September 2, 2007
Simon Jenkins
Prison officers last week went on strike over a pay rise of 2.5%, phased. The heads of Britain’s 100 biggest companies have had 37%, unphased, as presumably are its recipients. The bosses won 28% more last year, 16% the year before and 13% and 23% in the two preceding years, yielding an average pay of £2.8m a head or 20 times the rise in price inflation. Under Labour, these company directors have stretched their remuneration to almost 100 times average earnings, a gap unprecedented since the rise of modern taxation.
Is this a good or bad thing? Any pay package is, like beauty, in the eye of the beholder. But for an entire class of workers to receive sequential increases of 37%, 28% and 16% suggests a serious leakage of cash from businesses into the pockets of those at the top. Nor is there any noticeable relationship of pay to company size or success. Last week Eric Nicoli left as boss of EMI after eight years in which the company faltered and its share price fell by 40%. Yet he received £800,000 a year in salary and was given a leaving present of £2.8m.
Cash bonuses mostly in financial services are beyond the imaginings of wage slaves. Bob Diamond, who works at (but does not even run) the floundering Barclays Bank, took a bonus of £10.4m this year. Sir Fred Goodwin of the Royal Bank of Scotland took £2.7m. Last month’s Guardian/Office for National Statistics survey reported that bonuses overall increased 30% in 2007 to £14 billion, double last year’s rise. Readers may be tempted to ask how people contrive to dispose of such sensational winnings each year.
The apologists have been in full cry. A simple response is to play the comparisons game. These companies are the size of small states and their leaders have a right to tax their workers and shareholders accordingly. So implies Peter Newhouse, the survey’s author, and a consultant with Reward Technology Forum. He says we should publicise rewards as “an important message to able and aspirational young people”. The CBI adds that companies must pay “the going rate” or competitive talent will float offshore and something called UK plc will suffer. Britain now depends for a third of its income on financial services, so do not kill the geese that lay the golden eggs.
Nor is that all. As this money swills through the pockets of bonus recipients, say the apologists, it “trickles down”, finding an outlet not just in blue-chip properties but in cars, restaurants, holidays, nannies, clothes, hunting stables and Cotswold interiors, most with a high labour content. The incomes of the very rich allegedly redistribute to the poor faster through personal expenditure than through taxation. This is plausible given how much of the latter goes on white collar salaries, fees and subsidies.
But all this is special pleading. In allowing himself to be bluffed by the super-rich, that they will emigrate if he properly taxes their earnings, Gordon Brown falls for the Mandy Rice-Davies retort: they would say that, wouldn’t they. As for dangling £2m bonuses before the young, it is like Margaret Thatcher telling young women to find themselves rich husbands. Other proffered comparisons, such as between executives and Elton John and David Beckham, ignore the fact that such celebrities operate in a truly open market, do not determine their own incomes and, unlike City firms, receive no public money.
Anyone who has served on a corporate remuneration committee knows how it operates. It puts pay decisions out to consultants who, like the nonexecutives, the headhunters and senior management as a whole, have a vested interest in inflated incomes. Everyone scratches everyone’s back.
Discussion is not concerned with market forces but public relations. How will an outrageous bonus look to the press? Can shareholders and investors be fooled?
Apart from such rare company doctors as Stuart Rose of Marks & Spencer, who can add value out of proportion to their price, Britain is experiencing the same breakdown in top pay restraint that JK Galbraith noted in America. Corporate remuneration, he remarked, was nothing to do with the marketplace but was a heart-warming gift from executives and their friends to each other, a gift that had grown so large as to “verge on larceny”.
I suspect that wildly extravagant short-term “incentives” are as likely to distort performance as boost it, as is the case with Whitehall public service targets. As for the idea that a 37% pay rise will trickle down to help the poor, this might pass muster as an economics essay but it will get short shrift in the canteen where 2.5% is the norm. Why does trickle-down not apply to them?
The claim that executives with families well installed in London and country houses will suddenly vanish to Monaco or the Cayman Islands if not paid millions more each year (or if fully taxed on those millions) is absurd. It ignores the role of location, lifestyle and other nonpecuniary perks in a modern executive’s career package.
Being well regarded for running a successful company should be more satisfying than a reputation for greed, as BP’s Lord Browne and the privatisation “fat cats” of the 1980s found to their anguish. London’s financial preeminence is based primarily on its lax market regulation and its agreeable living conditions for those not reliant on public services. Businesses will leave Britain not when executives are properly taxed but when they start losing money.
I prefer to kick all this out of court. The rich, like the poor, are always with us. There is no morality in economics. The exponential rise in corporate pay is a hangover from the 1986 Big Bang phase of Thatcherite capitalism. If it had anything to do with free competition, there would have been a rush of talent into this market sector and a consequent fall in pay. That has not happened.
Two forces are influencing top people’s pay. The first is structural. The fortunes recently made in the City are largely due to a shift from lumbering corporate suppliers of financial services, such as banks and brokers, to fast-moving individuals and partnerships. I see no harm in this. More worrying is the new cartels, like those that the Big Bang supposedly smashed. Just four accountancy firms control large-scale audit and have spilt over into public/private finance. Half of management consultancy, again involving a small group of firms, relies on work from government. The rise in statutory regulation under Labour has sent legal and other professional bonuses soaring. As Adam Smith said, people of the same trade never meet “even in merriment” but to conspire to raise prices. This is government’s doing.
The other force is political. The widening of the pay gap, which has not occurred in continental Europe, followed the disempowering of organised labour by Margaret Thatcher and Tony Blair, vigorously supported by Brown at the Treasury. This has released corporate Britain from any sense of self-restraint. Indulging tax loopholes for the rich while ordering workers to shoulder the fight against inflation may help Brown sound macho in the City, but it is high-risk politics.
A real sense of unfairness greeted the revelation that a number of the richest participants in economic success were, de facto, being subsidised by the rest through private equity tax evasion and/or nondomicilary status. The same anger was unleashed by the disclosure that a shift in the economy from manufacturing to financial services had led to a shift in profits to offshore tax havens.
Any lobbyist can cobble together special pleading for such antics, but they will not wash for millions of hardworking, tax-paying Britons. Low taxes for all are good, but tax breaks for a privileged few are wrong. The rising tide of wealth should float every boat, not just executive yachts.
As most people see their incomes slide ever further behind those about whom they read in the papers, they will be more inclined to cry halt. Democracy may not be the force it was, but it can deliver politicians an occasional kick, as can industrial relations. The prison officers may yet prove a straw in a wind that sweeps up others in its tail.
The days of statutory pay restraint are mercifully past, replaced in Britain by the most fluid labour market in Europe. But government vigilance is needed to retain that fluidity, and a regard for fairness to back it up.
Capital and labour will never coexist in a climate of equality, but some respect for equity must underpin the nation’s social contract. Otherwise we shall be back to the bitter divisions of the 1970s, where nobody wants to go.
'People will forgive you for being wrong, but they will never forgive you for being right - especially if events prove you right while proving them wrong.' Thomas Sowell
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Sunday, 2 September 2007
Tuesday, 28 August 2007
Neoliberalism! - How the neoliberals stitched up the wealth of nations for themselves
A cabal of intellectuals and elitists hijacked the economic debate, and now we are dealing with the catastrophic effects
George Monbiot
Tuesday August 28, 2007
The Guardian
For the first time the UK's consumer debt exceeds the total of its gross national product: a new report shows that we owe £1.35 trillion. Inspectors in the United States have discovered that 77,000 road bridges are in the same perilous state as the one which collapsed into the Mississippi. Two years after Hurricane Katrina struck, 120,000 people from New Orleans are still living in trailer homes and temporary lodgings. As runaway climate change approaches, governments refuse to take the necessary action. Booming inequality threatens to create the most divided societies the world has seen since before the first world war. Now a financial crisis caused by unregulated lending could turf hundreds of thousands out of their homes and trigger a cascade of economic troubles.
These problems appear unrelated, but they all have something in common. They arise in large part from a meeting that took place 60 years ago in a Swiss spa resort. It laid the foundations for a philosophy of government that is responsible for many, perhaps most, of our contemporary crises.
When the Mont Pelerin Society first met, in 1947, its political project did not have a name. But it knew where it was going. The society's founder, Friedrich von Hayek, remarked that the battle for ideas would take at least a generation to win, but he knew that his intellectual army would attract powerful backers. Its philosophy, which later came to be known as neoliberalism, accorded with the interests of the ultra-rich, so the ultra-rich would pay for it.
Neoliberalism claims that we are best served by maximum market freedom and minimum intervention by the state. The role of government should be confined to creating and defending markets, protecting private property and defending the realm. All other functions are better discharged by private enterprise, which will be prompted by the profit motive to supply essential services. By this means, enterprise is liberated, rational decisions are made and citizens are freed from the dehumanising hand of the state.
