The meltdown holds up a mirror to market fundamentalists

 


KAUSHIK BASU

The global financial meltdown that we are in the midst of is set to go down in history as one of the worst economic disasters. Despite the US government's $700 billion rescue package, the financial crisis is likely to spill over into the real economy, causing job losses and rising prices. This downturn is also expected to wash ashore in distant nations . India's growth rate is expected to drop from the recent 9 per cent to 7 per cent. The mystifying feature of financial crises is 'contagion'. A problem in one industry or region can leap and escalate to others, like an influenza epidemic. The present crisis began in the US housing market. Starting eight years ago, there was a large expansion of loans to homebuyers in the 'sub-prime market', that is, the segment of borrowers who are considered 'high-risk'—people with uncertain incomes, for instance. There were two factors behind this credit expansion. Mortgage companies discovered the art of packaging bundles of different mortgages and selling them off to large investment banks. These miscellaneous bundles were difficult to value, leading to genuine miscalculations and the under-estimation of risk. But there was another, less understood problem. Each lender calculated that, in the event of a default, it would foreclose on the mortgaged property and recover much of the loan. When, comforted by this, lots of mortgage companies and banks began extending credit to the sub-prime market, one important constant changed. Since the new home-buyers were more risky and many of them had taken 'teaser loans' (where the repayment burden is low to start with but grows rapidly later), the overall default rate rose. With so many homes coming back on the market, housing prices began to tumble. Suddenly the property that the banks were foreclosing on had less value, and the banks saw their own asset position deteriorating. Once news of this got out, there was a crisis of confidence with firms cutting back on investment and long-term contracts. That is when the big banks and insurance companies started collapsing. The role of confidence in financial markets is complex. The broad outlines are best conveyed by a well-known Bengali short story by Shibram Chakraborty: one Saturday morning the narrator finds himself in desperate need of Rs 500. He goes to a gullible friend named Gobar and, by promising to return him the money by Wednesday, gets him to give the loan. Predictably, when Wednesday comes, the narrator is in crisis. So he goes to his old school friend Harsha, borrows Rs 500 with the promise of returning it by Saturday, and repays Gobar. On Saturday, he is back to Gobar for a loan once again. And this becomes a routine: take from one on Saturday, give it to the other; take from the other on Wednesday and return it to the former. Crisis strikes one day at a street crossing when the narrator bumps into both of them. But he quickly recovers his equanimity, and says he is glad to see them together and has a simple suggestion that will save him a lot of time and leave their situation unaltered. Every Saturday, he tells Gobar, give Harsha Rs 500; and, every Wednesday, he tells Harsha, give Rs 500 to Gobar. Never stop and nothing will change. Facetious though the story is, it explains the role of confidence well. If Harsha believes that the narrator will always have access to a loan from Gobar, it is safe for him to lend the money, and likewise for Gobar. The moment doubt enters one of their heads, the game is lost. The fear of a stoppage in lending can cause lending to stop. It is this fragility of financial markets that makes intelligent regulation on the part of government so vital. In the US, the Glass-Steagall Act of 1933 was the bulwark of good finance.Wanton liberalisation of the law over the last several years and the failure of regulation to keep up with the growing complexity of markets prepared the brew for this crisis. Conservative thinkers, who say that it should all be left to the market, stand out not so much for their extreme ideology as for their stupidity. It is true that no one fully understands these crises, but there is enough research in economics now for us to know that if these fluctuations are to be kept within limits, there is no escape from intelligent regulation. (Kaushik Basu is chairman and professor, Department of Economics, Cornell University. He will write a monthly column for Outlook).

