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Friday 24 October 2008

Definitions: The Intelligentsia


 

 

By Gaither Stewart

26 September, 2008
Countercurrents.org


"Things as they are don't seem to me satisfactory….The world as it is, is unbearable."

(Albert Camus, Caligula, act 1, scene IV)

 

"What is so bewildering is the conviction—and it is becoming more and more general—that in all the perils that confront us the direction of affairs is given over to a way of thinking that no longer has any understanding of itself. It is like being in a carriage, descending an increasingly precipitous slope, and suddenly realizing there is no coachman on the box."

(The Russian diplomat- poet Fyodor Tyuchev (1803-1873) in a letter to his wife about the dangerous road ahead toward revolution)

 

(Rome) I am not an intellectual. But I am an artist and part of the intelligentsia.

WHAT? Not an intellectual! Intelligentsia? What is the difference?

 

Though most people are vaguely familiar with the word intelligentsia, many confuse it with intellectuals and might be surprised at my claim that I am not of the first but belong to the latter. That distinction is the subject of discussion here—the distinction between uncommitted, if not compromised, intellectuals and the socially committed intelligentsia. That difference is an accusation against the ambivalent situations of many intellectuals in the USA today. That difference can also clarify the positions of educated people in general in all of contemporary Western society.

 

Since intelligentsia comes to us from the Russian, in research for my recent essays, "Stalin, The Poet, And Life's Choices" and "The Return of the Proletariat" (www.bestcyrano.org and elsewhere) I studied also the emergence of the intelligentsia in pre-revolutionary Russia and its contribution to the greatest revolution of our times. Most curious are its instructive analogies with and disconcerting divergences from the educated classes in the USA today. The Russian revolutionary example, like Russia itself, is not as distant and exotic as westerners might believe, the Russia that America has propagandized as just another despotic Eastern power.

 

We should recall that Russia is also the West. It is part of us.
For the great Dostoevsky, Russia is even a far better West, even a better Christendom, for that matter.

 

At the outset it must be clear that the word, intellectual, does NOT reflect the significance of intelligentsia. Despite dictionary definitions, the two are not the same. For a starter, some intellectuals in our society belong to the intelligentsia. Many do not. For example, pure intellectuals with no pretensions of belonging to the radical intelligentsia occupy the huge and powerful academic world. Therefore, to distinguish between the two one resorts to the transcription of the word from Russian, hopefully to express the true meaning of the latter. Nonetheless, the word intelligentsia too has been internationalized and its meaning at times degraded to banality.

 

In pre-revolutionary Russia the intelligentsia did not mean a professional part of the population such as writers, academicians, philosophers, sociologists, academicians and educated people in general. Instead it was a social group united by ideas: a similar political direction, philosophy and world outlook. Just read Dostoevsky's novels and you read novels of the ideas projected by the intelligentsia of then. Historically the word implies radicalism and a desire for drastic socio-political change, a particularly valid consideration for intellectuals in the USA.

The appeal of Marxism to the intelligentsia was and remains a natural process. Marxism contains not only the element of philosophical materialism but also a big and seductive dose of genuine existential philosophy, born from Marx's German idealism. Faith in the human will. Confidence in human activity by the revolutionary struggle of the classes. The idea that man can overcome the power of (mostly hidden) economic power relations over his life. A positive view of the future.

 

Hence, the most learned and educated people in society are most certainly NOT to be considered part of the intelligentsia if they are conservative or reactionary. Examples of intellectuals who are not of the radical intelligentsia are numerous, for example the French intellectuals who at the peak of the Revolution morphed into counter-revolutionaries and fled back to the King and his Court rather than risk the perils of the Revolution of the people.

 

Similarly, modern French intellectuals of the "ideology is dead" school such as Bernard Henri-Lévy and other so-called nouveaux philosophes, made careers debunking intellectual commitment, which is the role of the intelligentsia. After the overthrow of Communism in East Europe the typically facile message of the nouveaux philosophes was that one could no longer take socialist ideas seriously. Lévy said, oh so misguidedly, so maliciously: "When intellectuals let themselves believe in a community of men, they are never far away from barbarism." Not only reductive but no less than an apology for totalitarianism, of the natural, right wing kind.

 

Lévy and his intellectual friends became opportunistic journalists. They found easy targets among French committed writers: Sartre had flirted with terrorists of the German Baader-Meinhof Gang and Debray trained in guerrilla warfare in Bolivia with Che Guevara. Jean Paul Sartre, Albert Camus, Régis Debray and also André Gide, despite his flirts with Cold War anti-Communists, were the other side of the moon from the so-called philosophes.

 

For as always and everywhere post-commitment intellectuals like Lévy find themselves in the blind alley of having to try to justify social injustice. Under the guise of neo-liberal free marketers, conformists coolly tell us that rich countries have no responsibility for problems of the Third World—as if we didn't all belong to the same world. Given his impeccable credentials as an elegant counter-revolutionary, it should come as no surprise that Henri-Lévy, thick central casting Hollywood French accent and all, is warmly received, some would say fawned upon in the most distinguished precincts of the American media establishment, from the intellectually clueless Charlie Rose to the pseudo-left gnomes at NPR.

 

Fortunately, many European and Latin American intellectuals have been political and progressive. By force of their commitment they are members of the intelligentsia striving to change the world: such as Sartre and Camus in France. In Latin America Gabriel García Márquez (my journalistic model and master on the positive role of bias), the great writer Ernesto Sábato in Argentina who headed action against the military regime, and Pablo Neruda in Chile who joined the Socialist government of Salvador Allende, belong to the committed intelligentsia, as did the prototype of the man of action, Che Guevara, and certainly Fidel, whose role as a dedicated teacher of the masses, as Mao once saw himself, is also well established. Presidents Chavez and Morales are now following the same route.

To grasp the world of difference between the compromised artistic intellectual and the committed intelligentsia one only needs to compare their role in society with that of powerful, highly placed Jorge Luis Borges who instead supported the military regime in Argentina. Or with the neoliberal Mario Vargas Llosa in Peru, wonderful writer, but considered by many a traitor to his original vocation.

The bulk of America's academic specialists and economists and the entire rightwing intellectual establishment with its think tanks and foundations do NOT, cannot belong to the intelligentsia. It would be highly imaginative, misleading and false for members of neo-conservative circles to depict themselves as intelligentsia, as used here. For it is the reactionary intellectuals who write those ridiculous, stupid and mendacious political convention speeches and slogans which members of the real intelligentsia find so unbearable. Reactionary intellectuals coin the euphemistic language marked by expressions such as "preponderant intervention", "preemptive war", "New World Order", "collateral damage", etc., and organize blasphemous functions like national prayer breakfasts, all of which makes the intelligentsia vomit in disgust.

 

Such "intellectuals" can never be intelligentsia.

 

No matter how educated they are, no matter their impressive credentials in this or that field and recognition among their own kind, reactionaries are NOT of the intelligentsia, who instead strive for radical social change.

 

Obviously the distinction I began with is fundamental. Yes, if we want to distinguish between educated people in the image loving, reality show-driven, imitative, poseur society of the USA today and the intelligentsia of positive, forward-looking radical thinkers linked by ideas. For the most part the latter are linked by ideas simply because the impossibility of real and meaningful political action leads them to the development of ideas.

 

Underlying the intelligentsia's ideas however—and this is fundamental in the USA today—lurks a revolutionary frame of mind. That mindset is based on an idea, a goal of social justice that though it still dangles out of reach, is a common idea and logical goal: to change the world.

 

For example, writers and journalists. Are they mere intellectuals as was Borges, or intelligentsia? According to the Russian Communist theorist Georgy Plekhanov, "the belief in art for art's sake arises when artists and people keenly interested in art are hopelessly out of harmony with their social environment." Art for art's sake is the attempt to instill ideal life in one who has no real life.

 

Authoritarian systems rely on compromised writers to portray false images because they fear the truthful portrayal of reality. The compromised writer follows the victors. Conformity and opportunism go hand in hand. The road of the uncommitted intellectual is the middle. He avoids saying what he feels for fear of his place in society. He is aware that many people do not like being told the truth and he is willing to write what he is told people want to hear.

 

Compromise in journalism and literature leads straight to the banalities of writing—the terrible to-do about petty problems of ordinary existence or in its most degenerated form about the radiant futures of totalitarian societies. The headache of choosing a vacation destination or workers with shining eyes gazing toward the horizon of the future cannot be a substitute for themes like injustice and human suffering.

 

This is not however to suggest that culture predominates.

There is no doubt that political-economic power calls the shots.

 

And capitalist Europe, America, Japan, etc., remain capitalist, imperialistic, greedy and avaricious.

 

The message carried by a common culture of social change contrasts with the message of economic gain and political power. Culture's message must be social, inquisitive, critical, often calling people to arms for resistance. In this sense, at certain times of societal evolution, literature can be more important than economics and politics, and religion too, for that matter.

I could have ended this essay here. The significant part has been said. Yet, since the goal I am speaking of is radical change I still want to underline the analogy between the American and European intelligentsia and the pre-revolutionary atmosphere in Tsarist Russia.

 

What? Russia again? Another futile historical reflection? Another wasted "intellectual" retrospect?

 

No, I don't think so. Because America today stands on the threshold—maybe on the precipice—of an explosive situation in which the appearance of a new version of the proletariat now formed by wage earners and crossovers from the impoverished, zombie middle class points toward the inevitable emergence of a new political movement. That virgin movement needs new ideas. It badly needs ideas and guidance, today. For this objective, this goal, is no longer some theoretical political Ultima Thule. This is an Alamo for America.

The American intelligentsia represented by the editors of publications like the one that published this article originally (Cyrano's Journal Online) and by a growing number of like-minded persons are still too few in the vast nonsense and ignorance of real America. No wonder the American intelligentsia's oppressive feeling of isolation. As in pre-revolutionary Russia, also the radical American intelligentsia speaks of itself as "we" and of state authority as "they." No wonder its loneliness, as if living among people who no longer understand its language. No wonder the feeling of comradery among us. And no wonder the hint of a kind of monastic order about the American radical intelligentsia, its different life style and behavior and its ability to see through the gossamer manifestations of the capitalist society in which it lives. No wonder the radical's difficulties inside real society moving in the wrong direction!

And no wonder the more sensitive uncommitted intellectual feels superfluous in the presence of the committed intelligentsia.

 

This is not to deny that the intelligentsia has its grave faults, inconsistencies, stupidities. The intelligentsia's outsider complex is in fact counter-productive and a-historical.

 

There is an elusive word that describes the situation and mood I have in mind. It's in a song. Or in a poem. It's on the tip of my tongue. The word might describe who we are. I begin to recall. There is a Dominican song. Buscando…? Buscando visa para un sueño. Searching for a visa to a dream. A reason for being. Searching for a visa.

 

The intelligentsia desires that visa in order to arrive, and not remain excluded, isolated, lonely. It wants to participate, to be part of the main. Even if the main is on a false course toward the rocks and shipwreck. We instead live as strangers in a foreign land. But we hope to find the way back, for we miss America. That visa opens new horizons.

 

The chance reader only has to open his mind in order to see the real world with new eyes. To see that it is not a world to conquer militarily. It is a world to join. An entire world marked by humanness. As has been said before the intelligentsia cannot forget that sometimes it's necessary to steep oneself in the non-intelligence of the world. For unlike the intellectual class of educated specialists, the intelligentsia is formed by various social classes, not by castes nor a common social or economic status. As the Russian philosopher Nicolas Berdyaev remarked about the intelligentsia, "By definition it stands for a break with the classification of everything according to categories."