This, at any rate, is the theory. But as David Harvey proposes in his book A Brief History of Neoliberalism, wherever the neoliberal programme has been implemented, it has caused a massive shift of wealth not just to the top 1%, but to the top tenth of the top 1%. In the US, for instance, the upper 0.1% has already regained the position it held at the beginning of the 1920s. The conditions that neoliberalism demands in order to free human beings from the slavery of the state - minimal taxes, the dismantling of public services and social security, deregulation, the breaking of the unions - just happen to be the conditions required to make the elite even richer, while leaving everyone else to sink or swim. In practice the philosophy developed at Mont Pelerin is little but an elaborate disguise for a wealth grab.
So the question is this: given that the crises I have listed are predictable effects of the dismantling of public services and the deregulation of business and financial markets, given that it damages the interests of nearly everyone, how has neoliberalism come to dominate public life?
Richard Nixon was once forced to concede that "we are all Keynesians now". Even the Republicans supported the interventionist doctrines of John Maynard Keynes. But we are all neoliberals now. Margaret Thatcher kept telling us that "there is no alternative", and by implementing her programmes Clinton, Blair, Brown and the other leaders of what were once progressive parties appear to prove her right.
The first great advantage the neoliberals possessed was an unceasing fountain of money. US oligarchs and their foundations - Coors, Olin, Scaife, Pew and others - have poured hundreds of millions into setting up thinktanks, founding business schools and transforming university economics departments into bastions of almost totalitarian neoliberal thinking. The Heritage Foundation, the Hoover Institute, the American Enterprise Institute and many others in the US, the Institute of Economic Affairs, the Centre for Policy Studies and the Adam Smith Institute in the UK, were all established to promote this project. Their purpose was to develop the ideas and the language which would mask the real intent of the programme - the restoration of the power of the elite - and package it as a proposal for the betterment of humankind.
Their project was assisted by ideas which arose in a very different quarter. The revolutionary movements of 1968 also sought greater individual liberties, and many of the soixante-huitards saw the state as their oppressor. As Harvey shows, the neoliberals coopted their language and ideas. Some of the anarchists I know still voice notions almost identical to those of the neoliberals: the intent is different, but the consequences very similar.
Hayek's disciples were also able to make use of economic crises. An early experiment took place in New York City, which was hit by budgetary disaster in 1975. Its bankers demanded that the city follow their prescriptions - huge cuts in public services, smashing of the unions, public subsidies for business. In the UK, stagflation, strikes and budgetary breakdown allowed Thatcher, whose ideas were framed by her neoliberal adviser Keith Joseph, to come to the rescue. Her programme worked, but created a new set of crises.
If these opportunities were insufficient, the neoliberals and their backers would use bribery or force. In the US, the Democrats were neutered by new laws on campaign finance. To compete successfully for funding with the Republicans, they would have to give big business what it wanted. The first neoliberal programme of all was implemented in Chile following Pinochet's coup, with the backing of the US government and economists taught by Milton Friedman, one of the founding members of the Mont Pelerin Society. Drumming up support for the project was easy: if you disagreed, you got shot. The International Monetary Fund and the World Bank used their power over developing nations to demand the same policies.
But the most powerful promoter of this programme was the media. Most of it is owned by multimillionaires who use it to project the ideas that support their interests. Those ideas which threaten their interests are either ignored or ridiculed. It is through the newspapers and TV channels that the socially destructive notions of a small group of extremists have come to look like common sense. The corporations' tame thinkers sell the project by reframing our political language (for an account of how this happens, see George Lakoff's book, Don't Think of an Elephant!). Nowadays I hear even my progressive friends using terms like wealth creators, tax relief, big government, consumer democracy, red tape, compensation culture, job seekers and benefit cheats. These terms, all invented or promoted by neoliberals, have become so commonplace that they now seem almost neutral.
Neoliberalism, if unchecked, will catalyse crisis after crisis, all of which can be solved only by greater intervention on the part of the state. In confronting it, we must recognise that we will never be able to mobilise the resources its exponents have been given. But as the disasters they have caused unfold, the public will need ever less persuading that it has been misled.
Play Movie Mash-up and win BIG prizes! Hayek, wealth,
Sunday, 26 August 2007
Even I Question The 'Truth' About 9/11
By Robert Fisk
26 August, 2007
The Independent
Each time I lecture abroad on the Middle East, there is always someone in the audience – just one – whom I call the "raver". Apologies here to all the men and women who come to my talks with bright and pertinent questions – often quite humbling ones for me as a journalist – and which show that they understand the Middle East tragedy a lot better than the journalists who report it. But the "raver" is real. He has turned up in corporeal form in Stockholm and in Oxford, in Sao Paulo and in Yerevan, in Cairo, in Los Angeles and, in female form, in Barcelona. No matter the country, there will always be a "raver".
His – or her – question goes like this. Why, if you believe you're a free journalist, don't you report what you really know about 9/11? Why don't you tell the truth – that the Bush administration (or the CIA or Mossad, you name it) blew up the twin towers? Why don't you reveal the secrets behind 9/11? The assumption in each case is that Fisk knows – that Fisk has an absolute concrete, copper-bottomed fact-filled desk containing final proof of what "all the world knows" (that usually is the phrase) – who destroyed the twin towers. Sometimes the "raver" is clearly distressed. One man in Cork screamed his question at me, and then – the moment I suggested that his version of the plot was a bit odd – left the hall, shouting abuse and kicking over chairs.
Usually, I have tried to tell the "truth"; that while there are unanswered questions about 9/11, I am the Middle East correspondent of The Independent, not the conspiracy correspondent; that I have quite enough real plots on my hands in Lebanon, Iraq, Syria, Iran, the Gulf, etc, to worry about imaginary ones in Manhattan. My final argument – a clincher, in my view – is that the Bush administration has screwed up everything – militarily, politically diplomatically – it has tried to do in the Middle East; so how on earth could it successfully bring off the international crimes against humanity in the United States on 11 September 2001?
Well, I still hold to that view. Any military which can claim – as the Americans did two days ago – that al-Qa'ida is on the run is not capable of carrying out anything on the scale of 9/11. "We disrupted al-Qa'ida, causing them to run," Colonel David Sutherland said of the preposterously code-named "Operation Lightning Hammer" in Iraq's Diyala province. "Their fear of facing our forces proves the terrorists know there is no safe haven for them." And more of the same, all of it untrue.
Within hours, al-Qa'ida attacked Baquba in battalion strength and slaughtered all the local sheikhs who had thrown in their hand with the Americans. It reminds me of Vietnam, the war which George Bush watched from the skies over Texas – which may account for why he this week mixed up the end of the Vietnam war with the genocide in a different country called Cambodia, whose population was eventually rescued by the same Vietnamese whom Mr Bush's more courageous colleagues had been fighting all along.
But – here we go. I am increasingly troubled at the inconsistencies in the official narrative of 9/11. It's not just the obvious non sequiturs: where are the aircraft parts (engines, etc) from the attack on the Pentagon? Why have the officials involved in the United 93 flight (which crashed in Pennsylvania) been muzzled? Why did flight 93's debris spread over miles when it was supposed to have crashed in one piece in a field? Again, I'm not talking about the crazed "research" of David Icke's Alice in Wonderland and the World Trade Center Disaster – which should send any sane man back to reading the telephone directory.
I am talking about scientific issues. If it is true, for example, that kerosene burns at 820C under optimum conditions, how come the steel beams of the twin towers – whose melting point is supposed to be about 1,480C – would snap through at the same time? (They collapsed in 8.1 and 10 seconds.) What about the third tower – the so-called World Trade Centre Building 7 (or the Salmon Brothers Building) – which collapsed in 6.6 seconds in its own footprint at 5.20pm on 11 September? Why did it so neatly fall to the ground when no aircraft had hit it? The American National Institute of Standards and Technology was instructed to analyse the cause of the destruction of all three buildings. They have not yet reported on WTC 7. Two prominent American professors of mechanical engineering – very definitely not in the "raver" bracket – are now legally challenging the terms of reference of this final report on the grounds that it could be "fraudulent or deceptive".
Journalistically, there were many odd things about 9/11. Initial reports of reporters that they heard "explosions" in the towers – which could well have been the beams cracking – are easy to dismiss. Less so the report that the body of a female air crew member was found in a Manhattan street with her hands bound. OK, so let's claim that was just hearsay reporting at the time, just as the CIA's list of Arab suicide-hijackers, which included three men who were – and still are – very much alive and living in the Middle East, was an initial intelligence error.
But what about the weird letter allegedly written by Mohamed Atta, the Egyptian hijacker-murderer with the spooky face, whose "Islamic" advice to his gruesome comrades – released by the CIA – mystified every Muslim friend I know in the Middle East? Atta mentioned his family – which no Muslim, however ill-taught, would be likely to include in such a prayer. He reminds his comrades-in-murder to say the first Muslim prayer of the day and then goes on to quote from it. But no Muslim would need such a reminder – let alone expect the text of the "Fajr" prayer to be included in Atta's letter.
Let me repeat. I am not a conspiracy theorist. Spare me the ravers. Spare me the plots. But like everyone else, I would like to know the full story of 9/11, not least because it was the trigger for the whole lunatic, meretricious "war on terror" which has led us to disaster in Iraq and Afghanistan and in much of the Middle East. Bush's happily departed adviser Karl Rove once said that "we're an empire now – we create our own reality". True? At least tell us. It would stop people kicking over chairs.
