lifts with the twinkly-eyed lady down the corridor and that there will come no firm close-of-season on the universal duty to be sexually satisfied. That's fine as far as it goes – and since we haven't yet moved from gentle encouragement to compulsion it goes just as far as you want it to. But there is still a difficulty. Because we remember that sex wasn't once about control and cosiness yet we're still working with bodies that thousands of years of evolution have designed to wind down from the crescendo of reproduction, so that we get out of the way of younger, healthier breeders.

The result is, undeniably, a mismatch between the urgent advertising for sex we encounter every day and what you might call our capacity to consume. As you get older there won't necessarily be any problem with the availability of sex or – I'm relieved to say – with its quality when you get it. The problem – foolishly or not – lies in the sharpness of the appetite. As a 14-year-old male you long to be fed. As a 50-year-old you long to be hungry again.

Thursday, 25 September 2008

India hits bottleneck on way to prosperity



By David Pilling
Published: September 24 2008 20:15 | Last updated: September 24 2008 20:15
If ever there were a symbol of India's ambitions to become a modern nation, it would surely be the Nano, the tiny car with the even tinier price-tag. A triumph of homegrown engineering, the $2,200 (€1,490, £1,186) Nano encapsulates the dream of millions of Indians groping for a shot at urban prosperity. That process has stalled.
The Nano has run into trouble because of a messy tussle over land with dispossessed farmers. But the struggle to determine whether West Bengal's paddy fields yield up crops or cars is symbolic of something much bigger: the difficulty India has in emulating the manufacturing-led models of countries that have hauled themselves from poverty.
No big economy has prospered without undergoing a huge, often brutal, shift of labour from the countryside to cities and from farms to factories. In Britain, this process was underpinned by the enclosure acts of the 18th and 19th centuries, which drove people from the land by expropriating the commons, creating a landless working class that became fodder for the dark satanic mills of its industrialisation.
The pattern, with some variations, was repeated elsewhere, including in Japan and South Korea, where people were pushed by poverty and pulled by ambition to work in vast urban conglomerations. China, today, is in the throes of the biggest mass migration in history as people flock from subsistence farming to clock in at the world's workshop. As many as 600m people, or about 47 per cent of China's population, live in cities, at least 100 of which have swelled to more than 1m inhabitants. According to McKinsey, the consultancy, the country is adding a new Chicago a year to its urban throng.
Now look at India. According to Rana Hasan, labour expert at the Asian Development Bank, of the 406m labour force in 2000, 78 per cent lived in rural areas against just 22 per cent in towns and cities. The structural transformation from low-productivity farm labour to higher-productivity industry has been painfully slow. Today, agriculture employs about 60 per cent of the workforce but accounts for a measly one-fifth of national output. The predominantly urban, "organised" sector produces 40 per cent of output with just 7 per cent of the workforce.
According to unpublished research*, in 2004 there were 6.75m "standard workers" (working 300 days a year, eight hours a day) engaged in Indian manufacturing versus 61m in the Chinese sector. The Indian figure may underestimate the true picture by up to two-thirds because of "unregistered enterprises" that slip through the statistical net. Even so, there is a yawning gap with China.
India's information technology and service sector, no matter how dynamic, simply cannot absorb enough labour. To truly shine, India will need millions, perhaps tens of millions, more manufacturing jobs. Why has it not created them?
One answer is that it got off to a false start. Mahatma Gandhi's idealisation of rural simplicity set the tone for post-independence policies that concentrated on heavy-industry import substitution but was biased against creating labour-intensive manufacturing jobs. Policies of "reserving" entire production lines for small-scale enterprises throttled automation.
Even now that some of these policies are being dismantled, as states vie for investment, you often need up to 100 permits, chits and slips to set up a factory. Rigid labour laws, which make it hard to fire workers, as well as pot-holed roads and intermittent electricity supplies, remain formidable barriers to industrialisation.
More fundamentally still, as the dispute over land in West Bengal shows, it is hard to engineer mass migration in a democracy. In contrast to 18th century Britain and 21st century China, the vote of a dispossessed Indian peasant is worth the same as that of a would-be industrialist. Collectively, it is worth more. "You have to hand it to Indian democracy," says Mr Hasan. "It does give you a voice. But that makes it very difficult to negotiate change."
The fact that a process is slow and messy does not mean it is doomed, argues Kishore Mahbubani, dean of Singapore's Lee Kuan Yew School of Public Policy. India was slow off the mark, dismantling the Licence Raj in 1991, more than a decade after Deng Xiaoping unleashed China's potential. "My sense is that it will catch up," Mr Mahbubani says. Indeed, where investment has come, such as in automotive components, advocates argue that quality matches world standards.
Amartya Sen, Nobel economist, agrees that democracy need be no obstacle to industrialisation. But even if short-term obstacles – such as bureaucracy and access to land – are overcome, he sees a severe bottleneck ahead. That is the neglect of basic education and healthcare which, as well as being scandalous in its own right, deprives India of the fit and literate workforce any competitive industry requires.
Mao Zedong, for all the reckless horror he unleashed, did bring schools and rudimentary healthcare to the peasants. "The train of China's industrialisation runs on the secure foundation of Maoist rails," says Prof Sen. If India is to become a car-owning democracy, it will have to solve some basic problems first.

