It's time to start talking to the City

A radical reform of the financial sector can only be achieved if we know what kind of capitalism we want

• Ha-Joon Chang
• guardian.co.uk, Monday 20 February 2012

Last week I delivered a lecture on my latest book to about 150 people from the financial industry at the London Stock Exchange. The event was not organised or endorsed by the LSE itself, but the venue was quite poignant for me, given that a few months ago I did the same thing on the other side of the barricade, so to speak, at the Occupy London Stock Exchange movement.

At the exchange I made two proposals I knew may not be popular with the audience. My first was that we need to completely change the way we run our corporations, especially in the UK and the US. I started from the observation that financial deregulation since the 1980s has greatly increased the power of shareholders by expanding the options open to them, both geographically and in terms of product choice. Such deregulation was particularly advanced in Britain and America, making them the homes of "shareholder capitalism".

With greater abilities to move around, shareholders have begun to adopt increasingly short time horizons. As Prem Sikka wrote in the Guardian in December 2011, the average shareholding period in UK firms fell from about five years in the mid-1960s to 7.5 months in 2007. The figure for UK banks had fallen to three months by 2008 (although it is up to about two years now).
In order to satisfy impatient shareholders, managers have maximised short-term profits by squeezing other "stakeholders", such as workers and suppliers, and by minimising investments, whose costs are immediate but whose returns are remote. Such strategy does long-term damages by demoralising workers, lowering supplier qualities, and making equipment outmoded. But the managers do not care because their pay is linked to short-term equity prices, whose maximisation is what short term-oriented shareholders want.

That is not all. An increasing proportion of profits are distributed to shareholders through dividends and share buybacks (firms buying their own shares to prop up their prices). According to William Lazonick – a leading authority on this issue – between 2001 and 2010, top UK firms (86 companies that are included in the S&P Europe 350 index) distributed 88% of their profits to shareholders in dividends (62%) and share buybacks (26%).

During the same period, top US companies (459 of those in the S&P 500) paid out an even greater proportion to shareholders: 94% (40% in dividends and 54% in buybacks). The figure used to be just over 50% in the early 80s (about 50% in dividends and less than 5% in buybacks).

The resulting depletion in retained profit, traditionally the biggest source of corporate investments, has dramatically undermined these corporations' abilities to invest, further weakening their long-term competitiveness. Therefore, I concluded, unless we significantly restrict the freedom of movement for shareholders, through financial reregulation, and reward managers according to more long term-oriented performance measures than share prices, companies will continue to be managed in a way that undermines their own viability and weakens the national economy in the long run.

My second proposal was that, in order to improve the stability of our financial system, we need to radically simplify it. I argued that financial deregulation in the last 30 years led to the proliferation of complex financial derivatives. This has created a financial system whose complexity has far outstripped our ability to control it, as dramatically demonstrated by the 2008 financial crisis.
Drawing on the works of Herbert Simon, the 1978 Nobel economics laureate and a founding father of the study of artificial intelligence, I pointed out that often the crucial constraint on good decision-making is not the lack of information but our limited mental capability, or what Simon called "bounded rationality". Given our bounded rationality, I asserted, the only way to increase the stability of our financial system is to make it simpler. And the most important action to take is to restrict, or even ban, complex and risky financial instruments through the financial world equivalent of the drugs approval procedure.

The reactions of my audience were rather surprising. Not only did nobody challenge my proposals, but many agreed with me. Yes, they said, "quarterly capitalism" has been destructive. True, they related, we've seen too many derivative products that few people understood. And, yes, many of those products have been socially harmful.

It seems that, as it is wrong to label the Occupy movement as anti-capitalist, it is misleading to characterise the financial industry as being in denial about the need for reform. I am not naive enough to think that the people who came to my lecture are typical of the financial industry. However, a surprisingly large number of them acknowledged the problems of short-termism and excessive complexity that their industry has generated to the detriment of the rest of the economy – and ultimately to its own detriment, as the financial industry cannot thrive alone.

The rest of us need to have a closer dialogue with reform-minded people in the financial industry. They are the ones who can generate greater political acceptance of reforms among their colleagues and who can also help us devise technically competent reform proposals. After all, without a degree of "changes from within", no reform can be truly durable.

Don't blame the ratings agencies for the eurozone turmoil

Europe and the eurozone are strangling themselves with a toxic mixture of austerity and a structurally flawed financial system

• 
• • Ha-Joon Chang
  • guardian.co.uk, Sunday 15 January 2012 21.16 GMT

Standard & Poor's has decided to downgrade France's top-notch credit rating. Photograph: Philippe Huguen/AFP/Getty Images

 

Even the most rational Europeans must now feel that Friday the 13th is an unlucky day after all. On that day last week, the Greek debt restructuring negotiation broke down, with many bondholders refusing to join the voluntary 50% "haircut" – that is, debt write-off – scheme, agreed last summer. While the negotiation may resume, this has dramatically increased the chance of disorderly Greek default.

Later in the day, Standard & Poor's, one of the big three credit ratings agencies, downgraded nine of the 17 eurozone economies. As a result, Portugal pulled off the hat-trick of getting a "junk" rating by all of the big three, while France was deprived of its coveted AAA rating. With Germany left as the only AAA-rated large economy backing the eurozone rescue fund (the Dutch economy, the second biggest AAA economy left, is much smaller than the French economy) the eurozone crisis looks that much more difficult to handle.

The eurozone countries criticise S&P, and other ratings agencies, for unjustly downgrading their economies. France is particularly upset that it was downgraded while Britain has kept its AAA status, hinting at an Anglo-American conspiracy against France. But this does not wash, as one of the big three, Fitch, is 80% owned by a French company.

Nevertheless, France has some grounds to be aggrieved, as it is doing better on many economic indicators, including budget deficit, than Britain. And given the incompetence and cynicism of the big three exposed by the 1997 Asian financial crisis and more dramatically by the 2008 global financial crisis, there are good grounds for doubting their judgments.

However, the eurozone countries need to realise that its Friday-the-13th misfortune was in no small part their own doing.

First of all, the downgrading owes a lot to the austerity-driven downward adjustments that the core eurozone countries, especially Germany, have imposed upon the periphery economies. As the ratings agencies themselves have often – albeit inconsistently – pointed out, austerity reduces economic growth, which then diminishes the growth of tax revenue, making the budget deficit problem more intractable. The resulting financial turmoil drags even the healthier economies down, which is what we have just seen.

Even the breakdown in the Greek debt negotiation is partly due to past eurozone policy action. In the euro crisis talks last autumn, France took the lead in shooting down the German proposal that the holders of sovereign debts be forced to accept haircuts in a crisis. Having thus delegitimised the very idea of compulsory debt restructuring, the eurozone countries should not be surprised that many holders of Greek government papers are refusing to join a voluntary one.

On top of that, the eurozone countries need to understand why the ratings agencies keep returning to haunt them. Last autumn's EU proposal to strengthen regulation on the ratings industry shows that the eurozone policymakers think the main problem with the ratings industry is lack of competition and transparency. However, the undue influence of the agencies owes a lot more to the very nature of the financial system that the European (and other) policymakers have let evolve in the last couple of decades.

First, over this period they have installed a financial regulatory structure that is highly dependent on the credit ratings agencies. So we measure the capital bases of financial institutions, which determine their abilities to lend, by weighting the assets they own by their respective credit ratings. We also demand that certain financial institutions (eg pension funds, insurance companies) cannot own assets with below a certain minimum credit rating. All well intentioned, but it is no big surprise that such regulatory structure makes the ratings agencies highly influential.

The Americans have actually cottoned on this problem and made the regulatory system less dependent on credit ratings in the Dodd-Frank Act, but the European regulators have failed to do the same. It is no good complaining that ratings agencies are too powerful while keeping in place all those regulations that make them so.

Most fundamentally, and this is what the Americans as well as the Europeans fail to see, the increasingly long-distance and complex nature of our financial system has increased our dependence on ratings agencies.

In the old days, few bothered to engage a credit ratings agency because they dealt with what they knew. Banks lent to companies that they knew or to local households, whose behaviours they could easily understand, even if they did not know them individually. Most people bought financial products from companies and governments of their own countries in their own currencies. However, with greater deregulation of finance, people are increasingly buying and selling financial products issued by companies and countries that they do not really understand. To make it worse, those products are often complex, composite ones created through financial engineering. As a result, we have become increasingly dependent on someone else – that is, the ratings agencies – to tell us how risky our financial actions are.

This means that, unless we simplify the system and structurally reduce the need for the ratings agencies, our dependence on them will persist – if somewhat reduced – even if we make financial regulation less dependent on credit ratings.

The eurozone, and more broadly Europe, is slowly strangling itself with a toxic mixture of austerity and a structurally flawed financial system. Without a radical rethink on the issues of budget deficit, sovereign bankruptcy and financial reform, the continent is doomed to a prolonged period of turmoil and stagnation.

• © 2012 Guardian News and Media Limited or its affiliated companies. All rights reserved.

