(Please scroll down to read the selected article.)

Dec. 2, 2010
Economics and ethics at the forefront

Tuesday, November 9, 2010
The Fed and the Debased “Imperial Dollar”: Future Inflation,
Timid Economic Growth and
Higher Interest Rates Ahead

September 14, 2010

Save the Banks and Kill the Economy

Thursday, August 12, 2010
The Moral Legacy of Hiroshima and Nagasaki

Friday, July 9, 2010

A Long Economic Winter Ahead

Monday, June 21, 2010

The Bush-Cheney Gulf Coast Oil Spill of 2010

Monday, June 7, 2010

For a More Ethical Civilization

Wednesday, May 5, 2010
On Iran, the U.S. is Painting Itself into a Political and Moral Corner

Monday, March 22, 2010
Economic Bubbles and Financial Crises, Past and Present

Monday, March 8, 2010

The Moral Dimension of Things

Friday, January 22, 2010

The United States of Corporate America: From Democracy to Plutocracy

Thursday, January 7, 2010
Economy 2010: From the Scandalous Known Past to the Uncertain Future


Dec. 2, 2010
Coastal Breeze News, p. B2

“Economics and Ethics at the Forefront”, p. B2

Few are more poised to speak about economics and ethics and how they relate to each other than economist and philosopher Rodrigue Tremblay, an emeritus professor of economics and finance at the University of Montreal and a part time resident of Marco Island with his wife Carole. Dr. Tremblay is the author of thirty nonfiction books, including a basic textbook in Economics, and the 2010’s The Code for Global Ethics (Prometheus Books), and he writes an international blog about geopolitics on the Internet ( that is posted in ten languages.
Now that he is semi-retired, Dr. Tremblay feels that he has more time to devote to big issues. He is particularly worried that our current economic and financial problems are as much moral as technical in nature. “Why do political leaders seem to be lying most of the time? Why is uncontrolled greed so prevalent in corporate boardrooms? … Why does materialism seem to trump everything else? Why do we have the uneasy feeling that our society is going in the wrong direction? The very fact that we have to raise such questions may be a sign of the times,” Dr. Tremblay wrote in a recent blog entitled “The Moral Dimension of Things”. “Historically”, he says, “it can be shown that when the moral environment in a society is deteriorating, problems tend to pile up.”

Tremblay thinks that we are presently living in one of those times, characterized by deep and entrenched political corruption, by routine abuse of power and disregard for the rule of law in high places, and by unchecked greed, fraud and deception in the economic sphere. The results are all there to see: Severe and prolonged economic and financial crises, rising social inequalities and social injustice, increasing intolerance toward individual choices, the disregard for environmental decay, the rise of religious absolutism, a return to whimsical wars of aggression (or of pre-emptive wars), to blind terrorism, and to the repugnant use of torture, and even to genocide and to blatant war crimes. These are all indicators that our civilization has lost its moral compass.
And devising such a moral compass is the central object of his most recent book, The Code for Global Ethics. In it, Dr. Tremblay postulates that many of our problems and threats are not only severe but they have also become global in nature. He also thinks that our scientific and technological progress is advancing faster than our moral progress, with the consequence that problems seem to arise faster than our moral ability to face them and solve them. Dr. Tremblay doesn’t hesitate to place part of the blame on old religion-based rules of morality, essentially because they have not incorporated new scientific knowledge discovered over the last four centuries.
Indeed, Dr. Tremblay stresses three facts that have changed forever our worldview and humans’ vision of themselves in the Universe. They are:
• Galileo’s proof, in 1632, that the Earth and humans were not the center of the Universe.
• Darwin’s discovery, in 1859, (“On the Origin of Species”) that humans are the outcome of a very long natural biological evolution.
• And, the Watson-Crick-Wilkins-Franklin’s discovery, in 1953, of the structure of the double helix DNA molecule in human cells, and the devastating knowledge that humans share more than 98 percent of the same genes with chimpanzees.
These discoveries have tremendous consequences for our moral stance and for the pursuit of a global civilization.
Asked what a more universal civilization would look like, Dr. Tremblay answers the following:
“First and foremost, the scope of human empathy would be more universal and more comprehensive, and would not merely apply to some chosen people, to members of a particular religion or to persons belonging to a particular civilization. In practice, this would require that we establish a higher threshold of human morality, beyond the traditional norm of the Golden Rule (“Treat others as you would have others treat you.”) It would require that we adopt what I call a Super Golden Rule of humanist morality that incorporates the humanist rule of empathy: “Not only do to others as you would have them do to you, but also, do to others what you would wish to be done to you, if you were in their place.” — Of course, the corollary also follows: “Don’t do to others what you would not like to be done to you, if you were in their place.”
Dr. Tremblay does not believe that we currently live in such a global civilization. “My best hope, he says, “is that we will avoid falling back into an age of obscurantism and of decadence, and that we will be able to build a truly humanist civilization for the future.”
To meet the basic criterion for such a future global civilization, Dr. Tremblay establishes ten fundamental principles in The Code for Global Ethics.

Tuesday, November 9, 2010
The Fed and the Debased “Imperial Dollar”: Future Inflation,
Timid Economic Growth and
Higher Interest Rates Ahead

"Under a paper money system, a determined government can always generate higher spending and hence positive inflation."
Ben Bernanke, future Fed Chairman (in 2002)

“My thesis here is that cooperation between the monetary and fiscal authorities in Japan could help solve the problems that each policymaker faces on its own. Consider for example a tax cut for households and businesses that is explicitly coupled with incremental BOJ purchases of government debt – so that the tax cut is in effect financed by money creation. Moreover, assume that the Bank of Japan has made a commitment, by announcing a price-level target, to reflate the economy, so that much or all of the increase in the money stock is viewed as permanent.”
Ben Bernanke, future Fed Chairman (in 2002)

“The Fed, in effect, is telling the markets not to worry about our fiscal deficits, it will be the buyer of first and perhaps last resort. There is no need - as with Charles Ponzi - to find an increasing amount of future gullibles, they will just write the check themselves. I ask you: Has there ever been a Ponzi scheme so brazen? There has not.”

Bill Gross, PIMCO's managing director

On Wednesday, November 3rd, the Bernanke Fed announced that it stands ready to resume money printing to stimulate the economy through quantitative money easing, an euphemism for printing more dollars. Indeed, it intends to buy $600-billion of longer-term Treasury securities until the end of the second quarter of 2011, plus some $300 billion of reinvestments, on top of the some $1.75 trillion of various types of securities, many of which were mortgage backed securities, that it has added in 2009 to its balance sheet, currently standing at a total of $2.3 trillion. There could even be additional increases in newly printed money as the Fed intends to "regularly review and adjust the program as needed to best foster maximum employment and price stability."

After the election of fiscal conservatives on November 2nd, it seems that printing money is the only instrument left for the Obama administration to stimulate the economy. I fail to see, however, what is “conservative” about that. Actively debasing a currency to stimulate an economy used to be a Third-World economic recipe, —A recipe for disaster. Now, the United States government feels that is the only way to get out of the economic doldrums.

But U.S. economic problems are essentially structural in nature, and are due to a bad housing mortgage policy, a bad industrial policy, a bad financial policy, a bad fiscal policy, a bad foreign investment policy, too much entitlement debt, severe demographic problems related to the aging baby-boomers, and to very costly hegemonic wars abroad. Relying exclusively on monetary quick fixes to correct them misses the mark and may have serious unintended negative consequences down the road.

In fact, it is likely that in the long run, this extreme monetary policy risks exacerbating rather than correcting the problems. Economic structural problems cannot be corrected with monetary means. They rather require real economic solutions. That means correcting the housing mortgage mess and devising an industrial strategy, a fiscal strategy, and an investment strategy that can put the economy back on its tracks of economic growth.

But, for better or worse, the Federal Reserve Board (Fed) seems to be the only branch of the U.S. government left that can still function properly, i.e. that is not caught in a permanent political gridlock. As a consequence, for the time being at least, bankers are in charge of the U.S. economy. Since they are the ones who created many of the current problems, this is not very reassuring.

Let's remind ourselves that the Fed is a semi-public, semi-private organization that has a long history of creating financial asset price bubbles in the U.S and around the world, essentially because the U.S. dollar is an international key-currency widely used around the world and is an important part of other central banks' official reserves.

Thus, the real danger is that the Fed will again overdo it and create unmanageable financial and monetary bubbles in the coming years. —It did it in the past. It did it in the late 1960's and early '70s, and we witnessed the same scenario unfolding with the Greenspan Fed in the late 1990s, when excessive easy money helped inflate the Internet and tech stock market bubble. We saw this again in the early 2000s, when easy Fed money helped inflate the housing bubble. And now, we're seeing it again with the Bernanke Fed. As a general rule, a central bank should not push the monetary gas pedal to the floor and be obliged to slam on the monetary brakes later, thus placing the real economy on a roller-coaster of booms and busts. That is not the way to run a large economy.

But because of the circumstances, the Fed may be at it again. This time it is busy creating a massive bond bubblesome important currency misalignments and a massive gold and commodity price bubble. We should also not forget that abnormally low interest rates and lower bond yields increase the present value of pension liabilities of most defined benefit pension plans.
Therefore, I would not be surprised to see a pension crisisdeveloping in the coming years under the current Fed monetary policy. Of course, all of these bubbles are interrelated but when they come crashing down, four or five years down the road, maybe sooner, the economy may then be in worse shape than it is today. My most likely scenario is for the Fed to keep the monetary gas pedal way down until the 2012 election, and then slam on the monetary brakes thereafter to salvage what will be left of the imperial dollar.

If so, this could be a partial repeat of Japan's experience in mismanaging its economy in the early 1990's until 2000, a period known as the lost decade.

The current Fed's monetary policy is to flood financial markets with liquidity, i.e. newly created dollars, and, in the process, devalue the U.S. dollar, spur American exports and prevent deflationary expectations from taking hold and from making already high debt loads even heavier. For this, the Fed has been engaged since 2009 in round after round of money creation and interest rate reductions to the point of pushing short-term monetary rates close to zero and keeping short-term real rates negative. But if the economy is in a liquidity trap, as it is fair to assume it is, although a central bank can print all the money it wants, this is unlikely to stimulate the real economy for very long. —This is like pushing on a string. Printing money, if it is an emergency temporary measure, can help mitigate the effect of having too much debt and debt-service costs relative to income, as is the case today with many debtors in a debt liquidation mode. However, if this becomes a feature of monetary policy for too long, it can have disastrous consequences.

In general, it can be said that the Fed can manipulate short term interest rates by artificially increasing demand for short term securities, but inflation expectations are a big component of long term interest rates and are much less influenced by the Fed. Therefore, if the Fed's intention of printing large amounts of new money raises fears of future inflation, long term interest rates may rise rather than fall, and this is bound to hurt long-term productive investments.

