Those who believe the myth that 1970s Britain was 'the sick man of Europe' forget how progressive the decade was
Neil Clark
Neil Clark
guardian.co.uk, Friday 10 June 2011 10.30 BST
It's regarded by some as one of the slushiest No 1 records of all time. It's exactly 35 years ago this week that No Charge, sung by the Canadian artist JJ Barrie, got to No 1 in the British pop charts – and thanks to the wonders of BBC4, who are repeating Top of the Pops shows from 1976 on a weekly basis, we'll all be able to see it performed on our television screens next Monday.
Some won't be looking forward to it too much – in his Guardian article of a week ago, Alexis Petridis claimed that 1976 was the worst year for pop music ever.
But leaving aside debates about musical merit, what watching the repeats of Top of the Pops and other programmes from the same era on channels such as Yesterday, ITV3 and ITV4 shows us is what a less commercialised age the pre-Thatcherite 1970s were.
No Charge might be considered over-sentimental by some, but it is also a powerful critique of the mentality of putting a dollar sign on things we should be doing for free.
It's extremely unlikely that such a song would be released in the uber-capitalist Britain of today, let alone get to No 1. But in the progressive, left-leaning mid-1970s, it was always likely to be a hit.
Thanks to the glories of the "market economy", many things which were free, or at least very cheap, 35 years ago, cost a small fortune today. In 1976 you didn't have to book up months in advance to find a reasonable train fare from London to Liverpool, you just turned up on the day. Utility bills were not something to be feared in the days when publicly owned bodies and not profit-hungry private companies provided your electricity, gas and water.
Students going on to higher education did not have to worry about building up huge debts in order to pursue their studies. Neither did old people have to worry about selling their homes in order to finance going into care. And in those pre-Sky days, all the best sports – including live coverage of England's summer Test match series – could be watched on television for the very modest cost of the licence fee.
In short, in the social democratic Britain of the 1970s, No Charge was not just the name of a No 1 hit record, it summed up the ethos of the era – an era in which the interests of people came before corporate profits.
This aspect of the 1970s is often lost in accounts of the period. The dominant neoliberal narrative casts 1970s Britain as the "sick man of Europe" – a country rescued from the horrors of collectivism by the great saviour Margaret Thatcher. But even the liberal left have bought in to large parts of this rightwing myth, and have failed to stick up for the 1970s as much as they should. The fact that Britain went to the IMF in the autumn of 1976 is taken as proof that the postwar settlement had failed – even Denis Healey, chancellor at the time, has admitted: "We didn't really need the money at all."
Watching television programmes of the 1970s reminds us of the anti-capitalist values which were once mainstream. The year that No Charge got to No 1 saw the television debut of James Mitchell's drama series, When the Boat Comes In, which tells the story of trade union activist and strike organiser Jack Ford. The Onedin Line, currently being re-shown on the Yesterday channel, highlighted the greed of unscrupulous ship-owners and the terrible conditions that sailors had to endure in the 19th century. Upstairs Downstairs, another 70s classic being repeated on ITV3, showed how those "downstairs" saw their position improve in the 20th century. In Poldark, the title character takes the side of the poor against the greedy landowner and banker George Warleggan.
Since the days when those programmes were screened, we've seen the money-grabbing values of the City and Wall Street permeate all aspects of our lives. Who would have thought that water – which falls out of the sky for free – would become a tradable commodity, or that care homes would be owned by City investors?
While in the summer of 1976 we were listening to No Charge and enjoying the lowest levels of inequality in our history, in the grossly unequal Britain of June 2011, we're tuning into The Apprentice. The proto-Thatcherite little boy in No Charge – who wants to bill his mum $5 for "mowin the lawn" and $1 for "takin out the trash" – rightly gets corrected: today he'd probably be lauded as a brilliant up-and-coming entrepreneur.
Neoliberals want us to believe that "market forces" are the only show in town. But watching 1970s television programmes gives us a window into a world where things were different. It's not possible to turn the clock back to 1976, but we can make the title of JJ Barrie's No 1 hit record the slogan for a better and less commercialised Britain.
“Blessed is the nation that doesn’t need heroes" Goethe. “Hero-worship is strongest where there is least regard for human freedom.” Herbert Spencer
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Showing posts with label business education. Show all posts
Showing posts with label business education. Show all posts
Friday 10 June 2011
Sunday 6 March 2011
The real scandal at the LSE
A tangled web of relationships with the last Labour government and Libya have brought a high-minded institution to its knees, says Peter Stanford
There is a revealing remark in the minutes of the debate that took place in October 2009 at the governing council of the London School of Economics over whether to accept a donation of £1.5 million from Saif Gaddafi, son of the Libyan dictator. Fred Halliday, the school’s professor of international relations, had warned the council that accepting the money would taint the LSE’s reputation, but his concerns were dismissed by a fellow academic, David Held, professor of political science. Refusal, Held protested, would cause “personal embarrassment” to Saif Gaddafi.
Concern for Gaddafi Jnr’s feelings, rather than Halliday’s hard-headed analysis, evidently won the day. The governing council accepted the loot (of which £300,000 was subsequently paid) from the Gaddafi International Charity and Development Foundation. The fact that among those members giving their assent to supping with the devil was Sharmi Chakrabarti, the director of Liberty and merciless scourge of those who compromise principles of justice, only adds to the air of unreality that surrounds the whole shameful episode. She has since spoken of her “bucketfuls” of regret.
They must all now be wishing that they had used a longer spoon because their decision, as the disgraced LSE director, Sir Howard Davies, observed this week, has backfired spectacularly. With Saif Gaddafi pictured on the streets of Tripoli brandishing a semi-automatic weapon and telling a global television audience that he would do anything to perpetuate his father’s regime, right down to “the last bullet”, Sir Howard has been forced to resign.
He leaves behind an institution in crisis, its good name compromised. Which is precisely what Fred Halliday (who has subsequently died) predicted, but at the time he was sidelined by colleagues who muttered in private that he was difficult and a heavy drinker.
Before rushing to condemn, of course, it is always worth dispensing for a moment with hindsight. Anyone who has sat on the board of a charity or educational institution will recall similar dilemmas (albeit on a smaller scale) to that faced by LSE’s council that day. An offer of money comes in, but there are unpalatable strings. You know you could put the funds to good effect – in this case to the study of civil society and democracy in north Africa – and you could do with a fund-raising success.
British universities, in particular, have been complaining for years that they are underfunded compared with rival overseas institutions. Various governments’ standard responses to such pleading has long been to tell them to seek private and corporate sponsors. So, even if they feel queasy about it, our higher education institutions would argue that they are being forced to turn a blind eye to the skeletons in the cupboard of donors likes Saif Gaddafi, and a deaf ear to those tiresome old-world souls such as Halliday who insist on mentioning ethics and morality.