To secure credit, Europe finds global financial markets no longer attuned to Western interests

Joergen Oerstroem Moeller 

The eurozone crisis has not only raised questions about the viability of the common currency, but could also jeopardize an economic model that has so far reigned supreme. The course taken to resolve the crisis in Europe will have long-term impact on the most vibrant parts of the world – from Asia to Latin America.

In developed countries of the West, debtors have run up a high debt ratio to gross domestic product, even while economic growth was high – overspending when they should have saved. They borrowed to spend more, demonstrating a disastrous failure to grasp basic economic principles as well as flaws in moral behaviour and ethical judgment. Among these borrowers are established heavyweights – the United States, most European nations and Japan. The United States, one of the wealthiest countries, became an importer of capital instead of exporting capital, registering its last balance vis-à-vis the rest of the world in 1991.

After accumulating savings over several decades through prudent and cautious policies, the creditors sit on a large pile of reserves with low domestic debt and government deficits. These reserves are largely held by emerging countries with China at the forefront. As a paradox, the emerging economies have taken it upon themselves to lend to the richer countries – exporting capital almost as vendor’s credit. Indeed, this reversal of roles is one explanation for the global financial crisis. The global monetary system is not geared to function under such circumstances.

This development was framed by the so-called Washington Consensus of the 1980s – a neoliberal formula that spurred globalisation by promoting liberalization of trade, interest rates and foreign direct investment; privatisation and deregulation; as well as competitive exchange rates and fiscal discipline. Fundamental flaws were exposed, raising the question about which economic model might replace it.

There are two possibilities in this competition: One strategy is from the United States and a group of Democrats who suggest that more short-term borrowing and spending could lead to growth, tax revenues and exit from recession – even if the debt grows and deficits become permanent. A breakthrough by the US Congressional super-committee to make substantial cuts over the next 10 years won’t fundamentally change this stance, merely reducing rather than eliminating the deficit. The Europeans have taken the opposite view: They advocate starting the recovery by reducing deficits and debt even if that seems counterproductive for economic growth in the short run. The Europeans are also raising taxes across the board, regarded as indispensable for restoring balance in government budgets.

The results of either plan won’t be known for a few years. Chances are, however, that the European policy will carry the day for the simple reason that creditors call the tune. It’s highly unlikely that creditors favour continued reliance on deficits as the inevitable consequence will be inflation, eroding the purchasing power of their reserves. Indeed, the Chinese rating agency Dagong has announced that it may cut the US sovereign rating for the second time since August if the US conducts a third round of quantitative easing.

Early in the crisis, as Europe set up a stabilizing bailout fund, there were rumours in the market that China, Russia and Japan might rescue of the euro, either by buying European bonds or going through the International Monetary Fund. It’s unclear how China wants to proceed with such an undertaking, but Russia and Japan have allegedly acted to do that through the International Monetary Fund or by buying European bonds.

Countries with surpluses do not dream of rescuing the euro; they act in their own interest. Economically they prefer the European fiscal discipline, reasoning that American prodigality will shift much burden of adjustment onto them. They may dread being left with the US dollar as the only major international currency, forcing them to endure, at times, whimsical policy decisions by the Federal Reserve System, the US Treasury Department or US Congress. The euro and the European Union are seen, and indeed needed, as a counterweight. The EU may look weak, but it’s a respectable global partner, offering the euro as an alternative to the dollar and serving as a major player in trade negotiations and the debate about global warming, just to mention a few examples.

It can be expected that other nations will step forward to support the euro. But at what price? What conditions, if any, will be put on the table and will the Europeans consent? A case can be made that, as creditors undertake investments to help the euro, they actually help themselves, and there are no reasons why the eurozone should pay any price. We can expect a game of hardball, in which nerves matters, and who gives what to whom may not be clear at all.

Another question has arisen about who decides and who is in charge. The G20 meeting in Cannes revealed a growing consensus to stop the financial houses amassing and subsequently abusing power. If the global financial system is big enough to force Italy into a default-like situation, many countries are surely asking whether they’ll be next. The big financial houses are viewed by many as irresponsible stakeholders, if stakeholders at all. Consider, the US government is suing 18 banks for selling US$ 200 billion in toxic mortgage-backed securities to government-sponsored firms, the Federal National Mortgage Association and the Federal Home Mortgage Corporation, known as Fannie Mae and Freddie Mac. In April 2011 the European Commission initiated investigations into activities of 16 banks suspected of collusion or abuse of possible collective dominance in a segment of the market for financial derivatives.

The market has muscled its way in as judge about whether a country’s political system or economic policy are good enough. But the market is neither a single institution nor a broad, balanced mix of diverse players. It’s become a small group of large financial institutions, the power of which overwhelm what even big countries can muster: 147 institutions directly or indirectly control 40 percent of global revenue among private corporations. A sore point is that they pursue profits without concern over implications for countries and societies. Rather than let measures work, these financiers force the issue here and now, even as they speculate against efforts, many admittedly delayed and inadequate, to resolve debt crises. Financial institutions holding sovereign bonds that could default insure themselves by buying a credit default swaps. What seems like prudent corporate governance becomes a shell game as these obligations are traded among financial institutions, some of which don’t hold sovereign bonds in their portfolios – all of which heightens interest in forcing default.

The temptation to roll back economic globalisation inter alia by breaking up the eurozone or restricting capital movements has been resisted. Economic globalisation is holding firm.

Creditor countries can set the course on future economic policies – likely highlighting fiscal discipline. While the West had vested interest in the big financial houses, the incoming paymasters do not, and they can be expected to increase their control over investment patterns. This can be done either by setting up own financial houses or buying into Western financial institutions as was the case in the slipstream of the 2008 global debt crisis.

The global financial market is changing course, away from looking after Western interests and acting in accordance with corporate governance as defined by the West toward a more global outlook guided by the interests of new group of creditors.

---

Joergen Oerstroem Moeller is a visiting senior research fellow, Institute of Southeast Asian Studies, Singapore, and adjunct professor, Singapore Management University and Copenhagen Business School.

The trader who lifted the lid on what the City really thinks

One man reveals how economic disaster would let him and his colleagues profit 

By Tom Peck
Tuesday, 27 September 2011

The world may be teetering again on the precipice of economic disaster but those with any investment in the popularity of Alessio Rastani, a hitherto unknown "independent trader", had a worse day than most after his memorable appearance on television yesterday morning.

"I have a confession, I go to bed every night and I dream of another recession, I dream of another moment like this," he told dumbstruck BBC News presenter Martine Croxall, when asked if the proposed eurozone bailout would work.

The interviewer thanked the trader for his candour but told him that "jaws had dropped" around the BBC newsroom while they listened to his answers shortly after 11am.

"I'm a trader," he said. "We don't really care whether they're going to fix the economy, our job is to make money from it.

"The 1930s depression wasn't just about a market crash," he added. "There were some people who were prepared to make money from that crash. I think anyone can do that. It's an opportunity."

The three-minute clip quickly spread online, provoking outrage. In the interview, Mr Rastani went on to advise "everyone watching this" that, "This economic crisis is like a cancer, if you just wait and wait hoping it is going to go away, just like a cancer it is going to grow and it will be too late."

He said it was "wishful thinking" to believe that governments could prevent another recession.

On his Twitter profile Mr Rastani describes himself as an "experienced Stock Market and Forex trader" who is "dedicated to helping others succeed".

Some were as quick to praise him as others were to damn him. Comments on his Facebook page included: "Great interview" and "talk about the truth," while others described Mr Rastani as a hero.

The current crisis bears considerable similarity to that which engulfed the world in 2008, though thus far it lacks the talismanic hate figure generously provided in the form of the former RBS chief Sir Fred Goodwin. The slick-haired, pink-tied and American-accented Mr Rastani may yet fill the void.

Quite how much he personally stands to gain should the financial world collapse again is unclear. The profile on his website, Leadingtrader. com, would suggest he is more reliant on "professional speaking" than his wizardry in the money markets to keep in him in hair gel. But after his performance yesterday it may just be that, like the eurozone, that particular sideline is beyond salvation.

"My belief is that anyone who wants to improve their income and achieve success in life, cannot afford to ignore learning how to trade," he says.

"Based on Alessio's sound advice, I pulled my money out of the markets just before the 2008 stock market crash. He saved me a fortune, not to mention my pension!" claims a client named as Maurice E.

Though Twitter users were quick to pick up on Mr Rastani's outburst, his dire forecast went mysteriously unnoticed by the wider financial markets. Shares in French and German banks rose by as much as 10 per cent, as traders analysed a proposed three trillion euro (£2.6 trillion) rescue package for the single currency.

Global finance has dysfunction at its heart

Sound fiscal policy alone won't solve this debt crisis. We need structural reform of the entire financial system

• 
• • Ha-Joon Chang
  • guardian.co.uk, Monday 8 August 2011 18.08 BST 

The world economy is in turmoil again. We have seen two weeks of near-universal falls in major stock markets, prompted by the spread of the eurozone crisis to Spain and Italy, the phony fiscal crisis in the US manufactured by the Republicans, and the economic slowdown around the world. The first ever downgrading of the US debt by Standard & Poor's last weekend has certainly added to the drama of the unfolding events.