Moreover, make no mistake, with globalized financial markets, a large chunk of the newly created dollars is flowing out of the United States and is invested in higher interest rate countries, pushing the dollar further down and these countries' currencies further up. Of course, some of the newly created money will immediately find its way in the stock market, but there is no certainty that this will induce already stretched banks to increase their banking loans to businesses.

Another consequence is this: The current outflow of U.S. dollars helps keep the dollar exchange rate low, but when the Fed is forced to aggressively raise interest rates, as it will inevitably be forced to do later on, the reverse will happen and the U.S. dollar will likely overshoot and then become overvalued. This is the case today with the Japanese yen which became unduly strong when the Japanese carry trade (too much cheap money invested abroad returns home) collapsed.

What counts for most people, however, is that the Fed’s zero-interest rate policy has not cured the structural housing mortgage crisis, since home foreclosures are still very high. The Fed now places most of its hopes on a currency devaluation,which is the old trick of the “beggar thy neighbor” policy, i.e. trying to export one country's unemployment to its trading partners by devaluating the currency. This was a form of protectionism much relied upon during the 1929-39 Great Depression. This may work for a while, at least as long as other countries can absorb American exports without launching their own money printing process in order to prevent an appreciation of their currencies.

Indeed, is it likely that countries which see their currencies being revalued by the Fed will remain passive? The Fed is implicitly making the bet that these countries will not retaliate, and that theinternational dollar-based currency system will remain intact. But for how long? Sooner or later, some central banks around the world will have no choice but to impose capital controls in order to slow down the inflow of unwanted outside money and the onslaught of imported inflationand prevent their exchanges rates from rising too high too fast. If they do, the entire process ofeconomic globalization may begin to unravel.

Meanwhile, foreign central banks, for example, could accelerate their rush to dump the U.S dollar and to accumulate gold and other more stable currencies such as the euro, the Swiss franc, the British pound, the Canadian dollar and the Australian dollar. China has already begun to do just that. The share of dollarofficial reserves would then decline from about 60 percent presently to perhaps less than 50 percent. That may signal the beginning of the end for the “imperial dollar” which has dominated the international monetary system since the Bretton Woods conference of 1944.
This is to be followed closely.


September 14, 2010

Save the Banks and Kill the Economy

"The problems we face today cannot be solved by the minds that created them."
Albert Einstein (1879-1955), Physicist and Professor, Nobel Prize 1921

"I don't see (subprime mortgage market troubles) imposing a serious problem. I think it's going to be largely contained."
U.S. Treasury Secretary Henry Paulson, April 20 2007

"Providing assistance to banks and their borrowers can be counterproductive, resulting in increased losses to banks, which often ... take unproductive risks at government expense. The typical result ... is a deeper hole in the net worth of banks, crippling tax burdens to finance bank bailouts, and even more severe credit supply contraction and economic decline."
The International Monetary Fund (IMF), (Study of financial crises from 1970 to 2007)

"The dirty little secret ... is that every Republican in this country wants Obama to fail, but none of them have the guts to say so; I am willing to say it."
Rush Limbaugh, radio activist, February 27, 2009

It has become a truism to say that the Democrats and the Obama administration now  ≥own≤ the crucial issue of the economy. Justly or unjustly, voters are bound to hold them accountable for the poor state of the U.S. economy. This is not an enviable political position to be in just before an election, at a time when disgusted voters are most angry and very anxious about the economy and their economic future. Recent polls indicate that nearly two-thirds of Americans think their nation is in a state of decline and that the economy will remain in the same recessionary state or get worse next year.

Contrary to what President Franklin D. Roosevelt did in the 1930s, President Barack Obama did not confront the banking industry head-on after fraudulent practices caused one of the worst financial crises in U.S. history. In particular, he did not reverse the blanket financial deregulation that the Clinton and Bush administrations engineered in 1999, in 2000, in 2004, in 2005 and in 2007 that allowed for creating mortgage-linked synthetic subprime securities and for betting against them. Instead, his economic operatives (Geithner, Summers, Bernanke, Orszag, Emanuel, (L.A.) Sachs, Romer, Bair, ...etc.) threw trillions of public dollars to the largest banks, allowing top bankers to keep enjoying hundreds of million of dollars in yearly bonuses, at a time when some 300,000 Americans are losing their homes through foreclosures every month. Such a persistent epidemic of home foreclosures is creating a tremendous drag on the economy, besides being a social disaster. —The system that is responsible for so many home foreclosures has not been fixed, although valiant attempts have been made to mitigate the process.

Meanwhile, also with the intention of saving the largest banks, regulators began pressing the banks to raise capital asset ratios and to shrink their risk assets. The Bernanke Fed went so far as to lend money to the largest banks at zero interest rate, while paying interest on the excess reserves the banks kept at the Fed, a practice that resulted in an outright gift to the banks.

All these policies have resulted in tightening credit availability and in provoking the largest plunge in the M3 money supplysince the Great Depression. As long as this condition endures, there won't be any substantial economic recovery in the United States.

Just as Obama did for the wars, when he kept in position and even promoted Bush operatives Gates and Petraeus, Obama kept or brought back as his economic team some of the very Wall Street-connected people who were responsible for creating the conditions that led to the financial crisis in the first place.

Now, at mid-term, President Barack Obama is saddled with the devastating image of a defender and promoter of Bush's wars in Afghanistan and Iraq and is viewed by many as having sided with Wall Street bankers against Main Street folks, just as George W. Bush did with his Goldman Sachs-connected Treasury Secretary Henry Paulson and his banking bailouts. To many Americans, indeed, the Obama administration looks more and more like a third-term Bush II administration. For many Americans, it's a nightmare.

The biggest mistake that President Barack Obama seems to have made, at the beginning of his mandate, was to not disassociate himself more clearly from the previous Bush administration. Now, it's too late, and unfortunately for him and the divided Democrats, they are poised to suffer the wrath of an enraged and disillusioned electorate.

Indeed, with U.S. real unemployment rate hovering around 17 percent, with 3 out of 4 workers telling pollsters that they doubt that their wages will increase next year, with many American households' financial situation deteriorating, with home foreclosures approaching 10 million, with huge fiscal deficits and future tax hikes likely, with the Bernanke Fed adopting third-world monetary policies in monetizing the public debt, and with an overall anemic economic growth, the Obama administration and the Democratic Congress are going into the November 2 midterm elections with many monkeys on their backs and very little public confidence.

The only thing that runs in their favor is the poor quality and vision of their Republican opponents who have followed an obstructionist strategy and have sided time and again with lobbyists, thus blocking most attempts to straighten things up. Only a credible campaign to persuade the electorate in extremis that Democrat incumbents are ≥less worse≤ than their Republican opponents, coupled with a high turnout at the polls could prevent a Democratic bloodbath in the U.S. Congress, especially in the House of Representatives, next November. —If not, President Barack Obama will officially become a lame-duck president after November 2, and Congress will be paralyzed at a very crucial time when strong leadership is required to get out of the economic mess. This is a most unappealing perspective.


Thursday, August 12, 2010
The Moral Legacy of Hiroshima and Nagasaki

"We have discovered the most terrible bomb in the history of the world. It may be the fire destruction prophesied in the Euphrates Valley Era, after Noah and his fabulous Ark.... This weapon is to be used against Japan ... [We] will use it so that military objectives and soldiers and sailors are the target and not women and children. Even if the Japs are savages, ruthless, merciless and fanatic, we as the leader of the world for the common welfare cannot drop that terrible bomb on the old capital or the new. ...  The target will be a purely military one... It seems to be the most terrible thing ever discovered, but it can be made the most useful."
Harry S. Truman (1884-1972), 33rd U.S. President, (Diary, July 25, 1945)

"The World will note that the first atomic bomb was dropped on Hiroshima a military base. That was because we wished in this first attack to avoid, insofar  as possible, the killing of civilians."
Harry S. Truman (1884-1972), 33rd U.S. President, (radio speech to the Nation, August 9, 1945)

".. In [July] 1945... Secretary of War [Henry L.] Stimson, visiting my headquarters in Germany, informed me that our government was preparing to drop an atomic bomb on Japan. I was one of those who felt that there were a number of cogent reasons to question the wisdom of such an act. ...The Secretary, upon giving me the news of the successful bomb test in New Mexico, and of the plan for using it, asked for my reaction, apparently expecting a vigorous assent...During his recitation of the relevant facts, I had been conscious of a feeling of depression and so I voiced to him my grave misgivings, first on the basis of my belief that Japan was already defeated and that dropping the bomb was completely unnecessary, and secondly because I thought that our country should avoid shocking world opinion by the use of a weapon whose employment was, I thought, no longer mandatory as a measure to save American lives.
It was my belief that Japan was, at that very moment, seeking some way to surrender with a minimum loss of 'face'. The Secretary was deeply perturbed by my attitude."
General Dwight Eisenhower, Supreme Commander of the Allied Forces in Europe and 34th U.S. President from 1952 to 1960, (Mandate For Change, p. 380)

"Mechanized civilization has just reached the ultimate stage of barbarism. In a near future, we will have to choose between mass suicide and intelligent use of scientific conquests [...] This can no longer be simply a prayer; it must become an order which goes upward from the peoples to the governments, an order to make a definitive choice between hell and reason."
Albert Camus (1913-1960), French philosopher and author, August 8, 1945

"As American Christians, we are deeply penitent for the irresponsible use already made of the atomic bomb. We are agreed that, whatever be one's judgment of the war in principle, the surprise bombings of Hiroshima and Nagasaki are morally indefensible."
The American Federal Council of Churches' Report on Atomic Warfare and the Christian Faith, 1946

"It is my opinion that the use of this barbarous weapon at Hiroshima and Nagasaki was of no material assistance in our war against Japan. " - "The lethal possibilities of atomic warfare in the future are frightening. My own feeling was that in being the first to use it, we had adopted an ethical standard common to the barbarians of the Dark Ages."
William Leahy, Chief of Staff to Presidents Franklin D. Roosevelt and Harry S. Truman (“I Was There”, p. 441)

When U.S. President Harry S. Truman decided on his own to use the atom bomb, a barbarous weapon of mass destruction, against the Japanese civilian populations of the cities of Hiroshima and of Nagasaki on August 6 and on August 9, 1945, the United States sided officially on the wrong side of history. General Dwight Eisenhower, Supreme Commander of the Allied Forces in Europe and 34th U.S. President from 1952 to 1960, said it in so many words: "...the Japanese were ready to surrender and it wasn't necessary to hit them with that awful thing."  (Newsweek, November 11, 1963). Between 90,000 and 120,000 people died in Hiroshima and between 60,000 and 80,000 died in Nagasaki, for a grand total of between 150,000 and 200,000 most cruel deaths.

It seems that military man Eisenhower was more ethical than Freemason small-town politician Harry S. Truman regarding the fateful decision.

In being the first country to use nuclear weapons against civilian populations, the United States was then in direct violation of internationally accepted principles of war with respect to the wholesale and indiscriminate destruction of populations. Thus, August 1945 is a most dangerous and ominous precedent that marked a new dismal beginning in the history of humanity, a big moral step backward.