 

So now that we have defined it, praised it, and lamented its loneliness and even inadequacies, what does all this mean for us? Intellectuals? Intelligentsia?

It comes down to a question of roles. The American intelligentsia asks, What is to be done? That same question was posed by the Russian intelligentsia in the suffocating society of 19th century Russia so reminiscent of today's America.

I keep returning to the Russian example because just as the intelligentsia in pre-revolutionary Russia set its stamp on the development of the idea of Socialism there (after all, making the greatest revolution of modern times!), we believe that when the propitious moment arrives, when what was inexpressible becomes expressible, when events have created a universal mood of revolutionary discontent with the existing system, when tensions reach the boiling point, the American intelligentsia, together with the American wage earners and the ever vaster, ever multiplying, ever angrier and, one hopes, awakened middle class, will rise against the capitalist system and salvage the positive parts of America and bring about radical change.

 

Change is a word that both the intelligentsia and intellectuals of America should be discussing together. What kind of change do they mean? Intellectuals mean one thing. Usually reform. The intelligentsia means another. Radical change. It's an unfortunate paradox that the intelligentsia doesn't always know what exactly to do with pure intelligence.

 

The change is not the change promised in electoral campaigns, not the change written on the little cards held in the hands of backers of one candidate or the other. The goal has to be the radical transformation of the entire society. The idea of change right now is so potent that even the establishment's figureheads, Obama and McCain, are brawling to own the "brand".

The American intelligentsia might keep in mind one comforting thought: of major world countries today perhaps only America is still economically self-contained and self-sufficient enough to support and survive the upheavals of a new social revolution.

 

The great historical contradiction however is that in no other country is real capitalism so strong and the positive idea of Socialism so weak as in the United States of America, which in turn has made Socialism so difficult to achieve elsewhere.

 

So the quandary for the American intelligentsia is: What is to be done? Or, What can be done? For to our great misfortune—even if the American intelligentsia-radical Left had the means to address the rising wage earner-middle class coalition—what message would it send to them, the new masses?

A hard, brutal truth is that there is precious little to admire, little to address, in that growing class of the neo-proletariat marked by drabness and mediocrity, physical obese ugliness, monotony and mental laziness and cultivated ignorance and its anti-historical cult of non-memory, a class waiting almost obsessively to be entertained.

 

Par example: Have American people gone crazy to even consider the theatrical vulgarity of the ridiculous candidacy of a redneck racist warmonger like Sarah Palin as Vice President and possible President of the USA, recalling Roman Emperor Caligula's mad idea of naming his favorite horse, Incitatus—or Galloper—as Consul of the empire? Has everyone gone mad?

 

As an American I am offended by the idea. Have Americans morphed into the peoples of ancient decadent Rome? Peoples who for distraction relied on the blood and sand of the arenas of the coliseums across the empire. Where are we to find a model of a political and cultural ideal that could appeal to such a trampled-on lot who have been expertly trained to despise anyone or anything different from them and their "values" and the "American-way-of-life"?

 

With the reality in mind that it is precisely that ragged, disinterested American proletariat-middle class that must execute the radical change, the American intelligentsia, just as in pre-revolutionary Russia, truly has just cause to wonder: What is to be done?

 

In the United States the official reaction to the "Communist threat" corrupted generations of Americans and was the justification of the advent of official amorality in a virgin America that still considered itself pristine. In the Cold War any subterfuge was licit. In the Cold War the lie was good. Four decades of the great lie of anti-Communism sufficed to generate a new morality in America. A morality of evil that filtered down into society. It has nothing to do with ideas or ideology; only power. It is a way of viewing the world, pursued and confirmed by a great slice of the country's intellectuals. A cold manner, amoral and immoral at the same time. This evil power is an American spirit, an evil spirit that has perhaps always lurked in America. For as we now know America was never innocent. At the best, only naive. Evil lurked in the Blue Ridge Mountains of my boyhood. Evil still lurks in fundamentalist America.

 

Yet, at the same time the American nation has been duped, wants to be duped, by the great lie of the "Communist threat." The subsequent creation of terrorism and fear was the natural course of things.

 

Addendum: I confess that I'm not totally satisfied with the word intelligentsia. I welcome suggestions for a better word, a modern word that describes that dynamic but minute, unhappy, isolated and lonely part of American society today that so desires dramatic, drastic, radical, revolutionary change.

The Personal Manifesto of a member of the intelligentsia

 

• I am not objective, as true objectivity is a myth. Nor impartial, which is about the same. I have no desire to be unbiased. And God forbid that I ever become non-partisan—oh, that ugly hyphened word! Just that hyphen alone is enough to make me partisan.

 

• Traditionally journalists are supposed to be objective and impartial. But who said so? My answer is that I can be as partial and subjective as I please. As necessary. For that matter, most journalists do the same anyway, though they disguise their partiality in nice little euphemisms. [For most in the media, and the public, the mere fact of working for a commercial newspaper or tv station constitutes de facto proof of being a "professional."]

 

• As the great Gabriel García Márquez taught his journalism students, above all you must learn to be partial. Forget rules about impartiality and reliance on facts laid down by the little men. Balls! Screw the reliance on facts. Those incontrovertible facts! An obsession with facts creates small-minded people. All our lives they hit us over the head with them. When someone says 'Let's get down to brass tacks' or 'the facts are', it's time to watch out. So two plus two is four! As if only things that happen or allegedly happen are worthwhile! Facts obscure the real truth. We read mountains of facts and believe we know what is happening but we still know nothing about the center of things, the core truths.

 

• No honest journalist-writer can allow himself to be unbiased and objective. After all, few of us are academics.

 

• Besides, impartial to what? To lies? To rampant hypocrisy? To swindles? What is there about which we should be impartial unless it's those hateful facts? As if we should be impartial to and have no opinion about the fictional facts that created wars in Afghanistan and Iraq, that pave the way to war against Iran, that crushed Serbia and created Kosovo, that lead to the ranting and raving—oh, those facts!—against Chávez in Venezuela, that support lists of rogue nations and terrorist movements such as Hamas and Hizbollah. Should we be impartial to the men and institutions—like Wall Street and its minions deeply embedded in government, often indistinguishable from the political class—that have given us repeated recessions and depressions in our history, gutted and mismanaged the American economy to fit their own agendas, created a reign of deepening economic and social inequality, and that now, in 2008, threaten to crown their high-handed thievery with a mugging of the US taxpayer to the tune of trillions of dollars?


• It is surely a question of the chalk circle of the masses that Power cultivates. No one should step outside it. There is no need for genetic or biologic cloning,


As Baudrillard reminds us, the individual is already cloned culturally and mentally … by them. We feel it around us everyday just living in our society. Power wants more of it; the cloned man is easy to control.


The individual is something else.

 

We do not reject the idea of the whole individual that cannot be further divided. Yet, we want to be similar to our fellow humans, a social animal, but, still different, more than a reduced size copy of other humans. Individuality? Yes, but not at the cost of elimination of others.

 

Viva bias!



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Definitions: The Bourgeoisie

 

 

By Gaither Stewart

16 October, 2008
Countercurrents.org


"We are not fighting against men or a kind of politics but against the class which produces those politics and those men."
(from Dirty Hands, a political play by Jean Paul Sartre, first performed in Paris on April 2, 1948.)

 

"It takes a day to make a senator and ten years to make a worker." AND, as Caligula says to the senators: "It is much easier to descend the social ladder than to climb back up." (from the play Caligula by Albert Camus, first performed in Paris in 1945, words I include here just for fun, mockery and a hint of warning.)

 

Rome: It's a capricious irony of history that the word bourgeois, which pinpoints the capitalist class, is perceived by nearly everyone, including the bourgeois themselves, as an epithet and is almost universally rebuffed!

 

Generally we conceive of the bourgeois in reference to their over emphasis on form and formality, in total contrast with the image of the bohemian radical. Bourgeois characteristics include emphasis on tradition, pretentiousness, conventionality, propriety, status obsession, respectability at all costs, an affected manner of speech and an overall comportment befitting such a description. The bourgeois personality is one of seeming rather than being.

 

To most ears both the noun and the adjective bourgeois ring negative and evil. Both upper and lower social classes detest that person and class. Bourgeois bastard! Fucking bourgeois! No wonder few people choose to identify themselves as bourgeois, preferring "middle class" or some such.

 

My family discussion is a good example. For some time my wife and I have benefited from an apartment exchange with a person in a central area of Paris so that in recent years we spend several months a year there. Though I prefer Paris to my home Rome, my individualistic Italian, French-speaking wife doesn't share my enthusiasm. Scornfully, dismissively she charges that Parisians are too bourgeois. Too closed, too clannish. Bonjour, Madame, bonjour Monsieur, au revoir Madame, au revoir Monsieur, all day long. For her Paris is atrocious, people don't meet each other, they're indifferent, uninterested in relations with others, in their work, in their life. I can't pin her down as to what she really means but she stubbornly insists that Parisians are unbearably bourgeois. Clearly the sense in which she uses "bourgeois" is the most common in the world today.

 

In this essay I have in mind the socio-political meaning of bourgeoisie, the morally corrupt class that Marxism equates with the capitalist class. Precisely the corrupt bandit class of the USA to be saved by the great financial bailout of Wall Street. Which shows again that in the eternal class struggle the bourgeoisie is always the evil oppressor. The crucial distinction between bourgeoisie and proletariat is the distinction between evil and good. Yet, the modern age is known as the epoch of the bourgeoisie, that is, of capitalism.

 

That is the great contradiction of our epoch. Since modern revolutions eliminated monarchies and simplified the class struggle, western society has been divided into two hostile camps: the bourgeoisie which runs things, and the proletariat which resists exploitation by it. The ethical pathos of Marxism is the exposure of exploitation of labor as the basis of human society.

One recalls that the bourgeoisie played the major role in the French Revolution. Since then, in the shape and form of the capitalist system, it has maintained the upper hand most everywhere, or sooner or later regained it, as in post-Communist East Europe. It has crushed the other classes and converted everyone else into wage earners. That is its nature.

 

For its prosperity the capitalist bourgeoisie depends on free trade. Except for down moments like today when things go haywire for free market capitalism, especially on deregulated and uncontrolled Wall Street and it turns back to the people to bail it out of the chaos it creates at regular intervals. Its survival depends on unending growth and constantly expanding markets, the continual acceleration and revolutionizing of production, political centralization and today in Europe and the USA on the exportation of jobs to the poor world. Meanwhile bourgeois (bandit) capitalism requires and has achieved the concentration of property and wealth in a few hands. That is its constant goal. It thrives on the incessant creation of new desires—subsequently morphed into needs—throughout the world. In that sense the bourgeoisie is through and through cosmopolitan.

Paradoxically, those primary requisites for the bourgeoisie's existence provoke the resistance of the proletariat. It's a vicious circle. In a great dialectic the survival needs of the bourgeoisie generate the resistance that can ultimately crush it. The resistance that according to Marxist theory will someday crush it. These days, there for everyone to see, for everyone to feel, the spreading sense of unease marking its successive economic-financial crises point to the eventual demise of bourgeois, bandit capitalism.

