(Please scroll down to read selected article.)

Friday, December 19, 2008
A Most Desperate Move by the Fed

Monday, December 1, 2008
The New Obama Administration: A Lot of “More of the Same”

Friday, November 14, 2008

The Foreign Policy of an Obama Administration

Friday, October 31, 2008
How U. S. Politicians and Bankers Built a Financial Debt House of Cards (whose Collapse Threatens to Destroy the World Economy)

Sunday, October 19, 2008
The Failed Presidency of George W. Bush:
A Dismal Legacy. --[PART I]

Sunday, October 26, 2008
The Failed Presidency of George W. BushA Dismal Legacy. --[PART II]

Monday, October 13, 2008
Anatomy of the American Financial Crisis:
How It is Turning into a Worldwide Crisis

Sunday, September 28, 2008
Tragedy in the Making in Washington and on Wall Street: The Canadian Solution

Thursday, September 25, 2008

The Bush Administration's Banking Rescue Plan

Wednesday, September 17, 2008
The U.S. Financial System in Serious Trouble

Monday, September 8, 2008

The U.S. 2008 Presidential Election: An Evaluation

Wednesday, August 20, 2008
Why Not Simply Abolish NATO?

Wednesday, August 13, 2008

Irresponsible Risk-Takers in Command

Friday, August 1, 2008

The U.S. Economy and Bad Government Policies

Monday, July 7, 2008

Candidate Obama: A Less Risky Alternative

Monday, June 16, 2008

The Illegitimate and Disastrous U.S. Military Occupation of Iraq

Monday, June 2, 2008

Candidate McCain: A Risky Choice

Friday, May 16, 2008
In a Casino Mentality, The Economy Goes From Bubble to Bubble

Saturday, April 12, 2008

When the Fed Goes into the Investment Business

Sunday, March 30, 2008
Economic Cycles and Political Trends in the United States (Part I)

Sunday, April 6, 2008
Economic Cycles and Political Trends in the United States (Part II)

Friday, February 22, 2008
The U.S Financial System, the Debt Bubble and the Cancer of Excessive Deregulation

Friday, February 22, 2008
The U.S Financial System, the Debt Bubble and the Cancer of Excessive Deregulation

Monday, January 14, 2008
Mr. Ban Ki-moon and the Future of the United Nations


Friday, December 19, 2008

A Most Desperate Move by the Fed

"In a crisis, discount and discount heavily."
Walter Bagehot (1826-1877), British economist

"I believe that banking institutions are more dangerous to our liberties than standing armies. Already they have raised up a monied aristocracy that has set the government at defiance. The issuing power (of money) should be taken away from the banks and restored to the people to whom it properly belongs."
Thomas Jefferson (1743-1826), 3rd U.S. President.

"By this means [printing money] government may secretly and unobserved, confiscate the wealth of the people, and not one man in a million will detect the theft."
John Maynard Keynes (1883-1946), British economist

Last Tuesday, December 16 (2008), the Bernanke Fed took the most unusual step of lowering the overnight inter-bank lending rate, the federal funds rate, to a level never reached before, i.e. zero percent with an upside limit of 0.25 percent. It also announced that it will buy “large quantities of” mortgage-backed securities and is considering doing the same thing with Treasury bonds of longer maturities, in order to lower the entire yield curve. What it did not say explicitly is that the Fed is ready to debase the U.S. dollar to artificially low levels in order to reflate the U.S. economy. What the Fed wants is to trigger monetary inflation and change deflation expectations at all costs through large-scale debt monetisation and thus floating excess debts in a sea of newly created money.

Overall, what the Fed has done, in effect, is to announce that it is suspending the normal functioning of private credit and capital markets, according to supply and demand, and has decided to micro-manage such failing markets for the foreseeable future, that is to say as long as deflationary pressures, in its own view, persist in the U.S. economy. The Fed is also taking big chunks of ownership in large private U.S. banks in order to recapitalize them and to let them deleverage themselves in an orderly way.

People may want to know why the Fed went to that “socialist” extreme and what will be the financial and economic intended and unintended consequences?

First of all, let's keep in mind that the Fed is the only central bank in the world that is partly public-owned and partly private-owned. Bankers sitting on the Fed board can make decisions to lend new money to themselves at whatever rate they choose. The entire American financial and fiscal system is run by bankers, either at the Fed or at the Treasury. Indeed, beginning on January 20 (2009), the Obama administration's Treasury Secretary will be the current president of the New York Fed, Mr. Timothy Geithner, who will be replacing Secretary Henry Paulson, himself a former CEO of the Wall Street investment bank Goldman Sachs.

Although the U.S. President initiates and Congress approves the nominations of the seven members (currently only five in exercise) of the Federal Reserve Board of Governors (for a 14-year term), the de factomanaging of the Fed is left to bankers. This is done through the Federal Open Market Committee (FOMC) which implements monetary policy through open market operations and other discounting policies and discount loans. It is comprised of the seven members of the Board of Governors and five presidents of the twelve Federal Reserve District Banks. The Chairman of the Fed Board is also the Chairman of the FOMC. The President of the New York Fed is always on the FOMC and acts as its Vice Chairman. [The remaining 4 fed member slots are shared and rotated among the remaining 11 District Banks. In fact, the presidents of all twelve Federal Reserve District Banks are present at the FOMC meetings, but only five are enabled to vote at any given time. But, since members of the Fed board often originate from the regional Fed banks or from private banks, bankers are often in the majority in deciding American monetary policy.]

Secondly, by taking over private financial markets, the Fed is, in effect, covering its own mistakes (and those of the SEC and of the U.S. Treasury) for having allowed the building up of a shaky pyramid of asset-backed securities (ABS), not the least being the toxic mortgage-backed securities, and the gambling-prone credit default swaps (CDS), that has been crumbling to the ground.

It is my feeling that the Fed, by creating a bond bubble, at this time is only postponing the day of reckoning and is buying time. When the bond bubble bursts, and believe me, it will burst, as all bubbles do, this will push the U.S. economy further down. For instance, when this happens, many capitalized pension funds could fail and many retirees could be then pushed toward poverty. Future spikes in interest rates will hurt investments and damage the economy even more.

Meanwhile, a bout of competing currency devaluations has been launched, since other governments and other central banks will have to try to debase their own currencies if they want to avoid importing the worst of the U.S. economic downturn. This will be reminiscent of what happened during the 1930s economic depression. Not a pretty perspective for the future of fiat currencies.

It seems that the Fed has an uncanny talent for creating financial and economic bubbles. In the late 1990s, after the Asian financial crisis and after the near failure of the hedge fund Long-Term Capital Management (LTCM), in September 1998, the Greenspan Fed flooded the U.S. economy with liquidity and created the 2000 tech bubble. The same Greenspan Fed aggressively lowered the Federal Funds rate from 6.5 percent to 1 percent in 2004, thus paving the way to the worst housing bubble in American history. Now, the Bernanke Fed is at it again, and, by lowering the federal funds rate to close to zero and by announcing that it stands ready to monetize U.S. Treasury debt, it is actively blowing into what has the appearance of one of the worst bond bubbles ever.

Of course, the Fed has bestowed so much money on banks in exchange for their bad debts while the banks themselves are unwilling to lend, that U.S. banks' excess reserves at the Fed have exploded to more than half a trillion (November '08), which is ten times what is required. This is a sign that the U.S. economy is currently in a liquidity trap.

There is a lot of money in the system, but it is not circulating. The velocity of money is down. In such a situation of excess liquidity, when the Fed creates more liquidity, it is like pushing on a string. Therefore, by lowering short-term interest rates to close to zero, the Fed is helping itself before helping others, since it will be paying less interest on Banks' excess reserves, most of which came from the Fed anyhow. Some of the excess liquidity can spill into the stock market and lift all boats for a while. However, the true test of the Fed's recent desperate move will be if banks increase their lending. We shall know in due course.