In future generations, it most certainly will be considered that the use of the atom bomb against the Japanese civilian populations of Hiroshima and Nagasaki was a historic crime against humanitythat will stain the reputation of the United States for centuries to come. It can also be said that President Harry S. Truman, besides lying to the American people about the whole sordid affair (see official quotes above), has left behind him a terrible moral legacy of incalculable consequences to future generations of Americans.

Many self-serving reasons have been advanced for justifying Truman's decision, such as the objective of saving the lives of American soldiers by shortening the war in the Pacific and avoiding a military invasion of Japan with a quick Japanese surrender. That surrender came on August 15, 1945 and it was made official on September 2 with the signing of the Japanese Instrument of Surrender, nearly one month after the bombing of the cities of Hiroshima and Nagasaki. Nazi Germany had capitulated on May 8, 1945 and World War II was already over in Europe. There was also the diplomatic fear that the Soviet Red Army could have invaded Japan, as they had done in Berlin, thus depriving the United States of a hard fought clear-cut victory against Japan.

But by the end of July 1945, according to military experts, the Japanese military apparatus had de facto been defeated. It is also true that the militarist Japanese Supreme Council for the Direction of the War was stalling with the aim of getting better capitulation terms hoping for a negotiated settlement, especially regarding the future role of their Emperor Hirohito as formal head of state.

In Europe, the allies had caused a recalcitrant Nazi Germany to accept an unconditional surrender and there were other military means to force the Japanese government to surrender. The convenient pretext of rushing a surrender carries no weight compared to the enormity of using the nuclear weapon on two civilian targets. And even if President Truman was anxious to demonstrate the power of the atom bomb and impress his Soviet friends—and possibly also assert himself as a political figure vis-à-vis previous President Franklin D. Roosevelt, who had died a few months earlier, on April 12, 1945—this could have been done while targeting remote Japanese military targets, not on targeting entire cities. It seems that there were no moral considerations in this most inhuman decision.

Since that fateful month of August 1945, humanity has embarked upon a disastrous nuclear arms race and is rushing toward oblivion with its eyes open and its mind closed.


Friday, July 9, 2010

A Long Economic Winter Ahead

"A State divided into a small number of rich and a large number of poor will always develop a government manipulated by the rich to protect the amenities represented by their property.":
Harold Laski (1893-1950), British political theorist, 1930

“Money becomes evil not when it is used to buy goods but when it is used to buy power... economic inequalities become evil when they are translated into political inequalities.”
Samuel Huntington (1927-2008), political scientist

“… if financial markets are skittish and don't have confidence in a country's fiscal soundness, that is also going to undermine our recovery."
President Barack Obama, June 25, 2010

“Any intelligent fool can make things bigger, more complex, and more violent. It takes a touch of genius, and a lot of courage to move in the opposite direction.”
Albert Einstein (1879-1955) Physicist and Professor, Nobel Prize 1921

The bond market is telling us that there could be hard economic times ahead and that deflation, for the time being, is more of a threat than inflation. -Leading indicators are also pointing to possible economic weakness ahead. -The Euro zoneis being pulled apart by the economic asymmetry of its members, the less productive among them (Greece, Spain, Ireland, Portugal and Italy) being unable to keep pace with the very productive German economy. -The U.S. money supply M3 is contracting. -The Chinese bubble is dangerously approaching the bursting point. -And, the deflation of debt all over the place threatens to plunge the world economy into a deflationary tailspin. —In this context, there is a good chance of a double-dip recession next year, in 2011.

Readers of this blog know where I stand on this issue. One year ago, on July 10, 2009, when everybody and his uncle was declaring the recession over and the return of business as usual, I wrote a piece announcing that my analysis was pointing out to ten years of economic hardship entitled “We are in the Midst of the Great Baby-Boomers Economic Stagnation of 2007-2017”. I wrote then that many observers think that 'prosperity is around the corner' and that this recession, like others since World War II, will end as soon as the stock market, as a leading indicator, recovers and people start spending again. This is a myopic view of the current economic big picture.”

Let us keep in mind that in May of 1930, President Herbert Hoover was also proclaiming that “the danger ... is safely behind us.” This was ten years too early for such a declaration. Just as in the 1930s, the U.S. economy and many part of the world economy suffer from a debt overhang that usually takes at least ten years to correct. When overall debt is four times larger than the economy, as it is the case today and as it was close to being the case in the 1930s, a debt deflation becomes unavoidable.

Economic booms built on a mountain of debt, some of which is fraudulent and speculative debt, tend to end badly. The higher the debt mountain relative to the real economy, the more serious is the following economic meltdown. This is because an unsustainable debt level means that some of the investments and projects thus financed make no economic sense and no sufficient income can be forthcoming to service and repay the debts. The first consequence is excess capacity and falling asset prices. The second consequence is an unavoidable liquidation of debts and a debt deflation. The third consequence is economic stagnation.

The danger that accompanies a protracted period of debt-liquidation and debt deflation after a binge of over-indebtedness is well known in economics. In 1933, Yale economist Irving Fisher published his debt-deflation theory of economic depressions. The core of the theory is that over-indebtedness leads to deflation, which in turn leads to an economic contraction. Fisher summarizes the links between debt liquidation and economic contraction in nine interacting steps:

1- Debt liquidation leads to distress selling.
2- Contraction of deposit currency, as bank loans are paid off, and to a slowing down of the velocity of circulation of money.
3- A fall in the level of prices.
4- If the fall of prices is not interfered with by reflation or otherwise, this is followed by greater fall in the net worth of business, precipitating bankruptcies.
5This leads to a like fall in profits.
6- A reduction in construction, output, trade and in employment of labor results.
7- Losses, bankruptcies and unemployment lead to pessimism and loss of confidence.
8- The result is hoarding and a contraction in bank credits, which contribute in slowing down even more the velocity of circulation of money.
9- The overall deflation causes a fall in the nominal or money interest rates accompanied by a rise in the real or commodity rates of interest as prices fall.

A similar self-reinforcing spiral-down of debt-deflation and economic contraction can be feared in the coming years as the level of debt to the economy goes from about four times the economy to a more manageable two times the economy. In other words, it should not take more than $1.50 or $2 of new debt and credit to generate one dollar of new output. When it takes more debt than that to generate new production, this is an indication that the economy is becoming over-leveraged with debt.

Judging by the pronouncements made by leaders at the recent G8 and G20 meetings in June, and their collective commitment to cut governments’ deficits in half by 2013, I don't think that politicians fully understand the danger presently facing the world economy. In fact, any new shock hitting the world economy, economic or political, risks accelerating the collapse of the debt house of cards, with dire consequences for production and employment.

Austerity fiscal measures may raise government efficiency, but they are not what will cushion the real effects of the debt deflation. Both reflationary monetary policies and overall stabilization policies are needed, especially in the banking sector, in order to make sure that producers and employers are not frozen out of new bank credit.


Monday, June 21, 2010

The Bush-Cheney Gulf Coast Oil Spill of 2010

“If ever a time should come, when vain and aspiring men shall possess the highest seats in Government, our country will be in need of its experienced patriots to prevent its ruin."
Samuel Adams (1722-1803), statesman, political philosopher, and one of the Founding Fathers of the United States, 1776

“America is addicted to oil.”
President George W. Bush, State of the Union address, 2006

“Let me be clear: BP is responsible for this leak; BP will be paying the bill.”
President Barack Obama, May 2, 2010

More often than not, the consequences of public policies, good or bad, are felt many years after they have been taken. The 2010 BP oil spill in the Gulf of Mexico is a good example. This disaster is, to a large extent, a consequence of the Bush-Cheney energy policy of 2001 and later. 

After being ushered into power by a one-vote-majority Supreme Court decision, one of the first decisions made by the new Republican administration was to establish an Energy Task Force (the National Energy Policy Development Group) under the authority of oil-man Dick Cheney, former CEO of Halliburton (1995-2000). As some have asserted, chief deregulator Dick Cheney was not only a vice president but a genuine co-president in the split Bush-Cheney administration.

After some 106 days of mainly secret consultations and deliberations with the executives and interest groups representing the U.S. electricity, coal, natural gas and nuclear industries, with a pledge to keep secret the names of participating individuals, the Task Force's 163-page final report was sent to President George W. Bush on May 16, 2001.

The report focused on how to open up new domestic petroleum sources and on the need to expand and control the all-important Middle East oil production. A parallel report to the official Cheney report (Strategic Energy Policy Challenges for the 21st Century) even stated that “Iraq has become a key 'swing' producer, posing a difficult situation for the U.S. government”, ... a harbinger of things to come. This is all well documented in my book “The New American Empire”.

Soon after the secretive Cheney's Task Force report came out, things began rolling for the U.S. petroleum industry. The regulatory rulebooks for energy development on public property were rewritten with the idea of making the world environment safe for oil business companies. It was going to be “Drill, baby, drill”, including for deep-ocean drilling with minimal precautions, and damn the consequences! Regulations and clean energy budgets began to fall.

On April 9 2002, President George W. Bush announced deep cuts in public clean energy research and development.

In 2001-02, the Bush-Cheney administration's energy policy goals were incorporated into an energy bill (H.R. 4) titled the Securing America's Future Energy Act (SAFE) that included $33.5 billion in tax breaks and other incentives for oil companies and that lifted the oil drilling ban on the Coastal Plain of the Arctic National Wildlife Refuge in Alaska. In May 2002 the Democrat-controlled Senate narrowly rejected the bill.

On August 8, 2005, however, President George W. Bush signed into law the new approach and enacted a new sweeping pro-oil bill, the “Energy Policy Act of 2005”. The bill followed closely in the footsteps of Vice President Cheney’s 2001 energy report and provided $27 billion to coal, oil and gas, and nuclear industries, and $6.4 billion for renewable energy.

Then, also in 2005, the Bush-Cheney administration allowed the U.S. oil and gas industry to regulate itselfThe federal agency responsible for managing oil and gas resources and for collecting royalties from companies, the Interior Department's Minerals Management Service (MMS), decided, on August 30, 2005, that oil companies, rather than the government, were in the best position for determining their operations’ environmental impacts. In effect, MMS decided on that date to de facto merge its services with those of the oil companies, even to the point of letting the oil industry fill out MMS's inspection reports. MMS officials also had other cozy relations with the companies they were supposed to regulate.

Then again, on July 14, 2008, just months before leaving office, President George W. Bush signed an executive order to lift the moratorium on offshore drilling in the eastern Gulf of Mexico and off the Atlantic and Pacific coasts. Such a moratorium had been put in place in 1990 by President George H.W. Bush.

There is also some confusion concerning the scope of responsibility that oil companies have in the event of an environment catastrophe. Since 1986, there already was on federal books an Oil Spill Liability Trust Fund (OSLTF) that set a cap on losses that a business could suffer from an oil spill. That liability cap was set at $75 million by the George H. Bush administration, as part of the Oil Pollution Act of 1990, after the Alaska Exxon Valdez spill of March 1989. Only proven negligence can render that liability cap inoperative. Since the puny $75 m. cap has not been increased in twenty years, that may explain why some analysts still recommend to their clients to buythe BP stockBP is a worldwide oil company that makes in excess of $25 b. a year.