 

So why has it not already happened, one must wonder? Why hasn't it collapsed long ago? Though the bourgeoisie-capitalist class is small and the proletariat wage earners an overwhelming majority, why don't the exploited classes rebel and rebel, revolt and revolt, again and again? Why not? The reason is clear: the exploited classes are not only victims. They are also accomplices. Half victim, half accomplice. The historical paradox. The ruling class counts on this dichotomy to maintain the system. Divide and rule. Meritocracy. Rewards for obedience. Two cars and bigger houses for staying in line. A system based on money, domination and fear. Religion too, but especially FEAR. Fear of fear. Fear of change. Fear, fear, fear. A fearful people is an obedient people. Today's Americans are a sacrificed generation. Their illusion of true love has faded. Instead there is the feminine side—seduction and sex ever before us, in all its forms. But love is not the question. For love you still need illusion and innocence. And we are a disillusioned generation. All of us. Only fiction remains. And our bitterness, jealousy and fear. That's why you need an absolute, overwhelming desire to fight back. The only alternative is to flee into the mountains or the desert, 20 miles from anyplace. No banks, no commerce, no bureaucratic offices in sight. Or perhaps resort to walking the labyrinth in the Chartres Cathedral in search of the final secret, the beautiful butterfly to change things.

 

At the same time there is a glut of everything in the Western world. Yet vampire bourgeois capitalism cannot cut back. Staggering, careening on its crazy course, it goes after more and more growth, to survive. It needs more and more production, more markets, more and cheaper labor, more consumers (while salaries everywhere are lower and lower so that consumption decreases), more power, more of everything, clearly unachievable forever. How fast can a man run, one asked after the new world record 100-meter dash at the Beijing Olympics? 9.5 seconds? Then tomorrow, perhaps 9 seconds. Then 8. But can it go on forever, faster and faster?

 

Bourgeoisie, Borghesia, Burguesia, Bürgerstand. Middle class! The French word bourgeoisie, originally in reference to inhabitants of towns or bourgs, is most expressive of the class's socio-political signification, especially in reference to the upper or merchant class, who are the capitalists. (Also in socio-political language the word bourgeois has pejorative overtones, smacking of undeserved wealth and nouveaux riches tastes.) Then there is their chief political support, the crutch of the bourgeois capitalism: the so-called petite bourgeoisie, the class between the upper bourgeoisie and the proletariat, the shopkeeper class, the urban people, the target of populist leaders since the Roman Empire, the followers of dictators from Mussolini to Hitler, who are the flag-waving super Americans of today.

 

On the other hand, the European bourgeoisie is not to be confused with the American middle class. They are not the same thing. Sociologically, in the pejorative sense my wife means, both Italy and France are largely "bourgeois" North Europe is even more of the petit petit bourgeois category, East Europe and Latin America are by nature proletarian with a thin bourgeois-intellectual class at the top. The European bourgeoisie creates more culture, while in the USA because of social mobility (itself rapidly vanishing) culture and art can come from anywhere.


Since the rebellious years after 1968 fixed class relationships have diminished in Europe too, especially evident in Italy and the France. Europe is again rich. Life style is more bourgeois! Still, within that bourgeoisie are the most educated classes, which in the past produced also the intelligentsia wing and the revolutionary vanguard. Therefore, and in contrast with the USA, from that same European bourgeois class—also marked by set values and tradition—have emerged the movements for drastic social change.

 

Today with the Right winds of neo-liberalism sweeping over Europe, those times seem distant. 1968 belongs to another epoch. Still, the term bourgeoisie as used by the radical Left in Europe and the USA (many or most of whom are bourgeois renegades!) depicts the society the Left opposes. Yet nowhere else were whole peoples more jubilant than Europeans over America's recent fall back on nationalizations of the core of the financial system (which despite stringent efforts the European Union has not yet succeeded in eliminating completely) in an attempt to save temporarily its economic neck and the "American way of life" and reinforce the transformation to Fascism.

 

One doesn't forget easily that the bourgeoisie was guilty of permitting if not creating Fascism. The European and American bourgeoisie propped up Fascism in order to preserve its own social rule. The basis of its rule, private property and the capitalism, was threatened by the proletarian revolution that Western Socialists (largely emerging from the same bourgeoisie), still in the throes of nationalism, were never able to pull off. For the European upper bourgeoisie, Fascism was little more than an annoyance that saved their system. Even World War II was preferable to proletarian revolution. We are witnessing a repetition of that history in the USA today.

 

The close collaboration of American and European capitalism right up until World War II was a confirmation of their secret alliance sans frontières. In the immediate post-war America's renewed alliance with the residue of Nazi Germany against Communist Russia was a resumption of the pre-war Fascist-Capitalist bond against Soviet Russia. In that sense the Fascist-Capitalist blood alliance created by the bourgeoisie of Europe and the USA protected each other against the working class.

 

The bourgeoisie in feudal pre-revolutionary France was a specific class. Much wealthier than the lower classes, it lacked the privileges of the aristocracy against whom it made the French Revolution. It made its revolution in order to rip political power from the hands of the aristocracy and acquire its privileges. It became the new ruling class.

Since then it has incurred the hate and wrath of all other classes. Deregulation is not new. Bourgeois slogans have always been 'no rules, no laws, all power to the middle classes.' Compromise with other powers, yes,—especially with organized religions and various forms of "democracy"—but forever at the expense of the working classes.

 

In the bourgeois world anywhere and under any form of government workingmen are destined to remain forever workingmen.

 

Lest one forget: despite the high-sounding and immortal words, liberté, egalité, fraternité, the French Revolution was a bourgeois revolution against royal power and the aristocracy, and executed in the beginning by the "people." The only things lacking to the "freedom" of the bourgeoisie were equal privileges and participation in the government, i.e. political power. It overthrew the king, took power and then did precious little for the sans culottes. The bourgeoisie emerged victorious. In the bourgeois capitalist world the words liberty, equality and brotherhood have remained to this day empty slogans. No more than that.

The principle of private property is a religion that has nothing to do with homeowners. It refers to ownership of the means of production. That is great wealth and the political power to back it up. That religion was the economic basis of the French Revolution. That has never changed. For that same reason, the great Socialist revolution was always just around the corner, a hairsbreadth away. That again is the history of man.

Nonetheless the French Revolution was a great awakening. Despite its bourgeois character and the power it wielded, the communist idea kept coming to the front. According to Peter Kropotkin, in his memorable classic, The Great French Revolution, the word Socialism came into vogue chiefly in order to avoid the term Communism. Kropotkin: "Secret Communist societies became action societies, and were rigorously suppressed by the bourgeoisie." The fearful bourgeoisie first checked the revolutionary impulse in France and soon restored the monarchy to guarantee its survival. The spirit of the French Revolution was nonetheless contagious. Kropotkin closed his major work with immortal praise for it: "The one thing certain is, that whatsoever nation enters on the path of revolution in our own day, it will be heir to all our forefathers have done in France."

 

Soon Marxism came along to pinpoint and define once and for all the bourgeoisie as the exploiting class, the class that obtains its income from capital and commerce. The bourgeoisie is the ruling class because it owns the means of production—land, factories and resources.

 

Moreover it has the means of coercion of the lower classes. By control of police and army it is able to keep in line and exploit the work of wage earners who live only from their labor. Perhaps in no other major country do Marx's theses more concisely describe the societal line-up than in the USA today. Therefore America cannot remain forever immune to the class struggle, quiet today, deathly quiet, mute, unvoiced, but potentially explosive.

 

A graffiti on the walls of the Sèvres-Babylone metro station in Paris noted by French writer Michel Houellebecq—reductive, curious, ambivalent, and even permissive slogan as it is—rings like a warning, the very minimum warning, to the tiny American capitalist class, new born Christian or not: "God wanted inequalities but not injustices."

 

Power in America is aware of the menace and the threat of the extension of the struggle for justice to all social classes, to el pueblo unido. Therefore the system's perfidious use of terrorism and fear, religion, the American way of life and the future of our children to hoodwink the people.

 

One often hears the expression exploitation of labor. What does it mean exactly?

It's basic. The heart of Marxism. Its validity is recognized most everywhere. The capitalist owner of the means of production pays wages and production costs and then sells the goods produced by labor, keeping for himself the difference between costs and sales. Part of his profit is Marx's "surplus value." It's the size of his profit that creates inequalities. The point is the worker creates the wealth of the greedy capitalist, who squeezes the workingman up to the limit, gaining thousands of times more than the worker can earn in a lifetime. That is injustice. The owner, the entrepreneur and his executives (here we mean also the real owners and CEOs of banks and funds, of stock markets, insurance giants, holding companies and the like) gain the maximum profit without actually doing any work. And he has the bourgeois government ready to bail him out when he fucks up, which his greed causes at regular intervals. That too is exploitation of labor. That is injustice.

Karl Marx used the word bourgeois to describe the social class that holds property and capital making possible exploitation. Though he recognized the bourgeoisie's industriousness, he criticized its moral hypocrisy for its exploitation of other men. As time passed he came to use bourgeois to describe not only the class, but also its ideology: class society based on capitalism and labor. A society of the capitalist and the worker.

 

Members of the American middle class are marked by considerable diversity, who however tend to overlap. They prize non-conformity, innovation and independence and tend to comprise also the artistically creative part of the nation. Education is a chief indicator of middle class status. Education is fundamental to prepare members of the class for creative and leadership roles. For that reason, writers, educators, teachers, journalists, artists and the mainline media owners come chiefly from the middle class (es).

 

It is that middle class-bourgeoisie that has written the bulk of modern social and political history. The history most of us know best is their view of history. Now that history must be re-written. Everything must be reviewed. Everything must be revised. All of it—World Wars I and II, the "forgotten" Korean War where it all started, the Cold War, the USSR, Stalin, Iran, Iraq. Everything. Especially 911. GW Bush in power is not the same thing as Reagan who set the scene. But something changed. What has changed? That is also a mystery that must be clarified.

 

One change is that the real American upper middle class is shrinking in size. And from generation to generation it is becoming more elite. Sociologists instruct us that at today's pace another generation will suffice to eliminate the class. The prohibitive costs of higher education today guarantee the manifest elitism in America and the continuity of power in the hands of the smaller and smaller and best educated upper, to a great extent capitalist class, who more and more constitute also the political class, the caste. The American middle class is the most representative of the America the world is familiar with, not very complimentary of that class in view of the widely diffused anti-Americanism in the world. Yet it is threatened with extinction.

That is, eliminated by way of a golpe. A coup d'état. Executed by elite America against America itself.

 

The fervor of bourgeois revolution infected Russia from the early XIX century. Originally Social Democracy developed independently of the working classes in Russia, just as in the West. But as the class struggle intensified and sharpened, Lenin and the revolutionary Socialist intellectuals came to differ from the rest. Lenin preached that the choice came down to one between "bourgeois ideology" and "Socialist ideology". The former pointed toward reform and the creation of capitalism before social revolution. Lenin aimed at revolution, here and now, before the creation and organization of a great working class capable of making the revolution itself.

 

As elsewhere revolutionaries in Russia were powerfully influenced by Marx's comments in his "Critical Notes on the Kind of Prussia and Social Reform" on "the feeble reaction of the German bourgeoisie to socialism" and, on the other hand, "the brilliant talents of the German proletariat for socialism." Marx often compared the impotence of the German bourgeoisie for political revolution, responsible for the political impotence of Germany itself, with the social capacity of the German proletariat.