That is certainly part of the story behind what happened this week at the LSE. In the wake of Sir Howard’s resignation, the focus has switched to the “accommodations” made by other universities with questionable donors. Liverpool John Moores, for example, has been accused by Tory MP Robert Halfon of also having dealings with the Gaddafis. It says it received only £14,000, to improve health care in Libya and said it was no longer involved in the work. “We are not ashamed of trying to help the people of Libya develop their economy and their infrastructure to improve their health services,” it said in a statement.
So is this just business as usual on the campuses and in the quads, or is there something deeper and more perverse going on at the LSE governing council, as a spokesman for the students’ union there has suggested? One headline has described the council as a bunch of “useful idiots”, a phrase borrowed from the tyrant Stalin who used it to mock Left-leaning academics who eulogised his brutal form of communism.
The degree to which the LSE outperformed others in abandoning principle to engage with a Libyan regime with a long, bloody and truly appalling history of crimes against both its own people and British citizens – supplying semtex to the IRA in the Seventies, and downing a jet over Lockerbie in 1988 – is now to be investigated by Lord Woolf, the former Lord Chief Justice. Among the issues for him to address will be the awarding of a PhD to Saif Gaddafi. The Labour peer Lord Desai, who examined the thesis, has praised the “idealism” Gaddafi displayed in his study, but others claim it was all plagiarised.
What is not disputed is that the interviews upon which the thesis was based were carried out not by the student himself, as is usual, but by a US-based consultancy, Monitor, whose board is made up of academics and former senior civil servants. An act of generosity towards a young man in a strange country? It seems it had more to do with Monitor’s ongoing mission to present a more pleasing image of the Libyan regime in the West. Monitor has since admitted that its actions were “misguided”.
A single, almost casual footnote on page 173 of the Gaddafi thesis should have alerted Lord Desai and his colleagues at the LSE to the peculiar gestation of the document. In reference to a section on the role of oil companies in improving transparency in democracies, this attribution is written: “Comment from Tony Blair in private communication with the author of this thesis”. It must be handy to be able to ring up the British Prime Minister to try out your pet student theory.
Also on Lord Woolf’s list of questions will be Sir Howard’s personal mission – as a former head of the Financial Services Authority, hardly an institution famous for taking a tough line with miscreants – to offer financial advice to the Libyans. “I wish I hadn’t done it now,” the former director said in his resignation interview, “but I was asked by the Government.” I thought it was only in Gaddafi’s Libya that you had to do what the government asked.
It is that web of relationships between government – specifically the Blair government – the LSE, Monitor and Saif Gaddafi that is at the heart of this whole debacle. Sir Howard’s predecessor as director was Anthony (now Lord) Giddens, guru of the Blairite “Third Way” and apparently such a starry-eyed admirer of the Libyan dictator that he wrote in 2005 of how Gaddafi senior cut “an impressive figure” and appeared “genuinely popular” with his own people.
Then there is Sir Mark Allen, former MI6 spy and adviser to Blair and BP, who is on the board of LSE Ideas, a study centre at the school for international affairs and “grand strategy”. It is chaired by another Blair adviser, Sir David Manning, and includes Jonathan Powell, former Chief-of-Staff, and Baroness Symons, a Blairite former Foreign Office minister.
For those tempted to think that the LSE’s current troubles are simply the result of being backed into a corner by the need for money, and then being conned by Saif Gaddafi into believing he was really a force for change at his father’s side, these connections are hard to explain away. There is, at the very least, the semblance of a calculated political and commercial plan here to win influence with the Gaddafis by peddling the good name of the LSE.
David Starkey, the historian who taught for many years at the LSE, has damned the whole farrago at his alma mater as “typically Blairite”. It is hard not to agree. Getting concessions from Gaddafi over nuclear weapons in 2004 may have shown the former Prime Minister at his pragmatic best, but the ill-advised, headlong rush thereafter to cosy up to an always ugly Libyan regime so as to get hold of the dictator’s billions, and his country’s oil reserves and revenues, has now ended up tainting many reputations.
Such a fate is often the lot of politicians, but it is a calamitous and self-inflicted blow to the academic institution set up in 1895 by George Bernard Shaw and social reformers Sidney and Beatrice Webb on such high-minded Fabian principles.
There is a revealing remark in the minutes of the debate that took place in October 2009 at the governing council of the London School of Economics over whether to accept a donation of £1.5 million from Saif Gaddafi, son of the Libyan dictator. Fred Halliday, the school’s professor of international relations, had warned the council that accepting the money would taint the LSE’s reputation, but his concerns were dismissed by a fellow academic, David Held, professor of political science. Refusal, Held protested, would cause “personal embarrassment” to Saif Gaddafi.
Concern for Gaddafi Jnr’s feelings, rather than Halliday’s hard-headed analysis, evidently won the day. The governing council accepted the loot (of which £300,000 was subsequently paid) from the Gaddafi International Charity and Development Foundation. The fact that among those members giving their assent to supping with the devil was Sharmi Chakrabarti, the director of Liberty and merciless scourge of those who compromise principles of justice, only adds to the air of unreality that surrounds the whole shameful episode. She has since spoken of her “bucketfuls” of regret.
They must all now be wishing that they had used a longer spoon because their decision, as the disgraced LSE director, Sir Howard Davies, observed this week, has backfired spectacularly. With Saif Gaddafi pictured on the streets of Tripoli brandishing a semi-automatic weapon and telling a global television audience that he would do anything to perpetuate his father’s regime, right down to “the last bullet”, Sir Howard has been forced to resign.
He leaves behind an institution in crisis, its good name compromised. Which is precisely what Fred Halliday (who has subsequently died) predicted, but at the time he was sidelined by colleagues who muttered in private that he was difficult and a heavy drinker.
Before rushing to condemn, of course, it is always worth dispensing for a moment with hindsight. Anyone who has sat on the board of a charity or educational institution will recall similar dilemmas (albeit on a smaller scale) to that faced by LSE’s council that day. An offer of money comes in, but there are unpalatable strings. You know you could put the funds to good effect – in this case to the study of civil society and democracy in north Africa – and you could do with a fund-raising success.
British universities, in particular, have been complaining for years that they are underfunded compared with rival overseas institutions. Various governments’ standard responses to such pleading has long been to tell them to seek private and corporate sponsors. So, even if they feel queasy about it, our higher education institutions would argue that they are being forced to turn a blind eye to the skeletons in the cupboard of donors likes Saif Gaddafi, and a deaf ear to those tiresome old-world souls such as Halliday who insist on mentioning ethics and morality.