Covered from losses by the liability cap, oil companies persuaded the Bush-Cheney administration that expensive security measures were not required, even for drilling in deep oceanic waters. For example, Minerals Management Service (MMS), decided not to require oil companies to install a remote-control oil blowout preventer on their deep-sea oil drilling rigs, i.e. an acoustic blow off valve that immediately chokes off the flow of oil in an emergency. Even though they are expensive, (they cost $500,000 each), most offshore oil rigs in other countries—in Norway and in Brazil for example, but not in the U.S. or the U.K— have such a switch installed for cutting off the flow of oil in an emergency by closing a valve located on the ocean floor.

No such emergency switch was available on April 20, 2010, when BP's 18,000-foot-drilling-deep floating oil rig blew up, a catastrophe that killed eleven workers, injured many others, and which has spewed, so far, as much as 100 million gallons of oil into the Gulf of Mexico (some 2,400,000 barrels, or nearly ten oil tankers the size of the Exxon Valdez). The British-American BP company, seemingly, had cut corners in order to take advantage of the lax regulatory environment.

However, contrary to the damage done by Hurricane Katrina in 2005, a natural event, the 2010 Gulf oil spill is a man-made disaster (just as, by the way, the 2003 Iraq war and the 2007-08 financial crisis were also man-made disasters). It could have been prevented if the Bush-Cheney administration had not removed the regulations mandating basic safety procedures in oil drilling, especially for offshore drilling.

Of course, BP and its subcontractors (Transocean, Halliburton, etc.) are the ones who are directly responsible for the disaster. But the Bush-Cheney administration must share a large part of the blame and responsibility in preparing the regulatory background for the disaster.

President Barack Obama also doesn't escape all responsibility, because he was the one who insisted on keeping so many Bush-Cheney appointees in their high positions after he was elected. Moreover, on March 31, 2010, only weeks before the BP Gulf Oil Spill, his administration also proposed to open vast expanses of American coastlines to oil and natural gas drilling. Americans have reasons to be confused and appalled.


Monday, June 7, 2010

For a More Ethical Civilization

"When plunder becomes a way of life for a group of men living together in society, they create for themselves, in the course of time, a legal system that authorizes it and a moral code that glorifies it."
Frederic Bastiat (1801-1850), French economist

"The world today is as furiously religious as it ever was. ... Experiments with secularized religions have generally failed; religious movements with beliefs and practices dripping with reactionary supernaturalism have widely succeeded."

Peter Berger, Desecularization of the World, 1999

 “I think that on balance the moral influence of religion has been awful. With or without religion, good people can behave well and bad people can do evil; but for good people to do evil—that takes religion.”
Steven Weinberg, 1979 Nobel Laureate in Physics

There has never been more talk about ethics than today, not only in private lives, but also in government circles, in business boardrooms and in the media. That is because most people realize we are living a very corrupt period. In 2009, the United States ranked 19th in a worldwide corruption index, way below New Zealand (1st) or Denmark (2nd).

Indeed, more than three quarters of Americans believe that we are living at a time of declining moral values. A recent Gallup poll found that 76 percent of Americans think moral values in their country are getting worse, while only 14 percent believe they’re getting better. This would seem to be paradoxical, since other indicators show that the United States is getting more religious and pious. More religion and less morality?

For instance, it has been observed that teen birth rates are the highest in the most religious states. That may be because poor people tend to be more religious compared to the rich and tend to be less educated and less well informed. Consider also that it has been observed that religious people are more racist than average.

Morality is a complex issue, but that is no reason to sweep it under the rug of indifference.

In a new book, I attempt to tackle the issue of ethics and its sources. I have arrived at the conclusion that humanity needs a new worldview—a new moral code— a new objective standard of right and wrong, because our prevailing sources of morality are at best inadequate, and at worse, perverse.

This is because many of our problems today are not only technical in nature, but they also have a moral underpinning, and are thus much more difficult to solve. It may also be because our scientific and technological progress seems to be advancing much faster than our moral progress, with the consequence that problems arise faster than our moral ability to face them and to solve them can cope. Indeed, our problems are more and more global in nature, while our moral worldview is still essentially parochial.

We thought that wars of aggression (or pre-emptive wars) had been abolished with the adoption of the United Nations Charter on June 26, 1945 and the issuance of the Nuremberg Charter on August 8, 1945. But wars of aggression persist. —We also thought that financial crises and the severe economic recessions and sometimes depressions they provoked were a thing of the past, thanks to a protecting net of financial regulations designed to control greed and prevent a repeat of the past. Well, twenty years of wholesale deregulation has brought us back to an era of anything goes and financial collapse. We also thought that the problem of poverty in the world could be alleviated, but abject poverty persists in many parts of the world.

There seems to be a pattern here, and it is that humanity seems unable to break out of a cycle of wars, economic crises and endemic poverty.

And, these throwbacks to an unpalatable past seem to coincide with other developments, such as the spread of nuclear weaponry, the persistence of ignorance, growing social and economic inequalities, disregard for basic democratic principles, the rise in global pollution, and an increasing religion-based willingness to kill and terrorize.

With the current globalization of our problems, we need to extend our circle of empathy and view humanity as a worldwide extended human family. As long as we refrain from facing that challenge, divisiveness and unsolvable conflicts will persist.

The contradiction between modern problems, new scientific knowledge and the inadequacy of our prevalent source of morality or of ethics, led me to ask what kind of values would be required to face the new challenges. What would our civilization look like if we were to adopt them?

In such a such a civilization,
• All human beings would be equal in dignity and in human rights.
• Life on this planet would not be devalued and seen as only a preparation for a better life after death, somewhere beyond the clouds.
• The virtues of tolerance and of human liberty would be proclaimed and applied, subject only to the requirements of public order.
• Human solidarity and sharing would be better accepted as a protection against poverty and deprivation.
• The manipulation and domination of others through lies, propaganda, and exploitation schemes of all kinds would be less prevalent.
• There would be less reliance on superstition and religion to understand the Universe and to solve life's problems and more on reason, logic and science.
• Better care of the Earth's natural environment—land, soil, water, air and space—would be taken in order to bequeath a brighter heritage to future generations.
• We would have ended the primitive practice of resorting to violence or to wars to resolve differences and conflicts.
• There would be more genuine democracy in the organization of public affairs, according to individual freedom and responsibility.
• Governments would see that their first and most important task is to help develop children's intelligence and talents through education.

Yes we can, if we try.

* Drawn from notes for a conference by Dr. Rodrigue Tremblay at the American Humanist Association's Annual Meeting, San Jose, California, Friday, June 4, 2010. 


Wednesday, May 5, 2010
On Iran, the U.S. is Painting Itself into a Political and Moral Corner

“This confrontation [between the forces of the Apocalypse and Israel] is willed by God, who wants to use this conflict to erase his people’s enemies before a New Age begins”.
U.S. President George W. Bush (in a 2003 conversation with French President Jacques Chirac)

 “Preventive war was an invention of [Adolf] Hitler. Frankly, I would not even listen to anyone seriously that came and talked about such a thing.”

 “We don’t desire any nuclear proliferation in our region, and our policy is well known regardless of which country has such programs. For us it doesn’t matter whether it is Israel or Iran. I will call on the international community, which is so sensitive toward Iran, to pay attention to Israel, too.”
Recep Tayyip Erdogan, Turkey's Prime Minister

“Nothing in this Treaty shall be interpreted as affecting the inalienable right of all the Parties to the Treaty to develop research, production and use of nuclear energy for peaceful purposes without discrimination.”
The Nuclear Non-Proliferation Treaty (NPT)

By now, most everybody knows that the (2003-) Bush-Cheney Iraq War was based on fiction and on deception. There was no such thing as “weapons of mass destruction” in Iraq, the rationale for an illegal attack against that country. And Bush II and his accomplices knew that.

But incredibly, just as the Bush-Cheney administration did in order to launch a war against Iraq in 2003 by (falsely) alleging that Iraq had weapons of mass destruction, the Obama-Biden administration, in 2010, is arguing for unilateral sanctions against Iran and even beating the drums of war against Iran, alleging that its program to enrich uranium and operate nuclear power plants is posing an existential threat to Israel, to Europe and to the United States.

Besides being a blatant exaggeration, this is nevertheless most dangerous. Indeed, such an eventual military attack—which, by the way, would be illegal under international law—would also have dire economic consequences, because it would almost certainly result in the closing of the narrow Strait of Hormuz. Should we be reminded that it is through this strait that roughly 40 percent of all world traded oil transits out of the Persian Gulf to the Arabian Sea. Its closing would push the international oil price to unheard of levels.

Therefore, if the pro-Israel lobby and the pro-war neocon presswere to succeed in 2010-11 in triggering a hot war against Iran, as they did in 2002-03 against Iraq, this could easily turn the current festering financial crisis into a full-fledged worldwide economic depression. Believe me, the last thing the world economy needs now is an oil-shock that would derail the present feeble economic recovery.

But the most disconcerting of all is no doubt the implicit threat  recently made by President Barack Obama, on Tuesday, April 6, 2010, to launch a nuclear attack against Iran and North Korea if these countries refuse to toe Washington's line. That sort of loose language is most dangerous because it may serve to trivialize the military use of nuclear weapons, a disaster that the world must avoid. The round of pronouncements demonizing Iran and the incessant calls for sanctions against a sovereign country by other U.S. politicians is also most unproductive, even though that may make for good domestic politics.

This is of course in addition to the use of unmanned drones to drop bombs on civilians in Pakistan and other American death squad activities in Afghanistan that the Obama administration has intensified since gaining power. There seems to be a pattern here: No law or moral decency seem to be taken into consideration when such decisions, most likely illegal, are taken, no matter who is in power in Washington D.C.

It is true that Iran's domestic politics is not without reproach. This is a country that is run by a mixture of democratic and theocratic rules. However, compared to fundamentalist Islamic Saudi Arabia, Iran is somewhat more democratic and less oppressive of women, even though it does not satisfy all the Western criteria to be a true democratic state. But we don't declare war on a country because we don't like its domestic politics. That's not what the U.N. Charter or the Nuremberg Charter, says.

Logic would have it that all the nuclear countries in that part of the world (Israel, Pakistan, India,) sign the Nuclear Non-Proliferation Treaty (NPT), just as Iran has done, because an accidental, or worse, an intentional or provoked, use of nuclear weapons is the greatest threat to the region and to the world. In the long-run, however, the world needs a new and expanded nuclear non-proliferation treaty (NPT) to prevent nuclear war but, at the same time, to make sure that no country is denied access to nuclear energy that can enhance its economic development. Every country in the world has a right to enrich uranium and operate nuclear power plants.