 

His social analysis of Germany has held good for 150 years! In his words, "it is entirely false that social need produces political understanding." That sentence would apply more to the USA today than to anywhere else in the world.

 

Lenin and his Bolshevik Communists opted for the Socialist ideology. They reserved special hate for the bourgeoisie intent on maintaining its privileges at the expense of the workers. The Russian revolutionary foresight is especially meaningful in Third Millennium America. After Lenin came to power he made it clear that Russia was NOT an island of utopia. The idea of a "petit bourgeois utopia" was to remain forever anathema to Lenin and thus to the Russian Revolution. "It is a question of creating a Socialist state …. This is merely one phase through which we must pass on the way to world revolution."

 

In Lenin's mind everything anti-revolutionary was bourgeois. Bourgeois attitudes. Bourgeois ethics and morality. Bourgeois plots. Bourgeois peace. Bourgeois legality. Bourgeois reaction. Bourgeois imperialism. The bourgeoisie was not going to stop him. No hairsplitting! "We are turning more and more to the Left …. We will destroy the entire bourgeoisie, grind it to a powder."

In the Leninist concept "the bourgeoisie is the class which inevitably rules under capitalism, both under a monarchy and in the most democratic republic, and which also inevitably enjoys the support of the world bourgeoisie." He knew what he was talking about. The world bourgeoisie—Democratic, Fascist or Monarchic—never forgave or forgot the temerity, the audacity, the effrontery, of the Russian Revolution!

 

The Bolshevik leader had learned his lessons from the French Revolution. In his 1918 cry of "All power to the Soviets" he meant a resounding 'No!' to the bourgeoisie who instead demanded "All power to the Constituent Assembly." Lenin was not about to hand over parliamentary power to a certain bourgeois counter-revolution. The resulting bloody civil war between Reds and Whites of Russia was between those two battle cries, between those two classes: the red revolutionary class and the white malignant bourgeoisie.

From that moment it was all-out attack on the counter-revolutionary bourgeoisie. "Death to the bourgeoisie!"

 

Pravda wrote on August 31, 1918: "Workers! If you do not now destroy the bourgeoisie, it will destroy you. Prepare for a mass attack on the enemies of the Revolution…."

 

Then in "Catechism of a Class-conscious Proletarian" also in Pravda: "The bourgeois is our eternal enemy, forever boring from within." The writer meant bankers, rich merchants, manufacturers and landowners, officers of the old guard, priests, White Guard reactionaries, upper bourgeois classes. The professed aim of the Red Terror was not to wage a war against individuals but to eliminate the bourgeoisie as a class.

 

Instructive for modern readers is Alexis de Tocqueville's remark about France in L'Ancien Régime et La Révolution written long before Lenin was born: "For the first time perhaps since the beginning of the world one sees the upper classes so isolated and separated from all the rest that one can count their members and separate them as one separates the condemned part of the herd, and the middle classes reluctant to mix with the upper classes but on the contrary jealously trying to avoid contact with them: two symptoms which if one had understood them, would have announced for all the immensity of the revolution about to be accomplished, or rather, which was already made."

 

That rings familiar, eh! I mean the separation and isolation today of America's elitist capitalists from the rest of the people.

 

In his essay "The Transparency of Evil" Jean Baudrillard, unpredictable and surprising as ever, notes that each transparency raises the question of its contrary, the secret. Still, some things, he says, will simply never be visible. They will remain in the secret world and are shared in secret according to a kind of exchange different from that of the visible world. But since today everything happens in the visible world, the virtual world, what happens to those things that were once secret? Step by step, delving into the secret within the secret, Baudrillard then chills you with this: they become occult, clandestine, evil. That which once was just secret becomes the evil that must be abolished. The problem is one cannot destroy them because to a certain extent the secret, like myths, is indestructible. Therefore it becomes diabolic and infects the same instruments designed to eliminate it.

 

I reflect on this equation of the secret, the visible and the diabolic and apply it to the subject here. Conclusion: capitalist power is the occult evil and resistance must abolish it. Our bourgeois governments profess democracy and transparency. Yet they operate in the secrecy that has morphed into evil, while continuing to boast of democracy and God.

Capitalism as an economic and social system can only work when there are new frontiers to discover. Since, as we have seen, new opportunities and eternal growth are basic requirements for capitalistic society and since they have been exhausted, I too believe America has completed its historic Manifest Destiny.


Destiny. American capitalism has long loved the word. Baudrillard recalls a story about the rules of destiny, "Death in Samarkand." On a square of a town, Death makes a sign to a soldier, terrifying him. He runs to the king and tells him that Death made a sign to him. Therefore he was escaping immediately to Samarkand. The king summons Death and asks why he scared his captain. Death answers that he didn't intend frightening the soldier, he just wanted to remind him that they had an appointment that evening in Samarkand.



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Mammon, The God Of Excess


 

 

By Gaither Stewart

23 October, 2008
Countercurrents.org

The last of Gaither Stewart's Definitions series

 

(Rome-Paris) In an essay especially pertinent to contemporary American society, L'Exil d'Hélene, Albert Camus noted, "Greek thought always restrained itself behind the idea of limits. It never exceeded limits, neither the sacred, nor reason, because it denied nothing, neither the sacred, nor reason. It made allowance for everything, balancing shadow and light. Instead, our Europe, launched toward the conquest of totality, is the very daughter of excess (writing in the immediate aftermath of World War II, I'm certain Camus would note here not only Europe but especially the America of our times.) …. In its folly it extends the eternal limits, and immediately obscure Erinys fall on it and tear it apart."

Reading Camus' essay in the midst of the bedlam of the ongoing collapse of Capitalism falling to pieces around us helped me pinpoint the idea for this concluding essay of the Definitions series: Definitions: The Proletariat; Definitions: The Intelligentsia; Definitions: The Bourgeoisie. Mammon is the God of Excess and the very personification of the capitalist god (or rather its demon), even though now a fallen god.

 

The natural subject for this essay is Capitalism itself, in fact, the underlying subject of the whole essay quartet. However, since Capitalism is too vast to treat here, the god-devil image of Mammon is more accessible. For the very basis of Western society is the personification of a Weltanschauung, a view of life, which is the illusion of the possibility of a life without limits. Many readers have recognized the hubris of our economic-financial world this 2008 as the direct result of our attempt to exceed universal limits. For the worship of Mammon, the Golden Calf, the love of wealth, marks our times.

 

In the Bible, "Mammon" is not a demon but simply the Aramaic word meaning "wealth" or "property." Sometimes it is translated as "money." In the Middle Ages, in religious writings, in the fiery sermons of the fanatical Dominican monk in Florence, Girolamo Savonarola, and in literature, Mammon is personified as the demon of avarice and wealth.

For modern men as for medieval men Mammon is the personification of the excessive love of money and wealth. By extension then Mammon is the god of excess. Mammon demands that its worshippers strive toward excess, that they exceed the eternal limits of the Greeks. America has obeyed the abominable god's commandments.

Excess! Surplus. Extravagance. Intemperance. Exceptionalism. Outrageous expectations. Exaggerated presumptions. Too much. Too big. Too fast. Too much of everything. Too, too, too….

 

MEN INVENTED MONEY

Laws of ancient Babylonia formalized the use of money as a medium of exchange to replace barter. Money has always been an abstraction, a token, in lieu of real objects of real value. As precious metals became the symbol of money-wealth so did the worship of gold, the Golden Calf of the Babylonians. The worship of the rare soft metal, gold, whose qualities (not real value) were easily recognized, swept the civilized world.

 

In the long run, whatever the medium—gold and silver, coins, warehouse deposit receipts for real goods, paper currency and finally so-called fiat money (that is, money not backed by reserves of another commodity, inexorably lead to the power of emergent banks and financial institutions which lend money in excess of its reserves held for its depositors. That is, without guarantees of the bank's ability to pay its debts. That is, the economic mayhem of today.

 

In the resulting atmosphere man's natural inclinations toward avarice and greed for more and more money and the commodities money can buy has flourished—flaunted and displayed at all costs—and has exceeded all limits. For ages learned men have warned that money is the root of all evil. Our society in fact values property over life. We buy far more than we need or could ever use. We measure success in dollars and cents. We are driven by greed and selfishness. We worship money. We worship a token, a symbol, the Golden Calf. As obviously dysfunctional, unjust, and destructive as our system is, many of us who oppose the billion-dollar bailouts of financial markets still nod in agreement when capitalist economists insist that while the 'bailout' is excessive, 'something has to be done to restore investor confidence and get credit flowing again.'

 

We all want to live without economic worries. We all want to permit ourselves something extra. The truth is we enjoy luxury. Money is a necessity. The problem is the worship, the adoration of Mammon far beyond the limits. For God's sake, life lived just for money reduces our existence to null.

 

Yet, despite all, especially in the wreck of the capitalist world, money remains an abstraction, an invention of the human mind, the symbol of value, today enthroned on high in the world. We all know that money is the God of war and peace, the power of powers, the one power superior to all other powers. Thus it is the symbol of excess. The surpassing of natural limits. Man's invention, an enthroned abstraction, controls and manipulates our lives.

 

Everyone knows we live in an unequal world. Half of the world's population has nothing, a great majority struggles to make ends meet, while wealth is concentrated in the hands of a few.

Strangely, few people realize how excessive the inequality has become under the reign of today's super-Mammon. See these published statistics: The world now counts 358 billionaires, whose net worth equals the combined net worth of the world's 2.5 billion poorest people. The capitalization of some banks exceeds the total national production of 100 countries. This inequitable result is not unavoidable. The gap is not a natural human process.

 

This dramatic inequality is the will of and obedience to Mammon, the God of Excess.

 

Mammon's religion created neo-liberalism and the globalized free market economy and its excessive economic and social distortions so idealized by the god-demon's worshippers. That system is now on trial. We have ready evidence that globalized free trade does not advance economic and social justice. On the contrary, in a short time it has carried mankind to the precipice of universal ruin.

 

That excess, that concept of a world without limits, the belief that growth can continue forever, has spawned economic injustice. That excess is responsible for its merger into an unholy alliance with socio-political oppression on a transnational scale.

 

Mammon up there on his throne must be roaring in laughter and rubbing his demonic hands in self-satisfaction. Mammon-Beelzebub has victory within his grasp.

Does this idol worship really make sense? Everyone should be wondering about that. While the top 200 gigantic industrial corporations control 25% of the world's production, they employ only 0.35 % of the world's population. Something stinks here! Moreover, not counting the rotten financial institutions, the top 300 transnational companies own 25% of the world's production assets. And now this: the combined assets of the world's 50 largest commercial banks and diversified financial companies (only 50!) amount to 60% of an estimated $20 trillion global productive capital. That's capitalism at its most excessive extension, far, far beyond the limits.

 

What do such statistics mean? The truth is such excesses are too much for the human mind to register and comprehend. Therefore we ignore them. Yet those figures register what happens in the real economy. They tell us that deregulation has been the final systemic flaw.

 

Clearly rampant savage capitalism has not only killed America but has carried our entire world beyond the limits. As others have warned repeatedly, economic growth cannot be eternal. Nor is it even desirable. There is a limit. There is a limit to everything. Growth cannot exceed those limits.