Win £3000 to spend on whatever you want at Uni! Click here to WIN!

Wednesday, 24 September 2008

Anatomy of a break-up

It happens every day, yet the bitterness of love turning sour always takes those involved by surprise. Mark Steel was in his forties a respectable father of two when his relationship fell apart. This is histragicomic account of its sad unravelling

Wednesday, 24 September 2008

It must be a trial to live with a comic and their disconcerting habits. Only comics, for example, feel such inconsolable anguish in a curry house, because they're halfway through telling a hilarious joke and it's trodden on by the waiter interrupting with "Your starters, please" and delivering your onion bhajis. Only comics come away from a funeral feeling numb and hollow because another comic's story about the dead person got a bigger laugh than their own. So my partner would probably have been able to make a case that if you're going through a period of manic volatile anxiety, it may not be advisable to be living with a comic.

For around 10 years, our awkward moments remained an unwelcome nuisance that we could learn to live with, like diabetes.

But then they grew, like the engine noise you know you shouldn't ignore, but do anyway until it suddenly clatters with doom. In some ways the more dramatic episodes were the most manageable. But when there was a low level of rumbling discontent, it was tempting to deal with it as a genuine argument, for example by exhaling a puff of exasperation and saying, "But you asked for custard." And that way we could descend into the world of the classic bickering couple, boiling with a sense of injustice while enunciating one word at a time with tensely bent fingers and a galloping heart, "You said turn left so I turned left."

There'd be the gruelling moments following a chilling exchange when neither of us would speak as we brushed past each other, each of us leaving a trail of unsettling frostiness.

Then a neighbour would call out "Hi, yoo-hoo, anyone there?" and my partner would suddenly abandon her scowl and cheerily discuss the latest episode of Buffy the Vampire Slayer. Which makes you even more livid, unable to de-clench a single muscle while wanting to shout, "OY. We're supposed to be GRUMPY here. You might have been faking it for effect so you can switch it off as soon as an outsider arrives but I really fucking MEANT it er, sorry, Barbara."

Or we'd play out that dreadful scene in which you've snapped at each other with particularly malicious venom but you're not really in a position to leave the room to allow the acrimony to cool down. For example, having just been described as "a selfish shitty lump of shit", you've still got to sit next to each other for the foreseeable future because you've just turned on to the M6 at Lancaster.

From time to time we'd hold a series of informal summits, after the children went to bed, involving discussions that went on until about one in the morning, so that each session was probably longer than the United Nations take to discuss the crisis in Kashmir. And because I fidget, I'd make things worse by getting up to change the CD, which must be exasperating if you're midway through a heartfelt soliloquy about feeling unappreciated.