Monday, March 22, 2010
Economic Bubbles and Financial Crises, Past and Present

By Rodrigue Tremblay

"It is well enough that people ... do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning."
Henry Ford, American industrialist

"It seems to me that Europe, especially with the addition of more countries, is becoming ever-more susceptible to any asymmetric shock. Sooner or later, when the global economy hits a real bump, Europe's internal contradictions will tear it apart."
Milton Friedman, American economist

"The normal functioning of our economy leads to financial trauma and crises, inflation, currency depreciations, unemployment and poverty in the middle of what could be virtually universal affluence-in short ... financially complex capitalism is inherently flawed."

Hyman Minsky, American economist

I have spent some fifty years studying economic cycles and teaching international finance, but I had never seen the likes of what we witnessed and experienced over the last three years. That's because such financial crises seem to happen 60 to 75 years apart.

—It is a fact that the outbreak of this severe worldwide financial crisis two years ago was a surprise to many people. For instance, it was widely thought that financial crises, and the severe economic recessions and sometimes depressions they provoked, were really a thing of the past thanks to the protective net of financial regulations that was designed in the 1930s to prevent a repeat of such financial collapses.

—But here we are again, mired in the most severe economic crisis since the 1930s. We may ask why?

The main reason is that the U.S economy, but also most of the world economy, has been subjected to a financial experiment, over the last some 10 years, which has turned sour. In fact, it has turned into a financial fiasco.

Indeed, it must be understood that a completely new type of banking finance was invented; but all the risks involved had not been properly assessed. For a while, the debt pyramid was allowed to grow, but it collapsed when its shaky and unsound foundation disintegrated.

—Of course, there have been similar financial collapses in the past, (notably in 1873, in 1907 and in 1931) and the overall cause is always the same: the financial sector takes too much risk and becomes overextended, creating in the process a debt load for the economy that is unsustainable.

Let's consider a striking fact of today financial situation: The debt load imposed on the economy is even higher today than it was in the 1930s when total total debt reached the level of some 300% of the annual production or GDP.

Well, today, the ratio of total debt to the U.S. Gross Domestic Product (GDP) is close to 400 percent.
Keep in mind that it took nearly 20 years to bring this ratio down to about 140, in 1952.

What this means is that today it takes about $4.00 of debt to create one dollar of economic activity while it took only $1.40 of debt in the early 1950s to create one dollar of GDP activity. This shows how complex the financial system has become. The question that remains to be answered is whether it will take 20 years to lower the debt ratio from 400% to, say, 200%!

This all shows how this can be devastating for the real economy when financial flows are disrupted and when credit becomes difficult to obtain.

—Sadly, this is our situation today: Investors and producers have a lot of problems financing their new investment projects. This is a big monkey on the back of the economy and it is an important cause of current, and possibly future, economic stagnation.

But before looking into the future, let's review quickly the main reasons why financial crises arise. Why, in other words, the financial tail is sometime allowed to wag the economic dog.

1. First, the question of deregulation. Too much optimism, overconfidence or simple naiveté sometimes allow the development of some form of risky Ponzi-scheme finance. And, this is pretty much what we have seen over the last 10 years.
—Under the old traditional financial rules, a bank or a credit union would collect deposits or borrow in the open market, lend this money to investors, keep reserves for contingencies, and would hold onto the loans until maturity.

For big banks, at least, this is no longer the model. With the merging of investment banking and commercial banking after 1999, traditional financial rules were pushed aside and they were replaced with the rules of asset securitization through which large banks ceased being banks to become brokers, that is they ceased being lenders to become sellers of sophisticated new securities. More about that later.

Under these new rules, a bank still accepts deposits or borrows in the open market, but it does not hold on to the loans it makes. Rather, it takes a bunch of heterogeneous loans made by itself or by others, repackages and slices them up, and sells them as investment vehicles to third parties. That's what is called the “securitization” process; it is a sort of sausage machine that takes one type of securities at one end and transforms it into another type of securities, a more risky one, at the other end. —Large Banks have become large financial sausage makers!

In other words, the financial chain has been made longer, much longer; but, as with all chains, its overall strength is not better than the strength of its weakest link. And the new financial products turned out to be the weakest links. They were toxic financial products.

2. Why were such new banking rules adopted? Why were they so risky and dangerous? And how did they lead to the near complete collapse of the credit system in the fall of 2008? These are fundamental questions.

And, as for most questions, there are short answers and there are long answers.

I have four short answers:

-First, they were very profitable to the mega-banks for a while because the banks raked in large fees on the new financial products.
-Second, the politicians were persuaded to let them “innovate” with the new leverage finance by removing most regulation that would have prevented the banks from doing what they were doing.
-Third, it led to irresponsible lending because the lenders were no longer risking their own money but the money of far away investors.
-And, fourth, the moral dimension cannot be neglected. Indeed, it took a lot of corruption and a lot of greed to create such a mammoth crisis. —[Greed was even glorified in the 1987 movie “Wall St.” in which Michael Douglas—playing the character of financier Gordon Gekko—says: “Greed is good, Greed is right. Greed Works.” This was the prevailing ideology at the time.]

(This is an issue that I explain more fully in my new book The Code for Global Ethics.)

For a financial crisis of this magnitude to occur, it takes two kinds of corruption or fraud. —(I don't delve here into the kind of intellectual corruption that supported the ideology that markets can do no wrong or that they are always “efficient”. In fact, markets are very imperfect; they are often under the control of monopolies or cartels, and sometimes, they do not function at all.)

In the first place, politicians have either to make mistakes or worse, to be in the banks' pockets and do what people with money (who want more money) tell them what to do.

For instance, as far back as 1977, the Carter administration and the U.S. Congress prepared the ground for the future crisis: It passed the Community Reinvestment Act, by which the Federal Housing Administration loosened down-payment standards for marginal borrowers. —Twenty-five years later, in 2003, President George W. Bush also signed “The American Dream Downpayment Act” into law. This reinforced the pressure on large banks to provide subprime mortgages to needy borrowers incapable of making down payments.

The public financial deregulation stampede that took place between 1999 and 2007 was therefore an extension of this philosophy that special lending rules could and should apply to housing finance.

The string of specific financial deregulation steps taken by the politicians that have paved the way for the current era of irresponsible Ponzi-scheme finance and casino-like leverage banking practices is very long, and I don't want to burden you with too many details.

As a reminder, however, here are the most important ones:

1.    In 1999, the Clinton administration and the Republican-dominated U. S. Congress passed the Gramm-Leach-Bliley Act (GLBA) that, in effect, abolished most of the 1933 Glass-Steagall Act In the past, that law had prevented the unregulated investment banking from merging with the regulated and government-insured commercial banking sector.

2.    Then, in 2000, the U. S. reintroduced legalized gambling into the financial sector, a prohibition that had been in place since after the 1907 financial crisis, when President Theodore Roosevelt (1858 –1919) was in office. It adopted the Commodity Futures Modernization Act of 2000, which specifically exempted financial gambling from state gaming laws. This move paved the way for inventing new risky financial instruments.

3.    In 2004, the Securities and Exchange Commission (SEC) removed the ceiling on the level of risk that the largest American investment banks (Goldman Sachs, Morgan Stanley, Lehman Brothers, Merrill Lynch, Bear Stearns) could take on so-called securitized loans and  their hedge fund operations.

4.    In 2005, bankruptcy laws were changed in the United States at the request of the banking industry. This made it more difficult for federal bankruptcy judges to restructure mortgages before resorting to foreclosures, under Chapter 7 of the U.S. bankruptcy code. [N.B.: According to the Center for Responsive Politics, the banking industry spent over $100 million in lobbying efforts to have bill S-256 passed].

5.    Finally, in July 2007, only weeks before the subprime financial crisis went into full gear the SEC removed  the “uptick” rule for short selling stocks in a panic. (The President of CITI Group, Mr. Vikram Pandit, testified before the Congressional Oversight Committee that short-sellers played a big role in bringing his bank, the largest in the world, close to bankruptcy.)

3. The second type of irresponsibility, and even of fraud, was the one that bankers themselves committed.

-First, they embraced subprime lending, by selling adjustable-rate (ARMs), or interest-only or even negative-amortization subprime mortgages, with minimal or no down payments, to borrowers they knew could not pay them back if anything went wrong.

Today, about eight million foreclosures have already taken place.And it is expected that in 2010-11, the number of foreclosure filings could rise to another 3.5 to 4 million.

Why were banks irresponsible in their lending? Essentially, besides willing to please the politicians, it's because they thought they were not at risk for their own irresponsibility. Indeed, with the new practice of financial securitization, banks were not worried by the possible insolvency of borrowers, because they knew they could sell those risky subprime mortgages to other banks which ultimately sold them down-stream as some commercial-like paper to unaware investors. It was a form of “pass-the-buck” lending.

In the end, many of the primary and secondary mortgage lenders such as Countrywide Financial, Washington Mutual, IndyMac, and ultimately Bear Stearns and even Wachovia, collapsed. And the two largest players in the U. S. mortgage market Fannie Mae and Freddie Mac, as insurers and secondary mortgage lenders, came very near to total collapse before the U.S government came to their rescue and invested $400 billion in them.

4. A few more words about the main culprit products in this fiasco, the famous or rather infamous so-called “credit derivatives”, that disintegrated in the fall of 2008. Those were the weak links in the financial chain. And that's where I will limit my comments.

Credit derivatives come in acronyms like an alphabet soup, but the most basic ones are: 

-The synthetic subprime collateralized debt obligations  (CDOs), (or slices or tranches of amalgamated pools of subprime loans based on mostly interest-only second-handed mortgages, but also on other types of debts, such as credit card debts). CDOs are basically illiquid financial products because they usually can be bought or sold only through the entity that created them.
-And, the Credit Default Swaps. CDSs are insurance credit protection contracts offering protection against default on the interest or principal payments of a loan.

More than one trillion and a half dollars ($1 500 000 000 000) of these asset-backed financial products were sold, not only in the U.S., but all over the world.

The problem was those who sold this type of financial insurance—large investment banks and above all the largest insurance company in the world, American International Group (AIG) —were not regulated and kept very little reserves behind it.

Creating CDOs (i.e. packaging different debts together) was very profitable for banks, for some insurance companies that insured them by issuing CDSs, while holding very little reserves, and for the credit agencies (Moody's, Standard & Poor's and Fitch) that rated them.

But CDSs are very dangerous products.

-First, although they are really insurance contracts, they are not typically written by insurance companies but by financial firms or subsidiaries. This means that they are not regulated under insurance laws, state or federal.

-Second, one does not need to have an insurable interest to purchase CDS insurance. (For example, it is not allowed to buy life insurance on a person with whom the buyer is not closely related. The same for a fire insurance policy on a home; one must be an owner to qualify).

But with CDSs, one may be an outsider, that is a speculator or a hedger, who has nothing to insure but is only interested in holding the CDS contract for financial gain. As a consequence, the total amount of CDS contracts issued can be much larger than the value of the insured security, four or five times larger. At that point, CDSs become casino chips whose ultimate value is backed only by the issuer.—And this has consequences. In fact, the invention of CDSs has made the debt default crisis much worse by artificially maintaining the value of debts at a high level, thus creating bankruptcies all around. It is as if a system of fire insurance had resulted in increasing the insidence of fire. This is an example of a very dangerous and bad financial innovation.