 

VIEWS OF MAMMON

 

As the Christian bible states, jumbled, abstruse, over-simplified, it is on target in the great divide between Mammon on one hand, and Man on the other: "No one can serve two masters. He will either hate one and love the other, or be devoted to one and despise the other. You cannot serve God and mammon." (The Gospel according to St. Matthew 6:24)

In Dante's Divine Comedy, Mammon appears as a wolf-like demon of wealth, wolves being associated with greed in the Middle Ages. Thomas Aquinas described metaphorically the sin of avarice as "Mammon carried up from hell by a wolf, coming to inflame the human heart with greed."

"Woe to the rich," Savonarola preached in rich Florence until they hung and burned him. "Rethink you well, O ye rich, for affliction shall smite you."

 

In Paradise Lost Milton wrote of a fallen angel who values earthly treasure over all other things:

Mammon led them on--
Mammon, the least erected Spirit that fell
From Heaven; for even in Heaven his looks and thoughts
Were always downward bent, admiring more
The riches of heaven's pavement, trodden gold,
Than aught divine or holy else enjoyed
In vision beatific. By him first
Men also, and by his suggestion taught,
Ransacked the centre, and with impious hands
Rifled the bowels of their mother Earth
For treasures better hid. Soon had his crew
Opened into the hill a spacious wound,
And digged out ribs of gold...
Paradise Lost, Book i, 678-690

 

In the comic book Spawn about which I read online Mammon is depicted as a handsome gentleman, suave and sophisticated at the head of an army of demons. This demon is often seen making attractive deals with humans for their souls and is thought to be quite persuasive.

 

EUROPE ON THE SAME MISERABLE SHIP

 

The news that the US Congress voted down the first bailout bill labeling it "Socialism" struck Europe as an unimaginable surprise. The impotence of the US president seemed like another stone on the tomb of America's rock faith in the market. Some European observers interpreted the anti-bailout opposition as an atmosphere of everyman for himself: deputies worried only about their re-election if they save Wall Street sharks.

 

Europe was surprised at the mediocre provincialism, the egoism of the American political world face to face with the gravest of financial disasters. Cynical Europeans saw through the Republican reluctance to vote for the bailout plan. Though its rightwing supporters wanted nothing to do with "Socialism," they let the Democratic opposition vote in the bill so they could get the benefits of the bailout but not have to pay the political price.

 

No wonder Europeans wonder about American democracy. Is its responsibility as the world leader not too serious a matter to be left in the hands of an America morally and politically destroyed by eight years of lies about everything, from the wars to torture to the "solid" economy? Europeans note that they, like Americans, must now pay for a failed and bankrupt US presidency.

Such is the price of excess. Of exceeding the limits.

 

The crisis has provoked a historic turn-around—the wave of re-nationalizations unseen in America since the Great Depression. It's the return of the state-proprietor. Not because of an ideological change of heart but out of necessity. Some reactions to the emergency have been similar in America and Europe. But not all. Those differences between the two are great. And often not in capitalist Europe's favor. European banks are slower and even more reticent than American banks to reveal the black holes in their balance sheets caused by trash instruments of credit.

 

The dimension of the crisis in Europe was masked. Europe has not been simply grazed by America's crisis. European workers-savers are just as exposed as Americans, a fact covered up by bankers in London's City and Paris' La Défense and in Frankfurt's skyscrapers. Now Europe is in the hurricane. And wage earners must pay for it. As usual. What happened in the USA should not hide the gravity of the parallel drama in Europe—stock markets crashing and banks failing, merging or nationalizing, such as the giant Belgian Fortis Bank, worth triple the GDP of Belgium, saved by the injection of capital from Belgium, Netherlands and Luxemburg. The same kind of life jacket was thrown out to the German Hypo Real Estate. Even rich Iceland had to nationalize a bankrupt bank and borrow money from Russia to survive.

 

Size! Excess! Growth at all costs! Beyond the limits!

 

The Deutsche Bank is worth 80% of Germany's GDP, Barclay's is equal to 100% of England's. Excess and size are the reasons Europe is no less exposed and vulnerable than the US. The US crisis forced European financial authorities to recognize that some financial giants are "too big to be allowed to fail." Europe faces something even worse: "institutions too big to be saved!" Excessive in respect to the sizes and capacities of the old nations-states. The results of the multinational European Union at work.

 

The Italian journalist, Federico Rampini noted the inadequacy of Europe's political and institutional means to confront the storm. The American bailout has a price tag of one trillion, i.e. 7% of the US GDP. A murderous price for US public finances but not impossible. To equal that price the European Union had to ignore its stability pact and surrender principles of financial rigor. Compromises are necessary to confront the tremors of the capitalist economy. EU banks are of global dimensions but there is no single responsible authority. The European Central Bank does not have the Fed's institutional powers, there is no European Treasury, and such vigilance as exists is divided among national states.

 

Europe however has one major advantage over America: Nationalization, i.e. Socialism, is not overly alarming to Europe. The social state still has its admirers and is an acceptable and salonfähig crutch.

 

HEROES

 

In Greek tragedy the gods drive mad those they want to ruin. One recognizes elements of Greek tragedy in the negotiations between the two American "super heroes", Treasury Secretary Hank Paulson with his martial air and the President of the American Central Bank, the Fed, professorial Ben Bernanke, and the American Congress: the conflict, the rhetorical confrontation between Paulson-Bernanke and hesitant and furious senators, the supplication of super-Paulson kneeling before House Speaker, Nancy Pelosi, imploring her to allocate 700 billion dollars to re-float the financial Titanic, and the indispensable recitative of the messenger—Bush, McCain or Obama—before the cameras to recount their versions of this anthological confrontation.


As such, the unlikely actors are begging for a bit less market and a bit more state.

 

The crunch has carried us back in time. We have seen images of multitudes of hungry people on the streets of the Western world as after the Great Depression of the 1930s. We ask why the crisis? Why low salaries of wage earners and half-billion dollar bonuses for executives? Why?

 

It's the money.

It's the excess.

It's the ignorance of limits.

 

Taxpayer money is always available to save banks. To save the globalized markets for the paper economy. Blackmail of the poor taxpayers is always a bailout. The irony is that the same people who caused the meltdown are those called to resolve it. Are they saving it or profiting from it? We believe they are benefiting. For money, anything goes today as in super wealthy medieval Florence. Or, as some cynical Europeans wonder, are the presses of the Mint simply printing new money?

 

Does that mean that a new epoch is beginning? A non-capitalist era? Are we already in the new era? One wonders. Even retrograde Pope Benedict XVI recently stated, "Money is nothing." Super secret Opus Dei calls for a reform of our lifestyle.

 

For the Catholic Church this is an ethical question. Though inequalities are related to ethics, I believe the growth of inequalities is a social question. The confirmation of the failures of un-reformable capitalism.


Epilogue: After decades of living ten kilometers from the Vatican with its popes and saints, superstitions and exorcisms and visions and epiphanies, in a world in which faith is the whole point, I still find it strange that the atmosphere in which we live is strange. Yet, strange things do happen in our lives. Like the following miraculous scene I have described so often that today I do not know if it really happened, if I dreamed it, or if I made it up.

 

I was once driving through Decatur, part of Atlanta, Georgia, on my way to interview the French-Russian writer Vladimir Volkov who was teaching at Agnes Scott College. I stopped at a café (at this point, I suspect, real reality ends) and I was sitting in a booth over coffee looking blankly out the window into early spring sunrays when Saint Paul walked in. I recognized him. He sat down with me. He talked about his blindness in the Okefenoke swamps and something about King David before saying apropos of nothing that the good life of Americans had convinced them that all is well between them and God. I sat up straight, immediately receptive. Such thoughts were already running through my head. They believe they're the chosen people because their material life is so good, Saint Paul said, because they are blessed while others starve. In the meantime, he said, God is offering his blessings to others, so that Americans will wake up. A nation that has received God's grace can't just go on sinning as it likes. It has special rules. It can't behave as it does, he insisted. Americans are deluded thinking they're a special people. They preach to others while they don't know what they're doing themselves. They say stealing is bad and then sack entire continents, including their own. They say killing is wrong and they annihilate entire peoples and imprison their own. They say war is wrong and they have made war for a century. They're proud because they know God's law, yet much of the world hates them. America is rich at the expense of others.

 

The holy man dressed in white hesitated, looked at me closely as if to determine if I was receptive and then said that God would bless those who came to him. But God can change His mind, he said. He can bless or cut off as He pleases. He can bless America today and someone else tomorrow. Saint Paul then mentioned an old prophecy of Hosea that God would desert the chosen people and love other people who no one has loved before. No one is good, he said, no one in the world is innocent.



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Thursday 23 October 2008

US government throws oil on fire

By Henry C K Liu

Free-market fundamentalists have been operating in denial mode for more than a year, since the US financial sector imploded in a credit crisis from excessive debt in August 2007, claiming that the economic fundamentals were still basically sound, even within the debt-infested financial sector.

As denial was rendered increasingly untenable by unfolding events, champions of market fundamentalism began clamoring for increasingly larger doses of government intervention in failed free markets around the world to restore sound market fundamentals. For the market fundamentalist faithful, this amounts to asking the devil to save god.

Aside from ideological inconsistency, the real cause of the year-long credit crisis has continued to be misdiagnosed in official circles whose members had until recently tirelessly promoted the merit of small government, perhaps even purposely by those in the position to know better and in whom society has vested power to prevent avoidable disaster. The diagnosis misjudged the current credit crisis as only a temporary liquidity quandary instead of recognizing it as a systemic insolvency. (See Fed helpless in its own crisis, Asia Times Online, January 26, 2008.)

The misdiagnosis led to a flawed prognosis that the liquidity crunch could be uncorked by serial injections of more government funds into intractable credit and capital market seizure. This faulty rationale was based on the fantasy that distressed financial institutions holding assets that had become illiquid could be relieved by wholesale monetization of such illiquid asset with government loans, even if such government loans are collateralized by the very same illiquid assets that private investors have continued to shun in the open market.

It is not that government officials know more than market participants about the true value of these illiquid assets; it is only that government officials with access to taxpayers' money have decided to ignore market forces to artificially support asset overvaluation, the original root cause of the problem. Instead of being the solution, the government with flawed responses backed by the people's money has become part of the problem.

President George W Bush told the American people on October 10 that "the fundamental problem is this: As the housing market has declined, banks holding assets related to home mortgages have suffered serious losses. As a result of these losses, many banks lack the capital or the confidence in each other to make new loans. In turn, our system of credit has frozen, which is keeping American businesses from financing their daily transactions - and creating uncertainty throughout our economy."

Skipping over the basic fact that the housing market has been declining because of a burst credit bubble, the president went on to identify five problems, the first of which is that "key markets are not functioning because there's a lack of liquidity - the grease necessary to keep the gears of our financial system turning. So the Federal Reserve has injected hundreds of billions of dollars into the system. The Fed has joined with central banks around the world to coordinate a cut in interest rates. This rate cut will allow banks to borrow money more affordably - and it should help free up additional credit necessary to create jobs, and finance college education, and help American families meet their daily needs. The Fed has also announced a new program to provide support for the commercial paper market, which is freezing up. As the new program kicks in over the next week or so, it will help revive a key source of short-term financing for American businesses and financial institutions."

The market responded to the president's speech with a one-day rally before resuming its sharp downward spiral, continuing a response pattern to all previous government announcements of drastic but allegedly necessary measures in recent weeks to stop the financial hemorrhage once and for all. Stocks posted the biggest drop since the 1987 crash two days after the president and Treasury Secretary presented the government's new "comprehensive" program to arrest the financial crisis.