© 2007 Independent News and Media Limited
26 August, 2007
The Independent
Each time I lecture abroad on the Middle East, there is always someone in the audience – just one – whom I call the "raver". Apologies here to all the men and women who come to my talks with bright and pertinent questions – often quite humbling ones for me as a journalist – and which show that they understand the Middle East tragedy a lot better than the journalists who report it. But the "raver" is real. He has turned up in corporeal form in Stockholm and in Oxford, in Sao Paulo and in Yerevan, in Cairo, in Los Angeles and, in female form, in Barcelona. No matter the country, there will always be a "raver".
His – or her – question goes like this. Why, if you believe you're a free journalist, don't you report what you really know about 9/11? Why don't you tell the truth – that the Bush administration (or the CIA or Mossad, you name it) blew up the twin towers? Why don't you reveal the secrets behind 9/11? The assumption in each case is that Fisk knows – that Fisk has an absolute concrete, copper-bottomed fact-filled desk containing final proof of what "all the world knows" (that usually is the phrase) – who destroyed the twin towers. Sometimes the "raver" is clearly distressed. One man in Cork screamed his question at me, and then – the moment I suggested that his version of the plot was a bit odd – left the hall, shouting abuse and kicking over chairs.
Usually, I have tried to tell the "truth"; that while there are unanswered questions about 9/11, I am the Middle East correspondent of The Independent, not the conspiracy correspondent; that I have quite enough real plots on my hands in Lebanon, Iraq, Syria, Iran, the Gulf, etc, to worry about imaginary ones in Manhattan. My final argument – a clincher, in my view – is that the Bush administration has screwed up everything – militarily, politically diplomatically – it has tried to do in the Middle East; so how on earth could it successfully bring off the international crimes against humanity in the United States on 11 September 2001?
Well, I still hold to that view. Any military which can claim – as the Americans did two days ago – that al-Qa'ida is on the run is not capable of carrying out anything on the scale of 9/11. "We disrupted al-Qa'ida, causing them to run," Colonel David Sutherland said of the preposterously code-named "Operation Lightning Hammer" in Iraq's Diyala province. "Their fear of facing our forces proves the terrorists know there is no safe haven for them." And more of the same, all of it untrue.
Within hours, al-Qa'ida attacked Baquba in battalion strength and slaughtered all the local sheikhs who had thrown in their hand with the Americans. It reminds me of Vietnam, the war which George Bush watched from the skies over Texas – which may account for why he this week mixed up the end of the Vietnam war with the genocide in a different country called Cambodia, whose population was eventually rescued by the same Vietnamese whom Mr Bush's more courageous colleagues had been fighting all along.
But – here we go. I am increasingly troubled at the inconsistencies in the official narrative of 9/11. It's not just the obvious non sequiturs: where are the aircraft parts (engines, etc) from the attack on the Pentagon? Why have the officials involved in the United 93 flight (which crashed in Pennsylvania) been muzzled? Why did flight 93's debris spread over miles when it was supposed to have crashed in one piece in a field? Again, I'm not talking about the crazed "research" of David Icke's Alice in Wonderland and the World Trade Center Disaster – which should send any sane man back to reading the telephone directory.
I am talking about scientific issues. If it is true, for example, that kerosene burns at 820C under optimum conditions, how come the steel beams of the twin towers – whose melting point is supposed to be about 1,480C – would snap through at the same time? (They collapsed in 8.1 and 10 seconds.) What about the third tower – the so-called World Trade Centre Building 7 (or the Salmon Brothers Building) – which collapsed in 6.6 seconds in its own footprint at 5.20pm on 11 September? Why did it so neatly fall to the ground when no aircraft had hit it? The American National Institute of Standards and Technology was instructed to analyse the cause of the destruction of all three buildings. They have not yet reported on WTC 7. Two prominent American professors of mechanical engineering – very definitely not in the "raver" bracket – are now legally challenging the terms of reference of this final report on the grounds that it could be "fraudulent or deceptive".
Journalistically, there were many odd things about 9/11. Initial reports of reporters that they heard "explosions" in the towers – which could well have been the beams cracking – are easy to dismiss. Less so the report that the body of a female air crew member was found in a Manhattan street with her hands bound. OK, so let's claim that was just hearsay reporting at the time, just as the CIA's list of Arab suicide-hijackers, which included three men who were – and still are – very much alive and living in the Middle East, was an initial intelligence error.
But what about the weird letter allegedly written by Mohamed Atta, the Egyptian hijacker-murderer with the spooky face, whose "Islamic" advice to his gruesome comrades – released by the CIA – mystified every Muslim friend I know in the Middle East? Atta mentioned his family – which no Muslim, however ill-taught, would be likely to include in such a prayer. He reminds his comrades-in-murder to say the first Muslim prayer of the day and then goes on to quote from it. But no Muslim would need such a reminder – let alone expect the text of the "Fajr" prayer to be included in Atta's letter.
Let me repeat. I am not a conspiracy theorist. Spare me the ravers. Spare me the plots. But like everyone else, I would like to know the full story of 9/11, not least because it was the trigger for the whole lunatic, meretricious "war on terror" which has led us to disaster in Iraq and Afghanistan and in much of the Middle East. Bush's happily departed adviser Karl Rove once said that "we're an empire now – we create our own reality". True? At least tell us. It would stop people kicking over chairs.
© 2007 Independent News and Media Limited
Saturday, 25 August 2007
Listen To The People
If this deal is so indispensable, why can't the government get even a simple majority in its favour in Parliament?
VINOD MEHTA
O, National Interest, what sins are committed in thy name! Prakash Karat is protecting our national interest, Manmohan Singh is protecting our national interest, Amar Singh is protecting our national interest, George Fernandes is protecting our national interest, V.P. Singh is protecting our national interest. Mother India is being suffocated by these eminent protectors. One longs for someone who is selling the country for a few pieces of silver! It seems not patriotism, but national interest is the last refuge of the scoundrel. So complete and comprehensive is this protection that the country's blood pressure is at bursting point while the government is hanging by its short hairs. India needs to be saved from its protectors.
How did we arrive here? Barely two weeks ago, the UPA was sailing smoothly, uplifted by impressive victories in a presidential and vice-presidential poll. Politics was at once boring and predictable. In the UK, August (when the natives go en masse on chhutti) is the silly season. Newspaper stories about spotting the first cuckoo abound. So, too, it seemed in our blessed republic where completion of 60 years of freedom had resulted in an orgy of self-congratulation.
Governments, especially coalition governments, fall regularly in all democracies. In India, sometimes serious, sometimes less serious issues cause a government to go down. However, never in our chequered history has a foreign policy issue caused the death of a government. It is always a local issue—Advani's rath yatra, Rajiv taking umbrage at some IB men loitering in the wrong place—which has profound domestic implications.
Now we have the possibility of a civilian nuclear deal with the United States, which 99 per cent of the indigenous population do not understand or care much about, dragging the Congress-led coalition to the brink of self-annihilation.
A civilian nuclear deal with America is important, even very important. The ayatollahs of get-into-bed-with-the United States confidently assert it is a life or death matter for the country. Perhaps. From 3 per cent to 7 per cent of nuclear power is a gargantuan leap, and who knows what other goodies await us in the brave, new world of technological embrace with George Bush.
Forgive the frivolity. The deal, we are told, is a "stunning foreign policy achievement". The deal is Manmohan Singh's gift to the nation. The deal cements the economic, strategic, political and emotional bonds between the world's largest and oldest democracies. The deal will further boost the morale of 1.5 million NRIs in the US (according to me, that is good reason for rejecting the deal). All the aforementioned arguments are either wholly or partially true. Nevertheless, one must ask: is the deal worth sacrificing the government for?
If the much-desired deal is for some reason delayed or scrapped, will the US declare war on India? Will McDonald's pack up, will Boeing stop selling us aeroplanes, will GE shut shop, will Pizza Hut quit our shores? Without the sainted deal, Indo-US ties are booming, they are touching the stratosphere. Those who maintain that non-signing will cripple or seriously hamper bilateral relations are being economical with the truth. We need the deal, but we don't have to cut our nose to spite our face in order to get it.
It is not just the comrades who are suspicious of George Bush or Hillary Clinton. To talk about an independent foreign policy is not the sole prerogative of the Communists or the cold warriors. Do we wish to get into a clinch with a country which could bomb Iran before the deal is signed by the US Congress?
In Delhi the latest parlour game is to heap abuse on the Left. Hypocrites, harlots ("power without responsibility"), ideological dinosaurs, blind, selfish, Chinese spies—Messrs Bardhan and Karat may well be the hate figures of our America-loving democracy.Alas, abusing them won't get us very far. If this deal is so indispensable, why can't the government get even a simple majority in its favour in Parliament?
Dr Manmohan Singh is a wise, sincere, honest patriot and politician. Someone who he trusts and respects must explain to him that politics without power is meaningless. If the PM wants this deal and other free market reforms to go through, he must help his party win 272 seats. At present, it is Deal vs Government. Which will he choose? More important: which will the people of India choose?