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Castoffs of the universe

 

 

Where's the rescue plan for the banks' unwanted human capital? Try this rehabilitation package

 Guy Browning

• The Guardian,
• Saturday October 11 2008
• larger | smaller
• Article history

For the first time for a long time the masters of the universe, our big banking friends, are finding that the universe is actually a cold, dark and generally inhospitable place. The government has very kindly bailed out the banks, but not much thought has been given to the bankers themselves. Fortunately I have given this a great deal of thought and have worked out a rescue plan for these individuals which will guarantee long-term growth for them personally.
The first thing I did was some simple maths. I stress simple as opposed to the highly complex maths that the masters of the universe did which came up with such brilliant algorithms as 0x1 =3. I have calculated that for the salary of one master of the universe you could pay for 200 bank clerks. Personal banking would be immeasurably improved by having real people involved, in the same way that policing would come on in leaps and bounds if it involved actual police where you needed them.
In my plan, everyone's current account would come with a clerk attached. This person would be your personal financial butler who would do everything for you stopping only slightly short of ironing your bank notes. They would be taught that their wages depended on your money and would very quickly become as interested in your financial health as you were. Getting money from a hole in the wall is very much like receiving your prison meal through a hole in your door. Much more satisfying would be a clerk in the window system, wherein a smiling official would sit behind a window and give you cash when you needed it. This would cut down substantially on chip and pin fraud as the clerk would ask for your mother's maiden name or, ideally, would actually know your mother.
Heartening though the sight of your own bank clerk waiting at the bus stop in the morning would be, it still leaves the problem of what to do with the redundant masters of the universe. My rescue plan sees fund managers reassigned as fund raisers. They would be in charge of jumble sales. Not once a year but every weekend. This would mean they would spend much of their working week collecting boxes of junk from people's garages and then delivering the junk back to different garages after it had been displayed all Saturday afternoon without selling. I know these guys are highly motivated and competitive so I would put them on performance-related pay. They will get 10% of the price they can get for the plastic baby doll with one arm. In this way they will get a new and finer appreciation of what it means to sell "junk".
As anyone with a useful trade will tell you, it's not easy to move from one trade to another. With this in mind I would keep hedge fund managers' job descriptions almost intact except for the letter "d". They would become a new business called Hedge Fun. As the name implies this would be a gardening and landscaping service with special emphasis on hedge and shrubbery maintenance. Having promised endless growth to their customers, they would now be in charge of controlling the only real source of endless growth, nature. Every hedge they trimmed would be a Promethean reminder of the limits of growth elsewhere.
I have given a lot of thought to short sellers. My immediate solution was to insist they wore shorts as a badge of honour for service to the community. But that would be short-changing them, which we wouldn't want to do as that would mean that we were no better than them. Short sellers are highly motivated and intelligent types who make their money spotting, encouraging and betting on failure. There are many roles open to this sort of person. One such would be an operative whose sole task would be informing people about personal failures such as their driving test, being dumped by their partner or contracting a terminal illness. The short seller would always be on hand to share the bad news. Their income would come from tips.
The heart of darkness of the current financial crisis is the nasty little derivatives that turned sow's ear mortgages into silk purse bonds. These perfectly married individual greed to corporate greed by removing the simple 1+1=2 equation from banking. Happily my plan will also help derivative traders. I estimate that there is about £1bn worth of coppers in circulation that no one's using. I think we should give all these coppers to the masters of the universe to help them out of their troubles, on the understanding that they count it. By hand. I am confident that by the time they've finished, if not before, they will have rediscovered the forgotten art of adding up.
• Guy Browning writes the How to column in Weekend magazine and is the author of Maps of My Life 

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“Where Will The Money Come From?”

 

By Devinder Sharma

10 October, 2008
Countercurrents.org

Only a few months back, the day Finance Minister P Chidambaram in his budget speech announced Rs 60,000-crore loan waiver for the beleaguered farming community, there was an orchestrated outcry: "Where will this money come from?" Television anchors were visibly angry at this 'supposed windfall' for the farmers, the print media was outraged at this 'political and not economic' decision just before the ensuing elections, and the industry leaders were seen sulking.