The debate focuses on how budget deficits should be controlled, with the dominant view saying that they need to be cut quickly and mainly through reduction in welfare spending, while its critics argue for further short-term fiscal stimuli and longer-term deficit reduction relying more on tax increases.

While this debate is crucial, it should not distract us from the urgent need to reform our financial system, whose dysfunctionality lies at the heart of this crisis. Nowhere is this more obvious than in the case of the rating agencies, whose incompetence and cynicism have become evident following the 2008 crisis, if not before. Despite this, we have done nothing about them, and as a result we are facing absurdities today – European periphery countries have to radically rewrite social contracts at the dictates of these agencies, rather than through democratic debates, while the downgrading of US treasuries has increased the demands for them as "safe haven" products.

Was this inevitable? Hardly. We could have created a public rating agency (a UN agency funded by member states?) that does not charge for its service and thus can be more objective, thereby providing an effective competition to the current oligopoly of Standard & Poor's, Moody's, and Fitch. If the regulators had decided to become less reliant on their ratings in assessing the soundness of financial institutions, we would have weakened their undue influence. For the prevention of future financial crises we should have demanded greater transparency from the rating agencies – while changing their fee structure, in which they are paid by those firms that want to have their financial products rated. But these options weren't seriously contemplated.

Another example of financial reforms whose neglect comes back to haunt us is the introduction of internationally agreed rules on sovereign bankruptcy. In resolving the European sovereign debt crises, one of the greatest obstacles has been the refusal by bondholders to bear any burden of adjustments, talking as if such a proposal goes against the basic rules of capitalism. However, the principle that the creditor, as well as the debtor, pays for the consequences of an unsuccessful loan is already in full operation at another level in all capitalist economies.

When companies go bankrupt, creditors also have to take a hit – by providing debt standstill, writing off some debts, extending their maturities, or reducing the interest rates charged. The proposal to introduce the same principle to deal with sovereign bankruptcy has been around at least since the days of the 1997 Asian financial crisis. However, this issue was tossed aside because the rich country governments, under the influence of their financial lobbies, would not have it.

There are other financial reforms whose absence has not yet come back to haunt us in a major way but will do so in the future. The most important of these is the regulation of complex financial products. Despite the widespread agreement that these are what have made the current crisis so large and intractable, we have done practically nothing to regulate them. The usual refrain is that these products are too complicated to regulate. But then why not simply ban products whose safety cannot be convincingly demonstrated, as we do with drugs?

Nothing has been done to regulate tax havens, which not only depriven governments of tax revenues but also make financial regulations more difficult. Once again, we could have eliminated or significantly weakened tax havens by simply declaring that all transactions with companies registered in countries/territories that do not meet the minimum regulatory standards are illegal.

And what have we done to change the perverse incentive structure in the financial industry, which has encouraged excessive risk-taking? Practically nothing, except for a feeble bonus tax in the UK.
A correct fiscal policy by itself cannot tackle the structural problems that have brought about the current crisis. It can only create the space in which we make the real reforms, especially financial reform. Without such a reform we will not overcome this crisis satisfactorily nor avoid similar, and possibly even bigger, crises in the future.

THE US Rating Downgrade Explained - Finance capital is trying to impose the same fiscal austerity on the US as it had foisted on the eurozone.

(From Economic and Political Weekly India's editorial)

 The issuers of mortgage-backed securities (MBS) during the housing boom in the United States in the first few years of the 2000s paid the credit rating agencies – Moody’s, Standard & Poor’s (S&P), and Fitch – for the top ratings that the latter bestowed on those debt instruments. Thank heavens it was not the investors (in those securities) who had to compensate the credit rating agencies for the AAA credit ratings that they gave
the MBS shortly before the market collapsed and the securities defaulted. Now, on 5 August, one of them, S&P, became really audacious – it downgraded US Treasury securities, ignoring the
fact that, unlike in the case of the 17 countries in the European Monetary Union, the US Federal Reserve can sustain the government’s fiscal deficits and refinance the public debt by purchasing the Treasury’s securities. What may have provoked S&P into the act?

Can the turmoil on the financial markets since the downgrade be attributed to what S&P did? What may be the repercussions of “the deal” between the Barack Obama administration and the Republicans in Congress that permitted an enhancement of the ceiling on the US public debt based, of course, on the quid pro quo
of fiscal deficit reduction, a bargain that US finance capital was presumably not content with?

But, first, what about the settlement between President Obama and the Republicans? From the perspective of S&P’s credit rating, the question was one of sustainability of the public debt. Presumably, even after the agreement to reduce the projected fiscal deficit by $2.1 trillion over the next 10 years,
the projected public debt to gross domestic product (GDP) was rapidly rising from 2015 to 2021. S&P and US finance capital wanted double the cut in the fiscal deficit over the same period. But let us come to the expenditure reduction of $917 billion over the next 10 years that will permit a $1 trillion increase in the
debt ceiling. The many expenditure reductions that this will require have more to do with infrastructure, education, housing, community services, etc, than with defence and homeland security. And, a further $1.2 billion reduction in expenditure – again, more to do with entitlements than with defence – is on
the anvil, besides a balanced budget amendment. So severe cuts in social security, including Medicare, are very much on the agenda. In reality, it seems the Obama administration is not much at odds with the Republicans as regards these cuts, but, of course, the president is seeking another term in office, come November 2012, and so he could not have been able to meet finance capital’s demands to the full.

US public debt has risen rapidly since 2000, but the main reasons for this are the tax cuts for corporations and the rich, the wars in Iraq and Afghanistan (besides the otherwise huge increase in defence expenditure), the costly bailouts of banks, insurance companies and corporations such as the auto companies, and, of
course, the stimulus spending during the Great Recession. The deal with the Republicans will not affect the tax cuts, defence, and the bailouts. But more ominous is the fact of economic stagnation – the first and second quarter 2011 growth rates of 0.3% and 1.3% are dismal for an economy that is claimed to be recovering from the Great Recession. The cuts in government expenditure – coming at a time when additional private consumption and private investment are not forthcoming, and when the US cannot match
the neo-mercantilist powers like Germany and China – may, most likely, push the economy into another recession which will bring on even higher fiscal deficits. In fact, interest rates have declined
in the wake of S&P’s decision! And, of course, with the central banks of the 17 out of 27 countries of the European Union (EU) not allowed to sustain their respective governments’ fiscal deficits and refinance public debt by purchasing their governments’ securities, no solution of the eurozone’s debt crises is in sight.

Even as we look at S&P’s downgrading of US public debt, it might be worth a while to comment on the eurozone’s debt crisis, for the contrast may be enlightening. Here the problem has its roots in the EU’s Stability Pact which commits member states not to increase their fiscal deficits beyond 3% and their public debt to GDP beyond 60%. Countries that violate these stipulations are forced to borrow short-term on the private capital markets for their central banks are not permitted to sustain such fiscal deficits, and are
thus not allowed to refinance public debt by purchasing their government’s securities. The crucial link between monetary and fiscal policy is thus deliberately snapped. Now, besides Spain, Greece and Portugal, Italy too faces a public debt crisis that has its roots in such a financial architecture, and the people are forced
to bear the brunt of the draconian austerity measures imposed.

The United Kingdom (UK) would have also been in a similar boat if the eurozone criteria had applied to it. The financial markets would then have doubted the government’s ability to refinance the public debt because the link between the Treasury and the Bank of England would have been snapped.One might be thankful that the UK is not a part of the eurozone given the current social turmoil it is facing. Much of the eurozone countries’ mercantilist strategies have exacerbated the EU’s macroeconomic problems with their competitive drives to push down the wage relative to labour productivity, this, in the absence of a national currency whose value could have otherwise been depreciated.

Now, the US’ problems are not that of the eurozone but finance capital could not care less. It is trying to impose the eurozone’s fiscal responsibility standards on Washington, and, in this, S&P is its instrument. Finance capital will, after all, snatch as much of its share of the return on capital that it can, and, this, by any and all available means at its disposal, even if this robs the people at large of their very means of keeping body and soul together.

For the public, the primary domestic concern is unemployment. For financial institutions the primary concern is the deficit. Therefore, only the deficit is under discussion.

America In Decline

Noam Chomsky

“It is a common theme” that the United States, which “only a few years ago was hailed to stride the world as a colossus with unparalleled power and unmatched appeal is in decline, ominously facing the prospect of its final decay,” Giacomo Chiozza writes in the current Political Science Quarterly.

The theme is indeed widely believed. And with some reason, though a number of qualifications are in order. To start with, the decline has proceeded since the high point of U.S. power after World War II, and the remarkable triumphalism of the post-Gulf War '90s was mostly self-delusion.

Another common theme, at least among those who are not willfully blind, is that American decline is in no small measure self-inflicted. The comic opera in Washington this summer, which disgusts the country and bewilders the world, may have no analogue in the annals of parliamentary democracy.