Essentially, the CDS (credit default swap) market is an opaque and thinly traded over-the-counter market that is easily open to manipulation. At any moment in time, nobody really knows who owns or owes what to everybody else. Speculators buy those CDSs as if they were put options on the underlying bonds. When their prices go up, the price of the underlying bonds goes down, and a financial crisis ensues for the bond-issuing company or government. Together, CDOs and CDSs can make for a very toxic cocktail. —This is a clear case where the speculative financial tail moves everything else. Speculators are in control.

In fact, let me say that this is what drove General Motors into bankruptcy. Speculators killed General Motors, not the recession and low car sales. GM could have survived the recession as it had in the past. But this time, there were the CDSs.

—Why is this so? —Essentially because banks had transformed normal GM bonds into collateralized debt obligations (CDOs) by merging them with other debts, and because these bonds had been insured against default with CDSs issued mainly by the Financial Products unit of the large insurance company American International Group (AIG). Speculators bought these CDSs on the hope that the underlying CDOs that incorporated GM bonds would fall if GM were to fail. In essence, the speculators were betting that GM would fail and they were helping it to fail at the same time by selling short the very CDOs that incorporated GM debt while buying on leverage the CDSs on those CDOs.

When GM ran into financial troubles due to the recession and a drop in car sales, the value of GM bonds should have declined, allowing GM to buy them back at a lowered discount and enabling it to reduce its debt load and survive. But this time, thanks to the new securitization finance, more appropriately called “Ponzi-scheme finance”, an imprudent and possibly criminal type of finance in my opinion, things did not work out that way. GM's debts had been placed in packaged CDOs that were impossible to untangled, just as individual housing mortgages had been merged and packaged in sausage-like mortgage CDOs that could not be untangled if something were to go wrong.

CDS holders against CDO- GM bonds, both legitimate and gambling speculators, were insured against losses by AIG. And, as I will explain later, the Bush-Paulson administration guaranteed the value of all CDSs issued by AIG against CDO bonds, so the value of those bonds could not decline as they should have, and as they have in the past during an economic downturn. Besides, there are no open market for those CDOs, so nobody could know their real value.

 —This is what forced General Motors to file for bankruptcy. This is the same cause that provoked eight million plus home foreclosures in the U.S. while there are much fewer foreclosures in Canada. [For example, in the first quarter of 2008, 1.6 per cent of mortgages issued by Canada's top three sub-prime lenders were behind by at least three months. The equivalent rate was about 16 per cent in the U.S. As a consequence, house prices in Canada have been stable or rising.] —In this light, the GM bankruptcy was less a normal bankruptcy than a financial assassination.

—Please note that by salvaging General Motors, the U.S. government paid twice: It paid in full the banks and the speculators who held CDSs on CDO-GM bonds; and it later paid to keep GM operating.

Mind you, the same thing that the new securitization finance did to U.S. homeowners and to GM is being done these days to Greece. Greece's government debt has been transformed into derivative productsinsured with CDSs. Speculators are buying those Greek CDSs in the hope that the government of Greece will default on its debt.—This is the main reason behind the drop in the euro and of pound sterling in the last few weeks. There is a fear of a domino effect, with many European countries to default if speculators begin attacking one country after another. This could even bring down the euro monetary union.

—This is a crazy and immoral system. The plot thickens even more with the rumor that AIG has been a major issuer of Greek CDSs. If this were true, this would mean that the U.S. taxpayers are paying for AIG's losses on Greek CDSs with U.S. bail-out funds, thus financing the possible collapse of the euro monetary zone! —This cannot be allowed to go on. There should be an international conference to stop that madness.

-This is the reason I wrote here on my international blog( that the international financial system has been transformed nowadays into a gigantic unregulated Casino that allows all types of Ponzi schemes to go on.

5. You all know that the U. S. government, following the ideology of  “too-big-to-fail” for the large banks or the large insurers, has rescued the biggest among them.

It poured trillions of dollars into AIG, Fannie Mae and Freddie Mac and the five or six largest Wall St. Banks, essentially by buying their toxic assets at full price and by underwriting their gambling losses. With this massive recapitalization of the large banks through government subsidy, the crisis has somewhat subdued, for the time being.

In the meantime, however, the larger banks have become even larger, the bonuses received by their CEOs are still in the tens of millions, their huge pensions are intact, but bank loans to the economy have declined. The biggest winners of the financial crisis are precisely those who created it. —This is truly something that historians will have to explain to future generations.

(Without a doubt, the single bank that profited the most from the overall public rescue program was Lloyd Blankfein's Goldman Sachs, a bank that Secretary Henry (Hank) Paulson led until he became Treasury Secretary in 2006. —It can also be said that Treasury Secretary Henry Paulson and his deputy, investment banker Neel Kashkari, were in a mammoth financial conflict of interest when they engineered the banking bailout program, especially as $180 billion was pumped into AIG in order to pay out in full the gambling bets made by Goldman Sachs, their previous employer, and other speculators. It was a bailout of Wall Street by Wall Street while in control of the U.S. government. )

Meanwhile, and because of this bailout money, the largest American banks are getting larger. For example, in 2006, the combined assets of the U.S. six biggest banks (Citigroup, JPMorgan Chase, Bank of America, Wells Fargo, Goldman Sachs, and JP Morgan) totaled 55 percent of U.S. GDP. In 2010, this ratio stands at 63 percent (it was only 17 percent of GDP in 1995).
Consider also another measure: In 2007, the four largest U.S. banks — (Citigroup, JPMorgan Chase, Bank of America and Wells Fargo) — held 32 percent of all deposits in FDIC-insured institutions. As of June 30, 2009, it was 39 percent.

Therefore, since the banking structural problems have not been solved but rather made worse, the crisis could flare up again anytime, either here, as a lot of commercial loans (office buildings, malls, hotels...etc) are on the brink of default and will likely default in the coming years, or elsewhere, with many European governments having their own subprime crisis and being attacked by CDS gamblers.

I want to be clear here. —It would have been better if the problem had been avoided with more prudent government policies and banking practices. However, in the fall of 2008, the U.S. government had a responsibility, especially after the failure of Lehman Brothers on September 15, 2008, to stabilize the financial system and to avoid a deeper and wider financial crisis. After all, it was a series of government policies and deregulation steps that paved the way to the housing bubble and to the meltdown, to the emergence of risky financial products and to the resulting financial crisis.

—It is how this was done that borders on the scandalous, if it was not outright fraud in some cases, not the goal itself of averting the financial crisis from spiraling out of control. —For example, there was no need to pay billions of dollars to banks and speculators at 100 cents on the dollar for toxic and illiquid securities that were worth much, much less.

Presently, I think that we are in the eye of the hurricane regarding financial problems. I see five additional economic threats for the near and not so near future:

• A major sovereign debt crisis in many parts of the world, especially in southern Europe;

•  A major commercial debt crisis and small bank crisis in the United States;

•  The historical high level of income inequality in the United States and elsewhere;

•  The aging of the population in the United States and elsewhere and a concomittent slowdown in private consumption.

• The over-heating Chinese economy, its undervalued currency and a possible financial crisis in that country.

These factors and the ongoing difficulty in obtaining credit for investment will exert a drag on the economy over the coming years.

Indeed, history teaches us that a serious structural worldwide financial crisis sooner or later results in sovereign debt defaults by some countries. This has happened in 1833-37, 1870-90, 1932-1945, and it is to be expected that the number of countries that will renege on their foreign debt will increase in the coming years. A global debt bomb is hanging over Europe and other parts of the world. The euro zone itself may not survive the coming crisis. And, I would not exclude some U. S. states from this default scenario, not even the U. S. federal government, with its trillion + dollar deficits, fiscal deficits for as long as we can see, even though it has the power to print dollars which are still accepted around the world. That is the reason why I expect the other financial shoe to drop in 2011-13. —A major financial crisis, a major U.S dollar crisis (and the concommittent rise in the price of gold) and major bond and stock market crashes have a good chance to unfold in that time period.

6. Conclusions

It seems to me that the U.S. financial system, and even the world financial system, have to be profoundly reformed, if they are to serve the real economy, rather than the contrary. If such a reform does not come about, however, I am afraid that we have entered a period of economic difficulties that may last many, many years. In fact, I think that the world economy stands today at the hedge of a large precipice.

What type of reform? First and for all, the packaging of different debts in impossible to untangle CDOs should be outlawed. These products are financial time-bombs waiting to explode for the real economy, not only in the United States, but around the world. Second, CDS insurance products should be issued only against insurable securities and not issued as casino chips in values much larger than the value of the insured securities (i.e. no so-called naked CDSs). In order words, the entire innovation of securitization finance has to be reviewed and reigned in before it does further damage. These two reforms could be implemented immediately if politicians really understood the problems or if they were not in the banks' pockets.

However, if the U.S. Congress feels that this is too big a problem to tackle on its own, for different reasons, my third recommendation would be for the Obama administration and the EU to call for an international finance conference, preferably a G-20 conference, to have coordinated actions and have legislation implemented to that effect.

So far, the steps taken to study the problem and to reform the system have been slow in coming and very timid. For example, House Speaker Nancy Pelosi intends to create a congressional panel (rather than an outside commission of inquiry) to investigate the causes of the US 2007-09 financial crisis. This would seem to me to be an inadequate and insufficient response to a crisis of this magnitude and severity.

Fourth, for the longer run, and regarding the toxic financial products that precipitated the crisis, one wonders why new medication pills or drugs have to be approved by the U.S. Food and Drug Administration (FDA) in order to make sure that they do not hurt the human body, while no similar requirements of the sort exist for new financial products to make sure that they are not going to be very harmful to the real economy.

There seems to be two different standards applied here. I personally think that there is a  need for a Financial Products Administration (FPA) in order to make sure that possibly toxic financial products are not made available to the public before having been fully tested for their absence of toxicity. It should be mandatory that risky financial products be tested and approved before being sold to the public.

And fifth and last, as to deposit-taking banks and investment banks, I happen to believe that the Glass-Steagal law should be brought back in full. It was a wise and prudent law that stabilized financial markets for three quarters of a century. Its near complete elimination in 1999 opened the floodgates of irresponsible financial gambling that nearly brought down the demise of the entire U.S. economy. I do not think the contemplated “Volcker rule” to prevent banks from operating their own hedge funds goes far enough, considering the magnitude of the problem.

—I was amazed when the Glass-Steagal act was de factorepealed in 1999, and I am still amazed that the very economist who was most instrumental in that repeal is currently President Obama's principal economic adviser (Larry Summers).

—As a general principle, it should be reaffirmed that finance is there to serve the needs of the real economy, and not the reverse.