Six months later, no one is asking the same question. With the global financial crisis failing to work itself out, the Reserve Bank of India (RBI) is under pressure to intervene. Soon after the Wall Street mayhem, the RBI had pumped in Rs 84,000-crore in the domestic banking system through liquidity facility adjustment. An additional Rs 20,000-crore has been released through a 0.5 per cent reduction in cash reserve ration (CRR).

Sounds technical but let me simplify. Liquidity in layman term means 'fund availability' or in simple words making available more cash. All over the industrialised world, governments are stepping in to provide more cash in the hands of the private banks, and India is no exception.

Despite the Finance Minister saying that the fundamentals are strong, the banks are on a massive borrowing spree. In the first week of October alone, they borrowed Rs 90,075-crore every day from RBI through liquid facility adjustment. In the days to come, the RBI is under pressure to release another Rs 30,000-crore through the CRR, and also to cut repo rate – the rate at which it lends to banks. And thanks to the loan waiver, the banks will receive another Rs 50,000-crore in the coming weeks as part reimbursement for the farm loan waiver and fertiliser loan.

Isn't it a fact that Rs 60,000-crore loan waiver (later enhanced to Rs 71,000-crore) was actually a relief to the banks? What seemed to be a 'political' decision in the name of pulling out the indebted farmers was actually meant to maintain and sustain the health of the banking system. If the government had not provided the loan waiver, banks would have been in terrible liquidity crisis. With farmers unable to repay, these banks would have been saddled with massive non-performing assets (or a shortfall in liquidity) or non-availability of Rs 71,000-crore in cash.

In other words, the loan waiver was a partial bailout for the banks. Now no one is asking: "Where will this money come from?" On the contrary, most analysts are asking for more 'speed and sagacity' to tide over the crisis.

If only such 'speed and sagacity' was shown to tide over the terrible agrarian crisis sweeping throughout the country for over a decade now, thousands of farmers would have been saved from committing suicide. If only the RBI had stepped in to make more cash (or liquidity) available, the nation could have easily provided an assured employment to each and every Indian not only for 100 days but for all the 365 days in a year. The National Rural Employment Guarantee Programme (NREGA) can be easily extended to bring every unemployed Indian under its gambit.

And it is here that I fail to understand the sagacious logic of keeping the poor hungry and then expecting a higher economic growth trajectory; of paying a multi-million dollar salary (in addition to lucrative perks) to the bosses of the banks and corporate houses and then make the man on the street pay for the losses; in other words the logic behind privatising the profits and socialising the losses.

Take the case of the bankrupt Lehman Brothers. While the shareholders in the company have been wiped out, Richard Fuld, its chief executive, walks away with US $ 480 million as his personal remuneration over eight years, and this includes a $ 14 million ocean-front villa in Florida, and a home in an exclusive ski resort. Lawmakers investigating the bailed out insurance company AIG, were shocked to learn that days after the government rescued the company, it unashamedly spent US $ 44,000 on a posh California retreat for its executives, complete with spa, banquets and golf outings.

Why blame the American corporate leaders when US president George Bush himself had given them a free rope: "Government should not decide the compensation for America's corporate executives." Probably what he meant was that come what may, the US government will continue to provide funds to meet obscene corporate salaries and perks.

Prime Minister Manmohan Singh too had removed the upper ceiling on corporate salaries. According to Merril-Lynch and Capgemini, driven by impressive economic gains and robust market capitalism growth in 2007, India led the world in High-Net-Worth-Individual population growth at 22.7 per cent. Two year earlier, in 2005, there were 83,000 high net worth individuals with a wealth of at least $ 1 million (and this does not include immovable property).

This brings me back to the same question. How long will the world go on encouraging an economic system that makes the rich richer and the poor poorer? While 36 billionaires in India have a collective economic wealth equivalent to one-third of the country's GDP, the country's 600 million farmers collectively account for only 17 per cent share. With every passing year, the share of agriculture in GDP continues to slide down still further. No wonder, the average monthly income of a farm household (which includes five members of a family and two cattle) does not exceed Rs 2,400.