The spectacle is even coming to frighten the sponsors of the charade. Corporate power is now concerned that the extremists they helped put in office may in fact bring down the edifice on which their own wealth and privilege relies, the powerful nanny state that caters to their interests.

Corporate power’s ascendancy over politics and society – by now mostly financial – has reached the point that both political organizations, which at this stage barely resemble traditional parties, are far to the right of the population on the major issues under debate.

For the public, the primary domestic concern is unemployment. Under current circumstances, that crisis can be overcome only by a significant government stimulus, well beyond the recent one, which barely matched decline in state and local spending – though even that limited initiative probably saved millions of jobs.

For financial institutions the primary concern is the deficit. Therefore, only the deficit is under discussion. A large majority of the population favor addressing the deficit by taxing the very rich (72 percent, 27 percent opposed), reports a Washington Post-ABC News poll. Cutting health programs is opposed by overwhelming majorities (69 percent Medicaid, 78 percent Medicare). The likely outcome is therefore the opposite.

The Program on International Policy Attitudes surveyed how the public would eliminate the deficit. PIPA director Steven Kull writes, “Clearly both the administration and the Republican-led House (of Representatives) are out of step with the public’s values and priorities in regard to the budget.”

The survey illustrates the deep divide: “The biggest difference in spending is that the public favored deep cuts in defense spending, while the administration and the House propose modest increases. The public also favored more spending on job training, education and pollution control than did either the administration or the House.”

The final “compromise” – more accurately, capitulation to the far right – is the opposite throughout, and is almost certain to lead to slower growth and long-term harm to all but the rich and the corporations, which are enjoying record profits.

Not even discussed is that the deficit would be eliminated if, as economist Dean Baker has shown, the dysfunctional privatized health care system in the U.S. were replaced by one similar to other industrial societies’, which have half the per capita costs and health outcomes that are comparable or better.

The financial institutions and Big Pharma are far too powerful for such options even to be considered, though the thought seems hardly Utopian. Off the agenda for similar reasons are other economically sensible options, such as a small financial transactions tax.

Meanwhile new gifts are regularly lavished on Wall Street. The House Appropriations Committee cut the budget request for the Securities and Exchange Commission, the prime barrier against financial fraud. The Consumer Protection Agency is unlikely to survive intact.

Congress wields other weapons in its battle against future generations. Faced with Republican opposition to environmental protection, American Electric Power, a major utility, shelved “the nation’s most prominent effort to capture carbon dioxide from an existing coal-burning power plant, dealing a severe blow to efforts to rein in emissions responsible for global warming,” The New York Times reported.

The self-inflicted blows, while increasingly powerful, are not a recent innovation. They trace back to the 1970s, when the national political economy underwent major transformations, ending what is commonly called “the Golden Age” of (state) capitalism.

Two major elements were financialization (the shift of investor preference from industrial production to so-called FIRE: finance, insurance, real estate) and the offshoring of production. The ideological triumph of “free market doctrines,” highly selective as always, administered further blows, as they were translated into deregulation, rules of corporate governance linking huge CEO rewards to short-term profit, and other such policy decisions.

The resulting concentration of wealth yielded greater political power, accelerating a vicious cycle that has led to extraordinary wealth for a fraction of 1 percent of the population, mainly CEOs of major corporations, hedge fund managers and the like, while for the large majority real incomes have virtually stagnated.

In parallel, the cost of elections skyrocketed, driving both parties even deeper into corporate pockets. What remains of political democracy has been undermined further as both parties have turned to auctioning congressional leadership positions, as political economist Thomas Ferguson outlines in the Financial Times.

“The major political parties borrowed a practice from big box retailers like Walmart, Best Buy or Target,” Ferguson writes. “Uniquely among legislatures in the developed world, U.S. congressional parties now post prices for key slots in the lawmaking process.” The legislators who contribute the most funds to the party get the posts.

The result, according to Ferguson, is that debates “rely heavily on the endless repetition of a handful of slogans that have been battle-tested for their appeal to national investor blocs and interest groups that the leadership relies on for resources.” The country be damned.

Before the 2007 crash for which they were largely responsible, the new post-Golden Age financial institutions had gained startling economic power, more than tripling their share of corporate profits. After the crash, a number of economists began to inquire into their function in purely economic terms. Nobel laureate Robert Solow concludes that their general impact may be negative: “The successes probably add little or nothing to the efficiency of the real economy, while the disasters transfer wealth from taxpayers to financiers.”

By shredding the remnants of political democracy, the financial institutions lay the basis for carrying the lethal process forward – as long as their victims are willing to suffer in silence.

---

Noam Chomsky is emeritus professor of linguistics and philosophy at the Massachusetts Institute of Technology in Cambridge, Mass. His most recent book is '9-11:Tenth Anniversary

Ratings Agency Hypocrites

S&P’s downgrade carries a large dose of irony, since the extra debt the U.S. has piled on recently came courtesy of S&P's moronic toxic asset ratings.

by Nomi Prins | August 7, 2011 7:6 AM EDT

Can’t say rating agencies don’t have a sense of humor. Last weekend, the painfully embarrassing bipartisan political drama to raise the U.S. debt ceiling centered around doing whatever it took to avoid losing our sacrosanct AAA credit rating. This weekend, under cover of a Friday night, with markets safely closed and global traders gone for the weekend, the best-known rating agency, Standard and Poor’s, basically mooned U.S. economic policy.

On one main score, S&P’s downgrade rationale is right: Washington policy-making is decidedly "dysfunctional.” In fact, that’s a seismic understatement.

But that would also be a fair description of S&P’s decision-making in recent years. Remember: In the run-up to this very financial crisis, for which our debt creation machine at the Treasury Department ramped into over-drive, S&P was raking in fees for factory-stamping "AAA" approval on assets whose collateral was hemorrhaging value.

That high class rating was the criterion hurdle that allowed international cities, towns and pension funds to scoop up those assets, and then borrow against them because of their superior quality, and later suffer devastating losses and bankruptcies when the market didn’t afford them the value that the S&P AAA rating would have implied.

Perhaps, this downgrade is S&P’s way of saying, we’re on it now—we’re not going to give bad debt a pass anymore. Earlier this week, they downgraded a bunch of Spanish and Danish banks that are sitting on piles of crappy loans. Then, of course, there was Greece.

But just like Washington, the agency is missing the main reason for the recent upshot in debt. There’s a bar chart on the White House website that cites an extra $3.6 trillion of debt created during the Obama administration which is labeled for "economic and technical changes." That figure doesn’t include the $800 billion of stimulus money delineated separately, which is more deserving of that moniker.

Banks concocted $14 trillion of toxic assets that S&P rated AAA between 2003 and 2008.

Jin Lee / AP Photo

But it’s not like the GOP, in particular its Tea Party wing, screamed once about that $3.6 trillion figure during the latest capitol cacophony. Instead, the Treasury Department made up a name for Wall Street subsidies, and Congress went along. And until this spring, when the debt cap debate geared up a notch, S&P was pretty mum about this debt and exactly why it was created.

Recall, banks concocted $14 trillion of toxic assets that S&P rated AAA between 2003 and 2008—or higher in credit worthiness than it now deems the U.S. government to be. These banks now store $1.6 trillion of excess Treasury debt on reserves at the Fed (vs. about zero before the 2008 crisis) on which interest is being paid. In addition, the Fed holds $900 billion of mortgage related assets for the banks. Plus, about a half of trillion of debt is still backing some of AIG’s blunders, JP Morgan Chase’s takeover of Bear Stearns, the agencies that trade through Wall Street, and other sundries. That pretty much covers the extra debt since 2008—not that S&P mentioned this.

But yes, S&P is right. There is no credible plan coming from Washington to deal with this excess debt, nor is the deflection of the conversation to November fooling anyone, but that’s because there’s been no admission from either party as to why the debt came into being.

The bottom line? In the aftermath of the financial crisis, the U.S. created trillions of dollars of debt to float a financial system that was able to screw the U.S. economy largely because banks were able to obtain stellar ratings for crap assets, which had the effect of propagating them far more quickly through the system than they otherwise would have spread. The global thirst for AAA-rated assets pushed demand for questionable loans to fill them from the top down, as Wall Street raked in fees for creating and selling the assets. Later, banks received cheap loans, debt guarantees, and other financial stimulus from Washington when it all went haywire, ergo debt.

Despite a few congressional hearings on the topic, the rating agencies were never held accountable for their role in the toxic-asset pyramid scheme. Now they are holding the U.S. government accountable. The U.S. government deserves it, not because spending cuts weren’t ironed out, but because Wall Street stimulus wasn’t considered, the job market remains in tatters, and there’s no recovery on the horizon.

Still, the downgrade demonstrates that the U.S. doesn't run the show—the private banks and rating firms that get paid by them, do.

August 7, 2011 7:6am

Capitalism’s ideological crisis

 11 Jul, 2011, 04.59AM IST, Joseph E Stiglitz in The Economic Times

Just a few years ago, a powerful ideology - the belief in free and unfettered markets - brought the world to the brink of ruin.