That is certainly part of the story behind what happened this week at the LSE. In the wake of Sir Howard’s resignation, the focus has switched to the “accommodations” made by other universities with questionable donors. Liverpool John Moores, for example, has been accused by Tory MP Robert Halfon of also having dealings with the Gaddafis. It says it received only £14,000, to improve health care in Libya and said it was no longer involved in the work. “We are not ashamed of trying to help the people of Libya develop their economy and their infrastructure to improve their health services,” it said in a statement.
So is this just business as usual on the campuses and in the quads, or is there something deeper and more perverse going on at the LSE governing council, as a spokesman for the students’ union there has suggested? One headline has described the council as a bunch of “useful idiots”, a phrase borrowed from the tyrant Stalin who used it to mock Left-leaning academics who eulogised his brutal form of communism.
The degree to which the LSE outperformed others in abandoning principle to engage with a Libyan regime with a long, bloody and truly appalling history of crimes against both its own people and British citizens – supplying semtex to the IRA in the Seventies, and downing a jet over Lockerbie in 1988 – is now to be investigated by Lord Woolf, the former Lord Chief Justice. Among the issues for him to address will be the awarding of a PhD to Saif Gaddafi. The Labour peer Lord Desai, who examined the thesis, has praised the “idealism” Gaddafi displayed in his study, but others claim it was all plagiarised.
What is not disputed is that the interviews upon which the thesis was based were carried out not by the student himself, as is usual, but by a US-based consultancy, Monitor, whose board is made up of academics and former senior civil servants. An act of generosity towards a young man in a strange country? It seems it had more to do with Monitor’s ongoing mission to present a more pleasing image of the Libyan regime in the West. Monitor has since admitted that its actions were “misguided”.
A single, almost casual footnote on page 173 of the Gaddafi thesis should have alerted Lord Desai and his colleagues at the LSE to the peculiar gestation of the document. In reference to a section on the role of oil companies in improving transparency in democracies, this attribution is written: “Comment from Tony Blair in private communication with the author of this thesis”. It must be handy to be able to ring up the British Prime Minister to try out your pet student theory.
Also on Lord Woolf’s list of questions will be Sir Howard’s personal mission – as a former head of the Financial Services Authority, hardly an institution famous for taking a tough line with miscreants – to offer financial advice to the Libyans. “I wish I hadn’t done it now,” the former director said in his resignation interview, “but I was asked by the Government.” I thought it was only in Gaddafi’s Libya that you had to do what the government asked.
It is that web of relationships between government – specifically the Blair government – the LSE, Monitor and Saif Gaddafi that is at the heart of this whole debacle. Sir Howard’s predecessor as director was Anthony (now Lord) Giddens, guru of the Blairite “Third Way” and apparently such a starry-eyed admirer of the Libyan dictator that he wrote in 2005 of how Gaddafi senior cut “an impressive figure” and appeared “genuinely popular” with his own people.
Then there is Sir Mark Allen, former MI6 spy and adviser to Blair and BP, who is on the board of LSE Ideas, a study centre at the school for international affairs and “grand strategy”. It is chaired by another Blair adviser, Sir David Manning, and includes Jonathan Powell, former Chief-of-Staff, and Baroness Symons, a Blairite former Foreign Office minister.
For those tempted to think that the LSE’s current troubles are simply the result of being backed into a corner by the need for money, and then being conned by Saif Gaddafi into believing he was really a force for change at his father’s side, these connections are hard to explain away. There is, at the very least, the semblance of a calculated political and commercial plan here to win influence with the Gaddafis by peddling the good name of the LSE.
David Starkey, the historian who taught for many years at the LSE, has damned the whole farrago at his alma mater as “typically Blairite”. It is hard not to agree. Getting concessions from Gaddafi over nuclear weapons in 2004 may have shown the former Prime Minister at his pragmatic best, but the ill-advised, headlong rush thereafter to cosy up to an always ugly Libyan regime so as to get hold of the dictator’s billions, and his country’s oil reserves and revenues, has now ended up tainting many reputations.
Such a fate is often the lot of politicians, but it is a calamitous and self-inflicted blow to the academic institution set up in 1895 by George Bernard Shaw and social reformers Sidney and Beatrice Webb on such high-minded Fabian principles.
Tuesday 28 August 2007
Neoliberalism! - How the neoliberals stitched up the wealth of nations for themselves
A cabal of intellectuals and elitists hijacked the economic debate, and now we are dealing with the catastrophic effects
George Monbiot
Tuesday August 28, 2007
The Guardian
For the first time the UK's consumer debt exceeds the total of its gross national product: a new report shows that we owe £1.35 trillion. Inspectors in the United States have discovered that 77,000 road bridges are in the same perilous state as the one which collapsed into the Mississippi. Two years after Hurricane Katrina struck, 120,000 people from New Orleans are still living in trailer homes and temporary lodgings. As runaway climate change approaches, governments refuse to take the necessary action. Booming inequality threatens to create the most divided societies the world has seen since before the first world war. Now a financial crisis caused by unregulated lending could turf hundreds of thousands out of their homes and trigger a cascade of economic troubles.
These problems appear unrelated, but they all have something in common. They arise in large part from a meeting that took place 60 years ago in a Swiss spa resort. It laid the foundations for a philosophy of government that is responsible for many, perhaps most, of our contemporary crises.
When the Mont Pelerin Society first met, in 1947, its political project did not have a name. But it knew where it was going. The society's founder, Friedrich von Hayek, remarked that the battle for ideas would take at least a generation to win, but he knew that his intellectual army would attract powerful backers. Its philosophy, which later came to be known as neoliberalism, accorded with the interests of the ultra-rich, so the ultra-rich would pay for it.
Neoliberalism claims that we are best served by maximum market freedom and minimum intervention by the state. The role of government should be confined to creating and defending markets, protecting private property and defending the realm. All other functions are better discharged by private enterprise, which will be prompted by the profit motive to supply essential services. By this means, enterprise is liberated, rational decisions are made and citizens are freed from the dehumanising hand of the state.
This, at any rate, is the theory. But as David Harvey proposes in his book A Brief History of Neoliberalism, wherever the neoliberal programme has been implemented, it has caused a massive shift of wealth not just to the top 1%, but to the top tenth of the top 1%. In the US, for instance, the upper 0.1% has already regained the position it held at the beginning of the 1920s. The conditions that neoliberalism demands in order to free human beings from the slavery of the state - minimal taxes, the dismantling of public services and social security, deregulation, the breaking of the unions - just happen to be the conditions required to make the elite even richer, while leaving everyone else to sink or swim. In practice the philosophy developed at Mont Pelerin is little but an elaborate disguise for a wealth grab.