At one point my partner and I were referred to a doctor who might be able to help us out, but he couldn't find the key to his office so we conducted our discussion sitting in the corridor as hobbling men and kids with broken arms walked past us. Without looking at either of us he muttered, "Hmm, it may be depression" in a way that suggested that if you'd complained about chest pains he'd say, "Ahh, the problem is you've got an illness." After 10 minutes of questions like "What makes you angry?", he took me to one side and said, "Do you have sex?"

"Now and then," I told him hesitantly. "Try to give her more sex," he said, then walked off. And I got the impression he'd prescribe a similar remedy for food poisoning or bee stings.

One problem when a relationship is fraying is that the words that come out are difficult to decipher, as both parties find it hard to articulate the underlying cause of their anxiety. I'd hear, "The PROBLEM, as you well know, is what you KNOW it is and if you can't even KNOW what you've done, well then DON'T you think I don't KNOW." This is a delicate situation for anyone, but a comic has the overpowering instinct to say something like "That's the question for your philosophy exam you may turn over your papers and begin NOW." Which, I can testify, doesn't help.

Trying to answer the points raised, with however much sympathy, is just as useless because such anguish has its own language.

Reassuring someone that you haven't done what they're crying you've done is worthless, because that's not what they're really crying about. It even makes them more frustrated, like when you present a yelling toddler with a bottle of milk when they really want their teddy but can't say the word.

If there was an immediate solution, I couldn't find it, so I entered one of the most negative phases of life in which, despite having a house, a partner, children and middle-aged respectability, you find yourself sleeping every night on the settee. The question for any couple reduced to long-term settee status is how much bitterness must there be to make the settee preferable to the bed?

Settees are uncomfortable. You sleep at best fitfully and every morning a different bit of you is crunched and twisted. You wouldn't choose to sleep there when there's a specially designed piece of sleeping apparatus a few feet away, just because you'd had a row or were in a sulk. You'd have to feel as if you were two North Poles on a magnet, so that even if you were pushed into the bed, you'd ping backwards, twizzle round and land on the settee.

And somehow you get used to it, the journey from overwhelming love and passion to repulsion happening in such gradual increments that you accept it as normal.

I realised my life was in trouble when I started envying couples who had normal ferocious rows. They would be sitting opposite each other on a train, he fuming ahead, lips tight together, breathing heavily through his nose, while she turned each page of a magazine with a violent flick as if swatting away a strange green insect, when without looking up she would snarl, "I can't believe you're going to Dublin on my mum's sixtieth, Sean, you bastard." He'd give it two more snorts and a fume and splutter, "He's my mate, right." And I'd think, "Aah, how sweet." Because my rows had no logic and no plot. If anyone had overheard them, they'd have complained "I didn't enjoy that, there was no beginning, middle or end." They'd get going with an abstract complaint, such as "Oh yes, that's TYPICAL" and move rapidly on to random complaints such as "How DARE you? You couldn't even stand my CAT."

And yet to leave altogether seemed an awful, unimaginable prospect at every level from trying to calm inconsolable kids to having to set up a new broadband account. There's the stench of chaos: legal documents, financial agreements, access arrangements, finding somewhere to live, buying a new settee. And the dreadful finality and acceptance of failure. Despite the high number of families that break apart, each one is categorised as a "failed marriage". Aligned to this sense of failure is the humiliation of giving up. You used to gaze at each other across a table splashed with takeaway curry and communicate with tiny twinkling facial expressions, affectionate puffs and grunts, and it's achingly mournful to accept it's gone. You feel it must still be there somewhere, if only you look hard enough, in the same way that you search through the house over and over again, refusing to accept you've lost your favourite jacket.