Even in its hey-day, from the early 1980s until 2007, American-style deregulated capitalism brought greater material well-being only to the very richest in the richest country of the world. Indeed, over the course of this ideology's 30-year ascendance, most Americans saw their incomes decline or stagnate year after year.


Moreover, output growth in the United States was not economically sustainable. With so much of US national income going to so few, growth could continue only through consumption financed by a mounting pile of debt.


I was among those who hoped that, somehow, the financial crisis would teach Americans (and others) a lesson about the need for greater equality, stronger regulation, and a better balance between the market and government. Alas, that has not been the case. On the contrary, a resurgence of right-wing economics, driven, as always, by ideology and special interests, once again threatens the global economy - or at least the economies of Europe and America, where these ideas continue to flourish.


In the US, this right-wing resurgence, whose adherents evidently seek to repeal the basic laws of math and economics, is threatening to force a default on the national debt. If Congress mandates expenditures that exceed revenues, there will be a deficit, and that deficit has to be financed. Rather than carefully balancing the benefits of each government expenditure programme with the costs of raising taxes to finance those benefits, the right seeks to use a sledgehammer - not allowing the national debt to increase forcesexpenditures to be limited to taxes.


This leaves open the question of which expenditures get priority - and if expenditures to pay interest on the national debt do not, a default is inevitable. Moreover, to cut back expenditures now, in the midst of an ongoing crisis brought on by free-market ideology, would inevitably simply prolong the downturn.


A decade ago, in the midst of an economic boom, the US faced a surplus so large that it threatened to eliminate the national debt. Unaffordable tax cuts and wars, a major recession, and soaring healthcare costs - fuelled in part by the commitment of George W Bush's administration to giving drug companies free rein in setting prices, even with government money at stake - quickly transformed a huge surplus into record peacetime deficits.


The remedies to the US deficit follow immediately from this diagnosis: put America back to work by stimulating the economy; end the mindless wars; rein in military and drug costs; and raise taxes, at least on the very rich. But the right will have none of this, and instead is pushing for even more tax cuts for corporations and the wealthy, together with expenditure cuts in investments and social protection that put the future of the US economy in peril and that shred what remains of the social contract. Meanwhile, the US financial sector has been lobbying hard to free itself of regulations, so that it can return to its previous, disastrously carefree, ways.


But matters are little better in Europe. As Greece and others face crises, the medicine du jour is simply timeworn austerity packages and privatisation, which will merely leave the countries that embrace them poorer and more vulnerable. This medicine failed in East Asia, Latin America and elsewhere, and it will fail in Europe this time around, too. Indeed, it has already failed in Ireland , Latvia , and Greece.


There is an alternative: an economic-growth strategy supported by the EU and the IMF. Growth would restore confidence that Greece could repay its debts, causing interest rates to fall and leaving more fiscal room for further growth-enhancing investments. Growth itself increases tax revenues and reduces the need for social expenditures, such as unemployment benefits. And the confidence that this engenders leads to still further growth.


Regrettably, the financial markets and right-wing economists have gotten the problem exactly backwards: they believe that austerity produces confidence, and that confidence will produce growth. But austerity undermines growth, worsening the government's fiscal position, or at least yielding less improvement than austerity's advocates promise. On both counts, confidence is undermined, and a downward spiral is set in motion.


Do we really need another costly experiment with ideas that have failed repeatedly? We shouldn't, but increasingly it appears that we will have to endure another one nonetheless. A failure of either Europe or the US to return to robust growth would be bad for the global economy. A failure in both would be disastrous - even if the major emerging market countries have attained self-sustaining growth. Unfortunately, unless wiser heads prevail, that is the way the world is heading.


(The author is University Professor at Columbia University and a Nobel laureate in economics)

Iceland broke the rules and got away with it

Now Ireland and Portugal wish they too had got tough with the markets


* Aditya Chakrabortty
o The Guardian, Tuesday 12 April 2011


Remember Iceland? In the autumn of 2008, it became the first national casualty of the financial meltdown; the first rich country in more than three decades to take an IMF bailout. Commentators declared it the Icarus economy, which had finally come crashing back down to earth. It became both parable and laughing stock. What's the difference between Iceland and Ireland, joked traders – one letter and a few months.

You don't hear much about the insolvent island any more – apart from occasions such as this weekend, when Icelandic voters were asked to repay the £3.5bn owing on collapsed bank Icesave, and replied with a firm "Nei".

Unnoticed it may be, but Reykjavik now serves as a very different kind of parable, of how to minimise the misery of financial collapse by ignoring economic orthodoxy. And in those other broke European economies – from Dublin to Athens to Lisbon – politicians and voters are starting to pay attention. After its three biggest banks – 85% of the country's financial system – failed in the same week, Iceland did two remarkable things. First, it let the banks go under: foreign financiers who had lent to Reykjavik institutions at their own risk didn't get a single krona back. Second, officials imposed capital controls, making it harder for hot-money merchants to pull their cash out of the country.

These policies were not just controversial; they represented a two-fingered salute to the polite society of academics and policy-makers who normally lay down the laws on economic disaster management.

Compare Iceland's policies with those followed by another tiny country in the North Atlantic, which also has a banking industry much bigger than its national economy. When the credit crunch came to Dublin, the government decided to underwrite the entire banking industry – including tens of billions of euros of loans made by foreign investors. That landed the country with a debt worth something like €80,000 for every household – a debt that effectively bankrupted the country.

"A reverse Robin Hood – taking money from the poor and giving to the rich," is how Anne Sibert, a member of the Central Bank of Iceland's monetary policy committee, describes the Irish policy. But Dublin was merely following the old free-market tradition that rules governments should never break faith with financiers.

Yet looking at the two countries now, it's hard to say that Ireland has prospered out of being orthodox, or that Iceland has suffered an especially terrible punishment for not sticking to the Way of the Markets.

Indeed, the evidence seems to point the opposite way: Iceland has come through in better condition than anyone in 2008 dared hope. The worst of its recession is over, even though it's still too early to talk about sustained growth, and the unemployment rate (7.5%) is just over half that of Ireland (13.6%). Remarkably, after the krona lost more than half its face value, inflation is also coming down quite sharply. And without having to pay back foreign creditors, the government's finances are also in better shape. In Ireland, on the other hand, the government has just injected more money into its banking sector – the fifth time it has had to do so.

Now, this is a picture that needs more qualifications than a brain surgeon. For a start, you wouldn't wish Iceland's fate on any economy. Huge spending cuts are still to kick in, and a lot more pain is in store. Thor Gylfason, an economist at the University of Iceland, reckons it will take another seven to 10 years before his country recovers from one of the worst economic disasters in recent history. This will be a long, slow haul.

But landed with an almost unbearable burden, Iceland has made the load easier on itself – and it has done so by getting tough with foreign speculators who lent money to the country at their own risk. In Dublin, on the other hand, as Irish MP Stephen Donnelly puts it, "the entire Irish people were made collateral for the banking system" – and its economic performance has not been remarkably better. More than that, there is a basic point about fairness: in Ireland, keeping the markets on side was deemed to be more important than keeping people in jobs – in Iceland, the priorities have been reversed.

Donnelly says that the Icelandic example is beginning to attract interest in the Dáil and in the media. An Icelandic politician was recently interviewed by Vincent Browne, the Irish equivalent of Jeremy Paxman. In the bust countries of southern Europe they're also starting to take notice. Last week, on the day that Portugal finally admitted it would need a bailout from Brussels, I was talking to Joana Gorjão Henriques, a journalist from Lisbon. She told me that her contacts were pasting stories about Iceland on Facebook, and that newspaper columnists were using Iceland's case as an example that Portugal, Greece and Ireland should follow – make an allegiance and say to the EU that they won't pay the debt.

There are echoes here of the Asian financial crisis of the late 90s. Then Malaysia's prime minister Mahathir Mohamad brought in capital controls to shore up a battered financial system – and he was pilloried from Washington to Wall Street. Nobel laureates in economics predicted imminent catastrophe for Malaysia; the International Monetary Fund effectively told Mohamad off. But the year after, Malaysia began a strong economic recovery, and now the IMF issues papers on the usefulness of capital controls.

Iceland was a country wrecked by implementing free-market dogma crudely and quickly; it may yet became another such lesson of how an economy can ignore free-market dogma – and come out far better than its critics predicted.

Are we better off without religion?

 

We should be careful about drawing rash conclusions from the correlation between religiosity and societal breakdown

• Sue Blackmore
• guardian.co.uk, Tuesday 8 December 2009 18.23 GMT

 

Popular religious belief is caused by dysfunctional social conditions. This is the conclusion of the latest sociological research (pdf) conducted by Gregory Paul. Far from religion benefiting societies, as the "moral-creator socioeconomic hypothesis" would have it, popular religion is a psychological mechanism for coping with high levels of stress and anxiety – or so he suggests.