VINOD MEHTA
O, National Interest, what sins are committed in thy name! Prakash Karat is protecting our national interest, Manmohan Singh is protecting our national interest, Amar Singh is protecting our national interest, George Fernandes is protecting our national interest, V.P. Singh is protecting our national interest. Mother India is being suffocated by these eminent protectors. One longs for someone who is selling the country for a few pieces of silver! It seems not patriotism, but national interest is the last refuge of the scoundrel. So complete and comprehensive is this protection that the country's blood pressure is at bursting point while the government is hanging by its short hairs. India needs to be saved from its protectors.
How did we arrive here? Barely two weeks ago, the UPA was sailing smoothly, uplifted by impressive victories in a presidential and vice-presidential poll. Politics was at once boring and predictable. In the UK, August (when the natives go en masse on chhutti) is the silly season. Newspaper stories about spotting the first cuckoo abound. So, too, it seemed in our blessed republic where completion of 60 years of freedom had resulted in an orgy of self-congratulation.
Governments, especially coalition governments, fall regularly in all democracies. In India, sometimes serious, sometimes less serious issues cause a government to go down. However, never in our chequered history has a foreign policy issue caused the death of a government. It is always a local issue—Advani's rath yatra, Rajiv taking umbrage at some IB men loitering in the wrong place—which has profound domestic implications.
Now we have the possibility of a civilian nuclear deal with the United States, which 99 per cent of the indigenous population do not understand or care much about, dragging the Congress-led coalition to the brink of self-annihilation.
A civilian nuclear deal with America is important, even very important. The ayatollahs of get-into-bed-with-the United States confidently assert it is a life or death matter for the country. Perhaps. From 3 per cent to 7 per cent of nuclear power is a gargantuan leap, and who knows what other goodies await us in the brave, new world of technological embrace with George Bush.
Forgive the frivolity. The deal, we are told, is a "stunning foreign policy achievement". The deal is Manmohan Singh's gift to the nation. The deal cements the economic, strategic, political and emotional bonds between the world's largest and oldest democracies. The deal will further boost the morale of 1.5 million NRIs in the US (according to me, that is good reason for rejecting the deal). All the aforementioned arguments are either wholly or partially true. Nevertheless, one must ask: is the deal worth sacrificing the government for?
If the much-desired deal is for some reason delayed or scrapped, will the US declare war on India? Will McDonald's pack up, will Boeing stop selling us aeroplanes, will GE shut shop, will Pizza Hut quit our shores? Without the sainted deal, Indo-US ties are booming, they are touching the stratosphere. Those who maintain that non-signing will cripple or seriously hamper bilateral relations are being economical with the truth. We need the deal, but we don't have to cut our nose to spite our face in order to get it.
It is not just the comrades who are suspicious of George Bush or Hillary Clinton. To talk about an independent foreign policy is not the sole prerogative of the Communists or the cold warriors. Do we wish to get into a clinch with a country which could bomb Iran before the deal is signed by the US Congress?
In Delhi the latest parlour game is to heap abuse on the Left. Hypocrites, harlots ("power without responsibility"), ideological dinosaurs, blind, selfish, Chinese spies—Messrs Bardhan and Karat may well be the hate figures of our America-loving democracy.Alas, abusing them won't get us very far. If this deal is so indispensable, why can't the government get even a simple majority in its favour in Parliament?
Dr Manmohan Singh is a wise, sincere, honest patriot and politician. Someone who he trusts and respects must explain to him that politics without power is meaningless. If the PM wants this deal and other free market reforms to go through, he must help his party win 272 seats. At present, it is Deal vs Government. Which will he choose? More important: which will the people of India choose?
Market Efficiency Hokum
By Stephen Lendman
24 August, 2007
Countercurrents.org
You know the story triumphantly heard in the West. Markets work best when governments let them operate freely - unconstrained by rules, regulations and taxes about which noted economist Milton Friedman once said in an interview he was "in favor of cutting....under any circumstances and for any excuse, for any reason, whenever it's possible (because) the big problem is not taxes (but government) spending.
Friedman is no longer with us, but by his reasoning, the solution to curbing it is "to hold down the amount of income (government) has (and presto) the way to do it is to cut taxes." He seemed to forget about borrowing and the Federal Reserve's ability to print limitless amounts of ready cash the way it's been doing for years and during the current credit squeeze. Friedman further added in the same interchange "If the White House were under (GW) Bush, and House and Senate....under the Democrats, I do not believe there would be much spending."
Clearly, either the Nobel laureate wasn't paying attention or age was taking its toll late in his life. Since 2001, Democrats embraced tax cutting and overspending policies as enthusiastically as Republicans with both parties directing the benefits hugely to the right pockets. They're on Wall Street and in corporate boardrooms where recipients know "free markets" work great with a little creative resource directing from Washington.
Financial Market Efficiency
In investment finance, Eugene Fama is generally regarded as the father of efficient market theory, also known as the "efficient market hypothesis (EMH)." He wrote his 1964 doctoral dissertation on it titled "The Behavior of Stock Market Prices" in which he concluded stock (and by implication other financial market) price movements are unpredictable and follow a "random walk" reflecting all available information known at the time. Thus, no one, in theory, has an advantage over another as everyone has equal access to everything publicly known (aside from "insiders" with a huge advantage). That includes rumored and actual financial, economic, political, social and all other information, all of which is reflected in asset prices at any given time.
Those buying this theory believe Milton Friedman knew best. He became the modern-day godfather of "free market" capitalism and leading exponent that markets work efficiently and best when unfettered by government intervention that generally gets things wrong. In 1958, Friedman explained it in his famous "I, Pencil" essay. In it, he illustrated the notion of Adam Smith's invisible hand and conservative economist Friedrich Hayek's teachings on the importance of "dispersed knowledge" and how the price system communicates information to "make (people) do desirable things without anyone having to tell them what to do."
Friedman's "pencil" story explained "a complex combination of miracles: a tree, zinc, copper, graphite, and so on." Added to these ingredients from nature is "an even more extraordinary miracle: the configuration of creative human energies - millions of tiny know-hows configuring naturally and spontaneously (responding to) human necessity and desire and in the absence of any human master-minding." None of them working independently was trying to make a pencil. No one directed them from a central office. They didn't know each other, lived in many countries, spoke different languages, practiced different religions, and may have even hated each other. Yet, their unrelated contributions produced a pencil.
By Friedman's reasoning, this could never happen through central planning. It sounds good in theory, but how does it jibe with reality. The Soviets split the atom, were first in space ahead of the US with Sputnik 1, and developed many advanced technologies even though they were outclassed and outspent by the West overall with greater resources to do it.
In practical reality, governments, like individuals operating freely in the marketplace, can succeed or fail. It comes down to people skills and how well they do their jobs. Top down or bottom up has little final effect on the end result, but does direct what's undertaken and what isn't. Top down in Canada, Western Europe and Venezuela delivers excellent state-funded health care to everyone. Bottom up in America offers it to anyone who can pay, but if not, you're out of luck if your employer won't provide it. Forty-seven million and counting had their luck run out, and Friedman's pencil making miracle won't treat them when they'll ill.
Put another way, if "free market" capitalism works best and America is its lead exponent, why then:
-- is poverty high and rising in the world's richest country;
-- incomes stagnating;
-- higher education becoming unaffordable for the majority;
-- public education crumbling;
-- jobs at all levels disappearing to low-wage countries;
-- the nation's vital infrastructure in a deplorable state;
-- 3.5 million or more homeless and heading higher in the wake of subprime defaults;
-- the standard of living of most in the country declining; and,
-- the nation, in fact, bankrupt according to a 2006 study for the St. Louis Fed.
Clearly, something is wrong with the "pencil miracle" working for some but not for most. Friedman no longer can respond and his acolytes won't.
The Myth that Markets Get It Right and Operate Efficiently
Economist Hyman Minsky was mostly ignored while he lived, but his star may be rising 11 years after his death in 1996. Some described him as a radical Keynesian based on the theories of economist John Maynard Keynes who taught economies operate best when mixed. He believed state and private sectors both play important roles with government stepping in to stimulate or constrain economic activity whenever private sector forces aren't able to do it best alone.
It's the opposite of "supply-side" Reaganomics and its illusory "trickle down" notion that economic growth works best through stimulative tax cuts its proponents claim promote investment that benefits everyone. It was Reagan-baloney then and now, and so is the notion markets are efficient and work best when left alone.
Minsky explained it, and people are now taking note in the wake of current market turbulence. His work showed financial market exuberance often becomes excessive, especially if no regulatory constraints are in place to curb it. He developed his theories in two books - "John Maynard Keynes" and "Stabilizing an Unstable Economy" as well as in numerous articles and essays.
In them, he constructed a "financial instability hypothesis" building on the work of Keynes' "General Theory of Employment, Interest and Money." He provided a framework for distinguishing between stabilizing and destabilizing free market debt structures he summarized as follows:
"Three distinct income-debt relations for economic units....labeled as hedge, speculative and Ponzi finance, can be identified."
-- "Hedge financing units are those which can fulfill all of their contractual payment obligations by their cash flows: the greater the weight of equity financing in the liability structure, the greater the likelihood that the unit is a hedge financing unit."