Bailing out the farmers from a distressing situation is always considered to be bad economics. It is branded as a political compulsion, and the sooner politicians emerge out of it the better it would be for economic growth and development. This economic prescription, which every economists worth the name is willing to endorse, is invariably for the farming community, the landless workers and the marginalised communities. They need to learn to be enterprising, and therefore must stop living on government subsidies.

When it comes to the enterprising millionaires -- corporates and the banks -- government bailouts are not only a must, but should be done speedily. "Where will the money come from?" is not a question to be asked when you are subsidising the rich and the elite. It is their birth right. You need to understand.

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Top ten blogs to read during the banking crisis

Perplexed by plummeting indexes? Worried about your bank's future? Comment Central's rounded up ten of the best blogs to guide you through the banking crisis:

Oliver Kamm's Blog:

Oliver modestly says that his leaving the City and the collapse of the banking system were merely coincidental. But the Times is certainly blessed by the fact that he joined us shortly before the current crisis. Oliver has traditionally left finance alone on his blog. But now he's writing about it with his predictable brilliance. A must-read.

Peston's Picks

The BBC's Robert Peston has literally moved markets this week. And whoever is to blame for the leaks that have spilled into his ears, you can't blame the journalist for making such excellent news with it. Ground-breaking and consistently on top of everything that's going on, this is the blog that the bankers are turning to.

Free exchange

No surprise that one of the best places to head for up-to-the-minute analysis of current events is over the Economist. Free exchange is smart, savvy and constantly updated. The regular roundup of news and analysis from all over the media ensure that, boom or bust, they never take their eye off the ball.

Brad Setser: Follow the money

From Iceland to Russia and back via Brazil. If you want the big picture on what's happening to your money right now, head over to this excellent Council on Foreign Relations blog. Brad Setser talks you through events in the world markets while making his own predictions. One for the globetrotter.

Stumbling and Mumbling

Only Chris Dillow could take a story about restaurants using monkeys as waiters and turn it into a post on how to save capitalism. The Investor's Chronicle writer has risen to the challenge over the past month with intelligent and often counter-intuitive theories on a variety of crisis-related topics.

Becker-Posner Blog:

Boasting about your financial literacy down the pub comes much more naturally if you know you have the clout of a Nobel Prize winner behind you. Gary Becker (who scooped the prize for Economics) and Richard Posner (a high-flying judge) write weekly on a variety of issues. Recently, they've covered the crisis, government equity and bailout structuring - all for your cribbing pleasure.

Greg Mankiw:

Ready for an economics class? Then head over to this Harvard Professor's blog. Originally designed to keep up with Mankiw's current and past students, it has become a must-read for those hoping to keep up with economic events. And as the former chair of Bush's economic advisors, Mankiw has an inside track on what's actually going on right now.

Real Time Economics

Reading Real Time Economics is like having the brains of the Wall Street Journal on speed dial. The journalists here put their fingers on the questions that everyone's wondering about. Better still, they actually take a stab at the answers.

Marginal Revolution

Two economists, one blog and an excellent cheat sheet. Marginal Revolution is one of the best-read economics blogs out there and has lived up to its reputation these past few weeks. During the crisis, they've provided a breakdown of events that is accessible to even the most credit confused customer.

The Daily Mash

Everyone needs a laugh right now. And the Daily Mash has surpassed itself as the first port of comedic call in this time of doom and gloom. They've written spoofs aplenty but their best line remains this explanation of the bailout:

The government is to invest £500bn of your money in British banks so they can lend it back to you with interest.


(And as a bonus blog, head on over to Times Online's excellent Money Central. They provide some of the most helpful lists out there for worried workers. Whether it's the best place to put your savings or ten properties you can afford to buy with your credit card, it's well worth a look.)

Faith. Belief. Trust. This economic orthodoxy was built on superstition.