Four levels of the credit crisis
The current credit crunch takes form on four separate but interrelated market levels.

On the first level is the banking system which traditionally intermediates credit through deposit taking and conventional lending.

A second level is the non-bank credit market via which institutional and corporate borrowers issue commercial paper for short-term funding by borrowing directly from institutions with surplus cash to invest, bypassing banks and using banks only as standbys in case maturing commercial paper cannot be rolled over occasionally.
A third level is the structured finance market in which debt securitization provides liberal credit to large pools of high-risk borrowers, with pools of debt structured as unbundled debt instruments of varying but connected degrees of risk, financed by funds from institutional investors with varying appetite for risk commensurate with varying levels of return, thus enabling pension funds and money market funds to invest in the upper tranches of structured debt that are supposed to be safe enough to satisfy conservative fiduciary requirements, but in aggregate adds up to corresponding escalation of systemic risk should any one link in the interconnected system fails.
Finally, there is the capital market where companies go to raise new capital in times of need, where in times of sudden and severe need can turn into a market opportunity for vultures. (See The pathology of debt, a five-part series initiated on Asia Times Online, November 27, 2007.)

Central banks around the world, led by the US Federal Reserve, generally have the institutional authority, historical experience and monetary resources to keep the traditional regulated banking system from failing, by nationalization and eventual consolidation.
As currently structured, central banks are not in possession of ready authority, operational experience or financial resources to keep the now vastly larger non-bank credit and capital markets from failing. Under conditions of a liquidity trap, central banks do not even have the means to force banks to lend to credit-unworthy or unwilling borrowers. This is known as the Fed pushing on a credit string. Further, the Fed is approaching the lower end of interest rate cuts, with the Fed funds rate target already at 1.5%. It cannot go below zero.

According to free-market principles, a healthy banking system is supposed to be able to save itself from systemic collapse by allowing individual wayward banks to fail. The fact that increased number of mismanaged banks is threatened with failure does not normally add up to any threat of systemic failure in the banking system. It in fact testifies to the systemic resilience of a healthy banking system.

The current problem arises from intricate and close interconnection among financial institutions and markets, which has made too many financial institutions "too big to fail" because their individual failure can cause systemic collapse through widespread interconnected contagion throughout the market.

For example, the trigger point behind Bear Stearns's near failure came from the repo market, where banks and securities firms routinely extend and receive short-term loans, typically made overnight and backed by top grade securities. Hours before 7:30am on March 14, 2008, Bear Stearns was faced with the problem of not being able to roll over its huge repo debt because its high-rated collaterals had fallen in market value. If the firm did not repay the maturing debt on time with new funds from new repo contracts, its creditors could start selling at fire-sale prices the collateral Bear had pledged to them, to cause substantial loss to Bear Stearns.

The implications would go far beyond losses for Bear Stearns. The sale receipts might not repay all investors and cause losses to conservative institutional investors such as pension funds and money market funds. If investors begin to question the safety of loans collateralized by triple-A securities they make in the repo market that are now worth less than their face value, they could start to withhold funds from the credit market when other investment banks and companies need to roll over their maturing short-term debts.

Hundred of firms would default and fail from a seizure of the $4.5 trillion repo market, bringing down banks that have issued standby credit to them in a financial chain reaction.

The distressing part is that the $4.5 trillion repo market is not an untested novel financial innovation such as subprime-mortgage-backed collateralized debt obligations. It is a decades-old, plain-vanilla debt market where market risk is considered minimal. A major counterparty default in the repo market would have been unprecedented because the collateral accepted in a repo contract is generally considered as triple-A rated, and such a default could have systemic consequences for the entire credit market and even impair the ability of the central bank to maintain the Fed funds rate target, which it normally does by participating in the repo market.

As I wrote three years ago (see The repo time bomb, Asia Times Online, September 29, 2005):
As with other financial markets, repo markets are subject to credit risk, operational risk and liquidity risk. However, what distinguishes the credit risk on repos from that associated with uncollateralized instruments is that repo credit exposures arise from volatility (or market risk) in the value of collateral. For example, a decline in the price of securities serving as collateral can result in an under-collateralization of the repo. Liquidity risk arises from the possibility that a loss of liquidity in collateral markets will force liquidation of collateral at a discount in the event of a counterparty default, or even a fire sale in the event of systemic panic. Leverage that is built up using repos can exponentially increase these risks when the market turns. While leverage facilitates the efficient operation of financial markets, rigorous risk management by market participants using leverage is important to maintain these risks at prudent levels.

In general, the art of risk management has been trailing the decline of risk aversion. Up to a point, repo markets have offsetting effects on systemic risk. They can be more resilient than uncollateralized markets to shocks that increase uncertainty about the credit standing of counterparties, limiting the transmission of shocks. However, this benefit can be neutralized by the fact that the use of collateral in repos withdraws securities from the pool of assets that would otherwise be available to unsecured creditors in the event of a bankruptcy. Another concern is that the close linkage of repo markets to securities markets means they can transmit shocks originating from this source. Finally, repos allow institutions to use leverage to take larger positions in financial markets, which adds to systemic risk.
A crisis emerges
In the structured finance market, a separate crisis was emerging, exacerbated by problems in the repo market. In March 2008, the Federal Reserve created a new facility to swap up to $200 billion of its Treasury securities for hard-to-trade mortgage-backed securities held by investment banks. A week later, the Fed took over $29 billion of investment bank Bear Stearns' obligations to prevent a chaotic failure of the firm and to enable its takeover by JPMorgan Chase with loans from the Fed discount window and by limiting potential loss to JPMorgan Chase to $2 billion. The Fed also opened its discount window to investment banks, making it the first time since the Great Depression that non-banks had been allowed to borrow from that window.

And in July, the Fed agreed to lend to Fannie Mae and Freddie Mac from its discount window should it "prove necessary". In the same month, another government arranged "shotgun marriage" induced Bank of America to acquire Merrill Lynch at a fire sale price of $50 billion. On September 18, the Federal Reserve pumped another $105 billion into the banking system.

Credit rating agencies may play a key role in structured finance transactions. Unlike a "typical" loan or bond issuance, where a borrower offers to pay a certain return on a loan, structured financial transactions may be viewed as either a series of loans with different characteristics, or else a number of small loans of a similar type packaged together into different loans called "tranches". Credit ratings often determine the interest rate or price ascribed to a particular tranche, based on the quality of loans or quality of assets contained within that grouping.

Companies involved in structured financing arrangements often consult with credit rating agencies to determine how to structure individual tranches of debt so that each receives a desired credit rating to certify its risk exposure. For example, a firm may wish to borrow a large sum of money by issuing debt securities. However, the amount is so large that the return investors may demand on a single issuance would be prohibitive. Instead, it decides to issue three separate bonds, with three separate credit ratings: A (medium low risk), BBB (medium risk), and BB (speculative), using the rating system of Standard & Poor's. The firm expects that the effective interest rate it pays on the BB-rated bonds will be more than the rate it must pay on the A-rated bonds, but that, overall, the amount it must pay for the total capital it raises will be less than it would pay if the entire amount were raised from a single bond offering. This is the basic principle of structured finance: the squeezing of financial value out of unbundling of debt.

As the transaction is devised, the firm may consult with a credit rating agency to see how it must structure each tranche - in other words, what types of assets must be used to secure the debt in each tranche - in order for that tranche to receive the desired rating. The structure is such that the credit rate of any one tranche will change if the credit ratings of other tranches at the riskier end change. This could cause triple-A rated tranches to be down rated in a down market.

Criticism surfaced in the wake of large losses in the collateralized debt obligation (CDO) market that occurred despite being assigned top ratings by the credit rating agencies. For instance, losses on $340.7 million worth of CDOs issued by Credit Suisse Group added up to about $125 million, despite being rated AAA or Aaa by Standard & Poor's, Moody's Investors Service and Fitch Group.

The rating agencies respond that their advice constitutes only a "point in time" analysis, that they make clear that they never promise or guarantee a certain rating to a particular tranche, and that they also make clear that any change in circumstance regarding the risk factors of any particular tranche will invalidate their analysis and result in a different credit rating. In order words, the risk structure is dynamic and systemic. In addition, most credit rating agencies do not rate bond issuances upon which they have offered rating structure advice, unless a firewall exists to avoid potential conflict.

Complicating matters for structured finance transactions, the rating agencies state that their ratings are opinions regarding the likelihood that a given debt security will fail to be serviced over a given period of time, and not an opinion on the volatility of that security and certainly not the wisdom of investing in that security.
In the past, most highly rated (AAA or Aaa) debt securities had characteristics of low volatility and high liquidity - in other words, the price of a highly rated bond did not fluctuate greatly day-to-day, and sellers of such securities could easily find buyers. However, structured transactions that involve the bundling of hundreds or thousands, or even millions, of similar (and similarly rated) securities tend to concentrate similar risk in such a way that even a slight change on a chance of default can have an enormous effect on the price of the bundled security.

This means that even though a rating agency could be correct in its opinion that the chance of default of a structured product is very low under normal market conditions, even a slight change in the market's perception of, and aversion to the risk of that product can have a disproportionate effect on the product's market price, with the result that an ostensibly AAA or Aaa-rated security can collapse in price even without there being any actual default or changes in significant chance of default. This possibility raises significant regulatory issues because the use of ratings in securities and banking regulation assumes incorrectly that high ratings correspond with low volatility and high liquidity.

Fed supports money market mutual Funds
The US Federal Reserve on October 21 announced it would create a Money Market Investor Funding Facility (MMIFF) to support a private-sector initiative designed to provide liquidity to US money market investors. MMIFF will finance up to $540 billion in purchases of short-term debt from money market mutual funds to shore up a key pillar of the US financial system.

MMIFF will provide senior secured funding to a series of special purpose vehicles to facilitate an industry-supported private-sector initiative to finance the purchase of eligible assets from eligible investors. Eligible assets will include US dollar-denominated certificates of deposit and commercial paper issued by highly rated financial institutions and having remaining maturities of 90 days or less. Eligible investors will include US money market mutual funds and over time may include other US money market investors.

The implosion of Enron eight years ago was caused by "special purpose vehicles" which were early incarnations of present-day "conduits" backed by phantom collaterals. Enron's collapse was a high-profile event that briefly brought credit risk to the forefront of concern in the financial services industry. Collateral management rose briefly from the Enron ashes as a critical mechanism to mitigate credit risk and to protect against counter-party default. Yet in the recent liquidity boom, collateral management has again been thrown out the window and rendered dysfunctional by faulty ratings based on values "marked to theoretical models" that fall apart in disorderly markets. (See The rise of the non-bank financial system, Asia Times Online, September 6, 2007).

Money market funds are facing severe redemption pressures since the financial crisis deepened last month, forcing them to raise cash by scaling back their short-term lending to banks and selling their holdings of commercial paper. This retreat has contributed both to a freeze in the interbank market and a steep decline in activity in the commercial paper market, which has made it difficult for banks and companies to raise short-term funds.

The Fed move on October 21 highlights the extent to which policymakers are concerned about US money markets, even as inter-bank lending rates dropping slightly. Policymakers are also worried that moves to prop up US banks may have undermined money funds, which compete with bank savings accounts.

"The short-term debt markets have been under considerable stress in recent weeks as money market mutual funds and other investors have had difficulty selling assets to satisfy redemption requests and meet portfolio rebalancing needs," the Fed said.