So the question is this: given that the crises I have listed are predictable effects of the dismantling of public services and the deregulation of business and financial markets, given that it damages the interests of nearly everyone, how has neoliberalism come to dominate public life?
Richard Nixon was once forced to concede that "we are all Keynesians now". Even the Republicans supported the interventionist doctrines of John Maynard Keynes. But we are all neoliberals now. Margaret Thatcher kept telling us that "there is no alternative", and by implementing her programmes Clinton, Blair, Brown and the other leaders of what were once progressive parties appear to prove her right.
The first great advantage the neoliberals possessed was an unceasing fountain of money. US oligarchs and their foundations - Coors, Olin, Scaife, Pew and others - have poured hundreds of millions into setting up thinktanks, founding business schools and transforming university economics departments into bastions of almost totalitarian neoliberal thinking. The Heritage Foundation, the Hoover Institute, the American Enterprise Institute and many others in the US, the Institute of Economic Affairs, the Centre for Policy Studies and the Adam Smith Institute in the UK, were all established to promote this project. Their purpose was to develop the ideas and the language which would mask the real intent of the programme - the restoration of the power of the elite - and package it as a proposal for the betterment of humankind.
Their project was assisted by ideas which arose in a very different quarter. The revolutionary movements of 1968 also sought greater individual liberties, and many of the soixante-huitards saw the state as their oppressor. As Harvey shows, the neoliberals coopted their language and ideas. Some of the anarchists I know still voice notions almost identical to those of the neoliberals: the intent is different, but the consequences very similar.
Hayek's disciples were also able to make use of economic crises. An early experiment took place in New York City, which was hit by budgetary disaster in 1975. Its bankers demanded that the city follow their prescriptions - huge cuts in public services, smashing of the unions, public subsidies for business. In the UK, stagflation, strikes and budgetary breakdown allowed Thatcher, whose ideas were framed by her neoliberal adviser Keith Joseph, to come to the rescue. Her programme worked, but created a new set of crises.
If these opportunities were insufficient, the neoliberals and their backers would use bribery or force. In the US, the Democrats were neutered by new laws on campaign finance. To compete successfully for funding with the Republicans, they would have to give big business what it wanted. The first neoliberal programme of all was implemented in Chile following Pinochet's coup, with the backing of the US government and economists taught by Milton Friedman, one of the founding members of the Mont Pelerin Society. Drumming up support for the project was easy: if you disagreed, you got shot. The International Monetary Fund and the World Bank used their power over developing nations to demand the same policies.
But the most powerful promoter of this programme was the media. Most of it is owned by multimillionaires who use it to project the ideas that support their interests. Those ideas which threaten their interests are either ignored or ridiculed. It is through the newspapers and TV channels that the socially destructive notions of a small group of extremists have come to look like common sense. The corporations' tame thinkers sell the project by reframing our political language (for an account of how this happens, see George Lakoff's book, Don't Think of an Elephant!). Nowadays I hear even my progressive friends using terms like wealth creators, tax relief, big government, consumer democracy, red tape, compensation culture, job seekers and benefit cheats. These terms, all invented or promoted by neoliberals, have become so commonplace that they now seem almost neutral.
Neoliberalism, if unchecked, will catalyse crisis after crisis, all of which can be solved only by greater intervention on the part of the state. In confronting it, we must recognise that we will never be able to mobilise the resources its exponents have been given. But as the disasters they have caused unfold, the public will need ever less persuading that it has been misled.
Play Movie Mash-up and win BIG prizes! Hayek, wealth,
Saturday 25 August 2007
Market Efficiency Hokum
By Stephen Lendman
24 August, 2007
Countercurrents.org
You know the story triumphantly heard in the West. Markets work best when governments let them operate freely - unconstrained by rules, regulations and taxes about which noted economist Milton Friedman once said in an interview he was "in favor of cutting....under any circumstances and for any excuse, for any reason, whenever it's possible (because) the big problem is not taxes (but government) spending.
Friedman is no longer with us, but by his reasoning, the solution to curbing it is "to hold down the amount of income (government) has (and presto) the way to do it is to cut taxes." He seemed to forget about borrowing and the Federal Reserve's ability to print limitless amounts of ready cash the way it's been doing for years and during the current credit squeeze. Friedman further added in the same interchange "If the White House were under (GW) Bush, and House and Senate....under the Democrats, I do not believe there would be much spending."
Clearly, either the Nobel laureate wasn't paying attention or age was taking its toll late in his life. Since 2001, Democrats embraced tax cutting and overspending policies as enthusiastically as Republicans with both parties directing the benefits hugely to the right pockets. They're on Wall Street and in corporate boardrooms where recipients know "free markets" work great with a little creative resource directing from Washington.
Financial Market Efficiency
In investment finance, Eugene Fama is generally regarded as the father of efficient market theory, also known as the "efficient market hypothesis (EMH)." He wrote his 1964 doctoral dissertation on it titled "The Behavior of Stock Market Prices" in which he concluded stock (and by implication other financial market) price movements are unpredictable and follow a "random walk" reflecting all available information known at the time. Thus, no one, in theory, has an advantage over another as everyone has equal access to everything publicly known (aside from "insiders" with a huge advantage). That includes rumored and actual financial, economic, political, social and all other information, all of which is reflected in asset prices at any given time.
Those buying this theory believe Milton Friedman knew best. He became the modern-day godfather of "free market" capitalism and leading exponent that markets work efficiently and best when unfettered by government intervention that generally gets things wrong. In 1958, Friedman explained it in his famous "I, Pencil" essay. In it, he illustrated the notion of Adam Smith's invisible hand and conservative economist Friedrich Hayek's teachings on the importance of "dispersed knowledge" and how the price system communicates information to "make (people) do desirable things without anyone having to tell them what to do."
Friedman's "pencil" story explained "a complex combination of miracles: a tree, zinc, copper, graphite, and so on." Added to these ingredients from nature is "an even more extraordinary miracle: the configuration of creative human energies - millions of tiny know-hows configuring naturally and spontaneously (responding to) human necessity and desire and in the absence of any human master-minding." None of them working independently was trying to make a pencil. No one directed them from a central office. They didn't know each other, lived in many countries, spoke different languages, practiced different religions, and may have even hated each other. Yet, their unrelated contributions produced a pencil.
By Friedman's reasoning, this could never happen through central planning. It sounds good in theory, but how does it jibe with reality. The Soviets split the atom, were first in space ahead of the US with Sputnik 1, and developed many advanced technologies even though they were outclassed and outspent by the West overall with greater resources to do it.