-- "Speculative finance units are units that can meet their payment commitments on 'income account' on their liabilities, even as they cannot repay the principle out of income cash flows. Such units need to 'roll over' their liabilities - issue new debt to meet commitments on maturing debt."
-- "For Ponzi units, the cash flows from operations are (insufficient)....either (to repay)....principle or interest on outstanding debts by their cash flows from operations. Such units can sell assets or borrow. Borrowing to pay interest....lowers the equity of a unit, even as it increases liabilities and the prior commitment of future incomes."
"....if hedge financing dominates....the economy may....be (in) equilibrium. In contrast, the greater the weight of speculative (and/or) Ponzi finance, the greater the likelihood that the economy is a deviation-amplifying system....(based on) the financial instability hypothesis (and) over periods of prolonged prosperity, the economy transits from financial relations (creating stability) to financial relations (creating) an unstable system."
"....over a protracted period of good times, capitalist economies (trend toward) a large weight (of) units engaged in speculative and Ponzi finance. (If this happens when) an economy is (experiencing inflation and the Federal Reserve tries) to exorcise (it) by monetary constraint....speculative units will become Ponzi (ones) and the net worth of previous Ponzi units will quickly evaporate. Consequently, units with cash flow shortfalls will be forced to (sell out). This is likely to lead to a collapse of asset values."
Minsky developed a seven stage framework showing how this works:
Stage One - Displacement
Disturbances of various kinds change investor perceptions and disrupt markets. It may be a tightened economic policy from higher interest rates or investors and lenders retrenching in reaction to:
-- a housing bubble, credit squeeze, and growing subprime mortgage delinquencies and defaults with spreading contagion affecting:
-- other mortgages, and the toxic waste derivative alchemy of:
-- collateralized debt obligation (CDO) instruments (packages of mostly risky junk and other debt),
--commercial and residential mortgage-backed securities (CMBS and RBMS - asset backed by mortgage principle and interest payments), and even
-- commercial and AAA paper; plus
-- home equity loans harder to service after mortgage reset increases.
Stage Two - Prices start to rise
Following displacement, markets bottom and prices begin rising as fundamentals improve. Investors start noticing as it becomes evident and gains momentum.
Stage Three - Easy credit
Recovery needs help and plentiful easy credit provides it. As conditions improve, it fuels speculation enticing more investors to jump in for financial opportunities or to borrow for a new home or other consumer spending. The easier and more plentiful credit gets, the more willing lenders are to give it including to borrowers with questionable credit ratings. Yale Economist Robert Shiller shares the view that "booms....generate laxity in standards for loans because there a general sense of optimism (like) what we saw in the late 80s" preceding the 1987 crash that doesn't necessarily signal an imminent one now.
New type financial instruments and arrangements also arise as lenders find creative and risky ways to make more money. In recent years, sharply rising housing prices enticed more buyers, and lenders got sloppy and greedy by providing interest-only mortgages to marginal buyers unable to make a down payment.
Stage Four - Overtrading
The cheaper and easier credit is, the greater the incentive to overtrade to cash in. Trading volume rises and shortages emerge. Prices begin accelerating and easy profits are made creating more greed and foolish behavior.
Stage Five - Euphoria
This is the most dangerous phase. Cooler heads are worried but fraudsters prevail claiming this time is different, and markets have a long way to go before topping out. Greed trumps good sense and investors foolishly think they're safe and can get out in time. Stories of easy riches abound, so why miss out. Into the fire they go, often after the easy money was made, and the outcome is predictable. The fraudsters sell at the top to small investors mistakenly buying at the wrong time and getting burned.
Stage Six - Insider profit taking
The pros have seen it before, understand things have gone too far, and quietly sell to the greater fools buying all they can. It's the beginning of the end.
Stage Seven - Revulsion
When cheap credit ends, enough insiders sell, or an unexpected piece of bad news roils markets, it becomes infectious. It can happen quickly turning euphoria into revulsion panicking investors to sell. They begin outnumbering buyers and prices tumble. Downward momentum is far greater and faster than when heading up.
Sound familiar? It's a "Minsky Moment," and the irony is most investors know easy credit, overtrading and euphoria create bubbles that always burst. The internet and tech one did in March, 2000, and since mid-July, reality caught up with excess speculation in equity prices, the housing bubble, growing mortgage delinquencies and subprime defaults. Goldilocks awoke and sought shelter as lenders remembered how to say "no." This time, central banks rode to the rescue (they hope) with huge cash infusions, the Fed cut its discount rate a half point August 17, and it signaled lower "fed funds" rates ahead if markets remain tight.
Intervention may reignite "animal spirits" and work short-term but won't easily band-aid over what noted investor Jeremy Grantham calls "the broadest overpricing of financial assets - equities, real estate, and fixed income - ever recorded" with the financial system dangerously "overstretched (and) overleveraged." His view is that current conditions have "almost never been this dire," and we're "watching a (too late to stop) very slow motion train wreck." Minsky would have noticed, too.
Grantham's exhaustive research shows all markets revert to their mean values, and all bubbles burst as the greatest Fed-engineered equity one ever in US history did in 2000 but didn't complete its corrective work. In Grantham's view, lots more pain is coming and before it's over, it will be mean, nasty and long, affecting everyone. Minsky saw it earlier, studied it, and wrote about it exhaustively when no one noticed. If he were living today, he'd say "I told you so."
Federal Reserve Engineered Housing Bubble and Resultant Financial Market Turmoil
Astute observers continue to speculate and comment that the housing bubble and resultant current financial market turmoil came from deliberate widespread malfeasance aided by considerable cash infusion help from the Federal Reserve in the lead on the scheme.
Economist Paul Krugman is one of the latest with his views expressed in an August 16 New York Times op ed piece titled "Workouts, Not Bailouts." He began by debunking Wall Streeter Treasury Secretary Henry Paulson's ludicrous April claim that the housing market was "at or near the bottom" followed by his equally absurd August view that subprime mortgages were "largely contained." Krugman's response: "the time for denial is past....housing starts and applications for building permits have fallen to their lowest levels in a decade, showing that home construction is still in free fall....home prices are still way too high (at 70% above their long-term trend values according to the Center for Economic and Policy Research, and) the housing slump (will be around) for years, not months" with all those empty unbought homes needing hard to find buyers to fill them.
In addition, mortgage problems are "anything but contained" and aren't confined to the subprime category. Krugman believes current real estate troubles and mortgage fallout bear similarity to the late 1990s stock bubble. Like today, they were accompanied by market manipulation and scandalous fraud at companies like Enron and WorldCom. In his view, "it is becoming increasingly clear that the real-estate bubble of recent years (like the 1990s stock bubble)....caused and was fed by widespread malfeasance." He left out the Fed but named co-conspiratorial players like Moody's Investors Service and other rating agencies getting paid lots of money to claim "dubious mortgage-backed securities to be highest-quality, AAA assets." In this role, they're no different than were "complaisant accountants" like Arthur Andersen that lost its license to practice from its role in the Enron fallout.
In the end, this scandal may be more far-reaching than earlier ones because so many underwriters and other firms are part of the fraud or are seeking to profit from it. At this point, it's hard separating villains from victims as, in some cases, they may be one in the same. They're all involved in dispersing up to trillions of dollars of risks through the derivative alchemy of highly complex, hard to value, packages of mostly subprime CDO and various other type debt instruments that may even end up in so-called safe money market funds unbeknownst to their unsuspecting owners.
Before this scandal ends, they'll be plenty of pain to go around, but as always, small investors and low income subprime and other mortgage homeowners will be hurt most. Krugman says this is "a clear case for government intervention," but it won't be the kind he wants. He cites a "serious market failure (needing fixing to) help (as many as) hundreds of thousands" of Americans who otherwise may lose their homes and/or financial nest eggs. Faced with this problem, "The federal government shouldn't be providing bailouts, (it should) arrange workouts....we've done (it) before (and it worked) - for third-world countries, not for US citizens." It helped both debtors escape default and creditors get back most of their money.
By providing huge cash infusions to ease credit and reignite "animal spirits," the Fed and other central banks showed they aren't listening. It proves what Ralph Nader said in his August 19 Countercurrents article called "Corporate Capitalists: Government Comes To The Rescue" that's also on CounterPunch titled "Greed and Folly on Wall Street." With "corporate capitalists' knees" a bit shaky, Nader recalled what his father once explained years ago when he asked and then told his children: "Why will capitalism always survive? Because socialism will always be used to save it." Put another way, the American business ethic has always been socialism for the rich, and, sink or swim, free market capitalism for the rest of us.
As the housing slump deepens and many tens of thousands of subprime and other mortgage holders default, vulture investors will profit hugely buying troubled assets at a fraction of their value as they always do in troubled economic times. Writer Danny Schechter calls the current subprime credit squeeze debacle a "sub-crime ponzi scheme (in a) highly rigged casino-like market system" targeting unsuspecting victims. Schechter wants a "jailout" for "criminal....financial institutions (posing) as respectable players." Krugman, on the other hand, wants a "workout" for the victims. Neither will get what he wants. In the end, as ordinary people lose out, big government will again rescue "corporate capitalism" (at least in the short-term) the way it always does when it gets in trouble. It's the "American way." It'll be no different this time.