Monday, December 1, 2008
The New Obama Administration: A Lot of “More of the Same”

"Obviously he [Rahm Emanuel] will influence the president to be pro-Israel, why wouldn't he be? What is he, an Arab? He's not going to clean the floors of the White House."
Binyamin Emanuel (father of President Obama's Chief of Staff Rahm Emanuel)

"I don't want to just end the [Iraq] war, ...I want to end the mindset that got us into war."
Candidate Sen. Barack Obama (January 31, 2008)

What Washington is really telling you is that you should keep doing the same old things over and over and over again and somehow expect a different outcome. And that's the definition of madness, doing the same thing over and over again and expecting something different.”
Candidate Sen. Barack Obama (December 27, 2007, to a crowd in Carroll, Iowa)

 “Plus ça change, plus c'est pareil!” [“The more things change, the more they remain the same!”]
Old French dictum

Democratic presidential candidate Barack Obama ran a successful campaign on an anti-Iraq war, anti-Washington establishment and pro-change platform. With the assistance of a rapidly deteriorating economic situation, he prevailed in obtaining a clear governing mandate. Most Americans have no other choice than to want him to succeed in delivering on his promises. But the issuance of vague political promises and the hard reality of governing while relying on an efficient decision-making process, are two different things.

President-elect Obama has so far concentrated on not repeating former president Jimmy Carter's mistakes in his difficult relations with Congress, and he has surrounded himself with people who are directly connected with the Democratic congressional majority. However, in so doing, he has given the impression that he has enthusiastically joined the Washington political establishment that he so vehemently decried only a short while ago. The real question is whether he has brought Washington insiders into his own political tent, or whether he has simply joined the same corrupt Washington establishment that he himself decried. Only the future will tell for sure.

It is indeed understandable that a young and relatively inexperienced President-elect Barack Obama would feel obliged to surround himself with people who know how to steer Congress, who have close ties to Wall Street and the media, or who have assisted him closely during his political ascension. After all, the efficiency of a new president depends very much on having Congress, especially members of his own party, solidly on his side, if he wants to accomplish anything important.

That is probably why he chose an old run-of-the-mill senator in the person of Sen. Joe Biden as his vice-presidential running mate in the first place. It was undoubtedly also the main factor in his selection of Illinois Rep. Rahm Emanuel as his Chief of Staff. These two political workhorses will facilitate the necessary collaboration between the White House and Congress.

I would therefore not place too big an emphasis on the personae of these two well-connected individuals, i.e. their close association with the American-Israel Public Affairs Committee AIPAC considering their strategic role with Congress.

Also, the need to move quickly in forming a new administration, unless this has been planned otherwise long in advance, makes it a necessity to call on people who have experience and competence in government affairs. And, for a new democratic administration, the reservoir of experienced public servants can be found in the 1992-2000 Clinton administration. This may explain why President-elect Obama's transition team is so heavily staffed with individuals who served in the former Clinton administration. Similarly, such people can be expected to recommend former acquaintances as candidates for important government positions.

Similarly, after the closely fought election, there is a practical need to reward the important constituencies that were the backbone of the winning coalition with hard work and money. Some high-profile nominations can be expected to fall in that category. This is to be expected.

For instance, the symbolic gesture of naming the first black Attorney general, the former No. 2 Justice Department official in the Clinton administration, Eric Holderis a case in point. The expected nomination of Washington insider Sen. Hillary Clinton as Secretary of State falls in the same category, i.e. the need to unite the Democratic Party behind the new administration. Ditto for the nomination of New Mexico Gov. Bill Richardson as Commerce secretary, a former U.N. ambassador and Energy secretary under President Bill Clinton.

The enlarged Obama economic team is technically competent and is designed to inspire confidence and to create a feeling of active involvement, with a hands-on approach. This is important to understand the nomination of a high profile financier as Treasury Secretary, in the person of New York Federal Reserve Bank CEO Timothy Geithner. As a question of routine, the Treasury Secretary-to-be should be asked whether he was in favor of letting the investment bank Lehman Brothers fail in mid-September, and why Citigroup, the second largest Wall Street megabank, is still paying dividends to its shareholders after it has been saved from bankruptcy with hundreds of billions of dollars of public money? Indeed, let's keep in mind that Timothy Geithner, as president of the New York Fed, was directly involved in many recent generous bailouts to Wall Street banks and insurance companies, including Bear Stearns, Merrill Lynch, Citigroup and American International Group. — He is not new at the job and he surely does not represent a break with the past.

Geithner was under secretary for international affairs during the Clinton administration under former Treasury Secretary Robert Rubin (later a director of Citigroup in 1999 and its chairman in 2007) and under Lawrence Summers, who succeeded Rubin as Treasury chief. (Summers is to lead the National Economic Council in the Obama administration.)

The arrival of legendary inflation-fighter Paul Volcker among Obama's economic advisers, however, is an indication that the new administration intends to be a problem-solving administration. This would seem to be required in order to repair the structural damage done to the U.S. economy over the last eight years. Nevertheless, a question lingers on: Will the ongoing mammoth bailout of Wall Street banks, with insufficient pro quo pro returns and protections for U.S. taxpayers, continue unabated under the Obama administration? If yes, these huge financial bailouts may turn out to be the largest transfer of wealth from the poor to the rich in the history of the world.

Economically, however, it can be said that the coming Obama administration finds itself in a somewhat enviable position. Indeed, if there were to be an economic depression in the coming years, such a depression would still be called the “George W. Bush depression”, just as the last one was known as the “Herbert Hoover depression”. The current economic and financial ordeals are justly part of the Bush administration's dismal legacy.

However, the same benefit of the doubt can hardly be extended when it comes to rewarding Sen. Joe Lieberman for siding against his own party, and for supporting the Republican Presidential Ticket (that he nearly joined) in 2008, and for filling other important cabinet posts. Let us remember that, in 2006, Sen. Lieberman was openly rejected by Democratic voters in a Connecticut primary, but ran as an independent candidate against the official Democratic anti-Iraq war candidate, Ned Lamont, in his own state of Connecticut. Could any other American politician, other than this fanatically pro-Iraq war and pro-AIPAC senator, have received the same generous accolade after being rejected by Democratic voters and after switching party lines twice, in both 2006 and 2008 elections?

Why then was Sen. Joe Lieberman allowed to keep his chairmanship of the all-important Senate Homeland Security Committee, with the implicit backing of President-elect Barack Obama, despite his high profile support for GOP presidential nominee John McCain during the 2008 presidential campaign? (N.B.: For the record, Sen. Barack Obama initially supported Lieberman over Lamont in 2006.) It is fair to say that if Sen. John  McCain  had won on November 4, Joe Lieberman would have gotten a high cabinet position in the new McCain Republican administration. Now that Lieberman is back in his powerful position in the Democratic-run Congress, it is also fair to say that this politician cannot lose, whatever he does. For him, at least, the Democrats and the Republicans are just two wings of a single large Establishment Party, in Washington D.C., between which some politicians are free to move at will.

What's going on over there? Does the desire to have a filibuster-proof threshold of sixty Democratic senators—and the good old-buddy system—explain and justify everything? Obviously, people are entitled at least to an explanation, lest rumors start to circulate that President Obama is de facto the stooge of powerful special money interests. The worst thing that could happen to a politician is to give the impression that he or she is in the pockets of rich special interests. This could be devastating to his credibility, not only domestically but also internationally.

Indeed, after the above revealing incident and after paying his political debts to supporting constituencies, things got even worse with some other nominations to the Obama cabinet, such as the choice of the crucial Defense secretary. Indeed, president-elect Obama—his promise of ending the Iraq war and changing the mindset in Washington that led to it, and the echo of his slogan "Change You Can Believe In" still ringing in our ears—is said to have decided to leave the Pentagon in the hands of Robert Gates, a Bush appointee who does not believe in ending the Iraq war, who believes in the unlawful concept of preventive war and who says that America has the right to "act violently and alone" in the world! Many may see in this nomination a kind of betrayal of his campaign rhetoric and an overt attempt on Obama's part to please the industrial-military complex.