 

 

There is no alternative, went the mantra. Now this corrupt mythology lies in tatters, the crisis of conviction is profound

All comments ()

• 
• • Madeleine Bunting
  • The Guardian,
  • Monday October 6 2008
  • Article history

Over morning newspapers with the Today programme in my ear, I eye my garden nervously. If I ripped up the roses and the lavender, how many rows of potatoes could I fit in? Enough to feed a family? Is this madness or not? And why is it that I no longer trust the economists and policymakers to give me a straight answer to that question?
There is a strange air of suspense. Everyone agrees that things could get grim, but what does that mean? Grim, as in a bit of nasty unemployment, or grim, as in total economic breakdown with queues for soup kitchens and millions living off their allotments? If the latter sounds fanciful, there are countries like Argentina and Russia who can tell you from bitter recent experience what happens when economies collapse.
Gordon Brown, fearful of "self-fulfilling prophecies", instead offers a tinny upbeat message. Everyone knows now that it is all about confidence: will savers panic and move their money to Ireland, crippling British banks? The circumspection of the wise men becomes sinister. On the Today programme, John Humphrys pressed Richard Lambert, director general of the CBI, for his forecast. Lambert hesitated, replying with, "my hope is ...". "No, no," interrupted Humphrys, "what is your forecast?" There was another hesitation before Lambert nervously "forecast" a grim 18 months before life resumed as normal. It sounded like a hope. No one has any idea what is going to happen.
No sooner do economists or government ministers make a pronouncement using words such as "impossibility", "unlikely" or "never", than they are having to eat them. If these are uncharted waters then perhaps we are at the moment when the tsunami is visible on the horizon, and the tide has suddenly retreated, and fish are stranded, gasping for oxygen all over the beach.
But don't get too bogged down in seed catalogues (and forget trying to get your head around collateralised debt obligations - even the Financial Times's banking correspondents admit it is "fiendishly complicated"), the average citizen has a far more important plot to unravel: how did we get in this mess, and how do we make sure it doesn't happen again?
Answering these two questions does not require a crash course in City finance and economics, because this crisis is as much about politics and ideology as anything. If you're pressed for time, the reading list can be very short. Key is Karl Polanyi's The Great Transformation, published in 1944, an economic history which sets out to explain 1929, the Great Depression and the rise of fascism. Polanyi's book came out the same year as another influential Austrian economist, Friedrich Hayek, brought out the central text of neoliberalism, The Road to Serfdom.
Hayek became the founding father of a model of economic management which has brought us to the current crisis; Polanyi, with extraordinary prescience, warned that the crisis would come; he rejected the idea that the market is a "self-regulating" mechanism which can correct itself. There is no "invisible hand" such as the neoliberals maintain, so there is nothing inevitable or "natural" about the way markets work: they are always shaped by political decisions.
At the time Polanyi was writing, there were many who agreed with him that free-market capitalism was chronically and destructively unstable, with terrible political consequences. But in the 70s and 80s, Hayek's neoliberalism began to take hold on the US ruling elite, Margaret Thatcher was recruited - and in due course Tony Blair and Gordon Brown. "Roll back the state, leave the economy to run itself" has held sway ever since. As Ann Pettifor points out on her website, debtonation.org, Alan Greenspan wrote enthusiastically in August that "the past decade has seen mounting global forces (the international version of Adam Smith's invisible hand) quietly displacing government control of economic affairs". He blithely continued that the greatest danger facing the economy was that "some governments, bedevilled by emerging inflationary forces, will endeavour to reassert their grip on economic affairs". Last week, Greenspan did a gigantic volte-face as he pleaded for government to do just that - reassert its grip in the form of the bail-out.
We are now learning what countries across the developing world have experienced over three decades: unstable and inequitable neoliberal economics leads to unacceptable levels of social disruption and hardship that can only be contained by brutal repression. Add that to the two other central charges against deregulated capitalism: first, it may create wealth but it does not distribute it effectively; and second, that it takes no account of what it cannot commodify - neither the social relationships of family and community nor the environment, which are vital to human wellbeing, and indeed to the functioning of the market itself. Ultimately, neoliberal capitalism is self-destructive.
We are now witnessing the collapse of this absurd economic orthodoxy that has dominated politics for nearly 30 years. Its triumphalist arrogance, its insistence on orthodoxy, has been comparable to Soviet communism in its scale. For two decades, we've been told "Tina" - "There is no alternative".
Economists talk of trust, belief, faith; we now understand that all along neoliberal capitalism was a form of mythology. That's why the triumphalism was necessary - you could not afford to have anyone challenge the system or we might all realise we were gawping at the emperor's nakedness. Rowan Williams was right to quote Marx, that "unbridled capitalism becomes a kind of mythology, ascribing reality, power and agency to things that have no life in themselves". Richard Dawkins should be critiquing this superstitious belief system.
Fortunately Thomas Frank did so in his brilliant book, One Market Under God (2001). This is the second book on the reading list, because it explains how neoliberalism entrenched its triumphalism into the political system of the US; how it marginalised and delegitimised all challenge and established hegemony in the so-called free world.
Now, as it all totters, we can take stock. We can ask how and why the critique - of which Frank was a part and Polanyi the bible - which was emerging in the late 90s was crippled. The anti-globalisation movement argued that neoliberal capitalism was unjust, unstable and destructive to human and environmental wellbeing. Sounds sensible now, but at the time it mysteriously got smeared by association with anarchists with a penchant for smashing Starbucks' windows. The broad network of social grassroots movements - US unions, Mexican peasants, Indian farmers - were misnamed, misunderstood, ridiculed and ignored. There is no alternative, the politicians intoned mantra-like.
Then 9/11 and for the next seven years a sideshow was offered as a distraction with caricature villains and thriller drama. While eyes were on the absurd charade of the "threat of Islamist terrorism to western civilisation", the real doomsday scenario that poses a far greater threat to western civilisation (whatever that is) was gathering pace right next to Ground Zero, in Wall Street.
As in all mythologies, the only option, according to Timothy Garton Ash (not noted for his religious faith) on these pages recently, is to pray. What makes me frightened is that this is a corrupt mythology which, like that of the Aztecs, may require a lot of human sacrifice.