—Finally, I would say that in economics, as in medicine, it is never too late to do the right thing. But if you don't, the disease may become progressively worse and it may become irreversible. I think that is where we stand today regarding the necessity to reform the financial system.

* Drawn from notes for a conference by Dr. Rodrigue Tremblay at the Renaissance Academy (Florida Gulf Coast University FGCU), Florida, Friday, March 19, 2010.


Monday, March 8, 2010

The Moral Dimension of Things

"When plunder becomes a way of life for a group of men living together in society, they create for themselves, in the course of time, a legal system that authorizes it and a moral code that glorifies it."

Frederic Bastiat (1801-1850), French economist

"Certain hierarchs of the Catholic Church in Latin America used prayer as an anesthesia to put the people to sleep. When they cannot dominate us with law, then comes prayer, and when they can't humiliate or dominate us with prayer, then comes the gun."
Evo Morales, President of Bolivia (July 13, 2009)

"The single most important quality needed to resist evil is moral autonomy. Moral autonomy is possible only through reflection, self-determination and the courage not to cooperate."
Immanuel Kant (1724-1804) German philosopher

Why do political leaders seem to be lying most of the time? Why is uncontrolled greed so prevalent in corporate rooms? Why do wicked men wage wars of aggression and become indifferent to the killing of innocent people? Why does materialism seem to trump everything else? Why do we have the uneasy feeling that our society is going in the wrong direction? The very fact that we have to raise such questions may be a sign of the times.

Indeed, when the stench of moral decay becomes overwhelming, bad things inevitably follow. Historically, it can be shown that when the moral environment in a society is deteriorating, problems tend to pile up.

We are presently living in one of those times, characterized by deep and entrenched political corruption, by routine abuse of power and disregard for the rule of law in high places, and by unchecked greed, fraud and deception in the economic sphere. The results are all there to see: Severe and prolonged economic and financial crises, rising social inequalities and social injustice, increasing intolerance toward individual choices, the disregard for environmental decay, the rise of religious absolutism, a return to whimsical wars of aggression (or of pre-emptive wars), to blind terrorism and to the repugnant use of torture, and even to genocide and to blatant war crimes. These are all indicators that our civilization has lost its moral compass.

With all these throwbacks to an unpalatable past, it is not surprising there is a resurgence of interest nowadays for questions of morality and of ethics.

The contradiction between modern problems, new scientific knowledge and the inadequacy of our prevalent source of morality or of ethics, which are mainly religion-based, has led a humanist like me to write a book, “The Code for GLOBAL ETHICS, Ten Humanist Principles”, [ISBN: 978-1616141721] prefaced by Dr. Paul Kurtz and published this year by Prometheus Books. The book is a down-to-earth discussion of ten basic humanist principles for our new global context.

Why such a renewed interest in the moral dimension of things? —First, partly because many of our problems and threats are not only severe but they have also become global in nature. —Second, the fact that we seem to be unable to solve our global problems might also be because our scientific and technological progress is advancing much faster than our moral progress, with the consequence that problems arise faster than our moral ability to face them and to solve them. —And third, this is also partly due to the fact that the old religion-based rules of morality are of little help in solving these new problems, basically because they belong to the past and because, unfortunately, they have not incorporated new scientific knowledge.

Indeed, humans' vision of themselves in the Universe has been forever altered by three fundamental scientific breakthroughs:
- Galileo's proof, in 1632, that the Earth and humans were not the center of the Universe, as supposedly holy books have proclaimed.
Darwin's discovery, in 1859, (“On the Origin of Species”) that humans are not some god-like creatures unique among all species, destined to live forever, but are rather the outcome of a very long natural biological evolution.
- And, the Watson-Crick-Wilkins-Franklin's discovery, in 1953, of the structure of the double helix DNA molecule (Deoxyribo Nucleic Acidin each of the 46 chromosomes in human cells, and the devastating knowledge that humans share more than 95 percent of the same genes with chimpanzees.
I would add, also, that ongoing research about how the human brain functions has cast new light on how some phenomena, such as different thoughts, including religious thoughts, are generated in different zones of the brain.

Therefore, nobody can claim anymore that the Earth is the center of the Universe; nobody can claim that humans are unique in the scale of things; and nobody can claim that the human body and the human mind are two unrelated entities. This knowledge has tremendous consequences for our moral stance.

My best hope is that we will avoid falling back into an age of obscurantism and of decadence, and that we will be able to build a truly humanist civilization for the future.


Friday, January 22, 2010

The United States of Corporate America: From Democracy to Plutocracy

"The price of apathy towards public affairs is to be ruled by evil men."
Plato, ancient Greek philosopher

...“The 20th century has been characterized by three developments of great political importance: The growth of democracy, the growth of corporate power, and the growth of corporate propaganda as a means of protecting corporate power against democracy.”
Alex Carey, Australian social scientist

“The most effective way to restrict democracy is to transfer decision-making from the public arena to unaccountable institutions: kings and princes, priestly castes, military juntas, party dictatorships, or modern corporations.”
Noam Chomsky, M.I.T. emeritus Professor of Linguistics

On Tuesday, January 19 (2010), the Obama administration got a kick in the pants from the Massachusetts voters when they filled former Senator Ted Kennedy's seat by electing a conservative Republican candidate. The essence of their message was: stop dithering and start governing; stop trying to satisfy the bankers and please the anonymous editors of Rupert Murdoch's Wall Street Journal, and start caring for the ordinary people.

Two days later, President Barack Obama seemed to have understood the people's message when he announced a “Volcker rule” that will forbid large banks from owning hedge funds that make money by placing large bets against their own clients, using information that these same clients gave them. It was about time. Such a policy should have been announced months ago, if not years ago.

On the same day, however, a nonelected body, the U.S. Supreme Court, threw a different challenge to the Obama administration. Indeed, on Thursday January 21 (2010), a Republican-appointed majority on the U.S. Supreme Court took it upon itself to profoundly change the U.S. Constitution and American democracy. Indeed, in what can be labeled a most reactionary decision, theRoberts U.S. Supreme Courtruled that legal entities, such as corporations and labor unions, have the same purely personal rights to free speech as living individuals. Indeed, the First Amendment of the U.S. Constitution says “Congress shall make no law ... abridging the freedom of speech.

The only problem with such a wide interpretation of the U.S. Bills of Rights(N.B.: The first ten amendments to the United States Constitution are known as the Bill of Rights) is that this runs contrary to its letter and its spirit, since it clearly states later on that "the enumeration in the Constitution, of certain rights, shall not be construed to deny or disparage others retained by the people, and reserves all powers not granted to the federal government to the citizenry or States.” The words “people” and “citizenry” clearly refer here to living human beings, not to legal or artificial entities such as business corporations, labor unions, financial organizations or political lobbies.

Such entities, for example, cannot vote in an election. Indeed, laws governing voting rights in the United States clearly establish that only “Adult citizens of the United States who are residents of one of the 50 states have the right to participate fully in the political system of the United States”. No mention is made of corporations or other legal entities.

However, with its January 21 (2010) decision, the majority on the Roberts U.S. Supreme Court is saying in effect that even if artificial entities cannot vote in an election, they can spend as much money as they like to influence the outcome of an election. Money is speech for them, and the more a legal entity has of it, the more it has a right to become powerful politically and control the political agenda.

In fact, what Chief Justice Roberts and his conservative Supreme Court majority have done is to overcome a century-old democratic tradition in the United States in granting a constitutional right to business corporations and to banks, (because they are really the ones with a lot of money), to use their enormous resources to not only participate in debates about public issues, but also, and above all, to de facto dictate the election of candidates of their choice to public office.

That's plutocracy, not democracy!

Plutocracy is defined as a political system characterized by “the rule by the wealthy, or power provided by wealth.” Democracyon the other hand, is defined as a political system where political power belongs to the people. This means “a political government either carried out directly by the people (direct democracy) or by means of elected representatives of the people (representative democracy). The terms "the power to the people" are derived from the words "people" and "power" in Greek.

This fundamental idea of democracy was well summarized by President Abraham Lincoln, in his 1863 Gettysburg Address, when he said that it is “a government of the people, by the people and for the people.” This is a definition that is based on the basic democratic principle of equality among human beings.

But now, the Roberts Court's decision must have made President Lincoln turn in his grave, because that decision, in effect, transfers political power from the living “people” to artificial corporate entities, with tons of money to spend. If Congress does not act quickly to reverse this decision, legal entities will be able to spend freely in the media to support or oppose political candidates for president and Congress, and this, as far as the last moment of a political campaign. This is quite something!

By a stroke of the pen, the Roberts Court has thus abolished the laws governing American electoral financing and removed limits to how much special money interests can spend to have the elected officials they want. The government they want will largely be “a government of the corporations, by the corporations, for the corporations.” Truly amazing!

To reflect the new political philosophy of the five-member majority of the Roberts Court, the Preambule of the U.S. Constitution that says “We the People of the United States, in order to form a more perfect Union...” should, maybe, more appropriately be changed for “We, the business corporations of America...”

It is that much more ironic that the word “corporation” appears nowhere in the U.S. Constitution or in the Bill of Rights. It is scarcely conceivable that the drafters of the Constitution had anything resembling corporate entities in mind when they drafted the Bill of Rights. But the Roberts Court majority does not seem to agree with Washington, Jefferson, Franklin, Madison, Mason...etc. Because of their decision, the five conservative members of the U. S. Supreme Court of today have become the new Fathers of the U. S. Constitution.

For nearly a century, it has been assumed that the U.S. Bill of Rights protected persons, not corporations. Even if sometimes the courts have extended the rights of the 14th Amendment banning the deprivation of property without due process or equal protection of the law to the property of corporations, it was never thought that the purely personal rights of the first Amendment of the Bill of Rights applied to corporate entities as well as to human beings. This is understandable. Business corporations are created through legislation that gives them potentially perpetual life and limited liability to enhance their efficiency as economic entities. While such characteristics can be beneficial in the economic sphere, they represent special dangers in the political sphere. That is the rationale for not extending constitutional rights to purely legal entities.

But now, the five-member majority of the Roberts Court have said that such legalized artificial entities have the same constitutionally protected rights to engage in political activities as living individuals.

In conclusion, let us reiterate that in a democracy—and as it is clearly established also in the U.S. Bill of Rights and in all democratic constitutions—the citizens are the only legitimate source of law. It follows inexorably that corporations, not being citizens, cannot be legitimate political actors. Chief Justice Roberts and his conservative Supreme Court majority have thus badly erred in their anti-democratic judgment.

Their judgment is clearly revolutionary or, more precisely, counter-revolutionary.