If the President-elect had wanted to bring Republicans into his administration, while marking a break with the recent past, he could have called on Sen. Chuck Hagel (R-NE), a decorated war veteran, to act as Secretary of Defense. —He did not. Alternatively, President-elect Obama could have asked Sen. Jim Webb (D-VA), a former Secretary of the Navyand a critic of Bush's Iraq war, to run the Pentagon. He did not, preferring a member of Bush's team, and this reveals more than anything else Obama's fundamental priority, i.e. to make himself acceptable to the Washington establishment.

This comes in tandem with the expected nomination of pro-war “stay the course” retired Marine Gen. Jim Jones as national security adviser, even though the general initially resisted Bush's rush to war with Iraq. The message here could be that, “as far as U.S. foreign policy is concerned, with Obama, it's business as usual.” Is this so? When a politician aims at pleasing everybody, he usually ends up pleasing nobody.

So far, even though he ran on an anti-Iraq war platform, President-elect Obama has not filled any important government position with individuals who are known to have opposed the war. Therefore, the question must be asked: Was he really sincere when he pretended to be opposed to Bush's war, or was he simply playing politics?

In any case, too many decisions of the Lieberman-Gates-Jones variety, and people will start to think that a few faces may change in Washington D.C., but things really stay the same, no matter the grandiose promises of “change”. Indeed, people are not far from having the impression that President-elect Obama has quickly “gone native”, even before taking office, and that he has been embraced by the more or less corrupt Washington and Wall Street establishments. —He seems to want to fit in. If true, President Obama will make speeches, give press conferences and reign, but he won't govern.

Indeed, was the November 4 U.S. presidential election anything more than a narrow choice between a third term Bush administration and a third term Clinton administration, ...or a mixture of the two?


Friday, November 14, 2008

The Foreign Policy of an Obama Administration

“Either man will abolish war, or war will abolish man.”

“In the field of world policy I would dedicate this nation to the policy of the good neighbor—the neighbor who resolutely respects himself and, because he does so, respects the rights of others.”
President Franklin D. Roosevelt (March 4, 1933)

“I believe in a whole lot of things that make me progressive and put me squarely in the Democratic camp.”
Sen. Barack Obama, (July  8, 2008)

President-elect Barack Obama is a nice guy and a fresh political face. His election on November 4 (2008), as president of the United States, is a great personal achievement. At the very least, he deserves the benefit of the doubt. Indeed, President-elect Obama has received from the American electorate an unequivocal public mandate for change. It is fair to say that his election creates an opportunity for the United States to tackle a number of systemic problems that have beset this proud nation for a long while.

The most important revision that could be made is the way Americans see their country in the world. Is the U.S. an old-style empire that uses empty phrases to advance imperialistic interests through military force? Or is the U.S. rather the first country truly founded on the Enlightenment principles of equality of all human beings, of individual freedom and responsibility, and of the democratic system of government, as embodied in the U.S. Constitution? Which is it going to be under an Obama administration?

Since World War II, the United States has been obsessed with its military power. The fact that the U.S. played such a central role in defeating Nazi Germany and imperial Japan went to the head of most American politicians and of many American citizens. Suddenly, the U.S. saw itself as grander than nature, a messianic, self-appointed “leader of the free world”. It was a mission that the military-industrial complexwas eager to embrace with enthusiasm.

Towards the end of World War II, General Motors CEO Charles Wilson advanced the fateful idea of a permanent war economy with ever increasing military expenditures, and with military bases all around the world. On April 14, 1950, Wilson's ideas were officially adopted by the U.S. government when National Security Council Document 68 was issued by the Truman administration. It was the framework for an amoral and costly foreign policy that propelled the United States upon a dangerous path and which, nearly sixty years later, is threatening to push it toward financial and moral bankruptcy. Indeed, it is because of this far-reaching policy that the United States today spends more on the military than all the other nations of the world combined and has been willing, under George W. Bush, to engage in a war of aggression.

Even before, however, numerous foreign military adventures, beginning with the Korean War (1950–53), followed the adoption of this militaristic policy. The worst blunder was undoubtedly the ill-advised and gratuitous Vietnam War (1959–1975), in which some 55,000 young Americans and more than one million Vietnamese lost their lives, all for naught. It was also a major component of the Cold War with the Soviet Union.

The obsession with anything military turned tragic in the 1980s, under Ronald Reagan, when propagandists began to present the United States as the “good empire” as compared with other “evil empires”. Of course, the most grotesque rendering of this delusion reached its zenith under George W. Bush, when the United States perceived itself as being above international law, in its self-appointed “mission” or “crusade” to impose American-style democracy and promote U.S. economic interests around the world with tanks and bombs.

This transformation of a law-abiding American republic into a somewhat rogue empire above the law was bound to have many dire consequences, for both itself and for the world.

In the past, the myth of a so-called U.S. "Manifest Destiny" under a divine authority, and of American exceptionalism, has often surfaced in American history, but rarely as intensely as it was witnessed during the last quarter century. Used initially by the Jacksonian Democrats to justify the extermination of the Indians and the conquest of the American West, the myth was promoted by the Republicans in the 1980s to pave the way for the ideology of an American world hegemony.

As if to corroborate historian Arnold Toynbee's 100 year cycle of imperial wars, the same myth had been used in the 1890s by members of the Republican Party to justify their seizure and occupation of former Spanish foreign colonies during the Spanish-American War of 1898. At that time, the United States embraced a policy of imperial conquests, with the occupation of the PhilippinesPuerto Rico and Panama.

Recently, the powerful neo-conservative movement adopted the same ideology of American moral superiority, presenting the policy of militarism and of imperialism as something "good". The neocons, indeed, have been the principal proponents of total global military domination by the United States. They have been the main driving force within the Bush-Cheney administration behind the American-led war of aggression against Iraq.

Soon, in January 2009, a new Obama administration will be inaugurated. Normally, if it really wants to change things, a new administration must spell out clearly its agenda during the first 100 days, before everything becomes “business as usual”. This is a moment to be seized and not be wasted, especially with the type of widespread mandate the incoming administration has received.

Will President Barack Obama deliver on his promise of change and adopt new and bold progressive policies? Indeed, will he have the wisdom and courage to revisit a more than half-century old foreign policy that has outlived its pertinence, and dare bring forward a new vision and a necessary change of direction? —At the very least, the question deserves to be raised.


Friday, October 31, 2008
How U. S. Politicians and Bankers Built a Financial Debt House of Cards (whose Collapse Threatens to Destroy the World Economy)

“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”

"All for ourselves, and nothing for other people, seems, in every age of the world, to have been the vile maxim of the masters of mankind."
Adam Smith (1723-1790), (The Wealth Of Nations, 1776)

"This economy of ours is on a solid foundation."
President George W. Bush (January 4, 2008)

"While the crash only took place six months ago, I am convinced we have now passed the worst and with continued unity of effort we shall rapidly recover."
President Herbert Hoover (1874-1964), (May 1, 1930}

Why does the world economy seem to be caught every 60 some yearsin a financial and banking turmoil that threatens to collapse the real economy? The answer has to be sought in human greed and political corruption that seem to collaborate in pushing to the extreme all types of speculative and parasitic practices.

Between 2002 and 2007, we have witnessed the culmination of such an example of greed and corruption on a very high scale, as an unstable pyramid of artificial financial debt instruments was built to higher and higher unsustainable levels, to the benefit of unregulated financial operators who raked in hundreds of billions in excessive profits, juicy fees and obscenely high year-end bonuses. Similarly, parasitic speculators took advantage of the situation that regulators had allowed to develop, and they made billions (not millions) speculating against the shaky house of cards of mortgage-backed securities. —These are the winners: bankers and speculators. —The losers in that charade are about everybody else: homeowners, investors, taxpayers, retirees, and workers who are poised to lose their jobs and incomes, as a consequence of the failure of government to prevent  these financial excesses.