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Grassroots Movements, Global Elites And Political Economy

 

 

By Pablo Ouziel

04 October, 2008
Countercurrents.org

What a week we have all had. I guess for those of us who make it to the weekend without a single scratch, it will be important to sit quietly in a corner making plans for the future. Obviously the time for tunnel vision and full faith in 'somebody' at the top having some mercy on us, must be quickly diffusing into an alternate form of thought. At least that is what I would hope for, because although the social inclination so far seems to be the blaming of a few rotten apples, based on my observations, I have no choice but to accept that the whole apple basket seems to be fairly rotten.

All I have heard on the streets over the last few days are words about the financial crisis. Everyone all of a sudden is concerned about their mortgage, their savings, their retirement, their stocks or more importantly, their jobs. Dismal economic data keeps propping up on every major newspaper and news channel and talk shows are packed with voices talking about the dire straits of this economic Armageddon. Yet, I can't help ask myself if we are all simply asleep or we are too scared to face the truth.

Almost everyone whom over the last decade of economic arrogance and pedantic borrowing preached about the power of the western world and its economic might, has all of a sudden turned around and become a spoke person for panic itself. Yet for the layperson it doesn't seem to matter. If it did, grassroots movements would be picking up traction and the global elites would be held accountable for their crimes. Too early for that, society is still not ready to come to terms with the fact that leaders are a reflection of the people they lead. I am inclined to believe that it will take a lot more pain, many more lies, and much larger panic before citizens stand up and react to this catastrophic social tsunami.

Yes, it is true that those at the top are enjoying the ride, or we could say were enjoying the ride - it now seems to be a little more bumpy. Yet the very fact that they haven't been held accountable by the rest of us is a reflection of collective guilt, and all who cry today are doing so because of our past general indifference. So what can one do?