To part in your forties with children in tow is so different from doing it in your twenties with nothing more to row about than who gets the blender. All continuity will be lost for ever; in 20 years' time there will still be awkward arrangements about who goes where at Christmas and there will be no time when everyone sits together joyfully recalling the years until now. So after a few months on that settee, it took only a half-decent week without a major cacophony to convince us to give it another go. I left the settee, and everything was marvellous. We held hands on the way to the shop, and some people came for dinner, and we had the floors done up, and we saw Crystal Palace get promoted in the play-off final. But of course it wasn't really marvellous, because nothing had been repaired. We were like an old car that's packed up, but then suddenly one day for some reason when you turn the ignition splutters along again for a while.

One night, after a particularly fraught five hours, I realised the front and back doors were both hidden behind a tower of chairs, planks of wood, buckets and assorted useless objects from under the stairs. "We've barricaded you in," said my son and daughter, "because we were afraid you might leave." These are the issues that are weighed up before anyone takes the decision to finally part from their family. Around this time, the Government and opposition were both suggesting financial incentives should be offered to families who stick together, to curb the blight of broken homes. Even that, they believe, comes down to money. They really haven't got a clue.

The final moments of a failing relationship are usually pathetically ordinary. Unlike in films, where there's a last brave embrace amid the hubbub of an Italian railway station, or a drunk but eloquent liberating speech delivered to a stunned family gathering, the last words are more likely to be "I think this is your mug."

There was a minor grumble, something to do with shopping, one sunny Saturday afternoon, that I think involved cat food, delivered with the intonation Al Pacino would have used if there'd been a cat food issue in Scarface. And immediately I knew that was the end. I had no idea a few minutes earlier that we were one small-to-medium-sized snarl from termination, but when it happened I just knew. I'd run out of tolerance, and it seemed as definite and beyond my control as if I'd gone to make a cake but discovered I'd run out of flour.

"That's it," I said, surprised. Just as there must be a definite point when someone knows, absolutely knows, "I am going to try to swim the Channel" or "I am going to explode myself in a public building" and they become mentally prepared for all that their decision entails. I knew right then that I'd soon be packing records and reassuring children, contacting the gas board and telling people they couldn't get me on that number any more.

One of the weirdest moments after moving out was the first morning I woke up in the new place. Not only was it chillingly still and quiet, this was what the place was always like. Before, there had been moments of quiet when everyone else was out, but it was always a slightly anxious quiet, a brief calm to be inhaled before doors crashed open and the natural beat of childhood urgency ricocheted once more round the building. It was the quiet of a stadium before the starting gun for a sprint final. Now there was a different quiet, a permanent quiet. I could make some artificial noise by putting on the Wu-Tang Clan, but there was no organic thud-thud "Aaagh" "Get OFF" "Dad can I have a Twix" "pewaaa waaa kachakach COOL I've shot a ZOMBIE on level 2."

Another thing that is odd is not having to tell anyone where you're going. You just leave the house, and don't have to call out, "Just nipping out for some Sellotape." To start with I'd wander up the road slightly disconcerted, as if there was some procedure I hadn't been through, perhaps a form to complete when I left the house, to send to the Town Hall. Quite simply, finding yourself on your own for the first time in 13 years is lonely. And the irony with loneliness is it can make you feel that all you want to do is be alone. Then, disaster I couldn't get cable. It wasn't available in the road for some reason. Surely there was a law somewhere that said if someone is lonely cable has to be provided as a basic human right.

Once you're no longer surrounded by the everyday torment of a fractious relationship, it becomes possible to view the squabbles and conflicts from a distance. Even in the midst of wrath and fury, you realise it isn't aimed at you, it's aimed into the air somewhere, at the universe, for being a bastard of a universe. But somehow there seemed to be no way of preventing the frustration from booming and crackling us into court.

As I walked towards the court on the day, I saw her through the window of Starbucks, reading the clinical legal documents of the case. And in that image lay the potential for total despair, the triumph of cynicism. What was the point of hope or love or the tingle of expectation if it could end sitting in Starbucks amending "related" to "pertaining" with a pink marker pen? Can there really be people who stride into court for a case against their ex-partners pumped up with the craving for victory, like American wrestlers? If so you have to wonder whether they ever were in love in the first place. My own overwhelming emotion in the courtroom was bewilderment at how this happened.