Indeed, the problem is both political and financial and this has to be understood in order to disentangle the web of causes that produces a financial and economic collapse. It is that combination of political corruption and racketeering financial and banking practices that creates the right environment for a major crisis to develop. Why each 60-some years? Essentially because the lessons learned the hard way by a grandparents' generation, sixty some years ago, are forgotten by a succeeding spoiled brats current generation, and the same past mistakes and fresh ones are made anew.

On that score, the big financial crises of 1873-1880 and 1929-1939 had pretty much the same type of causes as the one we are entering into today: the collapse of public and private basic morality among a very small elite that pushes its exploitation of public institutions to the breaking limit. For such a small elite, there comes a time when all means justify the supreme goal of enriching itself at the expense of the rest of society. All combines, tricks and schemes become acceptable and justified by pious ideological slogans such as “the market always knows best“, the new “wealth (no matter how acquired) will trickle down”, or, for the more delusional ones among them, “God is placing all that money in my hands, therefore, I must be doing good”!

The immediate technical question that must be answered is how a casino-like financial capitalism was allowed to develop? Why were banking practices twisted in such a way as to turn capital into the equivalent of casino chips?

Indeed, banking's primary function is to allow capital to be used in the most productive ways. It is the primary function of financial intermediaries (banks, savings & loans associations, stock exchanges, etc.) to convert savings into productive capital (plants, roads, etc.). Investments are kept tradeable and liquid by secondary capital markets. Properly regulated to avoid combines and scams, capital markets usually function smoothly.

It is when politicians, or regulators themselves, throw out such regulations that things can get ugly. In the U.S., a few disastrous steps were taken in 1999, 2000, 2004 and 2007, which can explain the current financial crisis.

A Decade of Planned Deregulation

Indeed, under the advice of then Fed chairman Alan Greenspan, a libertarian at heart, the Republican controlled Congress and the Democratic Clinton administration passed two laws designed to deregulate the American financial industry. First, in 1999, it passed the Gramm-Leach-Bliley Act (GLBA) that, in effect, abolished the 1933 Glass-Steagall Act, which had regulated investment banking, and which established tight barriers between the banking and insurance industries. With this new law, the large unregulated Wall Street investment banks and commercial banks, as well, could enlarge tremendously the range of their financial activities.

Then, in a one-two punch, the lame-duck 2000 U. S. Congress went further and reintroduced legalized gambling into the financial sector, a prohibition that had been in place since after the 1907 financial crisis. Indeed, by adopting the Commodity Futures Modernization Act of 2000Congress, and President Bill Clinton who signed it, exempted outright financial gambling from state gaming laws. With the new law, the entire American financial system could be turned into a large unregulated casino where everything goes (legally).

Another step toward a near complete deregulation of previously regulated financial activities was taken in 2004, this time by the regulatory agency of the Securities and Exchange Commission (SEC). Indeed, on March 28, 2004, the Securities and Exchange Commission (SEC) removed the ceiling on risk that the largest American investment banks could take on so-called securitized loans. Such loans were based on mortgages, but also on credit card debt, auto finance debt, student loans, etc.

Finally, the Securities and Exchange Commission took the last step toward deregulating financial markets when in the month of July 2007, weeks before the onset of the subprime crisis, it removed  the uptick” rule for short selling any security.

The Story of the Two Bubbles

The table was then set for what could turn out to be the biggest financial mismanagement in history. It was the product of two interrelated bubbles: a housing bubble and a financial debt bubble.

The housing boom was fed by extraordinaryily low interest rates and by lowered lending standards for mortgages. Indeed, from 2002 to 2005, under chairman Alan Greenspan, the Fed maintained excessive monetary liquidity in the financial system and short-term interest rates fell to 1 percent, with real interest rates negative.

Indeed, after the tech-bubble burst in 2001, and the March- November 2001 recession, the Greenspan Fed aggressively lowered the Federal Funds rate from 6.5 percent to 1 percent in 2004, the lowest it had been since 1958. It is widely accepted today that this aggressive monetary policy lasted too long and has played an important role in fueling the housing bubble.

But the housing bubble would have only been an above normal top within the 18-year Kuznets cycle, ( from a 1987 top to the 2005 top) if it had not been reinforced by an extraordinary debt bubble.

Last February 25, 2008, I explained the extent of the debt bubble, in the United States, in these terms:
“When one looks at a graph provided by the U.S. Bureau of Economic Analysis (BEA) and which shows the relative importance of total outstanding debt (corporate, financial, government, plus personal) in relation to the economy, one is struck by the fact that this ratio stayed around 1.2 times GDP for decades on. Then, something big happened in the early 1980s, and the ratio started to rise, with only a slight pause in the mid-1990s, to reach the air rarefied level of 3.1 times GDP presently, nearly 200 percent more than it used to be.”

That “something big” was the combination of the breaking up of the regulation apparatus we have already mentioned, and the appearance of new risky financial instruments.

Reckless Lending

On the one hand, first came the “subprime lenders” or what some call the predatory mortgage lenders. Spurred by an incentive system that rewarded risk-taking (big bonuses), mortgage banks and other lenders began to accommodate subprime borrowers with dubious credit by extending mortgage loans to homebuyers who would not have qualified in other times. —They lowered their lending standards.

Nontraditional home loans were advanced to borrowers who had no documented incomes. Some loans were interest-only loans with down payments of 5 percent or less. Some were adjustable rate loans (ARMs), with low rates for one or two years to be reset later at much higher rates. In 2006, about 25 percent of American mortgages were subprime and close to 20 percent were adjustable rate loans. Mortgage lenders and home buyers alike assumed that home prices were not going to fall on a national basis or that the Fed would intervene to save the industry by slashing interest rates.

The New Alchemy: Finance

On the other hand, the main reason of such lending recklessness was the facility with which subprime lenders could sell their risky mortgages upstream to bigger players, investments banks for example, which undertook to buy them, pool them into mortgage bonds and re-channel them into new financial instruments through a process of aggressive securitization.

These new "structured investment vehicles" (SIVs), which fall into the large class of derivative products, came under various names such as "Collateralized Bond Obligations" (CBOs) or "Collateralized Debt Obligations" (CDOs). They had the characteristics of short-term asset-based commercial paper that were backed by the underlying income producing mortgage assets downstream and were graded according to a certain risk of default. —The asset-based security (ABS) was born. [For reference, let us keep in mind that total derivative products around the world amount to more than $500 trillion, or more than 10 times the output of the global economy. This is a staggering overhang on the world economy when something goes wrong.]

More than one trillion and a half dollars of these asset-backed financial products were sold, not only in the U.S., but all over the world. However, the market for such artificial or fictitious financial instrument began to tighten significantly when the housing bubble burst in 2005 and 2006, as a wave of foreclosures and mortgage defaults hit the industry. It got worst after the August 2007 subprime crisis, and it became de facto frozen in the spring of 2008, after the demise of the investment bank Bear Stearns. The credit rating agencies (Moody's, Standard & Poor's and Fitch) had no choice but to lower their artificially high ratings on asset-based securities (ABS), and the prices of ABS plummeted.

Enter now another new financial instrument that made matters much worse and led directly to the crisis: the Credit Default Swaps (CDS). Because of the lack of proper government regulation, this new financial product really became, in financier Warren Buffett's words, a true financial weapon of mass destruction. Essentially because it became the tool of choice for the newly legalized activity of high level financial gambling by entities that were unrelated to any genuine lending operation. Indeed, as we will see below, in a panic environment, large off-shore hedge funds with their large pools of money could literally raid imprudent and weakened financial institutions with so-called “naked” short sell orders that far outnumber the buy orders from any potential buyers. In other words, they were in a position to corner the market.