Thursday, January 7, 2010
Economy 2010: From the Scandalous Known Past to the Uncertain Future

“Homes rose markedly in value, especially in hot markets like Florida and New York City. Borrowers  believed that home purchases were no-risk ventures certain to escalade, and they went out on a limb to buy. Lenders who had once required large down payments now permitted home purchasers to combine two and three loans to buy a home. People took out what were called “buffet” loans, which were interest-only loans that buyers were told they should refinance in three years or five years. Lenders told home buyers not to worry; homes were rising so fast in value that it would always be easy to refinance into another loan. Developpers built larger houses. Why not? Borrowers wanted larger homes. They needed the space to hold all the things they were buying.”
—U. S. Housing market in 1928-29, in Kristin Downey, The Woman Behind the New Deal (Frances Perkins), 2009, p. 106, from Gail Radford, Modern Housing for America: Policy Struggles in the New Deal, 1996, pp.10-22

"I place economy (saving) among the first and most important virtues, and debt as the greatest of dangers to be feared."
Thomas Jefferson: 3rd US President (1801-09)

"America is more communist than China is right now. You can see that this is welfare of the rich, it is socialism for the rich -- it's just bailing out financial institutions. This is madness; this is insanity; they have more than doubled the American national debt in one weekend for a bunch of crooks and incompetents."
Jim Rogers, American investor

After a decade plus of unchecked greed by money-changers, of the political dismantling of financial regulation, of large “too-big-to-fail” banks made larger, of artificial easy money by the central bank, of the risky securitization of all kinds of debt instruments and of leveraged buy-outs of scores of companies with their own debts by financial operators, it was no surprise that the financial house of cards came crashing down in 2007-2008. It was like a pre-programmed financial crisis. A perfect financial storm.

What lessons can be drawn from the recent unhealthy and unpalatable past? And, what is in store for the near future, considering that hardly anything in the financial environment has changed? A crisis caused by a near total absence of financial regulation, by a too easy monetary policy and by too much debt, has been met with no additional financial regulation, by an even easier monetary policy and by even more debt. In fact, the U.S. ratio of total debt ($57 trillion) to the economy (GDP: $14.5 trillion in 2009) is even higher today at 3.9, then it was before the onset of the crisis in 2007-08, when it stood at 3.4.

That is why we will argue here that the problems of U.S. financial dysfunction have not been solved. On the contrary, they have been swept under the large rug of even easier money and of even larger debts, which is only postponing the day of reckoning. For sure, the large Wall Street banks' bad debts have been transferred to the public sector (the Treasury and the Fed) and to the quasi public sector (Fannie Mae and Freddie Mac), but the overall debt load of the U.S. economy has not been reduced; it has been increased. That is why the U.S. is condemned to continue its foreign borrowing binge for some time to come.

In general, too much foreign borrowing is bad for an economy, especially if it is done to finance an excessive level of domestic consumption. When this happens, it is a sign that total domestic expenditures (government, corporations, consumers) exceed total incomes. The country lives beyond its means and the gap has to be filled with net foreign borrowings.

The principal indicator of this situation is the current account (a broader measure than the external trade balance) of the country. When a country's current account turns negative, more money for imports and interest payments is flowing out of the country than is coming in through exports and investment income. Like any individual, of course, a country can borrow abroad if its credit rating is good. The question is how much and for how long. For countries that have fully convertible currencies or, better, for countries like the United States whose national currency also serves as an international key-currency, the situation can endure for a longer period, but there is always a day of reckoning.

In general, for a normal economy, a negative current account that exceeds six (6) percent of Gross Domestic Product (GDP), especially if this is due to a negative trade balance, usually indicates a non sustainable situation of foreign borrowing and foreign indebtedness that can lead to a financial crisis. Countries like Mexico (1994-95) and Thailand (1997-98) experienced such a financial crisis in the 1990's. Such was the case also with Argentina at the turn of the century.

Since 2000, and coinciding with the arrival of the George W. Bush Republican administration, the United States has also embarked upon a policy of excessive domestic spending, resulting in larger and larger and persistent current account deficits and huge foreign borrowings. Indeed, the adoption of an imperial foreign policy of permanent war throughout the world, financed on credit, and an ideological preference for large fiscal deficits, have translated into large American current account deficits.

In 2006, the U.S. (external) current account deficit reached 6.5 percent of GDP. This was the apex of external debt sustainability and a harbinger of economic troubles to come for the U.S. economy. As a matter of fact, this induced me to write an article on October 16, 2006 entitled “Headwinds for the US Economy”, in which I warned that it was a "matter of months, not years", before the U.S. economy and the U.S. dollar begin to experience some downward pressures. I repeated the warning a few months later when I wrote on May 5, 2007, (A Slowdown or a Recession in the U.S. in 2008?), that we could expect "the collapse of one and possibly several major financial institutions under the pressures of bad loans and record foreclosures... The rate of foreclosure is bound to spike in the coming months, possibly culminating in the next two years into a financial hurricane." This was said many months before the onset of the 2008-09 recession and the September 15, 2008 failure of the large investment bank Lehman Brothers.

In 2008, in the midst of the economic recession, the U.S. current account deficit was still estimated at –$706 billion (nearly all caused by a –$707.8 billion trade deficit) for a $14,441 U. S. GDP, that translated into a 4.9 percent current account deficit relative to the economy.

With the 2008–09 economic crisis and recession, the US current account deficit has since been somewhat reduced due to a drop in incomes and in imports, and partly due to a sharp decline in oil prices, but it is expected to remain above four percent of GDP. In the coming years, this ratio is likely to increase again as the long-term U.S. fiscal deficit is expected to remain at 10 percent of GDP for years to come.

The Fed's Role in Creating Asset Price Bubbles

The causes of a financial crisis are complex and can vary from one country to the next. In general, however, they usually stem from the central bank becoming subservient to the government when the latter decides to embark upon a policy of large fiscal deficits. If the central government opts in favor of monetizing the public deficits and keeping interest rates low, an asset bubble is bound to emerge.

Unfortunately, that's pretty much what the Greenspan Fed elected to do in maintaining an easy money policy for too long and in keeping interest rates too low, for too long, in the late 1990s and in the first part of the 2000 decade. Indeed, most economists agree that in 2003-04, the U.S. Fed should have raised short-term interest rates (pushed down to 1 percent in June 2003 from 6.5 percent in December 2000). But the then Greenspan Fed (current Fed Chairman Ben S. Bernanke has been a Fed Board member since 2002) was deeply embroiled in the Bush political agenda. Chairman Alan Greenspan publicly acknowledged this fact when he declared on September 17, 2007, in an interview with the Financial Times, that “raising interest rates sooner and faster (before the 2004 presidential election) would not have been acceptable to the political establishment given the very low (official) rate of inflation”.

In financial matters, the American central bank (the Fed or the Federal Reserve System) is a curious animal. It is an institution that is entrusted to regulate banks and other financial institutions, but it is partly owned by the large money center banks. It is in a perpetual conflict of interests. In fact, it can be said that the Fed is the banks' own private government. In good times, large Wall Street banks, bank holding companies and other large integrated financial groups, such as AIG (American International Group), are pretty much left alone and allowed to build profitable but risky and shaky financial pyramids, with scant supervision. When things go bad, however, the Fed stands ready to bail them out with automatic discounting, zero-interest loans and other goodies, the overall cost being transferred to the general public through an inflation tax and a debased currency. We know since 2008 that the U.S. Treasury also stands ready with public money to bailout the large Wall Street banks when their gambles go sour. The $700 billion Troubled Assets Relief Program (TARP) is testimony to that effect.

A central bank can always print new money. But this is hardly a magic recipe for prosperity. If it were so, many Third World countries could claim to have discovered this magic potion. The current Bernanke Fed is tragically wrong in its belief that it can reverse the current over-indebtedness situation in the economy and its mismanagement of the financial crisis by printing money. It is not true that the real economy always respond positively to heavy doses of monetary stimulus. In fact, the contrary is usually the case. If it were true, Zimbabwe, which is an African economic basket case with an uncontrolled bout of hyperinflation, would be prosperous. The U.S. economy is not exempt from fundamental economic laws. A few years down the road, people will see why.

It is my feeling that the U.S. economy is presently in the eye of a powerful financial hurricane of debt liquidation. Such systemic crisis happens no more than twice in a century and it takes at least a decade to work itself out. In this environment, one should be wary of the stock market as a barometer of the real economy. There could be artificially created short-term “liquidity” rallies, when all the while the real economy remains in the doldrums. The 2009 liquidity-driven stock market rally has all the appearances of such a bear market rally destined to fail and trap many unwary investors. In fact, this rally looks like a mirror repeat of the 1930 stock market rally that saw stocks retrace some fifty percent of their initial 1929 losses. We know now that this was only a mirage, and that the worst was still to come.

In my last July 10 blog, I stated that there is likely to be a prolonged 2007-2017 economic stagnation period in the U.S. —I reconfirm this assessment, which is reinforced by my conviction that the Bernanke Fed is making matters worse by its unlimited printing press so-called “solution” of discounting everything but the kitchen sink. It is my contention that this imprudent Fed is paving the way for the mother load of bubble and subsequent crash. This is because, as alluded to above, they seem to have forgotten that the credit cycle and the process of debt build-up, and the subsequent debt liquidation that follows, are the primary driving forces in the underlying economic cycle.

This time the crash will be initiated in the huge bond market, will spread to the commercial loan market and ultimately to the stock market, and then will further crush the real economy in a way that few understand today but will learn the hard way in the coming years.

Let us keep in mind that in the recent past, the Fed and the U.S. Treasury did not see the subprime and housing crises coming. They were completely taken off-guard. In 2005, according to then Fed member Ben Bernanke, “there was no housing bubble”, even though everybody and his uncle could see that the real estate bubble was about to burst.

And now, let us look at the figures. At the end of 2009, reflecting a binge of printing new money by the Fed, the U.S. monetary base, i.e. money circulating through the public and banking reserves on deposit with the Federal Reserve, stood at more than $2,016,136,000,000, after having increased 146 percent in three years. This is unprecedented. —Even if one subtracts the inactive excess bank reserves at the Fed, worth more than $1 trillion (and earning interest!), the U.S.'s monetary base has grown 22 percent in three years, from a starting point of $818 billion in early 2006.
Nevertheless, Fed Chairman Ben Bernanke said in 2009, that he does not fear inflation and that, in fact, inflation could even go down from then on. He could be right for the next few months, but how about the next few years?

Those who listened to Chairman B. B. in 2005, and kept buying leveraged real estate, lost their shirt. I am of the feeling that those who believed Chairman B.B in 2009, and kept buying long-term U.S. Treasury bonds, are also going to lose their shirt. Because of the huge federal deficits and Fed policy to monetize a big chunk of them, U.S. long-term rates are bound to increase in the coming years, whether the real economy grows or not. That would be the next Fed-created bubble bursting, the bubble of artificially low interest rates, excessive money creation and artificially high asset prices for long-term Treasury bonds.

In the past, the big losers of this policy were the millions of people who lost their homes through mortgage foreclosures, the millions of people who lost their jobs through bankruptcies and the millions of retirees who saw their retirement incomes plummet with near zero interest rates. In the future, the principal losers will still be middle class families who will continue being the victims of a massive spoliation and will still have trouble making ends meet, plus retirees whose retirement capital will be further eroded. Where is AARP when we need it?