Under the Fed scheme, the US central bank will lend money to five special purpose vehicles, to be managed by JPMorgan Chase, tasked with purchasing assets from money market funds. These assets are low-risk paper, including certificates of deposit, bank notes and commercial paper with three-month maturities or less.

The creation of an extra liquidity facility on October 21 was seen as complementing a move the Fed announced two weeks earlier to create a vehicle aimed at purchasing potentially unlimited amounts of three-month debt from banks and non-financial companies. The size of the Fed's balance sheet has nearly doubled.

Each of the five vehicles may purchase paper from 10 financial institutions. The overall size of the program is capped at $600 billion - with the Fed funding 90% and the funds, which sell assets, taking the first 10% of losses. The Fed announced its plan even as money markets showed signs of easing. Overnight dollar Libor (London Interbank Offered Rate) declined 23 basis points to 1.28%, below the Fed's target rate of 1.5%. Three-month dollar Libor eased to 3.83%, its lowest fix in nearly a month. Three-month Libor was fixing about 2.80% prior to upheavals and has yet to reflect the Fed's rate cut on October 8 of 50 basis points.

Strategy ignores asset overvaluation
Although each step by the government in reaction to the credit crisis was a logical, targeted response to new systemic financial upheavals, the result was to prop up select distressed firms deemed too big to fail and support failing markets as they occurred, hoping in vain that it would be the last move needed to resolve the systemic crisis to put the economy on a path of recovery. The Fed and the Treasury appeared to be rushing from emergency to emergency without a strategic plan to deal with the fundamental problem of a debt bubble collapse.

The disjointed interventions appeared designed to keep a collapsing debt bubble from collapsing, a hopeless task that even former Fed chairman Alan Greenspan, the bubble wizard par excellence, was not naive enough to try. Greenspan merely replaced a burst bubble with a new bigger bubble, never trying to stop a collapsing bubble in mid course. Greenspan's approach was that of a post-disaster cleanup crew, not rushing into a collapsing structure as the current bailout team appears to be trying to do. Throwing good money after bad merely makes good money into bad. Spending good money after the collapse would infinitely buy more in the cleanup task.

Added to the mix was the political problem of government credit allocation. In April, Chris Dodd, chairman of the Senate Banking Committee, demanded that the Fed permit top-rated securities backed by student loans that now had uncertain market value and anemic liquidity to qualify for its $200 billion swap program. "If the Fed and the Treasury can commit $30 billion of taxpayer money to enable the takeover of Bear Stearns by JPMorgan Chase, then surely they can step in to enable working families to achieve the dream of a higher education for their children," the senator declared.

Two weeks later, the Fed said it would accept any AAA-rated securities as collateral, including those backed by student loans. The Fed has forced to move from its traditional role of neutral macro policy of stabilization to direct specific credit allocation, albeit in this particular case for a worthy cause, for where is the logic of saving the banking system to save tax payers' homes and not save the education of the nation's youths. As a matter of national policy, all education should be financed by public funds since education is the most rewarding social investment a society can make. Another is universal health care.

The economies of New York and New Jersey are also now severely impacted by the financial crisis on Wall Street. These states normally derive up to 30% of their revenue from the financial sector. The governors of the two states are calling for further stimulative aid from Washington. California is also saying it needs low-interest loans from the federal government to help with its budgetary shortfalls. The problem will spread to all states as the problems in financial sector spread to the economy.

The Fed floods Europe with dollars
On Monday, October 13, the Federal Reserve opened up the dollar spigot to European central banks to support the European dollar credit markets by agreeing to provide unlimited dollars, up from its previous $620 billion in currency swaps, to the three major central banks: the European Central Bank, the Bank of England and the Swiss National Bank, to allow them to relieve liquidity pressure on commercial banks across their respective regions.

Dollars had become elusive in recent weeks in the European banking system as short-term money markets around the world deteriorated. Domestic and foreign banks in Europe had been frozen out of loans beyond a day as institutions hoarded dollar resources amid concerns about counterparty default. Around the world, central banks were forced to move from the traditional role of monetary rule-makers to that of money and currency market players.

Meanwhile, to offer vastly more operational space to expand its liquidity facilities during the credit crisis, the Fed received authority from the Treasury in early October to start paying interest on reserves that commercial banks are required to deposit at the Fed.

Prompted by the US, governments across Europe took action to bail out their respective banks and protect their separate banking systems after the meeting of the Group of Seven leading industrialized countries in Washington during the weekend of October 11.

France extended state guarantees to $435 billion of senior bank debt to help jumpstart that country's credit markets. It created a state company with up to $54 billion in capital to recapitalize distressed French banks. The UK guaranteed $434 billion of bank debts and injected $64 billion into Royal Bank of Scotland Group, HBOS, a banking/insurance group in the UK, and Lloyds TSB Group, as part of its already announced ฃ400 billion (US$651 billion) bail-out plan.

Germany guaranteed up to $544 billion inter-bank debts, setting aside $27 billion for potential losses and injected up to $109 billion equity in German banks. Italy announced it will recapitalize Italian banks and guarantee bonds on a case-by-case basis. Spain will guarantee $136 billion in Spanish bank debts, set up a preventive facility to inject new capital into distressed Spanish banks until 2009 and establish up to $68 billion to buy Spanish bank assets.

The Netherlands is injecting 10 billion euros (US$13.4 billion) into ING Group, the banking and insurance giant which just weeks earlier was the white knight to bail out troubled Fortis. Austria, Portugal and Norway joined the effort, committing a total of 501 billion euros in guarantees and capital for banks in their respective jurisdiction.

Iceland banking crisis and geopolitics
Iceland's banking system meanwhile collapsed in September causing losses to non-Icelandic European depositors who were attracted by higher interest rates paid by Icelandic banks. The tiny country over the past decade had embraced neoliberal free-market capitalism and built a financial sector that brought unprecedented but unsustainable prosperity to its 300,000 people and won temporary favor with foreign savers and investors.

Iceland's financial crisis cannot be solved by bank nationalization, currency de-pegging and stock market suspension because its central bank, unlike the US Federal Reserve, which can produce dollars at will, must either earn or borrow euros and dollars. Failing to access International Monetary Fund loans because it is not yet part of the EU, Iceland turned to Russia for help. Commenting on the possibility of a 4 billion euro loan from Russia, Icelandic journalist Omar Valdimarsson ridiculed the value of 50 years of "special relationship" with the US by quoting Deng Xiaoping's famous saying: "It does not matter if the cat is black or white as long as it catches mice." The fat cat is Russia, although at the time of writing agreement with Moscow had yet to be reached.

Various reports, including in Business Week, on October 21 indicated Iceland "was likely" to receive a $6 billion rescue package "tailored by the International Monetary Fund (IMF), Nordic countries and Japan".

Crisis in East European banks
Banks in emerging economies in post-communist Eastern Europe, such as Hungary and Ukraine, were also hard hit. Ukraine, whose economy has been badly hurt from falling steel prices, may be unable to quickly accept a loan offered by the International Monetary Fund because the fund is seeking assurances on next year's budget from the cabinet, and the cabinet was recently dissolved by the president in a political shakeup.

While, with Iceland and Hungary, one of three European nations seeking aid from the IMF, Ukraine has complex political problems, being a country of 46 million culturally and politically divided between historical affinity towards Russia and new orientation towards the West.

Members of the Ukrainian parliament have filed an appeal to the country's top court, contesting an order by President Viktor Yushchenko to disband parliament and the cabinet and hold new elections on December 7, subsequently postponed to December 14. Until that case is decided, it is unclear whether the current cabinet holds power. Prime Minister Yulia Tymoshenko says it does, while the president's office is contesting that assessment. The IMF delegation has been meeting with both sides. The fund is offering a loan of as much as $15 billion to shore up Ukraine's finances as foreign investors flee for safe havens. As a condition for the loan, the IMF is asking that Ukraine run a balanced budget



in 2009, a condition that the Federal Reserve did not impose on the US government.

The Fitch rating agency downgraded Ukraine's sovereign debt rating on October 17 and issued a negative outlook for the country. A Ukrainian shipping company, Industrial Carriers, has collapsed. The government has frozen rail tariffs for steel companies, and as foreign investment dries up, speculators are betting on a decline in the national currency. In response, Ukraine plans to nationalize some commercial banks, which are suffering liquidity problems.

In Hungary, the authorities agreed to a loan of 5 billion euros ($6.7 billion) from the European Central Bank to allow banks to continue to loan to one another and businesses. In Iceland, officials said they would decide within a week whether to take out an IMF loan.

Crisis in Asian banks
In Asia, South Korea announced a $100 billion government guarantee on foreign currency loans and a $30 billion infusion into the Korean banking system. Malaysia and Singapore announced government guarantees of all deposits in their nations' banks through the end of 2010, mirroring a move made earlier by Hong Kong, Australia and others in the region.

Hong Kong's bank deposit guarantee channeled capital flows into its banks and away from the rest of the region, as depositors shifted funds to seek out safety. Similar moves by Australia, Indonesia and others have increased pressure for hold-outs to make guarantees of their own. A joint statement by Singaporean fiscal and monetary authorities acknowledged the need to respond to other countries' deposit guarantees: "The announcement by a few jurisdictions in the region of government guarantees for bank deposits has set off a dynamic that puts pressure on other jurisdictions to respond or else risk disadvantaging and potentially weakening their own financial institutions and financial sectors," adding it would guarantee a total of 150 billion Singapore dollars (US$102 billion).

Financial nationalism
While this wave of government intervention was billed as a positive sign of international coordination, the fact remains that such government measures were really driven by financial nationalism to prevent funds from leaving one national banking system for safer havens in another national banking system that offers better government guarantee.

Even the US Treasury dropped its earlier opposition to sovereign guarantees for funding, as such guarantees spreading across Europe to put US banks at a competitive disadvantage with their European rivals. Under the US plan, deposit guarantees will be provided by the Federal Deposit Insurance Corporation at higher limits. The US shift on sovereign guarantees makes it very likely that Canada, and possibly Japan, will follow suit out of self interest.

Once sovereign bank loan guarantees spread across Europe, the US had no choice but to follow suit, despite concerns among senior US policymakers that this could put added stress on the larger non-bank financial sector that competes with bank lenders. This development will prolong the seizure of the much larger non-bank credit market and possibly hasten its final collapse.

Non-bank financial system out in the cold
By yielding to the need to save the banking system as a first priority, the US has in fact abandoned its more advanced but complex and diverse non-bank financial system and reverted back to one based on a relatively small number of large universal banks on the traditional European model. By nationalizing the banking system with sovereign capital at a stage earlier than in past financial crises around the world, US policymakers hope to halt a credit market meltdown in mid-stream and engineer a quick turnaround of the the faltering economy before it reaches full momentum.

Unfortunately, it is a strategy similar to amputating the limbs of a patient to relieved circulatory pressure on the heart. The fact of the matter is that the US financial system has transformed into one in which banks get no respect from the non-bank sector. Banks have been relegated to a supportive role rather than their traditional prime role of intermediating of credit for the economy. The terms of the US sovereign recapitalization plan are much more favorable to the banks and bank shareholders than the UK proposal. The US terms favor weak banks by establishing the same terms for all, regardless of varying capital strength. It is directing needed medicine to the wrong organ.