Initially, in order to protect against the risk of default on the new asset-backed securities (ABS), some insurance companies—but also some investment banks themselves—began to issue bilateral “insurance” contracts against the newly created ABS. These were called Credit Default Swaps (CDS). In theory, they were supposed to offer protection against the possible default of an investment instrument, such as an asset-backed security. The issuer of ABS, or an investor looking for protection, could buy such an insurance contract and pay a premium, which was a small fraction of the asset being protected, say 5 percent. Understandably, when housing prices were on their way up, with little risk of mortgage default, the cost of such “protection” was low, and conversely, in a period of price decline, when the risk of default increases. This was a financial innovation, the so-called “insurance against default”, that opened the floodgates of money to be invested in the new financial instruments. Indeed, it allowed investors such as pension funds and other institutions which have a fiduciary obligation to buy only high-quality securities, to legally buy artificially highly rated (but risky) ABS securities, or to invest in hedge funds which specialized in leverage trading in derivative products.

But the hic is that the issuance and use of such financial “insurance” contracts were not regulated by any government agency, because the word “insurance” was not used; instead, they were considered as simply a protection against the “default” of payment on a financial security. And that's where the gambling part enters the picture: only 10 percent of CDS are genuine insurance contracts held by investors who really own asset-backed securities (these are covered CDS); 90 percent of them are rather held by speculators who trade CDS, while not owning any asset-backed securities to be protected (these are naked CDS). To picture the situation, we can consider such “naked” CDS as a form of high valued casino chips that one can buy to bet on the likely future value of a financial security, just as someone could bet on the issue of a horse race. Except that in this kind of unregulated financial gambling, as we will see, the owner of the chips can influence the outcome of the race by intervening in the race itself. In other words, the game is rigged.

The Financial Sector as a Vast Casino

To repeat, and contrary to ordinary regulated insurance contracts, Credit Default Swaps (CDS) can be bought and sold by speculators who are not directly involved in the mortgage business. They deal in “naked” CDS. As a comparison, for example, it is illegal to buy ordinary life insurance on the life of someone with whom a buyer is not related, in order to avoid evident abuses. —Not so with CDS, as it is the case with "naked" CDS. And because of the 2000 Commodity Futures Modernization Act passed by Congress, no state has the power to regulate this new form of sophisticated gambling. The result is astounding: it is estimated that the notional value of credit default swaps outstanding today is about $62 trillion (4 times the size of the US economy). This, in itself, is an indication of how popular the "naked" CDS innovation was as a way to bet on the collapse of the entire asset-backed securities construction. This is also a clear sign that, in a crisis, it would be all but financially impossible for the issuers of CDS to meet their obligations. In other words, disaster was just around the corner. —This is an event that any regulatory agency should have seen coming.

Indeed, when housing prices hit the expected top of their cycle, in the spring of 2005, and began falling, especially in 2006, the price for CDSs was still relatively low. So, some astute speculators undertook to buy CDSs and simultaneously began selling short the ABS that had been issued by investment banks, such as Lehman Brothers, in the correct expectation that mortgage-backed securities were bound to lose value with the expected rise in home foreclosures and mortgage defaults. For instance, one large speculator is reported having reaped, in 2007, an estimated $3 billion-plus for himself, which made it the largest one-year gain in Wall Street history, for a single individual. Many speculative hedge funds played the same game and raked in billions of dollars in easy-made gambling profits.

Who Pays for the Excesses?

Where did all this money came from? It came from the loses suffered by investors in investment banks and in some large insurance companies, and it came from taxpayers who had to advance a lot of money to prevent these financial firms from failing. The first losers, initially, were the very financial firms which had initially engaged, very profitably we must say, in the new risky finance, i.e. insurance companies, such as American International Group (AIG), (which was reported to have $400 billion CDS outstanding on its books when it failed), or from highly leveraged investment banks such as Bear StearnsGoldman SachsMorgan Stanley, Lehman Brothers, Merrill Lynch and others which specialized in buying primary subprime mortgages and in issuing asset-backed securities (ABS) in their place. They have suffered huge losses on their ABS and CDS. So much so that some of these financial firms saw their capital base nearly completely disappear, making them de facto insolvent and creating the credit crisis that we know.

The Government at the Rescue

To prevent a complete collapse of the financial system, the U.S. government (Fed, U.S. Treasury and FDIC) had to step in to prevent these large financial institutions from filing for bankruptcy, with multiple rescue and bail-out plans, with the notable exception of Lehman Brothers, which was left to fail on September 15, (2008). The U.S. Treasury also had to inject some $200 billion in the government sponsored Fannie Mae and Freddie Mac in preferred shares, in order to solidify their mortgage lending operations and their $5.3 trillion joint debt.

Consequently, large amounts of public money, in excess of $2 trillion, are now being used to settle the risky bets that large banks took over the years and which went bad. Public money is also being used to subsidize large banks to acquire smaller banks, in an unprecedented restructuration of the entire American banking sector. Such a government intervention will likely contribute to shore up the U.S. financial sector by strengthening its consolidated balance sheet. It remains to be seen, however, if some of the money will trickle down to the real economy.


The U.S.-based financial crisis has now become worldwide and is spreading. The root cause of this financial mess is due to the fact that the lessons of the far away past with its financial crises, and those of a more immediate past, have not been learned. Indeed, one would have hoped that lessons would have been learned from the 1980s Savings & Loans crisis and from the demise of the huge hedge fund, Long Term Capital Management, in the 1990s. But greed and corruption seem to have overtaken wisdom and to have prevented proper governmental oversight.

In the United States, over the last two decades, two parallel banking systems have co-existed, sometime even within the same institution. While one, the traditional banking system, was regulated, the other one, the investment banks and hedge funds and the credit derivatives market, was a shadow system that was hardly regulated at all. Not surprisingly, it is in this unregulated sector that the worst excesses have taken place, as one ever more risky financial innovation led to another. These excesses have resulted in creating a shaky pyramid of fictitious financial debt that has no, or little, relation to the underlying real economy of production of goods and services. How these excesses are going to be unwound will dictate how the world economy is going to fare in the coming years.

At the very least, the return to reality risks being painful and every effort should be deployed to mitigate its consequences for the greatest number.


Sunday, October 19, 2008
The Failed Presidency of George W. Bush:
A Dismal Legacy. --[PART I]

“The price of apathy towards public affairs is to be ruled by evil men.”
Plato (427-347 B.C.)

"We hang the petty thieves and appoint the great ones to public office."
Aesop (620–560 B.C.)

“When fanatics are on top there is no limit to oppression.”
H.L. Mencken (1880-1956), American author

“We've got a gang of clueless bozos steering our ship of state right over a cliff, we've got corporate gangsters stealing us blind, and we can't even clean up after a hurricane much less build a hybrid car. But instead of getting mad, everyone sits around and nods their heads when the politicians say, 'Stay the course.' Stay the course? ... I'll give you a sound bite: Throw all the bums out!”
Lee Iacocca, former CEO of Chrysler Corporation (book: Where Have All the Leaders Gone?)

Whoever is elected president in the coming November 4 American election will inherit a most miserable situation on nearly all fronts. This is because George W. Bush has been one of the worst presidents the U.S. has ever had, if not the worst. It is widely recognized that he was a below average politician who led his country on the wrong track, both domestically and internationally. Today, only a meager 9 percent of Americans dare to say that their country is moving in the right direction.

As a matter of fact, a very large majority of Americans— both Democrats and Republicans, men and women, residents of cities and of rural areas, high school graduates and college-educated— all say that the United States has been headed in the wrong direction under George W. Bush's stewardship. Bush's approval rating reflects the lack of confidence that Americans have in him and his administration. In fact, George W. Bush has recorded the lowest approval rating of any president in the 70-year history of the Gallup Poll. And, around the world, the United States has never had a leader who commands so little respect and confidence. Most people in the U.S. and abroad will find satisfaction in seeing histerm come to an end.