Perhaps the first thing we must all do is acknowledge that the financial panic we are facing is a lot deeper than what is presented through the media, and understand that the problem is systemic. The sooner we come to terms with this, the sooner we will be able to find real solutions. Developed countries are living way over their means and no matter how we try to prop it up, sooner or later the deck of cards is going to collapse. From my humble opinion, the sooner that happens the better, because with everyday that passes, the eventual landing gets much more painful.

The second point we are going to have to grapple with is the fact that the great majority of society has been too laissez-faire to predict what was heading our way and is today an apparent reality; the fact that our casino culture of gambling the world away was always a finite proposition which politicians and economists perpetuated to eternal existence, while the thirsty masses accepted it without question.

Thirdly, it will be incredibly important for those members of society who see themselves as belonging to the middle class and who have acquired that perceived status through debt, to accept their rank in the working class and unite again with their peers. This point is of particular importance because it has been the sole illusion of an imaginary middle class which has kept the bubble rising and when it bursts, millions of hypnotized believers will fall hard and will need to be picked up by the very group they left behind when they abandoned the class struggle.

Fourthly, we are all going to have to get used to the situation we have collectively generated, we are hostages to our own creation. The governments are there because we elected them and the banks are there because we trusted them without asking questions.

Despite all this, it remains crucial that we have a collective wakeup and begin to understand that as we strategize about our own personal situation, those who laid the foundations for this ugly mess we are faced with are still the global elite and they still hold the reigns of power. So, as we do our own accounting and plan for our own personal security, it will do us no harm and possibly a lot of good, to start looking at the world from a political economy perspective. We must understand that politics, economy and war are all intertwined variables of our current state of affairs. We must understand, that geopolitical events are all in some way linked to these three variables. I say this, because although we are no longer able to stop the deterioration of our financial systems and economies, we might be able through joint and organized collective action, to avoid worse events from unraveling.

The warning signs of economic deterioration begun a longtime ago, the majority chose to ignore them, and because of that we are all here today. Now the alarm bells of increased military confrontation are sounding loud and clear, I only hope we are all able to hear them and that our words speak louder than guns. One thing is certain, as President Dmitri Medvedev of Russia said today, the U.S. crisis shows that "the times when one economy and one country dominated are gone for good," as he concluded, the world no longer needs a "megaregulator." Although I believe this statement to be true, I fear that the U.S. elites, together with the elites of allied countries, will not let go of their perceived upper hand, and might be warming up to more war.

Sir Sherard Cowper-Coles, the British ambassador in Kabul already believes the war in Afghanistan is as good as lost, and the war in Iraq seems to be on the same destructive path. Yet, as Russia prepares to fly its supersonic Tu-160 nuclear bombers as part of its largest air force exercises since the collapse of the Soviet Union, the whole concept of war that westerners are used to could be escalating towards a more vivid reality. I hope the citizens of the west can understand this, and for once before it is too late, we can unplug our brains from the corporate propaganda system, which our elites have so carefully instituted, and we can do something about it. As for the Russians, Afghans, Iraqis, North Koreans, Chinese and others, let them stand up to their own governments, and once we are all doing that, let us neutralize their actions by holding hands and shouting stop!

Pablo Ouziel is a sociologist and freelance writer

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Enron was the pit canary, but its death went unheeded

 

 

History is repeating itself as companies hide debt, blame the market for their failings and expect the taxpayer to pony up

All comments ()

• Bethany McLean
• The Guardian,
• Saturday October 4 2008

 

Bad experiences are supposed to be good, in a twisted sort of way. That's because we're supposed to learn things that help us avoid the same mistakes the next time around. But it's hard to argue now that anything good came out of the bad experience called Enron. In fact, one thing that is crystal clear amid all the chaos of these days is that the lessons from Enron went unlearned - or were just forgotten.
 