To offer favorable terms to get the core group of nine top US banks to sign up immediately for half the $250 billion nationalization program was an essential part of US strategy. It removed uncertainty over uneven share prices of these banks that presented "co-ordination" problems, destabilizing swings in relative capital strength, and the "stigma" problem as a sign of weakness for participating banks. Most importantly, it eased the risk that the $125 billion would be too thinly spread across the vast US banking sector to make a real difference to the core group of financial institutions.

Questions remain in the market as to whether $250 billion will be enough for the gargantuan task. Measured against the size of capital injections in Europe and the larger scale of the US banking system, the fund appears visibly undersize. Also, diverting up to $250 billion to recapitalize banks, away from the $700 billion fund created to finance the purchase of illiquid toxic assets raises doubts of curative efficiency. The US Treasury has better ways to transfer assets from bank balance sheets to the government balance sheet with less cost.

The focus of the US rescue effort is now on the recapitalization and loan guarantee in the banking system. In effect, the US has decided to build a defensive wall around a core group of nine banks. These banks will not be allowed to fail, and the US government will rely on them to provide the bedrock of ongoing lending in the economy while trying to avoid any of them gaining dominant market share, as JP Morgan did in the 1907 crash. (See THE ROAD TO HYPERINFLATION, Part 2: A failure of central banking, Asia Times Online, June 30, 2008).

But in taking extreme measures to ensure the core banks will survive, the government appears to be abandoning the vast non-bank financial sector to its fate. The Fed will try to offset the enormous competitive advantage gained by banks by buying commercial paper from non-bank financial firms such as GE Capital and GMAC. However, this will not come close to balancing the full benefits of the guarantees for the banks provided by the Federal Deposit Insurance Corporation.

Still, these radical measures to guarantee inter-bank loans and to provide backstops for the commercial paper market do not address the structured finance problem, which few market participants fully understand, and no one alive knows its full extent in terms of who owns what and owes to whom and how much. Bank of International Settlement (BIS) data show that in June 2007, two months before the current credit crisis broke out, total over-the-counter (OTC) derivative contracts notional value outstanding was $516 trillion, with gross market value of $11 trillion; $347 trillion in interest rate derivative contracts with gross market value of $6 trillion; $43 trillion in credit default swaps (CDS) with $741 billion in gross market value. Notional value is not the amount at risk - only market value is at risk. Still, on a notional value of $516 trillion, a fluctuation of 1% in interest can cause market movements of $5.16 trillion, making the government's $700 billion rescue package look like a garden hose in a forest fire. It is true that many of the contracts are mutually canceling in a normal market. But in a market dominated by one sided sell off, the mutual canceling can turn into a receding tide that lowers all boats.

By December 2007, the total notional amount of outstanding derivatives in all categories rose to $596 trillion. Two-thirds of contracts by volume or $393 trillion were interest rate derivatives. Credit default swaps had a notional volume of $58 trillion, up from $43 trillion a year earlier. Currency derivatives reached a volume of $56 trillion. Unallocated derivatives had a notional amount of $71 trillion.

The non-bank financial sector in the US is already under even more severe stress than its banking system. US sovereign aid for banks could intensify the non-bank collapse, unless more steps are taken to aid non-bank institutions in coming days. Contraction of the non-bank sector and failure of non-bank institutions could lead to more distressed sales of assets and firms, frenzied scrambles by non-banks for bank licenses and an accelerated shift of both assets and liabilities into the banking sector. The recent movement of investment banks, such as Morgan Stanley and Goldman Sachs, to transform themselves as regulated banks, is a direct response to new government policy.

The problem is that if the core banks have not only to fill the "capital hole" left by their trading losses and to fund de-leverage moves but also must absorb a wave of illiquid toxic assets liabilities coming into the banking system from the wider non-bank financial sector, banks will need a lot more than their half-share of the $250 billion in government capital, perhaps in multiples of trillions of dollars. No one knows exactly how much.


For example, bankruptcy hearings revealed that Lehman needs to unravel more than 1.5 million contracts, mostly derivative swaps, before it can even to begin dealing with creditor requests for information on the bank's financial situation. Lehman's restructuring advisor is hiring 300 financial specialists for the challenging task, which will take between 45 and 60 days for Lehman merely to get its records in order. It is not clear if the final value of these contracts can be determined before they work themselves out at maturity.

Bank nationalization and private capital
The US plan to nationalize the banking system to save market capitalism will only work if it succeeds in attracting much larger amounts of private capital to the banking system. If not, geometric



multiples of the $250 billion of new government capital may be needed. And market response in days following the government announcement of drastic action suggests that private capital is not likely to be attracted because the value of the toxic assets have been kept at unrealistic levels by government intervention.

Two of the nine core banks being rescued, Citigroup and Merrill Lynch, reported fresh multibillion dollar losses on October 16 that essentially wiped out all profit of recent years. Since mid-2007, when the credit crisis first broke out, the nine core banks have written down the value of the troubled assets by $323 billion, more than double the government's bank rescue package of $125 billion. It is highly unlikely that the core banks can resist the temptation to hoard the new government capital to protect their individual solvency rather taking on new risk of unlocking the flow of credit through the economy, particularly when the credit crunch contagion is spreading to auto finance, credit cards, commercial real estate and corporate finance.

The trading pattern in the stock markets in recent weeks is ominous, with massive selling pressure concentrated in the final hour of trading. This means that traders are unwilling to hold securities overnight for fear of new bad news while they are sleeping. Technically, such trading patterns are a clear signs of a protracted bear market.

Ten days after Congress passed and President Bush signed into law the Emergency Economic Stabilization Act of 2008, the US Treasury announced on October 13 a comprehensive update on progress in implementing the $700 billion Troubled Asset Relief Program (TARP) as authorized by the new law. The law gives the Treasury Secretary broad and flexible authority to purchase and insure mortgage assets, and to purchase any other financial instrument that the secretary, in consultation with the Federal Reserve chairman, deems necessary to stabilize financial markets - including equity securities.

The Treasury worked hard with Congress to build in this flexibility because, it said, "the one constant throughout the credit crisis has been its unpredictability". In other words, the Treasury is not certain what the real problem is, or where it lies, or what the total dimension is and how to go about defusing it. It reserves the legislative fexibility of adopting new approaches as the new situation develops overnight, with announcements of new measures before the market opens the next morning.

The new law empowers the Treasury to design and deploy numerous tools to attack the root cause of the current turmoil: which the Treasury characterizes as "the capital hole created by illiquid troubled assets". The term "capital hole" signifies that the credit crisis is more than a passing problem of liquidity. A capital hole is a physical description of systemic insolvency.

The Treasury statement asserts that "addressing this problem should enable our banks to begin lending again." Yet bank lending is only part of the problem. The banking system as currently constituted covers only a fraction of the total credit market, with the non-bank financial sector covering the lion share. (See Credit bust bypasses banks, Asia Times Online, September 6, 2007.)

The US Treasury describes its strategy as "to achieve one simple goal - to restore capital flows to the consumers and businesses that form the core of the US economy by employing multiple tools to help financial institutions remove illiquid assets from their balance sheets, and attract both private and public capital."

Left unsaid is that fact that public capital of course leads to nationalization, and nationalization crowds out private capital unless public capital sells at a loss to private capital. In other words, the government's plan appears to be relying on an ultimate massive transfer of wealth from US taxpayers to holders of surplus private capital, some of whom may be foreigners.

Treasury said that in building the foundation for a strong, decisive and effective TARP, it is working very closely with both domestic and international regulators to "understand" how best to design tools that will be most effective in dealing with the challenges in the US and presumably the global financial system. For example, regulators are helping the Treasury to identify the quickest and most efficient method to purchase equity in financial institutions so they can resume lending. Throughout this process, the Treasury said it has kept in mind one clear priority: "to protect taxpayers by making the best use of their money."

Left unsaid is the certainty that taxpayers will have to take a haircut, and that by bailing out wayward banks, taxpayers may get by with a crew cut instead of a shaved bald head. Unsavory bankers appear to raking the taxpayers over hot coals by first wiping out their savings and then laying an inescapable claim on taxpayer future tax liabilities. On top of a trickling down of prosperity during the boom phase of the bubble in which wealth stayed mostly at the top, there will be a pouring down of the hot oil of loss on taxpayers with the bursting of the bubble.

Investigations of criminal fraud
Prosecutors in three New York area jurisdictions are trying to determine whether top managers at the now-bankrupt Lehman Brothers misled the public about its financial condition and some of the securities it sold during the past nine months. Dick Fuld, Lehman Brothers chief executive, is among 12 executives who have received subpoenas related to federal investigations into the events leading up to the company's bankruptcy filing last month. Other former Lehman executives known to have received subpoenas include Joe Gregory, chief operating officer, Erin Callan, chief financial officer, and Ian Lowitt, chief accounting officer, who replaced Callan as CFO. Grand jury investigations have been launched by federal prosecutors in Manhattan, Brooklyn and New Jersey.

The federal probes had been widely anticipated since Lehman entered bankruptcy protection in September in what became the biggest such filing in US history. Lawsuits filed against the firm allege that its top executives misled investors about Lehman's financial health in 2008. The US attorney in Manhattan, Andrew Cuomo, is reportedly looking at whether Lehman executives marked the firm's commercial real estate properties accurately on its balance sheet, and the US attorney in Brooklyn is investigating Lehman's sale of auction-rate securities, as well as what the company presented at an analysts conference call held by management on September 10, five days before the bankruptcy filing. The US attorney in New Jersey is believed to be investigating disclosures surrounding the sale of securities by Lehman in June.

In addition to the Lehman probes, federal investigators have opened investigations into at least 25 other companies, including AIG, the insurer, and mortgage financiers Fannie Mae and Freddie Mac. The US attorney in Seattle has announced an investigation into the collapse of Washington Mutual, the biggest bank failure in US history.

In September, prosecutors indicted two former Credit Suisse brokers for allegedly lying to clients about what kind of auction-rate securities they were being sold. They also indicted two former Bear Stearns hedge fund managers in June on charges that they intentionally misled investors about the financial conditions of the funds that collapsed in 2007. The Federal Bureau of Investigation has been working closely with the Securities and Exchange Commission and the Department of Justice on many of these cases.

In China's Special Administrative Region of Hong Kong, banks have agreed to buy back complex investment products guaranteed by Lehman Brothers, known as mini-bonds, after public complaints by investors, many elderly, prompted government investigation into bank sales practices for the financial products, which entered into default due to the Lehman bankruptcy in New York. Most investors said that they were led to believe they were buying high-yield bonds, while in reality the mini-bonds were a form of credit default swap with Lehman acting as counterparty.

The Hong Kong Monetary Authority, the bank regulator, referred 24 complaints of alleged misconduct by two unnamed local banks in the sale of Lehman-linked financial products to the watchdog Securities and Futures Commission. The HKMA has received 12,901 complaints concerning mini-bonds days after the Lehman bankruptcy filling. More than 33,000 Hong Kong investors purchased a total HK$11.2 billion (US$1.44 billion) of the mini-bonds from about 20 banks.

Singapore, meanwhile, said it would examine possible inadequate internal controls by financial institutions and suggested some banks would have to take responsibility for compensating investors for allegedly providing misleading information. The Monetary Authority of Singapore estimates that nearly 10,000 people in Singapore invested S$501 million in the products.

Next: Treasury's Assets Relief Program in trouble

Henry C K Liu is chairman of a New York-based private investment group. His website is at http://www.henryckliu.com.