I've long been interested in Paul's work because it addresses a whole bunch of fascinating questions – why are Americans so religious when the rest of the developed world is increasingly secular? Is religious belief beneficial to societies? does religion make people behave better?

 

Many believers assume, without question, that it does – even that there can be no morality without religion. They cite George Washington who believed that national morality could not prevail without religions principles, or Dostoevsky's famous claim (actually words of his fictional character Ivan Karamazov) that "without God all things are permitted". Then there are Americans defending their country's peculiarly high levels of popular religious belief and claiming that faith-based charity is better than universal government provision.

 

Atheists, naturalists and humanists fight back claiming that it's perfectly possible to be moral without God. Evolutionary psychology reveals the common morality of our species, and the universal values of fairness, kindness, and reciprocity. But who is right? As a scientist I want evidence. What if – against all my own beliefs – it turns out that religious people really do behave better than atheists, and that religious societies are better in important respects than non-religious ones, then I would have cause to rethink some of my ideas.

 

This is where Gregory Paul and his research come in. I have often quoted his earlier, 2005, research which showed strong positive correlations between nations' religious belief and levels of murder, teenage pregnancy, drug abuse and other indicators of dysfunction. It seemed to show, at the very least, that being religious does not necessarily make for a better society. The real problem was that he was able to show only correlations, and the publicity for his new research seemed to imply causation. If so this would have important implications indeed.

 
In this latest research Paul measures "popular religiosity" for developed nations, and then compares it against the "successful societies scale" (SSS) which includes such things such as homicides, the proportion of people incarcerated, infant mortality, sexually transmitted diseases, teenage births and abortions, corruption, income inequality, and many others. In other words it is a way of summing up a society's health. The outlier again and again is the US with a stunning catalogue of failures. On almost every measure the US comes out worse than any other 1st world developed nation, and it is also the most religious.

 

For this reason Paul carries out his analysis both with and without the US included, but either way the same correlations turn up. The 1st world nations with the highest levels of belief in God, and the greatest religious observance are also the ones with all the signs of societal dysfunction. These correlations are truly stunning. They are not "barely significant" or marginal in any way. Many, such as those between popular religiosity and teenage abortions and STDs have correlation coefficients over 0.9 and the overall correlation with the SSS is 0.7 with the US included and 0.5 without. These are powerful relationships. But why?

 
The critical step from correlation to cause is not easy. Paul analyses all sorts of possibilities. Immigration and diversity do not explain the relationships, nor do a country's frontier past, nor its violent media, and so he is led to his conclusions: "Because highly secular democracies are significantly and regularly outperforming the more theistic ones, the moral-creator socioeconomic hypothesis is rejected in favour of the secular-democratic socioeconomic hypothesis"; "religious prosociality and charity are less effective at improving societal conditions than are secular government programmes".

 

He draws implications for human evolution too. Contrary to Dan Dennett, Pascal Boyer and others, he argues that religion is not a deep-seated or inherited tendency. It is a crutch to which people turn when they are under extreme stress, "a natural invention of human minds in response to a defective habitat". Americans, he says, suffer appalling stress and anxiety due to the lack of universal health care, the competitive economic environment, and huge income inequalities, and under these conditions belief in a supernatural creator and reliance on religious observance provides relief. By contrast, the middle class majorities of western Europe, Canada, Australia, New Zealand and Japan have secure enough lives not to seek help from a supernatural creator.

 
These are powerful conclusions indeed, and if they are right the US in particular needs to take note. But are they? I still retain some caution. I keep reminding myself of the obvious point that in science it is all too easy to apply a more critical eye to research whose conclusions you disagree with. In this case the wiggly route from correlation to cause includes many questionable steps, and clearly a lot more research is needed. I was also dismayed by what might seem trivial – the appalling number of typos and other mistakes in the only version of the paper I could find – the one that is linked from the press release and several other places. There are missing words, added words, "their"s for "there"s and other errors that sometimes made it hard to follow. If the text was so poorly checked, I wondered, what about the data? Should I apply my critical concerns to those stunningly high correlations too?

I guess we'll find out, for this is a hot topic and a thriving research area. For now we need not necessarily agree with Paul that "it is probably not possible for a socially healthy nation to be highly religious" but he has certainly shown that the healthiest nations are also the least religious.

---

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A Letter To 'The Economist'

25 August 2009

To the Editor
The Economist

Dear Sir,

This is with regard to the review of my book Listening to Grasshoppers that appeared in The Economist. If this letter is long, ironically it is because the factual errors in the review are so many. In an attempt to highlight my "flawed reporting and incorrect analysis" the reviewer makes some extraordinary errors and leaps of logic:

1. "Ms Roy cites a massacre of perhaps 2,000 Muslims in Gujarat in 2002, in which the state's Hindu-nationalist government was allegedly complicit. Almost no senior official or Hinduist agitator has been prosecuted over the atrocity. And Narendra Modi, Gujarat's chief minister then and now, is currently vying to take over the leadership of the main opposition Bharatiya Janata Party, and one day India. Many of the country's industrialists would approve of that; even Ratan Tata, the gentlemanly head of the vast Tata Group which prides itself on its ethical dealings, has praised Mr Modi's business-friendly policies. Nothing annoys Ms Roy more."

Mr Tata did not merely praise Modi's business policies, he endorsed him warmly and publicly as a future candidate for prime minister. In India the said Mr Modi is still being investigated for his role in the 2002 pogrom. In his successful election campaigns after the pogrom, Modi brazenly cultivated communal hatred. He is a member of the RSS (Rashtriya Swayam Sevak Sangh), an organization that is proud of its fascist origins and counts both Hitler and Mussolini as its heroes. In addition to the massacres about 150,000 Muslims were driven from their homes during the carnage. Even today, under Mr Modi's administration, most continue to live in ghettos, socially and economically boycotted in a brutal system of communal apartheid, while the killers continue to live as free, respectable citizens. Incidentally, after considering the available information, the US government has denied Mr Modi a visa. A handicap, wouldn't you say, for a potential prime minister? Incidentally, for more on the Tata's "ethical dealings" you could google "Kalinganagar" or "Singur".

2. ". . . she is not always a reliable witness. Her claim that in Kashmir last summer protesters were as likely to call for union with Pakistan as freedom from India is probably wrong; most seemed to want to be shot of both countries."

I have never made such a claim. Nobody with an even passing acquaintance with Kashmir would (or should) say something so ridiculous. Given the intensity and violence of the fratricidal wars that Kashmiris have fought, and the thousands that have lost their lives over the Pakistan vs Freedom issue, and given that Kashmiri leadership is still unresolved about the question, it's extraordinary that the reviewer can so casually and so glibly claim to know what the majority of people of Kashmir want. My essay on Kashmir is actually titled "Azadi", which in Urdu means "Freedom". Perhaps the reviewer is unfamiliar with the language?

3. "More typically, she appears to gather her facts from newspapers (her articles strike the reader rather as 'lounge notes'), before selectively arranging and then exaggerating them to suit her own ends. For example, about 25% of India's territory is alleged to be affected by a Maoist insurgency, but that does not make it, as Ms Roy writes, 'out of government control'."

If the reviewer had cared to read the book instead of ransacking it, he/she would have come across a sentence that clarifies that several of the essays are "responses to the responses" about certain events. Given that much of my book is a critique of the disturbing role that a section of the corporate media has played in these events, is it surprising that media reports are frequently referred to? Most of the time this is in order to expose them for being false and motivated. To conclude from this that my "facts are gathered from newspapers" and that the articles are "lounge notes" is laughable.

The figure of 25 % of India's territory being under Maoist insurgency is a figure advanced by the Indian security establishment and is probably a slight exaggeration. However, it is a fact that vast swathes of India's territory are out of government control. It is for this reason that the Government has announced that in October, after the rains, there will be a military operation in states like Chhattisgarh, Orissa and Jharkhand in which ground troops will be backed up with helicopter gunships and satellite mapping. A brigade headquarters is being established in Raipur (Chhattisgarh), and 26,000 paramilitary troops (the same Rashtriya Rifles who are deployed in Kashmir, and similar to the Assam Rifles deployed in Assam, Manipur and Nagaland) are being raised for this war. This is in addition the thousands of security personnel who are already deployed in these areas. Perhaps the reviewer has never visited Dantewara , seen the burned, empty villages, or crossed the Indravati into the territory that is called "Pakistan", where police and security forces do not venture? Perhaps he/she hasn't heard of Abujmaad?

4. "Beyond India, her grasp of her subject-matter gets looser. If Ms Roy believes, as she writes, that a good portion of Africa's 'contemporary horrors' are caused by America's 'new colonial interests', she would do well to pay a visit to the continent."