How do you end up dreading a visit from the person you used to drive all night to see briefly in the morning? You don't want to spend the rest of your life looking back with disgust at every picnic and curry you shared, regretting the times of ringing in sick to spend the day in bed together, recalling festivals, boat trips, backstage passes, crazy French bars, trips to the all-night beigel shop at five in the morning, the night the Tories were kicked out, the bewildered newspaper man in the snow, as merely part of a marathon mistake.

Of course those moments were as strikingly real and electrifying as you remember them. Which is why the only true victory in this kind of court case would be one in which both of you were sentenced to stay locked in the room until you could remember, for the last time, the thrill of the first glance, the gulp at the first eye contact, the smell of the hopeful decaying function room where you first met.

However vindictive either side may appear, what most shattered couples really want, I suspect, is to smile at each other one last time and mean it, and in that moment salvage all the memories of hope.

Terminal Velocity

By Chan Akya

On the back of my last article on the undoing of the American/Western financial system (see Waiter, there's a banker in my soup, Asia Times Online, September 18, 2008) I had intended to write a follow-up on the implications for Asia. Events over the weekend though spell the very end of capitalism for the US and its European allies, pushing lifeboats on their decrepit financial sector even as the rest of the economies represented by the Group of Eight (G-8)leading industrialized countries come unstuck at breathtaking pace.

Perhaps the epitome of this decline was the coordinated support for the US dollar, combined with the provision of some US$200 billion of funds for the banking system last week. No matter all that, and the price of gold at the end of last week was still higher than at the end of the previous week.

US Treasury Secretary Henry Paulson seemed to have hidden his metaphorical bazooka for one weekend only (see Pareto's Bazooka, Asia Times Online, September 13, 2008) only to quickly unleash its fury in coordination with the Fed and the SEC last week once his favorite firms of Morgan Stanley and Goldman Sachs were threatened with bankruptcy.

Last week was quite far from the ordinary. The collapse of Lehman Brothers, the hastily arranged and seemingly shotgun marriage of Merrill Lynch with Bank of America as well as the breathtakingly immoral rescue of American International Group (AIG) by the Federal Reserve, which wasn't even that company's regulator, all point to the moral bankruptcy of Washington. The Securities and Exchange Commission (SEC) banned 799 stocks from being shorted for 10 days on Thursday night, in effect moving the goalposts once again (see A stone for Chris Cox, Asia Times Online, July 19, 2008) for my views on the sheer idiocy of banning short sales in financial markets).

In its defense the SEC, along with affected firms such as Morgan Stanley, pointed to the deep and serious risks being presented to the financial system by these unscrupulous short-sellers. Well, my heart bleeds for the investment banks but as it turns out, only 2.9% of Morgan Stanley was "on borrow", that is being used for short sales, at the beginning of last week. The rest of the decline in the company's share price - it fell 40% on one day for example - was basically good old genuine panic; the type that has not yet been banned by the SEC but is surely under consideration by some jobsworth or the other.

Just 10 years ago it was the very same luminaries from the US government, investment banks and the rest who pilloried the stock market intervention of the Hong Kong and Malaysian governments in 1998, arguing in favor of allowing the free market to establish itself. In editorial after editorial, these amazingly intelligent folks castigated the actions of Malaysia's then prime minister Mahathir Mohamad for banning short sales on the Kuala Lumpur Stock Exchange. The level of hypocrisy displayed by the US government - free-market professing Republican led, no less - in recent days brings to mind George Bernard Shaw's famous dictum that the "ordinary Britisher believes that God is an Englishman".

Much as Shaw foretold the end of the English empire, Paulson and his motley crew have brought forward the end of American and even Western economic power. As some wits remarked on television, there are even rumors that the Federal Reserve will guarantee personal happiness for the next few weeks, if so desired.