This is a terrible indictment of the Bush Administration that has presided over America's destinies for the last eight years. What is more disconcerting, this all came after George W. Bush won the presidential election in 2000, with fewer popular votes than Democratic candidate Al Gore, after a one-judge-majority decision of the Supreme Court, in effect, gave him the presidency. Therefore, this is an administration that had no widespread democratic mandate to do what it has done. And it has done a lot of things wrong. In fact, many people think this has been morally bankrupt administration.

• International disaster: An Illegal and Immoral War of Aggression

At the center of this fiasco, is the fact that the Bush-Cheney administration and its neocon cohort rushed to exploit the 9/11 terrorist attacks and used this as a pretext to implement a preconceived pro-Israel and pro-oil plan in the Middle East. This led them to adopt a simplistic response to Islamist terrorism, barging into complex Middle East societies on elephant feet. But in the process, they have only succeeded in making matters worse and in encouraging more hatred against the U.S. and more terrorism.

Indeed, George W. Bush will be remembered above all as the man who launched an illegal and immoral war of aggression against another sovereign nation, on false pretenses and forged documents, destroying in so doing the entire country of Iraq, and damaging perhaps irreparably the U.S. reputation in the world. As Scott McClellan, Bush's former Press Secretary during seven long years, stated, Bush and his advisers [in launching the Iraq War] "confused the propaganda campaign with the high level of candour and honesty so fundamentally needed to build and then sustain public support during a time of war".
Bush's deception and lies about Iraq in order to initiate a war of aggression, an aggression that is a war crime under the Nuremberg standard established by the U.S., are well documented. Thus, historians will have no difficulty in establishing the fact that the United States, under Bush, acted as a lawless international aggressor.
In initiating a war of aggression, Bush did violate the United Nations Charter, which "prohibits the use of military force" against any nation without the specific approval of the United Nations Security Council. The Security Council never approved the American-led military invasion of Iraq. Therefore, Bush and his crew had no international legal basis to invade Iraq. And they cannot pretend that Congress gave them such an authorization, since it is well known in law that no domestic law can override a signed international treaty in good standing.

In a domestic parallel, George W. Bush and his administration have set up what is probably the most widespread war profiteering system in modern history, through which billions and billions of dollars were misappropriated and wasted. At the same time as they were adopting a permanent war posture abroad, they were irresponsibly calling at home for a 674 billion dollar tax cut for their rich supporters and pushing up the deficits, of which a large proportion was financed by borrowing abroad.

• Illegality and Immorality

On the legal front, this is an administration that has shamed the United States with its illegal actions, with its deliberate and dishonest lies, with its war crimes, its disregard for international treaties, and with its overt disregard of constitutional government.

On the question of lawlessness, the list of missteps the Bush-Cheney administration took outside of the law is too long for a short article as this one. But there are numerous documents to be consulted and it is possible to attempt a short summary.

From the very beginning, the Bush-Cheney administration has dismissed international law and disregarded domestic law. They began by either repudiating or refusing to honor the United States' international commitments and obligations, thus showing indifference, if not outright hostility, toward international law. They opted out of five important international treaties and commitments: the Kyoto Protocol on Climate Change, the Anti-Ballistic Missile Treaty, the Biological and Toxin Weapons Convention, the Non-Proliferation of Nuclear Weapons Treaty and the International Criminal Court. In so doing, the United States, under the Bush-Cheney administration, has betrayed its international commitments and has moved away from being a moral state, and more and more toward the status of an international rogue state.

This was all confirmed when the Bush-Cheney administration adopted, in September 2002, the Bush Doctrine of preventive war, an internationally illegal and immoral program. Indeed, under existing international law, no country may attack another under false pretenses, nor use military force unilaterally.

This was followed by the even more dangerous and hairy Cheney Doctrine (or the One Percent Doctrine) which is anti-human rights, anti-rule of law and anti-Constitution, because it posits that if there is even a 1% chance American interests are in jeopardy somewhere in the world, unilateral American military interventions are justified, and this without conclusive evidence or extensive analysis. Such hubristic and shoot-from-the-hip foreign policies are a true recipe for international anarchy and thus render a great disservice to humanity.

Domestically, President George W. Bush has introduced the unconstitutional practice of adding signing statements to new laws, stating that he has the right, as President, to violate any section of a law, should he deem it in the national interest to do so. For example, on January 28, 2008, Bush signed into law the repeal of the “Insurrection Act Rider” in the 2006 defense appropriations bill. That rider had given the President sweeping power to use military troops in ways contrary to the Insurrection Act and Posse Comitatus Act and authorized the president to have troops patrol American streets in response to disasters, epidemics, and any “condition” he might cite. But in signing this repeal, Bush attached a signing statement that he did not feel bound by the repeal, thus opening the possibility he could ignore the law any time he saw fit to do so.

• Disrespect for Liberty and the U.S. Constitution

As if this were not enough, there was the attempt by the Bush-Cheney regime to suspend and even permanently abolish the more than eight centuries old right of Habeas Corpus. And when the Supreme Court, in a far-reaching decision on June 12, 2008, rebuked the B-C administration's argument that it had a right to establish concentration camps on U.S.-run properties around the world and hold prisoners indefinitely with no legal recourse, especially at the Guantánamo Bay detention center, President George W. Bush had the gall to criticize the Supreme Court's decision while on a trip to Europe.

Then Bush embarked upon a program of domestic spying on Americans never before seen in a democracy. He, indeed, removed most of thesafeguards that had been erected to protect citizens from illegal and warrantless spying activities by government, thus making a mockery of the U.S. Constitution. In particular, the Bush-Cheney administration did not respect key parts of the U.S. Constitution, especially the FourthAmendment, which protects against unreasonable searches and seizures. It must said, however, that some Bush Democrats, such as House Speaker Nancy Pelosi (D-CA) and Democratic House Majority LeaderSteny H. Hoyer (D - MD) have also willfully and enthusiastically collaborated with George W. Bush in enlarging the government’s spying powers over citizens. On his own, however, George W. Bush did his utmost to make permanent the President's War Powers, thus making sure that the United States could remain on a permanent war path and be in a position to suspend at will basic constitutional rights.

On top of everything, George W. Bush will be remembered as a politician who authorized torture and indefinite detention of prisoners. Indeed, after Bush willfully suspended the rights accorded prisoners of war by the Geneva Conventionshe was, in fact, officially turning the United States into an immoral nation that openly and unashamedly resorts to torture, thus violating basic rules of morality, international law and a host of international treaties adhered to by the United States. In fact, the Geneva Conventions in its article 3 does not only prohibit torture, but also any cruel, inhuman, degrading, and humiliating treatment of a detainee “in all circumstances.” However, it is not only on the issue of torture that the United States under Bush has become an international pariah.

The Bush-Cheney administration has also operated concentration campsin many countries, holding captive tens of thousands of detainees and hiding them from the Red Cross, the body empowered to monitor compliance with the Geneva Conventions. The Bush-Cheney administration has placed itself outside the civilized world and was nearly alone, last May (2008), in trying to undermine a treaty banning cluster bombsa type of bombs which have killed so many civilians, when 111 countries signed a treaty outlawing these inhuman weapons. On this occasion, the United States, under Bush-Cheney, sided with a handful of weapons makers and users, none of them known as great defenders of human rights and democracy: Russia, China, Israel, India and Pakistan. The Bush-Cheney administration has truly been a shamelessly immoral administration.

 (to be continued next week)


Sunday, October 26, 2008
The Failed Presidency of George W. BushA Dismal Legacy. --[PART II]

"Greed is good. Greed is right. Greed Works."
Gordon Gekko, corporate raider (played by Michael Douglas) in the movie Wall St.