Start with the Houston-based energy trader's notorious lack of transparency. After Enron's implosion, everyone talked about how important it was to be able to understand how a company makes money. Now raise your hand if you understand how a modern financial services firm makes money. No hands? The truth is, there is no way to understand. These companies are as opaque as Enron. Just as Enron had off balance-sheet vehicles - SIVs - that allowed it to book earnings and hide debt, Citigroup and other financial institutions had structured investment vehicles that did the same. Indeed, Citigroup had to take almost $50bn of SIVs back on to its balance sheet after they ran into trouble. It would be nice if the accounting rule-makers would grasp this basic tenet: if they want to hide it, we want to know about it.
 
Of course, SIVs are only a small manifestation of the deeper problem, which is the evolution of financial engineering into a dark art. Enron now seems like the canary in the coal mine. After its bankruptcy, Steve Cooper, who was in charge of restructuring it, told the Wall Street Journal his task might leave him "in a wheelchair and drooling" due to the complexity of its financial structures and the "unbelievable amount of debt accumulated around the company". Doesn't that sound like our entire financial system?
 
Just as Enron packaged bad investments into a private equity fund run by its chief financial officer, Wall Street packaged mortgages given to people who couldn't afford the payments into sleek new instruments called RMBS and CDOs. But Enron's machinations couldn't make the losses go away, and Wall Street's shiny acronyms can't turn a defaulted mortgage into good money.
 
As for the lessons we've forgotten, how about this one: financial statements aren't supposed to be fairytales. Enron was castigated for its abuse of mark-to-market, or fair value, accounting. This is supposed to allow investors to see what the market says a security is worth, instead of just what the company paid for it. Employed correctly, it makes a company's finances more transparent. But we all joked that Enron didn't mark to market - it marked to myth, to whatever it wanted them to be. In this, the US regulatory agency, the SEC, was complicit, because it signed off on Enron's use of this accounting and never ensured it wasn't abusing the rules.
 
Today's mark-to-market saga has a new twist. The SEC is facing political pressure to abolish mark-to-market accounting requirements for financial institutions, and some in Congress would like to dig mark-to-market's grave. Said in another way, now financial services firms may be allowed to deceive investors about their status, with the regulators blessing that deceit. (An aside here. Those who say mark-to-market should be abolished argue that because there is no market, firms are being forced to value these securities at artificially low levels. But there is no market precisely because firms aren't willing to sell at a price at which a reasonable investor would buy.)
 
While for a short period in the aftermath of Enron, we did understand that short-sellers serve a good purpose, we have also forgotten that. Short-sellers were the first to warn there were problems at Enron. But today, nobody is thanking short-sellers like David Einhorn, a hedge fund manager who began to warn investors about Lehman's problems in March, when the stock was worth about $50. Instead, companies say the short-sellers are to blame for their problems. And the SEC has gone along with this and banned short-selling in a number of stocks. Poor Washington Mutual and Wachovia, which plummeted after the ban on short-selling. How will they explain what happened to them now they can't blame short-sellers?
 
Which leads to the most sobering repeat lesson of all. Most of the believers in the free market only believe in it when it is going their way. When it doesn't, it's someone else's fault. Enron's former leaders often cited their free-market beliefs. Its demise, they said, was due to a short-sellers' conspiracy.
Indeed, when all was booming, Wall Streeters said they deserved their pay because the market said they were worth it. But now things are falling apart, they say the market doesn't work, and we need to stop short-selling, and taxpayers need to pony up. If there is a tiny bit of good in all this, it's that Wall Street, although it was complicit in the Enron mess, managed to walk away relatively unscathed. This time, Wall Street has brought itself down. Then again, maybe it really isn't a good sign for the future that there don't seem to be any smart guys anywhere in the room.
 
• Bethany McLean is a contributing editor at Vanity Fair and co-author of The Smartest Guys in the Room bethany.mclean@gmail.com

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