Call that triple-A?
Even away from the mumbo-jumbo of qualitative intervention, actual dollars being thrown around stack up nicely. There is firstly the $8.6 trillion in contingent liabilities that the US government has accepted within two weeks and without any apparent authority to do so - $5.2 trillion of liabilities guaranteed by Fannie Mae and Freddie Mac and $3.4 trillion outstanding at the country's money market funds that now enjoy a Federal guarantee.

For anyone keeping score, all that adds up to 160% of US government debt at the beginning of September. Add to these monstrosities the $700 billion that "Hank" Paulson now demands as new government funding to purchase every manner of decrepit mortgage-backed asset that US (and presumably European and Asian) banks wish to sell, and the total debt has increased by around 175%.

Against the gargantuan increase in total debt of the US, likely tax receipts will decline for many years to come as the combination of slower economic activity and historically built up tax-adjustable losses help individuals and companies to avoid paying taxes for many years to come. Indeed, one of the key tangible items for any bank to purchase its investment banking counterpart (Bank of America buying Merrill for example) is the billions in tax losses that can be absorbed in the event; these would more than pay for the purchase prices alone, leave aside the potential for revenue additions a few years down the line.

When debt increases and income declines, it is usual more difficult for the borrower to repay their debt. That is what creates a ratings event, ie for credit rating agencies to downgrade the borrower. The US government is now in the peculiar position wherein its debt is still rated at the triple-A level but there are very few quantifiable reasons for it remain so. While the overall situation is still better than that of the demographically-challenged European countries, I still cannot accept the notion that the US government is triple-A after last week's events.

A downgrade of the US government's debt will render much of its borrowings - Treasury bonds, agency bonds and the rest - unviable for holdings by the rest of the world. Alone, this could push up costs for the highly leveraged US economy at exactly the worst time in its cycle, and pummel growth for another couple of quarters by itself.

Of course, two of the three major credit rating agencies (Moody's, Standard & Poor's and Fitch) in the world are American while the third is European. Not to put too fine a point on it, I believe that it is quite unlikely that these agencies will proactively look to downgrade the US government - or indeed the governments of the UK, France, Italy et alia on the back of the most recent financial crisis. Whether the folks buying their bonds - Asian central banks and savers - will quite buy into that logic remains to be seen. Call me a cynic, but somehow I do not expect they will eat this "triple-A because we say so" nonsense twice. Then again, perhaps Asian central bankers ARE that stupid. We will find out soon enough.

Psst ... want a bailout?
The demand for Congress to pass some $700 billion in new purchasing power for the US Treasury acting in its own capacity goes beyond the dictionary definition of chutzpah, by making the very people responsible for driving the US economy aground also most likely to benefit from its recovery. It seems that there is hardly enough time to man gravy boats one last time in Washington, every lobbyist has gotten something valuable in the past week.

My views on the agency bailouts were aired previously (see And now for Fannie and Freddie, Asia Times Online, July 12, 2008) so perhaps it is apt to look at the other beneficiaries of last week's actions. Firstly, money market funds, where trillions of US savings are deposited by individuals and companies. These funds invest in short-term assets with strict ratings guidelines, therefore the chances of losing money are seen as minuscule. Yet, that is precisely what happened when Lehman Brothers declared bankruptcy last weekend.

Some funds had been holding hundreds of millions in Lehman short-term paper, which promptly went from being valued at par to being worthless from Friday to Monday. This led aggregate losses to eat into total capital, that is after accounting for interest received, creating a situation called "breaking the buck" - when the fund will return less than par to its investors. Alarmed at the potential for money deposited in these funds disappearing and taking with it any chances of a financial system recovery, the Fed quickly stepped in last week to guarantee the deposits.

People putting their money into such funds aren't the sort that would bother with neighborhood banks; they are the very rich across America and the rest of the world. Thus, the bailout wasn't intended so much for the investors as the borrowers, that is US financial and other companies.