“President [George W.] Bush will be remembered as the most fiscally irresponsible president in our nation’s history.”
Sen. Kent Conrad, Chairman of the Senate Budget Committee

[The government's decision to buy shares in the nation's leading banks] “is not intended to take over the free market, but to preserve it.”
President George W. Bush, October 14, 2008

"Our country for the first time in my life time has abandoned the basic principle of human rights. ...We've said that the Geneva Conventions do not apply to those people in Abu Ghraib prison and Guantanamo, and we've said we can torture prisoners and deprive them of an accusation of a crime to which they are accused."
Jimmy Carter, former American president

After [this] war [against Iraq] has ended, the United States will have to rebuild much more than the country of Iraq. We will have to rebuild America's image around the globe.”
Sen. Robert Byrd, (D-W.Va), March 19, 2003

Economically, the Bush-Cheney administration is leaving behind a big financial and economic mess. In fact, this is an administration that has brought misery upon America by its misguided economic policies that have built a mountain of shaky debt and rendered dysfunctional large segments of the American banking industry and large sectors of the U.S. economy, through inappropriate deregulation to enrich greedy special interest characters, wheeler-dealers, corporate con men, professional short-sellers and other scam artists and swindlers.In so doing, it has empowered rich parasitic speculators and turned the financial sector into a giant casinothus risking the health of the entire economy.

Indeed, and to complete the picture, the Bush-Cheney administration has emptied the public treasury, debased the U.S. currency and fueled deflationinflation and, in the end, produced stagflation and what can turn out to be a very serious recession.

This is understandable. Over the last eight years, the Bush-Cheney administration has adopted a laissez-fairepolicy based on a let-them-eat-cake ideology. It has pushed for economic deregulation throughout the government, beginning with the de-fanging of the Securities and Exchange CommissionIt has pursued an aggressive policy of deregulation of the large global investment banks, which were basically left to self-regulate themselves and allowed to build up the largest mountain of flimsy backed debt instruments and risky financial derivative products ever seen in history. It did the same thing for other regulatory agencies such as the Consumer Product Safety Commission, the Environmental Protection Agency, worker safety and transportation agencies.

It is thus no accident that the Bush-Cheney administration has presided over one of the worst financial collapses and credit crises in U.S. history, by packing regulatory agencies with cronies whose mission it was to let rapacious speculators and market manipulators go wild. The result has been the creation of a casino-like speculative economy that is now crashing down before our very eyes.

Under Bush-Cheney, financial markets became manipulated by unscrupulous bankers and by rapacious hedge funds, as public regulation was reduced to a minimum. Millions of Americans lost their homes through foreclosure and many more saw their working and pension incomes eroded and destroyed by inflation and plant closings. And as what could be a protracted recession proceeds, many more will lose their jobs in the coming months, while some older employees may have to postpone their retirement because of the disappearance of their pension money.

In a parody of President Abraham Lincoln, we can say this has been an administration that deserved to be dubbed "a government of the wealthy, by the wealthy and for the wealthy." Some would not hesitate to say, also in parody, that it has been "a government of Goldman Sachs, by Goldman Sachs and for Goldman Sachs,"considering the ubiquitous political and economic role which that firm has played within the Bush-Cheney administration. President Bush's own Chief of Staff, Mr. Joshua Bolten, comes from Goldman SachsAnd these days, everybody pretends not see the real and potential conflicts of interests of other public servants who are now on the giving public side of things, at the U.S. Treasury, and who are going to be on the receiving private side of public money, in a scant few months. It is the same thing with a lot of what the U.S. Treasurydoes. —Even the Governor of the Bank of Canada, Mr. Mark Carneyis a former employee of Goldman Sachs!

In a related matter, for historical purposes, it will be remembered that, in the fall of 2008, the Bush-Cheney administration sponsored a huge rescue-plus-bailout of the largest speculative Wall Street investment banks (which the Bush SEC had deregulated on March 28, 2004) and of a host of other banking and insurance institutions which had engaged in alchemy or synthetic finance and made risky investments. To that effect, it is ready to place at risk close to $2.0 trillion of public money and let the public debt explode, with few conditions attached to protect the public interest. In fact, the Bush administration stood ready to advance hundreds of billions of dollars and only requested non-voting preferred shares in the troubled banks and insurance companies that it rescued from bankruptcy. As a consequence, contrary to what the Roosevelt administration did in the 1930s, the U.S. government has no direct say about the way the troubled financial institutions are managed and run, and thus, if the bail-out were to be successful, most of the benefits would go to bank owners and their executives; but, if things continue to deteriorate, taxpayers will be the ones left holding the bag.

Some have said this is an example of corporate socialism for the rich. In  fact, this has nothing to do with socialism per se, but everything to do with legal and unapologetical extortionism on a high level. For all these reasons, if the ongoing recession and financial crisis were to turn into a full-fledged economic depression, as it could possibly do, and as it did in 1873-1880 and 1929-1939, it would have to be dubbed by historians "the Bush-Cheney Grand Economic Depression" of 2008-20(?).

George W. Bush will also be remembered for having financed his whimsical and ill-conceived three-trillion-dollar war of aggression against Iraq on credit, thus worsening the U.S. financial situation in the world, perhaps irrevocably. He is leaving behind him a financial mess like no one has seen since the great depressions following 1873 and 1929.
In all fairness, it must be said that some Democrats in Congress, the so-called Bush Democrats who usually vote with Republicans on foreign policy issues, have also been supporters of the Iraq War from the beginning and have invariably voted for the hundreds of billions of dollars required to finance it.

The Bush-Cheney administration has presided over economic dislocations and greed-fed financial bubbles,and it has been an agent of poverty and of financial and economic crises. This is an administration that will be sadly remembered for its huge tax cuts for the super richfor its huge fiscal deficits bequeathed to future generations and for its huge and costly bailouts for speculators and high flyers, and very little for families and ordinary citizens.  
As a consequence, on the whole, Americans are today poorer than when this duo took power eight years ago, while the gap between the very rich and the average American has never been wider. It has been a regime that has borrowed and borrowed, debased the currency, waged unnecessary wars and doled out defense contracts in the most reckless possible way, with a minimum of oversight and accountability.
• International Mess: An Irresponsible Attempt to rekindle the Cold War
Internationally, Bush and Cheney not only started a war against Iraq, a country that had never attacked the United States, but they also did their utmost to recklessly restart the Cold War with Russia. They did that by unilaterally abrogating the Anti-Ballistic Missile Treaty, by transforming NATO into an offensive military alliance and  by installing anti-missile sites, manned by American soldiers, in former Warsaw Pact countries, such as Poland and the Czech Republic, and in former Soviet republics, right next to Russia's borders.
The Bush-Cheney administration designed a policy of encircling Russia by arming pro-U.S. European client states. That is why they have directly provoked Russia by incorporating six former Warsaw Pact nations and three former soviet republics in the now offensive and U.S.-controlled military alliance that is NATO. They went as far as to openly support and arm aggression-prone governments in some former Soviet republics, especially in Georgia, the birthplace of Stalin. All this reflects a pro-active and aggressive military stance against Russia designed to provoke Russia and restart the Cold War, thus dangerously increasing the chances of a nuclear world war.
Let us recall that when Khrushchev's Soviet Union tried to install missiles in Cuba in 1962, it nearly started a world war. Now, half a century later, with Bush-Cheney, the brinkmanship is on the other side. They have acted irresponsibly in provoking Russia, as if they did not mind restarting a cold war with that country. Russian exasperation was well expressed by then Russian President Vladimir Putin when, in 2007, he said that “The United States [under Bush and Cheney] has overstepped its national borders in every way, and as a result, no one feels safe. . . . such a policy stimulates an arms race.”
• Disrespect of Military Advice

George W. Bush will be remembered as the man who brought within the walls of the White House not only corruption and incompetence in nearly every field of activity—as well as a lack of moral fortitude in approving torture—but also a quasi dictatorial gangster mentality in dealing with Congress, with the military, with other governments and with political opponents in general. For instance, Bush fired more generals and admirals than any other head of state since Adolf Hitler in Germany, some seventy years ago. Among others, Bush fired or forced into early retirement Gen. Eric K. Shinseki; Gen. John AbizaidGen. George Casey; and Adm. William J. Fallon, then top U.S. commander in the Middle East.