In practical reality, governments, like individuals operating freely in the marketplace, can succeed or fail. It comes down to people skills and how well they do their jobs. Top down or bottom up has little final effect on the end result, but does direct what's undertaken and what isn't. Top down in Canada, Western Europe and Venezuela delivers excellent state-funded health care to everyone. Bottom up in America offers it to anyone who can pay, but if not, you're out of luck if your employer won't provide it. Forty-seven million and counting had their luck run out, and Friedman's pencil making miracle won't treat them when they'll ill.
Put another way, if "free market" capitalism works best and America is its lead exponent, why then:
-- is poverty high and rising in the world's richest country;
-- incomes stagnating;
-- higher education becoming unaffordable for the majority;
-- public education crumbling;
-- jobs at all levels disappearing to low-wage countries;
-- the nation's vital infrastructure in a deplorable state;
-- 3.5 million or more homeless and heading higher in the wake of subprime defaults;
-- the standard of living of most in the country declining; and,
-- the nation, in fact, bankrupt according to a 2006 study for the St. Louis Fed.
Clearly, something is wrong with the "pencil miracle" working for some but not for most. Friedman no longer can respond and his acolytes won't.
The Myth that Markets Get It Right and Operate Efficiently
Economist Hyman Minsky was mostly ignored while he lived, but his star may be rising 11 years after his death in 1996. Some described him as a radical Keynesian based on the theories of economist John Maynard Keynes who taught economies operate best when mixed. He believed state and private sectors both play important roles with government stepping in to stimulate or constrain economic activity whenever private sector forces aren't able to do it best alone.
It's the opposite of "supply-side" Reaganomics and its illusory "trickle down" notion that economic growth works best through stimulative tax cuts its proponents claim promote investment that benefits everyone. It was Reagan-baloney then and now, and so is the notion markets are efficient and work best when left alone.
Minsky explained it, and people are now taking note in the wake of current market turbulence. His work showed financial market exuberance often becomes excessive, especially if no regulatory constraints are in place to curb it. He developed his theories in two books - "John Maynard Keynes" and "Stabilizing an Unstable Economy" as well as in numerous articles and essays.
In them, he constructed a "financial instability hypothesis" building on the work of Keynes' "General Theory of Employment, Interest and Money." He provided a framework for distinguishing between stabilizing and destabilizing free market debt structures he summarized as follows:
"Three distinct income-debt relations for economic units....labeled as hedge, speculative and Ponzi finance, can be identified."
-- "Hedge financing units are those which can fulfill all of their contractual payment obligations by their cash flows: the greater the weight of equity financing in the liability structure, the greater the likelihood that the unit is a hedge financing unit."
-- "Speculative finance units are units that can meet their payment commitments on 'income account' on their liabilities, even as they cannot repay the principle out of income cash flows. Such units need to 'roll over' their liabilities - issue new debt to meet commitments on maturing debt."
-- "For Ponzi units, the cash flows from operations are (insufficient)....either (to repay)....principle or interest on outstanding debts by their cash flows from operations. Such units can sell assets or borrow. Borrowing to pay interest....lowers the equity of a unit, even as it increases liabilities and the prior commitment of future incomes."
"....if hedge financing dominates....the economy may....be (in) equilibrium. In contrast, the greater the weight of speculative (and/or) Ponzi finance, the greater the likelihood that the economy is a deviation-amplifying system....(based on) the financial instability hypothesis (and) over periods of prolonged prosperity, the economy transits from financial relations (creating stability) to financial relations (creating) an unstable system."
"....over a protracted period of good times, capitalist economies (trend toward) a large weight (of) units engaged in speculative and Ponzi finance. (If this happens when) an economy is (experiencing inflation and the Federal Reserve tries) to exorcise (it) by monetary constraint....speculative units will become Ponzi (ones) and the net worth of previous Ponzi units will quickly evaporate. Consequently, units with cash flow shortfalls will be forced to (sell out). This is likely to lead to a collapse of asset values."
Minsky developed a seven stage framework showing how this works:
Stage One - Displacement
Disturbances of various kinds change investor perceptions and disrupt markets. It may be a tightened economic policy from higher interest rates or investors and lenders retrenching in reaction to:
-- a housing bubble, credit squeeze, and growing subprime mortgage delinquencies and defaults with spreading contagion affecting:
-- other mortgages, and the toxic waste derivative alchemy of:
-- collateralized debt obligation (CDO) instruments (packages of mostly risky junk and other debt),
--commercial and residential mortgage-backed securities (CMBS and RBMS - asset backed by mortgage principle and interest payments), and even
-- commercial and AAA paper; plus
-- home equity loans harder to service after mortgage reset increases.
Stage Two - Prices start to rise
Following displacement, markets bottom and prices begin rising as fundamentals improve. Investors start noticing as it becomes evident and gains momentum.
Stage Three - Easy credit
Recovery needs help and plentiful easy credit provides it. As conditions improve, it fuels speculation enticing more investors to jump in for financial opportunities or to borrow for a new home or other consumer spending. The easier and more plentiful credit gets, the more willing lenders are to give it including to borrowers with questionable credit ratings. Yale Economist Robert Shiller shares the view that "booms....generate laxity in standards for loans because there a general sense of optimism (like) what we saw in the late 80s" preceding the 1987 crash that doesn't necessarily signal an imminent one now.
New type financial instruments and arrangements also arise as lenders find creative and risky ways to make more money. In recent years, sharply rising housing prices enticed more buyers, and lenders got sloppy and greedy by providing interest-only mortgages to marginal buyers unable to make a down payment.
Stage Four - Overtrading
The cheaper and easier credit is, the greater the incentive to overtrade to cash in. Trading volume rises and shortages emerge. Prices begin accelerating and easy profits are made creating more greed and foolish behavior.
Stage Five - Euphoria
This is the most dangerous phase. Cooler heads are worried but fraudsters prevail claiming this time is different, and markets have a long way to go before topping out. Greed trumps good sense and investors foolishly think they're safe and can get out in time. Stories of easy riches abound, so why miss out. Into the fire they go, often after the easy money was made, and the outcome is predictable. The fraudsters sell at the top to small investors mistakenly buying at the wrong time and getting burned.
Stage Six - Insider profit taking
The pros have seen it before, understand things have gone too far, and quietly sell to the greater fools buying all they can. It's the beginning of the end.
Stage Seven - Revulsion
When cheap credit ends, enough insiders sell, or an unexpected piece of bad news roils markets, it becomes infectious. It can happen quickly turning euphoria into revulsion panicking investors to sell. They begin outnumbering buyers and prices tumble. Downward momentum is far greater and faster than when heading up.
Sound familiar? It's a "Minsky Moment," and the irony is most investors know easy credit, overtrading and euphoria create bubbles that always burst. The internet and tech one did in March, 2000, and since mid-July, reality caught up with excess speculation in equity prices, the housing bubble, growing mortgage delinquencies and subprime defaults. Goldilocks awoke and sought shelter as lenders remembered how to say "no." This time, central banks rode to the rescue (they hope) with huge cash infusions, the Fed cut its discount rate a half point August 17, and it signaled lower "fed funds" rates ahead if markets remain tight.