Stephen Lendman lives in Chicago and can be reached in Chicago at lendmanstephen@sbcglobal.net.
24 August, 2007
Countercurrents.org
You know the story triumphantly heard in the West. Markets work best when governments let them operate freely - unconstrained by rules, regulations and taxes about which noted economist Milton Friedman once said in an interview he was "in favor of cutting....under any circumstances and for any excuse, for any reason, whenever it's possible (because) the big problem is not taxes (but government) spending.
Friedman is no longer with us, but by his reasoning, the solution to curbing it is "to hold down the amount of income (government) has (and presto) the way to do it is to cut taxes." He seemed to forget about borrowing and the Federal Reserve's ability to print limitless amounts of ready cash the way it's been doing for years and during the current credit squeeze. Friedman further added in the same interchange "If the White House were under (GW) Bush, and House and Senate....under the Democrats, I do not believe there would be much spending."
Clearly, either the Nobel laureate wasn't paying attention or age was taking its toll late in his life. Since 2001, Democrats embraced tax cutting and overspending policies as enthusiastically as Republicans with both parties directing the benefits hugely to the right pockets. They're on Wall Street and in corporate boardrooms where recipients know "free markets" work great with a little creative resource directing from Washington.
Financial Market Efficiency
In investment finance, Eugene Fama is generally regarded as the father of efficient market theory, also known as the "efficient market hypothesis (EMH)." He wrote his 1964 doctoral dissertation on it titled "The Behavior of Stock Market Prices" in which he concluded stock (and by implication other financial market) price movements are unpredictable and follow a "random walk" reflecting all available information known at the time. Thus, no one, in theory, has an advantage over another as everyone has equal access to everything publicly known (aside from "insiders" with a huge advantage). That includes rumored and actual financial, economic, political, social and all other information, all of which is reflected in asset prices at any given time.
Those buying this theory believe Milton Friedman knew best. He became the modern-day godfather of "free market" capitalism and leading exponent that markets work efficiently and best when unfettered by government intervention that generally gets things wrong. In 1958, Friedman explained it in his famous "I, Pencil" essay. In it, he illustrated the notion of Adam Smith's invisible hand and conservative economist Friedrich Hayek's teachings on the importance of "dispersed knowledge" and how the price system communicates information to "make (people) do desirable things without anyone having to tell them what to do."
Friedman's "pencil" story explained "a complex combination of miracles: a tree, zinc, copper, graphite, and so on." Added to these ingredients from nature is "an even more extraordinary miracle: the configuration of creative human energies - millions of tiny know-hows configuring naturally and spontaneously (responding to) human necessity and desire and in the absence of any human master-minding." None of them working independently was trying to make a pencil. No one directed them from a central office. They didn't know each other, lived in many countries, spoke different languages, practiced different religions, and may have even hated each other. Yet, their unrelated contributions produced a pencil.
By Friedman's reasoning, this could never happen through central planning. It sounds good in theory, but how does it jibe with reality. The Soviets split the atom, were first in space ahead of the US with Sputnik 1, and developed many advanced technologies even though they were outclassed and outspent by the West overall with greater resources to do it.
In practical reality, governments, like individuals operating freely in the marketplace, can succeed or fail. It comes down to people skills and how well they do their jobs. Top down or bottom up has little final effect on the end result, but does direct what's undertaken and what isn't. Top down in Canada, Western Europe and Venezuela delivers excellent state-funded health care to everyone. Bottom up in America offers it to anyone who can pay, but if not, you're out of luck if your employer won't provide it. Forty-seven million and counting had their luck run out, and Friedman's pencil making miracle won't treat them when they'll ill.
Put another way, if "free market" capitalism works best and America is its lead exponent, why then:
-- is poverty high and rising in the world's richest country;
-- incomes stagnating;
-- higher education becoming unaffordable for the majority;
-- public education crumbling;
-- jobs at all levels disappearing to low-wage countries;
-- the nation's vital infrastructure in a deplorable state;
-- 3.5 million or more homeless and heading higher in the wake of subprime defaults;
-- the standard of living of most in the country declining; and,
-- the nation, in fact, bankrupt according to a 2006 study for the St. Louis Fed.
Clearly, something is wrong with the "pencil miracle" working for some but not for most. Friedman no longer can respond and his acolytes won't.
The Myth that Markets Get It Right and Operate Efficiently
Economist Hyman Minsky was mostly ignored while he lived, but his star may be rising 11 years after his death in 1996. Some described him as a radical Keynesian based on the theories of economist John Maynard Keynes who taught economies operate best when mixed. He believed state and private sectors both play important roles with government stepping in to stimulate or constrain economic activity whenever private sector forces aren't able to do it best alone.
It's the opposite of "supply-side" Reaganomics and its illusory "trickle down" notion that economic growth works best through stimulative tax cuts its proponents claim promote investment that benefits everyone. It was Reagan-baloney then and now, and so is the notion markets are efficient and work best when left alone.
Minsky explained it, and people are now taking note in the wake of current market turbulence. His work showed financial market exuberance often becomes excessive, especially if no regulatory constraints are in place to curb it. He developed his theories in two books - "John Maynard Keynes" and "Stabilizing an Unstable Economy" as well as in numerous articles and essays.
In them, he constructed a "financial instability hypothesis" building on the work of Keynes' "General Theory of Employment, Interest and Money." He provided a framework for distinguishing between stabilizing and destabilizing free market debt structures he summarized as follows:
"Three distinct income-debt relations for economic units....labeled as hedge, speculative and Ponzi finance, can be identified."
-- "Hedge financing units are those which can fulfill all of their contractual payment obligations by their cash flows: the greater the weight of equity financing in the liability structure, the greater the likelihood that the unit is a hedge financing unit."
-- "Speculative finance units are units that can meet their payment commitments on 'income account' on their liabilities, even as they cannot repay the principle out of income cash flows. Such units need to 'roll over' their liabilities - issue new debt to meet commitments on maturing debt."
-- "For Ponzi units, the cash flows from operations are (insufficient)....either (to repay)....principle or interest on outstanding debts by their cash flows from operations. Such units can sell assets or borrow. Borrowing to pay interest....lowers the equity of a unit, even as it increases liabilities and the prior commitment of future incomes."
"....if hedge financing dominates....the economy may....be (in) equilibrium. In contrast, the greater the weight of speculative (and/or) Ponzi finance, the greater the likelihood that the economy is a deviation-amplifying system....(based on) the financial instability hypothesis (and) over periods of prolonged prosperity, the economy transits from financial relations (creating stability) to financial relations (creating) an unstable system."
"....over a protracted period of good times, capitalist economies (trend toward) a large weight (of) units engaged in speculative and Ponzi finance. (If this happens when) an economy is (experiencing inflation and the Federal Reserve tries) to exorcise (it) by monetary constraint....speculative units will become Ponzi (ones) and the net worth of previous Ponzi units will quickly evaporate. Consequently, units with cash flow shortfalls will be forced to (sell out). This is likely to lead to a collapse of asset values."
Minsky developed a seven stage framework showing how this works:
Stage One - Displacement
Disturbances of various kinds change investor perceptions and disrupt markets. It may be a tightened economic policy from higher interest rates or investors and lenders retrenching in reaction to:
-- a housing bubble, credit squeeze, and growing subprime mortgage delinquencies and defaults with spreading contagion affecting:
-- other mortgages, and the toxic waste derivative alchemy of:
-- collateralized debt obligation (CDO) instruments (packages of mostly risky junk and other debt),
--commercial and residential mortgage-backed securities (CMBS and RBMS - asset backed by mortgage principle and interest payments), and even
-- commercial and AAA paper; plus
-- home equity loans harder to service after mortgage reset increases.
Stage Two - Prices start to rise
Following displacement, markets bottom and prices begin rising as fundamentals improve. Investors start noticing as it becomes evident and gains momentum.
Stage Three - Easy credit
Recovery needs help and plentiful easy credit provides it. As conditions improve, it fuels speculation enticing more investors to jump in for financial opportunities or to borrow for a new home or other consumer spending. The easier and more plentiful credit gets, the more willing lenders are to give it including to borrowers with questionable credit ratings. Yale Economist Robert Shiller shares the view that "booms....generate laxity in standards for loans because there a general sense of optimism (like) what we saw in the late 80s" preceding the 1987 crash that doesn't necessarily signal an imminent one now.
New type financial instruments and arrangements also arise as lenders find creative and risky ways to make more money. In recent years, sharply rising housing prices enticed more buyers, and lenders got sloppy and greedy by providing interest-only mortgages to marginal buyers unable to make a down payment.
Stage Four - Overtrading
The cheaper and easier credit is, the greater the incentive to overtrade to cash in. Trading volume rises and shortages emerge. Prices begin accelerating and easy profits are made creating more greed and foolish behavior.
Stage Five - Euphoria
This is the most dangerous phase. Cooler heads are worried but fraudsters prevail claiming this time is different, and markets have a long way to go before topping out. Greed trumps good sense and investors foolishly think they're safe and can get out in time. Stories of easy riches abound, so why miss out. Into the fire they go, often after the easy money was made, and the outcome is predictable. The fraudsters sell at the top to small investors mistakenly buying at the wrong time and getting burned.