My book is about India, not Africa, but yes, there is a paragraph about Africa. Here's the sentence the reviewer refers to: "The battle to control Africa's mineral wealth rages on -- scratch the surface of contemporary horrors in Africa, in Rwanda, the Congo, Nigeria, pick your country and chances are that you will be able to trace the story back to the old colonial interests of Europe and the new colonial interests of the United States." My mistake here is that I didn't mention the new colonial interests of countries like China and India as well. Does your reviewer not know about the legacy of Shell Oil in Nigeria? Or the politics that surrounds the mining of a mineral called coltan? Or of how Belgium's colonial regime structured the barriers of hatred between the Tutsis and the Hutus in Rwanda with their racist profiling and social engineering? As for the recommendation that I pay a visit to the continent . . . it's a grand idea, but how does one visit an entire continent? I have visited parts of it. Plenty of times. But the reviewer should know that it is possible to know things about places even if you haven't been to them, like historians know things about history without traveling back in time.

5. "For a more measured analysis, Ms Roy should perhaps turn to the finance ministry's recently published Economic Survey. There she would read that, 'High growth is critical to generate the revenues needed for meeting our social welfare objectives.' Ms Roy should take note."

Am I really being waved back into my seat with the finance ministry's Economic Survey? I thought everybody knew that the cut back on public spending (social welfare objectives) is almost in direct proportion to the growth rate? It's often a pre-requisite when loans from the World Bank, the ADB and the IMF are negotiated. Isn't that what structural adjustment is all about? Or is this the old Trickle Down theory being re-cycled? I've always wondered about this. Sometimes they say the Free Market provides a level playing field -- but then when questioned, they ask us to wait for Trickle Down. But things only Trickle Down slopes don't they? Anyway, there is a school of thought which believes that people actually do have rights. The right, for instance, to resist the Government taking away their land and their livelihoods, often at gunpoint, and then ordering them to wait for the leftovers (if the gentlemen leave any) to trickle down after the feast.

Regardless of our obvious ideological differences I hope you agree that errors and innuendo of this nature undermine the real debate.

With best wishes,
Arundhati Roy

Moron capitalism

tr
By Julian Delasantellis

Former top gun Fidelity Investments stock picker Peter Lynch used to advise investors to "invest in what you know" as the key to picking potentially profitable equities. Thus, instead of analyzing endless investment arcana such as price/earnings ratios or momentum oscillators, he said that the amateur stock picker could do just as well by finding good products, be they laundry detergents or instant coffee, and just buy the stocks of these companies.

One of Lynch's best picks, that of Reebok far before it got hot, was not the result of diligent, MBA-level financial analysis; it came into mind when he saw all the teenagers at what he had been told were the cool local hangouts wearing Reeboks.

But what if it were the other way around? What if, instead of providing a nice snug fit, a person who put on a new pair of Reeboks had their foot lacerated by ground glass purposely sewn into the innersole, and still the stock rose? What if a hot new instant coffee seeing its stock rally every day had on its jar a warning to "consult your physician before using if overly sensitive to arsenic?"

What if the proprietor of Monty Python's famed Whizzo Chocolate Company saw his company's shares skyrocketing, even though prominent among the firm's product line were confections such as "ram's bladder cup", "garnished with lark's vomit", "cockroach cluster", "anthrax ripple", "crunchy frog", made with "only the finest baby frogs, dew picked and flown from Iraq, cleansed in finest quality spring water, lightly killed, and then sealed in a succulent Swiss quintuple smooth treble cream milk chocolate envelope and lovingly frosted with glucose ," and "Spring Surprise", the surprise in that treat being that it features, after you put in your mouth, "steel bolts spring out and plunge straight through both cheeks".

If you think that investors would never reward corporate performance such as this, you haven't seen what's been going on in the share prices of some big US banks and financial institutions lately.

A common moniker used to describe government infrastructure spending projects ready to be funded is that the projects are affirmed to be "shovel ready", but no project is more ready and eagerly awaited than to have the world's stockmarkets dig and climb out of the deep ditches they threw themselves into last September.

Much has been accomplished since most world markets bottomed out in early March; the Dow Jones Industrial Average is up by more than 3,000 points, or over 50%, but for most of August the rescuers seem to have taken a break, with the benchmark index only rising 4% up to August 28, as opposed to an over 8.5% rise in July. The rescuers probably needed a break; there's just so much more further to go.

But like all the serious denizens of Bacchus know, that there's always a party going on somewhere, so it was with stocks in August. That revelry was quite surprising, for it happened to be located at what many informed observers quite correctly assume to be American finance's most fulsome foundation of feculence, the stocks of its major financial institutions.

Yes, you would have done a lot better than the general averages in August with the BIX, the nationwide banking stock index that purposely excludes the shares of the big New York "money center" banks - it was up about 20% for the month. The banking index that dares to take a bite of the big apple, and its big stocks, the KBW, struggled by with only about a 3% rise in share value.

So was that the moneymaking secret for August, banks and financial stocks, just not very big ones? Was the market still punishing the big money-center banks for their wanton and callous profligacy in tranching, bundling and selling all those worthless mortgage-backed collateralized debt obligations? In pushing capital towards smaller, even small town, American finance, was the market finally offering up a belated mea culpa for being so disastrously wrong in following the siren songs of those glittering metropolis lotharios into worldwide catastrophe?

Not on your life. In the same way that St Augustine once pleaded to the Lord to "make me good, but not just yet", American capital, reaching again for the brass ring, is apparently out for another spin with Mr Danger.

Almost all August US stock averages, especially the ones that deal in finance, are grossly distorted by the performance of just five singular names, Citigroup, which was up almost 65% for the month to August 28, Bank of America, up 21.5%, Fannie Mae, up 251%, Freddie Mac, up 287%.

In much the same way that the Yiddish word chutzpah is defined as a man who kills his parents and then begs the court for leniency because he is an orphan, investors in the stock of American International Group, the company whose over-enthusiastic embrace of credit default swaps torpedoed the economy of the entire planet when the company failed, actually had the chutzpah to enjoy its now ward-of-the-state's 282% rise in August. (For an account of credit default swaps see Jaws close in on Bernanke, Asia Times Online, July 16, 2008.)

For the sake of comparison, Goldman Sachs, a bank now making so much money that no one really knows or understands how, had to settle for a paltry, puny August rise in its stock of under 1%.

Not only are these five delinquents August's best show in town, it's almost that they were the only show in town. According to Matt Phillips in the Wall Street Journal, for most of the month, trading in just these five stocks alone has represented just under a third of the total volume on the New York Stock Exchange. Last Monday, August 24, it was over 43% of total; NYSE volume being accounted for by just these stocks.

Phillips has rounded up a now usual suspect for the extraordinary price and volume moves - the "high frequency" flash trading I discussed last month in relation to Goldman Sachs. (See Goldman Sachs - the lords of time, Asia Times Online, August 5, 2009.)

I have my doubts as to whether these rallies result from flash/high-frequency trading; for one thing, most of the exchanges banned flash trading following its existence becoming public knowledge. I'm not sure that Goldman, or anyone for that matter, would want to be rubbing the regulators' noses in the dirt so soon after essentially promising to be forever more on their best behavior.

Also, high-frequency trading does not usually influence the trend, or direction, of stock prices in the manner that something is doing with these shares - unless Goldman Sachs is pulling a new rabbit through a very new hat, high-frequency trading seems to be a stretch here.

Finally, if it is high-frequency/flash trading, it's not rewarding, as judged by the becalmed stock price of the acknowledged sensei in the practice, Goldman Sachs. There's not much fun in being a master of the universe like Goldman if little peons can blow your ears off while leaving you behind the dust.

On CNBC, Charles Gasparino suggests that this is all just small-time shorts finally throwing in the towel with purchases to close out their positions; if enough do that in a short period of time, it can have dramatic effects on a company's stock price. Still, since most of these stocks had already bottomed in the spring, the Gasparino hypothesis seems to imply that the shorts had held onto these positions long after they had reached their maximum profitability and were content to sit there and lose money with them from March until August.

So what was it that lit the fires under, in an American universe of about 6,000 traded stocks, these particular five stocks? What lit the new guns of August?

In the files that police agencies keep on criminals are detailed listings of who or what are the other criminals or gangs the socially undesirables hang out with; an analysis of the associations of the five here goes a long way to crack the case.

Fannie Mae, Freddie Mac, American International Group, Citigroup and Bank of America - these were all Paulson's Plunderers, the trigger men for the caper that brought the world economy down to its knees starting in the summer of 2008, when Henry Paulson was still Treasury secretary.

After Bear Stearns fell in March last year, there were a few brief months of peace that allowed laissez faire sycophants the opportunity to bleat on that the entire financial crisis was a lion with more roar than bite. Now we know that the actual economy had by then already entered the worst economic pullback since the Great Depression, even as promises were made that the skies were to be forever bright as long as the upper incomes were further fattened with tax cuts from out of re-elected conservative administrations.

Then, in July, Fannie Mae and Freddie Mac began to stumble under the crushing weight of the collapsing US housing market. At first, Paulson's US Treasury thought that all these two government-sponsored enterprises needed was just making the implicit guarantees of the pair a little bit more explicit, but this tourniquet did very little to staunch the bleeding. On September 7, it was announced that the two were being placed under "receivership", defined in this circumstance as what professed free-market conservatives call nationalizing a company when their ideology prevents them from admitting that they're nationalizing it.