Intervention may reignite "animal spirits" and work short-term but won't easily band-aid over what noted investor Jeremy Grantham calls "the broadest overpricing of financial assets - equities, real estate, and fixed income - ever recorded" with the financial system dangerously "overstretched (and) overleveraged." His view is that current conditions have "almost never been this dire," and we're "watching a (too late to stop) very slow motion train wreck." Minsky would have noticed, too.
Grantham's exhaustive research shows all markets revert to their mean values, and all bubbles burst as the greatest Fed-engineered equity one ever in US history did in 2000 but didn't complete its corrective work. In Grantham's view, lots more pain is coming and before it's over, it will be mean, nasty and long, affecting everyone. Minsky saw it earlier, studied it, and wrote about it exhaustively when no one noticed. If he were living today, he'd say "I told you so."
Federal Reserve Engineered Housing Bubble and Resultant Financial Market Turmoil
Astute observers continue to speculate and comment that the housing bubble and resultant current financial market turmoil came from deliberate widespread malfeasance aided by considerable cash infusion help from the Federal Reserve in the lead on the scheme.
Economist Paul Krugman is one of the latest with his views expressed in an August 16 New York Times op ed piece titled "Workouts, Not Bailouts." He began by debunking Wall Streeter Treasury Secretary Henry Paulson's ludicrous April claim that the housing market was "at or near the bottom" followed by his equally absurd August view that subprime mortgages were "largely contained." Krugman's response: "the time for denial is past....housing starts and applications for building permits have fallen to their lowest levels in a decade, showing that home construction is still in free fall....home prices are still way too high (at 70% above their long-term trend values according to the Center for Economic and Policy Research, and) the housing slump (will be around) for years, not months" with all those empty unbought homes needing hard to find buyers to fill them.
In addition, mortgage problems are "anything but contained" and aren't confined to the subprime category. Krugman believes current real estate troubles and mortgage fallout bear similarity to the late 1990s stock bubble. Like today, they were accompanied by market manipulation and scandalous fraud at companies like Enron and WorldCom. In his view, "it is becoming increasingly clear that the real-estate bubble of recent years (like the 1990s stock bubble)....caused and was fed by widespread malfeasance." He left out the Fed but named co-conspiratorial players like Moody's Investors Service and other rating agencies getting paid lots of money to claim "dubious mortgage-backed securities to be highest-quality, AAA assets." In this role, they're no different than were "complaisant accountants" like Arthur Andersen that lost its license to practice from its role in the Enron fallout.
In the end, this scandal may be more far-reaching than earlier ones because so many underwriters and other firms are part of the fraud or are seeking to profit from it. At this point, it's hard separating villains from victims as, in some cases, they may be one in the same. They're all involved in dispersing up to trillions of dollars of risks through the derivative alchemy of highly complex, hard to value, packages of mostly subprime CDO and various other type debt instruments that may even end up in so-called safe money market funds unbeknownst to their unsuspecting owners.
Before this scandal ends, they'll be plenty of pain to go around, but as always, small investors and low income subprime and other mortgage homeowners will be hurt most. Krugman says this is "a clear case for government intervention," but it won't be the kind he wants. He cites a "serious market failure (needing fixing to) help (as many as) hundreds of thousands" of Americans who otherwise may lose their homes and/or financial nest eggs. Faced with this problem, "The federal government shouldn't be providing bailouts, (it should) arrange workouts....we've done (it) before (and it worked) - for third-world countries, not for US citizens." It helped both debtors escape default and creditors get back most of their money.
By providing huge cash infusions to ease credit and reignite "animal spirits," the Fed and other central banks showed they aren't listening. It proves what Ralph Nader said in his August 19 Countercurrents article called "Corporate Capitalists: Government Comes To The Rescue" that's also on CounterPunch titled "Greed and Folly on Wall Street." With "corporate capitalists' knees" a bit shaky, Nader recalled what his father once explained years ago when he asked and then told his children: "Why will capitalism always survive? Because socialism will always be used to save it." Put another way, the American business ethic has always been socialism for the rich, and, sink or swim, free market capitalism for the rest of us.
As the housing slump deepens and many tens of thousands of subprime and other mortgage holders default, vulture investors will profit hugely buying troubled assets at a fraction of their value as they always do in troubled economic times. Writer Danny Schechter calls the current subprime credit squeeze debacle a "sub-crime ponzi scheme (in a) highly rigged casino-like market system" targeting unsuspecting victims. Schechter wants a "jailout" for "criminal....financial institutions (posing) as respectable players." Krugman, on the other hand, wants a "workout" for the victims. Neither will get what he wants. In the end, as ordinary people lose out, big government will again rescue "corporate capitalism" (at least in the short-term) the way it always does when it gets in trouble. It's the "American way." It'll be no different this time.
Stephen Lendman lives in Chicago and can be reached in Chicago at lendmanstephen@sbcglobal.net.
24 August, 2007
Countercurrents.org
You know the story triumphantly heard in the West. Markets work best when governments let them operate freely - unconstrained by rules, regulations and taxes about which noted economist Milton Friedman once said in an interview he was "in favor of cutting....under any circumstances and for any excuse, for any reason, whenever it's possible (because) the big problem is not taxes (but government) spending.
Friedman is no longer with us, but by his reasoning, the solution to curbing it is "to hold down the amount of income (government) has (and presto) the way to do it is to cut taxes." He seemed to forget about borrowing and the Federal Reserve's ability to print limitless amounts of ready cash the way it's been doing for years and during the current credit squeeze. Friedman further added in the same interchange "If the White House were under (GW) Bush, and House and Senate....under the Democrats, I do not believe there would be much spending."
Clearly, either the Nobel laureate wasn't paying attention or age was taking its toll late in his life. Since 2001, Democrats embraced tax cutting and overspending policies as enthusiastically as Republicans with both parties directing the benefits hugely to the right pockets. They're on Wall Street and in corporate boardrooms where recipients know "free markets" work great with a little creative resource directing from Washington.
Financial Market Efficiency
In investment finance, Eugene Fama is generally regarded as the father of efficient market theory, also known as the "efficient market hypothesis (EMH)." He wrote his 1964 doctoral dissertation on it titled "The Behavior of Stock Market Prices" in which he concluded stock (and by implication other financial market) price movements are unpredictable and follow a "random walk" reflecting all available information known at the time. Thus, no one, in theory, has an advantage over another as everyone has equal access to everything publicly known (aside from "insiders" with a huge advantage). That includes rumored and actual financial, economic, political, social and all other information, all of which is reflected in asset prices at any given time.