If even this made sense to you - and it doesn't to me - the second bit of moral hazard thrown out by Paulson boggles the mind a bit more so. His proposal for Congress to approve within a week a package of some $700 billion in funding for the US Treasury to directly purchase mortgage-backed securities (MBS) from financial firms has all kinds of danger signals popping up.

Paulson seems to believe that buying these securities and removing them from the public arena would create breathing room for the financial sector to re-emerge from the ashes of the financial crisis, but in so doing he will sow the seeds for the next few bubbles in the US and European financial systems.

These MBS that the Treasury intends to buy are the very same securities that private sector financial firms - investment banks, their commercial counterparts, insurers, credit rating agencies - all failed to properly understand or value. This wasn't a uniquely American problem either, as the rest of the world is also caught up in the same whirlpool of losses.

If profit-seeking folks couldn't understand these securities and figure out what they were worth, what possible hope is there for a government body to do so? The idea is to relieve the banks of these messy assets so that they can get back to their usual functioning, but it is more likely that the banks will simply sell all their dud assets to the Treasury and walk away with all the good stuff.

In any event, the Treasury initiative addresses only the parts of the leveraged market that have failed so far; these assets all based on mortgage lending were but the first to decline. Looking ahead, there are the hundreds of billions in leveraged loans made to companies buying other companies, billions of money lent to project finance for a global economy that is simply not likely to have the same kind of steam, and so on. If banks believe that they have put a couple of dud financial years behind them, the willingness to lend into the next bubble will increase.

This is the return of socialism with a vengeance. The very people who tut-tut the record of the Bank of Japan and the lost decade have implemented its rule book in double quick time. Japan continues to face a recessionary environment. Europe has gone back to its shell with poor economic data, mounting job losses, significant financial sector declines, widening pension deficits all helping to destroy its economic innards. The only part of G8 that was doing well - Russia - has also entered crisis mode due to its government's mishandling of corporate governance issues as well as the silly geopolitical maneuver in Georgia that helped to evaporate investor confidence in the country.

G-8 is thus a spent force, with the final chapters coming rather more quickly than I had predicted in a previous article (see Dear Dinosaurs, Asia Times Online, October 20, 2007). The icing on the cake is that when looking at the political landscape in these countries, no change appears imminent. European leaders all appear fairly secure in their jobs with even the UK's Brown postponing leadership challenges; so does the Russian dictatorship after all its recent misadventures. Japan faces the potential demise of the Liberal Democratic Party, but without any significant ideological change being espoused by the Democratic Party of Japan, I am at a loss to explain quite what will change for the country in enough time to pull out of its terminal economic decline.

Leaving the best for last, I am deeply entertained by polls showing that the Republican candidates are likely to win the US presidency once again. John McCain exhorted the strength of US fundamentals last week, clearly showing quite how in touch he was. When challenged, he praised the "fundamentals of US workers", presumably referring to the same folks who produce cars / machine tools / capital goods and the like at double the labor cost and triple the product faults of their Japanese and European counterparts.

As for his running-mate, Sarah Palin, her statement on the AIG rescue said it all:
Certainly AIG though, with the construction bonds that they're holding and with the insurance that they are holding (is) very, very impactful for Americans, so you know the shot that has been called by the Feds - it's understandable but very, very disappointing that taxpayers are called upon for another one.
Don't worry if that statement flummoxed you with its arcane references to construction bonds and insurance holdings; I couldn't understand it either. To think that Americans are willing to repose their confidence in these two characters after the level of economic destruction carried by the Bush-Cheney team points to their deeply forgiving and almost saintly nature.

For Asian countries looking to supplant the US as the pre-eminent economic engine of the world as well as muster up the occasional dance on the grave of the sole superpower, the return of the Republicans would truly be a godsend.

Cambridge Admissions - read the letters from readers also.


Get Hotmail on your mobile from Vodafone Try it Now