Stage Six - Insider profit taking
The pros have seen it before, understand things have gone too far, and quietly sell to the greater fools buying all they can. It's the beginning of the end.
Stage Seven - Revulsion
When cheap credit ends, enough insiders sell, or an unexpected piece of bad news roils markets, it becomes infectious. It can happen quickly turning euphoria into revulsion panicking investors to sell. They begin outnumbering buyers and prices tumble. Downward momentum is far greater and faster than when heading up.
Sound familiar? It's a "Minsky Moment," and the irony is most investors know easy credit, overtrading and euphoria create bubbles that always burst. The internet and tech one did in March, 2000, and since mid-July, reality caught up with excess speculation in equity prices, the housing bubble, growing mortgage delinquencies and subprime defaults. Goldilocks awoke and sought shelter as lenders remembered how to say "no." This time, central banks rode to the rescue (they hope) with huge cash infusions, the Fed cut its discount rate a half point August 17, and it signaled lower "fed funds" rates ahead if markets remain tight.
Intervention may reignite "animal spirits" and work short-term but won't easily band-aid over what noted investor Jeremy Grantham calls "the broadest overpricing of financial assets - equities, real estate, and fixed income - ever recorded" with the financial system dangerously "overstretched (and) overleveraged." His view is that current conditions have "almost never been this dire," and we're "watching a (too late to stop) very slow motion train wreck." Minsky would have noticed, too.
Grantham's exhaustive research shows all markets revert to their mean values, and all bubbles burst as the greatest Fed-engineered equity one ever in US history did in 2000 but didn't complete its corrective work. In Grantham's view, lots more pain is coming and before it's over, it will be mean, nasty and long, affecting everyone. Minsky saw it earlier, studied it, and wrote about it exhaustively when no one noticed. If he were living today, he'd say "I told you so."
Federal Reserve Engineered Housing Bubble and Resultant Financial Market Turmoil
Astute observers continue to speculate and comment that the housing bubble and resultant current financial market turmoil came from deliberate widespread malfeasance aided by considerable cash infusion help from the Federal Reserve in the lead on the scheme.
Economist Paul Krugman is one of the latest with his views expressed in an August 16 New York Times op ed piece titled "Workouts, Not Bailouts." He began by debunking Wall Streeter Treasury Secretary Henry Paulson's ludicrous April claim that the housing market was "at or near the bottom" followed by his equally absurd August view that subprime mortgages were "largely contained." Krugman's response: "the time for denial is past....housing starts and applications for building permits have fallen to their lowest levels in a decade, showing that home construction is still in free fall....home prices are still way too high (at 70% above their long-term trend values according to the Center for Economic and Policy Research, and) the housing slump (will be around) for years, not months" with all those empty unbought homes needing hard to find buyers to fill them.
In addition, mortgage problems are "anything but contained" and aren't confined to the subprime category. Krugman believes current real estate troubles and mortgage fallout bear similarity to the late 1990s stock bubble. Like today, they were accompanied by market manipulation and scandalous fraud at companies like Enron and WorldCom. In his view, "it is becoming increasingly clear that the real-estate bubble of recent years (like the 1990s stock bubble)....caused and was fed by widespread malfeasance." He left out the Fed but named co-conspiratorial players like Moody's Investors Service and other rating agencies getting paid lots of money to claim "dubious mortgage-backed securities to be highest-quality, AAA assets." In this role, they're no different than were "complaisant accountants" like Arthur Andersen that lost its license to practice from its role in the Enron fallout.
In the end, this scandal may be more far-reaching than earlier ones because so many underwriters and other firms are part of the fraud or are seeking to profit from it. At this point, it's hard separating villains from victims as, in some cases, they may be one in the same. They're all involved in dispersing up to trillions of dollars of risks through the derivative alchemy of highly complex, hard to value, packages of mostly subprime CDO and various other type debt instruments that may even end up in so-called safe money market funds unbeknownst to their unsuspecting owners.
Before this scandal ends, they'll be plenty of pain to go around, but as always, small investors and low income subprime and other mortgage homeowners will be hurt most. Krugman says this is "a clear case for government intervention," but it won't be the kind he wants. He cites a "serious market failure (needing fixing to) help (as many as) hundreds of thousands" of Americans who otherwise may lose their homes and/or financial nest eggs. Faced with this problem, "The federal government shouldn't be providing bailouts, (it should) arrange workouts....we've done (it) before (and it worked) - for third-world countries, not for US citizens." It helped both debtors escape default and creditors get back most of their money.
By providing huge cash infusions to ease credit and reignite "animal spirits," the Fed and other central banks showed they aren't listening. It proves what Ralph Nader said in his August 19 Countercurrents article called "Corporate Capitalists: Government Comes To The Rescue" that's also on CounterPunch titled "Greed and Folly on Wall Street." With "corporate capitalists' knees" a bit shaky, Nader recalled what his father once explained years ago when he asked and then told his children: "Why will capitalism always survive? Because socialism will always be used to save it." Put another way, the American business ethic has always been socialism for the rich, and, sink or swim, free market capitalism for the rest of us.
As the housing slump deepens and many tens of thousands of subprime and other mortgage holders default, vulture investors will profit hugely buying troubled assets at a fraction of their value as they always do in troubled economic times. Writer Danny Schechter calls the current subprime credit squeeze debacle a "sub-crime ponzi scheme (in a) highly rigged casino-like market system" targeting unsuspecting victims. Schechter wants a "jailout" for "criminal....financial institutions (posing) as respectable players." Krugman, on the other hand, wants a "workout" for the victims. Neither will get what he wants. In the end, as ordinary people lose out, big government will again rescue "corporate capitalism" (at least in the short-term) the way it always does when it gets in trouble. It's the "American way." It'll be no different this time.
Stephen Lendman lives in Chicago and can be reached in Chicago at lendmanstephen@sbcglobal.net.
Why We Are Against India-US Nuclear Deal!
By Sandeep Pandey, Aruna Roy & Medha Patkar
24 August, 2007
Countercurrents.org
Much has been said and written about the India-US Nuclear Deal; beginning with the statement issued by many eminent nuclear scientists soon after the talks on the deal began between India and US governments. Public fora and People's organisations such as Campaign for Nuclear Disarmament and Peace called it anti-Sovereignty. Today when it is seen as an issue of conflict between the UPA and its Left front allies, we as representatives of people's movements must re-iterate our stand, which is that the deal is not just anti-democratic but against peace, and against environmentally sustainable energy generation and self-reliant economic development.
The Left front is questioning the fact that such an international deal with significant implications is imposed on the Indian people and Parliament, with no public debate and consultation in India. While US Congress took a year and a half to discuss the proposed change in the US laws, permitting nuclear commerce with India, the process in India has been totally undemocratic.
The deal is part of a successful attempt by the United States to build a strategic relationship with India, in confronting the rising capitalist challenge from China where India will be used as its client in the region. Directly or indirectly, the US will also enter the Indian sub-continent, to manage intra-regional, inter-country relations. This whole process is likely to escalate the arms race between Pakistan and India, sabotaging the India-Pakistan peace process. How can we ignore that fact the US sells arms to both India and Pakistan?
The agreement also facilitates a full-fledged international exchange of nuclear fuel and technology with insufficient caution and control. There will no doubt be a corporate rush to extract, export and misuse nuclear fuel and technology, and it will be very difficult to prevent misuse even for the arms trade. Highly superficial clauses don't instill any confidence against such a possibility.
However, our basic objections to this deal stem from our opposition to the production and use of both nuclear weapons and nuclear energy. The irreversible dangers of radioactivity and its ongoing impact on health, water, and the environment are factors that are being summarily dismissed in an irresponsible manner. The whole cycle of nuclear production beginning with uranium mining, is fraught with catastrophic dangers, and as a nation we cannot use the decisions of another country as justification for our own. Places like Jaduguda in Jharkhand, Kota and Pokhran in Rajasthan, have already demonstrated the ongoing dangers of nuclear use to the common citizen.
We, in India, have inherited rich renewable sources of energy, which are environmentally benign and abundantly available. The solar, wind, and ocean waves along with human power need to be fully tapped and put to use with people's control. Appropriate technology, research and development for production of cheaper equipment and tools, need to be combined with just distribution, for the right priorities. There is no political will for this in the ruling establishment. Estimates show that India can generate far more energy through alternative, environmentally sound sources. The nuclear energy option should be put up for widespread public debate giving citizens a full opportunity to make an informed choice.
This deal however raises questions beyond nuclear energy opening up large spaces for US government and corporate control in India. This, no doubt, is a symbol of imperialism already demonstrated through the Iraq war and the obvious links of US policy with corporate control over resources. With unbound exchange of information, data and material, knowledge and technology the dominant global power is all set to encroach upon Indian reserves and impinge upon our sovereignty. The deal ensures supply of sufficient nuclear material to nuclear reactors in India for the next 40 years, but the precautionary agreements to negotiations and consultations are only promises for the future. All this is subject to approvals and conditions to be monitored by the US Congress, while sidelining the Indian parliament.