Those buying this theory believe Milton Friedman knew best. He became the modern-day godfather of "free market" capitalism and leading exponent that markets work efficiently and best when unfettered by government intervention that generally gets things wrong. In 1958, Friedman explained it in his famous "I, Pencil" essay. In it, he illustrated the notion of Adam Smith's invisible hand and conservative economist Friedrich Hayek's teachings on the importance of "dispersed knowledge" and how the price system communicates information to "make (people) do desirable things without anyone having to tell them what to do."
Friedman's "pencil" story explained "a complex combination of miracles: a tree, zinc, copper, graphite, and so on." Added to these ingredients from nature is "an even more extraordinary miracle: the configuration of creative human energies - millions of tiny know-hows configuring naturally and spontaneously (responding to) human necessity and desire and in the absence of any human master-minding." None of them working independently was trying to make a pencil. No one directed them from a central office. They didn't know each other, lived in many countries, spoke different languages, practiced different religions, and may have even hated each other. Yet, their unrelated contributions produced a pencil.
By Friedman's reasoning, this could never happen through central planning. It sounds good in theory, but how does it jibe with reality. The Soviets split the atom, were first in space ahead of the US with Sputnik 1, and developed many advanced technologies even though they were outclassed and outspent by the West overall with greater resources to do it.
In practical reality, governments, like individuals operating freely in the marketplace, can succeed or fail. It comes down to people skills and how well they do their jobs. Top down or bottom up has little final effect on the end result, but does direct what's undertaken and what isn't. Top down in Canada, Western Europe and Venezuela delivers excellent state-funded health care to everyone. Bottom up in America offers it to anyone who can pay, but if not, you're out of luck if your employer won't provide it. Forty-seven million and counting had their luck run out, and Friedman's pencil making miracle won't treat them when they'll ill.
Put another way, if "free market" capitalism works best and America is its lead exponent, why then:
-- is poverty high and rising in the world's richest country;
-- incomes stagnating;
-- higher education becoming unaffordable for the majority;
-- public education crumbling;
-- jobs at all levels disappearing to low-wage countries;
-- the nation's vital infrastructure in a deplorable state;
-- 3.5 million or more homeless and heading higher in the wake of subprime defaults;
-- the standard of living of most in the country declining; and,
-- the nation, in fact, bankrupt according to a 2006 study for the St. Louis Fed.
Clearly, something is wrong with the "pencil miracle" working for some but not for most. Friedman no longer can respond and his acolytes won't.
The Myth that Markets Get It Right and Operate Efficiently
Economist Hyman Minsky was mostly ignored while he lived, but his star may be rising 11 years after his death in 1996. Some described him as a radical Keynesian based on the theories of economist John Maynard Keynes who taught economies operate best when mixed. He believed state and private sectors both play important roles with government stepping in to stimulate or constrain economic activity whenever private sector forces aren't able to do it best alone.
It's the opposite of "supply-side" Reaganomics and its illusory "trickle down" notion that economic growth works best through stimulative tax cuts its proponents claim promote investment that benefits everyone. It was Reagan-baloney then and now, and so is the notion markets are efficient and work best when left alone.
Minsky explained it, and people are now taking note in the wake of current market turbulence. His work showed financial market exuberance often becomes excessive, especially if no regulatory constraints are in place to curb it. He developed his theories in two books - "John Maynard Keynes" and "Stabilizing an Unstable Economy" as well as in numerous articles and essays.
In them, he constructed a "financial instability hypothesis" building on the work of Keynes' "General Theory of Employment, Interest and Money." He provided a framework for distinguishing between stabilizing and destabilizing free market debt structures he summarized as follows:
"Three distinct income-debt relations for economic units....labeled as hedge, speculative and Ponzi finance, can be identified."
-- "Hedge financing units are those which can fulfill all of their contractual payment obligations by their cash flows: the greater the weight of equity financing in the liability structure, the greater the likelihood that the unit is a hedge financing unit."
-- "Speculative finance units are units that can meet their payment commitments on 'income account' on their liabilities, even as they cannot repay the principle out of income cash flows. Such units need to 'roll over' their liabilities - issue new debt to meet commitments on maturing debt."
-- "For Ponzi units, the cash flows from operations are (insufficient)....either (to repay)....principle or interest on outstanding debts by their cash flows from operations. Such units can sell assets or borrow. Borrowing to pay interest....lowers the equity of a unit, even as it increases liabilities and the prior commitment of future incomes."
"....if hedge financing dominates....the economy may....be (in) equilibrium. In contrast, the greater the weight of speculative (and/or) Ponzi finance, the greater the likelihood that the economy is a deviation-amplifying system....(based on) the financial instability hypothesis (and) over periods of prolonged prosperity, the economy transits from financial relations (creating stability) to financial relations (creating) an unstable system."
"....over a protracted period of good times, capitalist economies (trend toward) a large weight (of) units engaged in speculative and Ponzi finance. (If this happens when) an economy is (experiencing inflation and the Federal Reserve tries) to exorcise (it) by monetary constraint....speculative units will become Ponzi (ones) and the net worth of previous Ponzi units will quickly evaporate. Consequently, units with cash flow shortfalls will be forced to (sell out). This is likely to lead to a collapse of asset values."
Minsky developed a seven stage framework showing how this works:
Stage One - Displacement
Disturbances of various kinds change investor perceptions and disrupt markets. It may be a tightened economic policy from higher interest rates or investors and lenders retrenching in reaction to:
-- a housing bubble, credit squeeze, and growing subprime mortgage delinquencies and defaults with spreading contagion affecting:
-- other mortgages, and the toxic waste derivative alchemy of:
-- collateralized debt obligation (CDO) instruments (packages of mostly risky junk and other debt),
--commercial and residential mortgage-backed securities (CMBS and RBMS - asset backed by mortgage principle and interest payments), and even
-- commercial and AAA paper; plus
-- home equity loans harder to service after mortgage reset increases.
Stage Two - Prices start to rise
Following displacement, markets bottom and prices begin rising as fundamentals improve. Investors start noticing as it becomes evident and gains momentum.
Stage Three - Easy credit
Recovery needs help and plentiful easy credit provides it. As conditions improve, it fuels speculation enticing more investors to jump in for financial opportunities or to borrow for a new home or other consumer spending. The easier and more plentiful credit gets, the more willing lenders are to give it including to borrowers with questionable credit ratings. Yale Economist Robert Shiller shares the view that "booms....generate laxity in standards for loans because there a general sense of optimism (like) what we saw in the late 80s" preceding the 1987 crash that doesn't necessarily signal an imminent one now.