Lehman fell early on the following Monday, AIG the following day. By October, the barbarians were well past the gate and were assaulting the throne, causing an electronic "run" at Citigroup, then the world's largest private financial institution. Citigroup necessitated a few successive US government rescue packages before the stock stabilized early this year. Bank of America, this August's stock-price laggard among the fabulous five, never seems to have been in much of the imminent danger of collapse that the other four went through, but it still walked away with US$45 billion of US government financial system support/TARP money.

Adding that to the estimated $400 billion both the US government and Federal Reserve spent to refloat the GSEs, the $150 billion bailout of AIG, Citigroup's pocketing of $45 billion in TARP as well as its receipt of a government guarantee of up to $272 billion of its potentially diciest mortgage derivative debt, and you come to the conclusion that, in under one year, the US government has either pledged or proffered about $900 billion just to these five companies alone - roughly the low end of the range for the 10-year total cost of President Barack Obama's health plan.

All these emergency system rescues and developments were the bastardized orphans of the braying hounds of crisis; nobody, least of all former Goldman Sachs Golden God Paulson, would have in calmer times adopted a plan to react to a financial crisis in these peripatetic fashions. Indeed, just prior to the Lehman catastrophe, there was speculation that Paulson was going to turn away the next supplicant pleading for more government porridge, and, in doing so, reaffirm to the markets that, indeed, no one was too big to fail.

Late last August, three weeks before the failure of Lehman and AIG, I expounded on some of this thinking in that last, glorious summer of faux prosperity. (See, Tough love's fatal attraction, Asia Times Online, August 27, 2008).
The question then becomes, have all these factors, particularly the diverse, sometimes inchoate opposition to the manner in which the government financial elite has recruited from the private sector is reaching back to save their buddies (and their future jobs) in the private sector sufficient to stop any further rescues of the financial sector? Is the next supplicant, maybe Lehman Brothers, maybe once again Fannie and Freddie, to knock on the door of Paulson, [Federal Reserve chairman Ben] Bernanke and [Securities and Exchange Commission chairman Christopher] Cox saying that they're too big to fail going to be told that, in actuality, they're not?

It's not hard to imagine the consequences of such a denial. However soothing such a stand on free-market principle would undoubtedly sound to those seduced down the Pied Piper's road by ideology, for the rest of us the results would be catastrophic.
Then Lehman and AIG fell, then the deluge - it was catastrophic. In the three weeks following, the Dow Jones Industrial Average lost 3,700 points, about a third of its value.

Paulson's sentiments changed very quickly, as I described they would in that August 27 article. As in John Lennon's 1969 song of the misery of drug withdrawal, Cold Turkey, Paulson desperately wanted to once again start feeding the financial system's addiction to the government needle - "Oh, I'll be a good boy, please, make me well. I promise you anything, get me out of this hell."

How Paulson, followed by Obama Treasury Secretary Timothy Geithner, got out of his hell was to affirm, in statement and in very expensive deed, that most major American financial institutions were, indeed, too big too fail. The establishment of what blogger Barry Ritholtz calls "Bailout Nation" has sent the US federal budget deficit and debt numbers spinning to record highs like Las Vegas slot machines, and provided the seed for the gaseous inchoate populism of the teabag movement currently savaging Democratic solons at their town halls - but, as of yet, it has kept the US and much of the rest of the world's financial system intact, something that was thought to be not at all that certain back on Lehman weekend last year.

And a year later, on the stock market, the first are last and the last first. Why?

For the answer to that, you can look to your own behavior. What prevents you from doing really, really stupid things? If your $5,000 mortgage payment is due, what prevents you from using that money to instead cover the two hectares of the town's football pitch with 50 centimeters of cotton candy? What prevents you, should you see your surgeon in the cafeteria prior to your scheduled surgery, from slipping him some Scotch in his coffee when he's not looking? If you're on an airplane that you see is passing over your neighborhood, what stops you from opening the door, jumping out, and thus bypassing the terrible luggage carrel lines?

The answer is that there would be substantial negative costs, in terms of your health and wealth, to all that behavior. You would lose your home with the candy stunt, an internal organ or worse with your surgeon's mickey, probably your life leaving the airplane.

But what if this was not true, what if you were protected from the consequences of your worst decisions? You blow $5,000, but someone is there to give you another big check; you've got another surgeon to operate on you, or a parachute to put on as you leave the plane.

In other words, if you were continually bailed out of your worst, most risky decisions, wouldn't you do a lot more of them?

What is "too big to fail" but a government promise to bail out the banks come what may? As investors come to realize the influence and motivations of this now huge new market-influencing player, relationships and previously established market practices are changing, and that's what we are seeing in the outsized performances of Paulson's plunderers this month.

If "too big to fail" is no longer seen as a policy result to be avoided, but as a free ticket for a bank or other financial institution to receive nearly lifetime government protection, then it's not all that surprising that banks that now see themselves as too skinny to receive the government protection are trying to fatten up a bit.

Just in 2008, Wells Fargo's combined assets grew by 43% after swallowing up Wachovia; JP Morgan Chase's increased by 53%, after it assumed control of Bear Stearns and Washington Mutual. The Washington Post recently reported an unintended consequence of the rush from the huge to the gargantuan; the bigger banks, operating under the presumed guarantee of the government, are borrowing cheaper than smaller banks in the money markets - lenders apparently, with very good reason, feel that their loans to institutions that the government will be forced to stand behind are a safer bet than loans to smaller banks and financial institutions that the government might let fail.

As a result, local competition for customers among banks in America's small towns and communities is becoming a thing of the past; America's vaunted small-bank centered financial system, significant in the dynamism of the country's small-business-based economy, may soon, in a manner reminiscent of local retailers being put out of business and replaced by such national competitors as Wal-Mart and Target, be signified by, from sea to shining sea, just having a Chase or JP Morgan on one corner, and a Bank of America or Wells Fargo on the opposite.

If both the banks and their investors feel that the negative consequences of excessive risk, loan default and insolvency, are being handled by the government, it can't be all that surprising that both the banks and their investors are hungry to whet their palette with more of it. Some reports have it that the big banks are wading back into the market for highly leveraged mortgage-backed securities, the same type of instrument that sunk them the first time.

But at that time they didn't have the implied government guarantee. That frees the banks to make relatively risk-free decisions to take on more risk, and it frees the bank investors to engage in the mad bidding for big bank shares we are now seeing.

Mind you, this is in no way a prediction for endlessly sunny skies in the financial sector as a whole; on the other side of the banks being protected by the government camp's barbed-wire fence things are pretty lousy. Twenty percent of US banks lost money in the first quarter, and these days not a Friday goes by without the Federal Deposit Insurance Corporation's commissioner, Sheila Barr's bank closure team being dispatched into the heartland to put more financial institutions out of their misery - last week three banks, in California, Maryland and Minnesota, met their fate as their doors closed for the last time.

Already, 84 US banks have been seized by the FDIC this year, and its list of "problem banks" has swollen to 416. Since it is highly doubtful to more likely absolutely impossible that Obama will be sending out Geithner's cavalry to save this bunch, as one wag put it recently in the Huffington Post, perhaps the best operating investment philosophy for these curious times might be to "sell the FDIC [small banks] and buy the TARP" (big banks).

It's not as if the Obama administration does not see the inherent dangers of allowing the big financial institutions to plunder the countryside with too big to fail, but, during the current moment, Obama can ill-afford the poll-busting consequences of another Lehman shock, just as George W Bush and Paulson couldn't.

The Obama financial reform plan, released in June, did not call on the big banks to be broken or split up into more of a regulation-friendly size (the now trademark Obama/Geithner caution in dealing with the financial system was once again on obvious display there), but it did call for extra auditing, extra "stress tests" for the biggies, presumably to steer them in the right direction before they sail right off over another precipice.

Still, the entire financial reform effort has degenerated into one big semi-public sniping match between Geithner and Barr; besides, one wonders just how many more fights Obama will have the stomach for once he emerges bloodied, battered and bruised - whether he wins or loses - with healthcare.

All these things are undoubtedly seen by the players bidding up the big banks' stocks. Why not? This is probably as close to a sure thing as you're ever going to get in investing. Heads, the extra risk pays off, tails it doesn't, but you still get bailed out by the government.

As for Peter Lynch's dictum to "invest in what you know", well I know that this system, one that rewards the corpulent incompetents of the banking system over those who display innovation and entrepreneurialism, is just about the most dysfunctional thing I've ever seen; it's a virtual plea for foreign scavengers to come in and buy up the system's assets on the cheap.

Perhaps a future economics teacher, after lecturing on the previous historical epochs of agricultural capitalism, feudal capitalism, industrial capitalism and finance capitalism, will look down into his textbook to see the chapter heading that covers our current era - "moron capitalism".

Julian Delasantellis is a management consultant, private investor and educator in international business in the US state of Washington. He can be reached at juliandelasantellis@yahoo.com.