The UPA government is proving to be increasingly submissive to the exploitation of our resources, knowledge and cheap labour by commercial interests and corporate interests. The BJP and its allies are also in the power game, using capitalist forces for support. The Left has raised an important issue using their bargaining power. Non-party people's formations may not have the power in parliament, but we have an important set of issues that need to be considered.
The Indian Constitution which allows deal such as this, as well as international treaties and agreements to be reached without democratic consultation, needs an amendment to make public debate and referendums mandatory and pre-conditional. We need an approval from the Indian electorate before we agree to sign the agreement.
Sandeep Pandey
ashaashram@yahoo.com
Aruna Roy
e-mail: arunaroy@gmail.com, mkssrajasthan@gmail.com
Medha Patkar
e-mail: nba.medha@gmail.com
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Friday, 24 August 2007
UK GDP v Debt
For the first time, Britons' personal debt exceeds Britain's GDP
Another worrying milestone on a nation's journey deeper into debt
By Martin Hickman, Consumer Affairs Correspondent
Published: 24 August 2007
Britons have racked up so much debt on loans and credit cards that the total borrowed now exceeds the entire value of the economy, new research shows today. The financial consultant Grant Thornton is forecasting that gross domestic product (GDP) will hit £1.33 trillion this year, less than the £1.35trn which was outstanding on mortgages, credit cards and personal loans in June.
The symbolic overtaking is the first time that the country's 60 million people owe more to the banks than the value of everything made by every office and factory in the country. It prompted a warning that personal borrowing was so out of control that many more people would be pushed over the "financial edge". The runaway housing market is the biggest reason why consumer debt has spiralled, totalling £1.131trn. Debt on personal loans and credit cards totals £214bn. Overall, individuals owe the staggering sum of £1,344,721,000,000.
Grant Thornton ascribed the level of borrowings to a "buy now, pay later" culture and warned that interest rate rises could impose a significant burden on families and individuals. "Fortunately, most consumer debt is secured and can be repaid over several years otherwise we would be technically bankrupt," its chief economist, Stephen Gifford, said.
The research further darkens the storm clouds gathering over the British economy. Repossessions, personal insolvencies and debt judgments have all risen by about a third in the past year as borrowers have struggled to cope with the impact of five rate rises in a year.
Yesterday the financial website moneyexpert.com suggested that 2.5 million people were "very concerned" about their personal financial situation.
In the United States, the sudden failure of the poor to repay home loans in recent months has sparked a "sub-prime" crisis that has spooked the financial markets and wiped billions of pounds off share prices.
Responding to the latest figures, the Bank of England predicted debts would remain a "social" rather than an "economic" problem, indicating it believes indebtedness will be contained to individuals rather than threaten businesses.
Grant Thornton's notional payback date for personal debt has advanced markedly through the calendar during the past 10 years. In 1997 the UK took until 23 August to pay off its debt, but this year the date will be 5 January the following year, 2008.
Mark Allen, a personal insolvency partner, said it was not uncommon to encounter individuals with debts of £50,000 spread across five credit cards on top of a mortgage. "In our experience these are the sort of people walking a perilous financial tightrope," he said. "All it takes is an increase in costs or, as is the present case, a rise in mortgage premiums due to higher interest rates, to force people to default on their repayments - hence the increase in bankruptcies and individual voluntary arrangements."
Repossession leapt 30 per cent in the first six months of this year compared with the first half of last year. County court judgments rose 32. 5 per cent and personal insolvencies in England and Wales 33 per cent to more than 62,000 last year.
Mortgage payments are making ever-larger dents in household income, rising from 12.5 per cent in 1997 to 17.6 per cent in May this year. Datamonitor, the independent financial analyst, warned this week that the total number of Britons credit blacklisted by 2011 will jump by 20 per cent to 8.6 million.
Moneyexpert.com suggested in its survey that 7 per cent of adults were "very concerned" about their ability to keep on top of their debts, which would amount to 2.5 million adults. However, 40 per cent of the 2,000 respondents were unconcerned about their ability to manage their borrowings.
Malcolm Hurlston, the chairman of the Consumer Credit Counselling Service, said Grant Thornton's research made a symbolic point. "Basically speaking, it's just a mathematical question: the relationship between GDP and borrowing. It's really another way of saying that house prices have been going up quicker than wages," he said. "But what is happening is that unsecured debt is less of a problem than it used to be, whereas secured debt is the problem, and I think the Council of Mortgage lenders is expecting the figures for repossessions to get worse."
He added: "The problem on the secured front - mortgages - is getting worse because of the rising gap between house prices and incomes. In terms of volume, it's not going to be as bad as the early 1990s because the mortgage companies are gearing up for it - this time they will be trying to avoid repossessions as much as possible. But there's going to be a lot of activity and a lot of people will find that they can't pay the money back."
Mr Gifford said: "The level of debt has so far not caused much of a problem for the UK economy. Interest rates have been historically low and the UK economy has been ticking along healthily. But with five interest rate rises in the past year the picture is changing and becoming a burden for families and households."
Another worrying milestone on a nation's journey deeper into debt
By Martin Hickman, Consumer Affairs Correspondent
Published: 24 August 2007
Britons have racked up so much debt on loans and credit cards that the total borrowed now exceeds the entire value of the economy, new research shows today. The financial consultant Grant Thornton is forecasting that gross domestic product (GDP) will hit £1.33 trillion this year, less than the £1.35trn which was outstanding on mortgages, credit cards and personal loans in June.
The symbolic overtaking is the first time that the country's 60 million people owe more to the banks than the value of everything made by every office and factory in the country. It prompted a warning that personal borrowing was so out of control that many more people would be pushed over the "financial edge". The runaway housing market is the biggest reason why consumer debt has spiralled, totalling £1.131trn. Debt on personal loans and credit cards totals £214bn. Overall, individuals owe the staggering sum of £1,344,721,000,000.
Grant Thornton ascribed the level of borrowings to a "buy now, pay later" culture and warned that interest rate rises could impose a significant burden on families and individuals. "Fortunately, most consumer debt is secured and can be repaid over several years otherwise we would be technically bankrupt," its chief economist, Stephen Gifford, said.
The research further darkens the storm clouds gathering over the British economy. Repossessions, personal insolvencies and debt judgments have all risen by about a third in the past year as borrowers have struggled to cope with the impact of five rate rises in a year.
Yesterday the financial website moneyexpert.com suggested that 2.5 million people were "very concerned" about their personal financial situation.
In the United States, the sudden failure of the poor to repay home loans in recent months has sparked a "sub-prime" crisis that has spooked the financial markets and wiped billions of pounds off share prices.
Responding to the latest figures, the Bank of England predicted debts would remain a "social" rather than an "economic" problem, indicating it believes indebtedness will be contained to individuals rather than threaten businesses.
Grant Thornton's notional payback date for personal debt has advanced markedly through the calendar during the past 10 years. In 1997 the UK took until 23 August to pay off its debt, but this year the date will be 5 January the following year, 2008.
Mark Allen, a personal insolvency partner, said it was not uncommon to encounter individuals with debts of £50,000 spread across five credit cards on top of a mortgage. "In our experience these are the sort of people walking a perilous financial tightrope," he said. "All it takes is an increase in costs or, as is the present case, a rise in mortgage premiums due to higher interest rates, to force people to default on their repayments - hence the increase in bankruptcies and individual voluntary arrangements."
Repossession leapt 30 per cent in the first six months of this year compared with the first half of last year. County court judgments rose 32. 5 per cent and personal insolvencies in England and Wales 33 per cent to more than 62,000 last year.
Mortgage payments are making ever-larger dents in household income, rising from 12.5 per cent in 1997 to 17.6 per cent in May this year. Datamonitor, the independent financial analyst, warned this week that the total number of Britons credit blacklisted by 2011 will jump by 20 per cent to 8.6 million.
Moneyexpert.com suggested in its survey that 7 per cent of adults were "very concerned" about their ability to keep on top of their debts, which would amount to 2.5 million adults. However, 40 per cent of the 2,000 respondents were unconcerned about their ability to manage their borrowings.
Malcolm Hurlston, the chairman of the Consumer Credit Counselling Service, said Grant Thornton's research made a symbolic point. "Basically speaking, it's just a mathematical question: the relationship between GDP and borrowing. It's really another way of saying that house prices have been going up quicker than wages," he said. "But what is happening is that unsecured debt is less of a problem than it used to be, whereas secured debt is the problem, and I think the Council of Mortgage lenders is expecting the figures for repossessions to get worse."
He added: "The problem on the secured front - mortgages - is getting worse because of the rising gap between house prices and incomes. In terms of volume, it's not going to be as bad as the early 1990s because the mortgage companies are gearing up for it - this time they will be trying to avoid repossessions as much as possible. But there's going to be a lot of activity and a lot of people will find that they can't pay the money back."
Mr Gifford said: "The level of debt has so far not caused much of a problem for the UK economy. Interest rates have been historically low and the UK economy has been ticking along healthily. But with five interest rate rises in the past year the picture is changing and becoming a burden for families and households."
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