New type financial instruments and arrangements also arise as lenders find creative and risky ways to make more money. In recent years, sharply rising housing prices enticed more buyers, and lenders got sloppy and greedy by providing interest-only mortgages to marginal buyers unable to make a down payment.
Stage Four - Overtrading
The cheaper and easier credit is, the greater the incentive to overtrade to cash in. Trading volume rises and shortages emerge. Prices begin accelerating and easy profits are made creating more greed and foolish behavior.
Stage Five - Euphoria
This is the most dangerous phase. Cooler heads are worried but fraudsters prevail claiming this time is different, and markets have a long way to go before topping out. Greed trumps good sense and investors foolishly think they're safe and can get out in time. Stories of easy riches abound, so why miss out. Into the fire they go, often after the easy money was made, and the outcome is predictable. The fraudsters sell at the top to small investors mistakenly buying at the wrong time and getting burned.
Stage Six - Insider profit taking
The pros have seen it before, understand things have gone too far, and quietly sell to the greater fools buying all they can. It's the beginning of the end.
Stage Seven - Revulsion
When cheap credit ends, enough insiders sell, or an unexpected piece of bad news roils markets, it becomes infectious. It can happen quickly turning euphoria into revulsion panicking investors to sell. They begin outnumbering buyers and prices tumble. Downward momentum is far greater and faster than when heading up.
Sound familiar? It's a "Minsky Moment," and the irony is most investors know easy credit, overtrading and euphoria create bubbles that always burst. The internet and tech one did in March, 2000, and since mid-July, reality caught up with excess speculation in equity prices, the housing bubble, growing mortgage delinquencies and subprime defaults. Goldilocks awoke and sought shelter as lenders remembered how to say "no." This time, central banks rode to the rescue (they hope) with huge cash infusions, the Fed cut its discount rate a half point August 17, and it signaled lower "fed funds" rates ahead if markets remain tight.
Intervention may reignite "animal spirits" and work short-term but won't easily band-aid over what noted investor Jeremy Grantham calls "the broadest overpricing of financial assets - equities, real estate, and fixed income - ever recorded" with the financial system dangerously "overstretched (and) overleveraged." His view is that current conditions have "almost never been this dire," and we're "watching a (too late to stop) very slow motion train wreck." Minsky would have noticed, too.
Grantham's exhaustive research shows all markets revert to their mean values, and all bubbles burst as the greatest Fed-engineered equity one ever in US history did in 2000 but didn't complete its corrective work. In Grantham's view, lots more pain is coming and before it's over, it will be mean, nasty and long, affecting everyone. Minsky saw it earlier, studied it, and wrote about it exhaustively when no one noticed. If he were living today, he'd say "I told you so."
Federal Reserve Engineered Housing Bubble and Resultant Financial Market Turmoil
Astute observers continue to speculate and comment that the housing bubble and resultant current financial market turmoil came from deliberate widespread malfeasance aided by considerable cash infusion help from the Federal Reserve in the lead on the scheme.
Economist Paul Krugman is one of the latest with his views expressed in an August 16 New York Times op ed piece titled "Workouts, Not Bailouts." He began by debunking Wall Streeter Treasury Secretary Henry Paulson's ludicrous April claim that the housing market was "at or near the bottom" followed by his equally absurd August view that subprime mortgages were "largely contained." Krugman's response: "the time for denial is past....housing starts and applications for building permits have fallen to their lowest levels in a decade, showing that home construction is still in free fall....home prices are still way too high (at 70% above their long-term trend values according to the Center for Economic and Policy Research, and) the housing slump (will be around) for years, not months" with all those empty unbought homes needing hard to find buyers to fill them.
In addition, mortgage problems are "anything but contained" and aren't confined to the subprime category. Krugman believes current real estate troubles and mortgage fallout bear similarity to the late 1990s stock bubble. Like today, they were accompanied by market manipulation and scandalous fraud at companies like Enron and WorldCom. In his view, "it is becoming increasingly clear that the real-estate bubble of recent years (like the 1990s stock bubble)....caused and was fed by widespread malfeasance." He left out the Fed but named co-conspiratorial players like Moody's Investors Service and other rating agencies getting paid lots of money to claim "dubious mortgage-backed securities to be highest-quality, AAA assets." In this role, they're no different than were "complaisant accountants" like Arthur Andersen that lost its license to practice from its role in the Enron fallout.
In the end, this scandal may be more far-reaching than earlier ones because so many underwriters and other firms are part of the fraud or are seeking to profit from it. At this point, it's hard separating villains from victims as, in some cases, they may be one in the same. They're all involved in dispersing up to trillions of dollars of risks through the derivative alchemy of highly complex, hard to value, packages of mostly subprime CDO and various other type debt instruments that may even end up in so-called safe money market funds unbeknownst to their unsuspecting owners.
Before this scandal ends, they'll be plenty of pain to go around, but as always, small investors and low income subprime and other mortgage homeowners will be hurt most. Krugman says this is "a clear case for government intervention," but it won't be the kind he wants. He cites a "serious market failure (needing fixing to) help (as many as) hundreds of thousands" of Americans who otherwise may lose their homes and/or financial nest eggs. Faced with this problem, "The federal government shouldn't be providing bailouts, (it should) arrange workouts....we've done (it) before (and it worked) - for third-world countries, not for US citizens." It helped both debtors escape default and creditors get back most of their money.
By providing huge cash infusions to ease credit and reignite "animal spirits," the Fed and other central banks showed they aren't listening. It proves what Ralph Nader said in his August 19 Countercurrents article called "Corporate Capitalists: Government Comes To The Rescue" that's also on CounterPunch titled "Greed and Folly on Wall Street." With "corporate capitalists' knees" a bit shaky, Nader recalled what his father once explained years ago when he asked and then told his children: "Why will capitalism always survive? Because socialism will always be used to save it." Put another way, the American business ethic has always been socialism for the rich, and, sink or swim, free market capitalism for the rest of us.
As the housing slump deepens and many tens of thousands of subprime and other mortgage holders default, vulture investors will profit hugely buying troubled assets at a fraction of their value as they always do in troubled economic times. Writer Danny Schechter calls the current subprime credit squeeze debacle a "sub-crime ponzi scheme (in a) highly rigged casino-like market system" targeting unsuspecting victims. Schechter wants a "jailout" for "criminal....financial institutions (posing) as respectable players." Krugman, on the other hand, wants a "workout" for the victims. Neither will get what he wants. In the end, as ordinary people lose out, big government will again rescue "corporate capitalism" (at least in the short-term) the way it always does when it gets in trouble. It's the "American way." It'll be no different this time.
Stephen Lendman lives in Chicago and can be reached in Chicago at lendmanstephen@sbcglobal.net.
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