• A Propaganda-prone Administration

But perhaps one of the greatest indictments of the Bush-Cheney administration is the way it has used crude covert propaganda techniques worthy of a totalitarian regime. Indeed, it has launched a sophisticated propaganda campaign to manipulate information and public opinion that has had the effect of undermining democracy and the freedom of information. For one, it has subverted the major American TV and radio networks by provided them with false independent "analysts".

Second, it has paid journalists to push surreptitiously for government programs. Third, it has intervenedwithin news organizations, using the power of government to have journalists and producers fired when they didn't toe the government line. Fourth, the Bush administration has embarked upon the business ofcensoring moviesAnd that is only the tip of the iceberg, considering how pervasive the Bush-Cheney administration's direct and indirect control of the media has been. Never has American journalism and U.S. corporate media been so corrupt and complicit, and this is because the United States has never had such a corrupt administration, i.e. the 2001-2009 Bush-Cheney administration.

• Conclusion

To conclude, it should be obvious by now to anybody who has eyes to see that the Texan politician named George W.  Bush, son of former President George H. Bush, was unqualified for high office. He has amply and tragically demonstrated it. This is a politician who presided over an administration that has acted as a wrecking crew, destroying most of everything it has touched. [For more analysis on that, see my book "The New American Empire".]

In its countless failures, the Bush-Cheney administration has been an unhealthy mixture, rarely seen in a democracy, of immorality, lawlessness and incompetence. —It won't be missed by most people, both in the U.S. and around the world.


Monday, October 13, 2008
Anatomy of the American Financial Crisis:
How It is Turning into a Worldwide Crisis

"The basis for optimism is sheer terror."
Oscar Wilde

[After the March 2008 Bear Stears bailout]
"As more firms lost access to funding, the vicious circle of forced selling, increased volatility, and higher haircuts and margin calls that was already well advanced at the time would likely have intensified. The broader economy could hardly have remained immune from such severe financial disruptions."
Ben Bernanke, Fed Chairman (March 2008)

“In accounting 101 we learn that high yields equal high risk. We know the CEOs had an incentive to disregard this because they were getting huge bonuses.”
David Hartzell, dean of the University of Delaware's business college and a former vice-president of Salomon Brothers

“Intensifying solvency concerns about a number of the largest U.S.-based and European financial institutions have pushed the global financial system to the brink of systemic meltdown.”
Dominique Strauss-Kahn, Head of the IMF (October 11, 2008)

The Bush administration's way of dealing with the ongoing financial crisis has been frantic, but probably less than adequate. In fact, tragic errors may have been made that must be remedied as quickly as possible.

The most damaging error may have been to let the global investment bank Lehman Brothers fail ($691 billion of assets at the end of 2007), on Monday September 15. This fateful date may have to be remembered in the future. This was the largest failure of an investment bank since the collapse of Drexel Burnham Lambert in 1990. In contrast, the Fed and the U.S. Treasury moved quickly in mid-March (2008) to save a similar global investment bank in distress (but half the size of Lehman), Bear Stearns, by quickly lending and guaranteeing $29 billion to the large universal J. P. Morgan Chase bank in order to absorb it. —(N.B.: Let us keep in mind that it was the collapse in June 2007 of two internal Bear Stearns hedge funds that had been heavily invested in mortgage securities that kicked off the full-fledged market panic that unfolded in August 2007, and which today has turned into a full-fledged international financial crisis).

Why was the same treatment not offered to Lehman? Possibly because of a personal lack of empathy between Treasury Secretary Henry M. Paulson Jr. (a former chief executive of rival investment bank Goldman Sacks) and Lehman's CEO Mr. Richard S. Fuld Jr., or possibly because the Bush administration wanted to make an example that all investment banks, no matter how large, could not count on being rescued by the government. The Bush administration did not even bother to appoint a trustee to supervise Lehman’s liquidation in order to make it orderly.

Such a liquidation of a large international bank, known for its worldwide interconnections and unsound banking practices, was nearly a repeat of the mistake made in letting the large Vienna-based Creditanstalt bank fail, on May 13, 1931. This was a bank that had borrowed large amount of money in London and in New York to finance its activities. Its failure created a domino effect among other international banks that had lent to each other in the international credit chain. So much so that the failure of the Creditanstalt forced them to severely tighten their lending to absorb their sudden losses.

Seventy-seven years later, in 2008, the Bush administration's decision to let the Lehman Brothers bank fail has produced a similar ripple effect throughout the international financial system. And, perhaps more important politically, it signaled to the markets that the Bush administration was willing to let a dangerous debt deflation and an ominous credit crunch proceed. This may turn out to have been a most tragic mistake.

Indeed, Lehman's bankruptcy forced the global investment bank to quickly write down its huge portfolio of debt, a fair amount of it in derivative products. But since banks are creditors of each other, especially Lehman which dealt with large institutions, this had the consequence of spreading the American financial disease all over the world, and especially in Europe. Why? Because Lehman's London office was a huge center of sale and distribution for its more or less toxic derivative products all over Europe. Indeed, many European banks had invested in Lehman's securitized paper, and when it failed, they were left with large losses. As a consequence, they had to curtail their domestic lending and that's the reason the credit crunch is now moving to Europe.

The second mistake was to address the “liquidity problem” of American investment and mortgage banks without tackling at the same time their underlying “solvency problem”.

As we wrote right at the very beginning, on August 24, 2007, the financial crisis in the U.S. is not only a classic “liquidity problem”, when banks find themselves short of cash to pay immediate redemptions and withdrawals while their longer term loans are secure, but also and above all a “solvency problem”, because the huge losses that banks had to absorb when they wrote down the value of their toxic assets-backed securitized paper, eroded their capital base to an extent that they became de factoinsolvent. Market operators saw that and they sold the banks' shares short and the price of these shares plummeted.

With many banks' solvency now in doubt, inter-bank lending has nearly stopped, and because of a 'flight to safety', the Ted spread[the difference between three-month U.S. Treasury bills yields and yields on three month eurodollar contracts, as represented by the London Inter Bank Offered Rate, called Libor] exploded, and banks cut down their lending. Credit became tight and scarce. Because banks as a whole ordinarily lend between 10 and 12 times their capital base, the most liquid money supply (M1)began to contract in real terms. Even money market fundssuffered heavy losses, and a run on them was in full swing when the Treasury stepped in a month ago to offer an emergency $50 billion guarantee.

The U.S. economy may be approaching what can be called a classic “liquidity trap” situation, wherein the Fed is lowering interest rates while lending through its discount window and printing money on a high scale, however the liquid money supply figures, in real terms, are not increasing, but are rather falling. Thus, there is no immediate inflation, but the money supply is contracting as banks reduce their lending and make a rush to T-bills (their yields nearly fell to zero). The short-term result is a net deflationary effect for the overall economy and on the stock market (although the long term bond market sees inflation ahead, and long term rates are rising). —The result is stock market crashes in repetition.

In fact, this is precisely what has happened over the last few weeks, not only in the United States, but also in the U.K and in other European countries. This is a very dangerous development for the real economy, because money data in real terms are a leading indicator of the future course of the economy. Six or nine months down the road, the consequences of the credit crunch will appear in production and employment declines, because the credit crunch has the effect of placing a serious squeeze on most companies. Since the credit contraction really began in June (2008), the early part of 2009 is bound to show severe economic weakness.

On Friday, September 19 (2008), the Bush administration announced its solution to the growing banking crisis. It made public the $700 billion Paulson plan  (US Emergency Economic Stabilisation Act, EESA) that primarily focused on creating a government market for some of the bad mortgage-backed securities on the banks' books. —But this was only half of the problem. The other half of the problem was the need to stop the money supply from declining, by restoring bank credit lending and allowing companies to have access to working capital financing. The goal here is to prevent banking problems from morphing into a general contraction of consumption and capital investment plans, thus slowing down production and raising unemployement in the coming months.

For this to happen, however, banks must be allowed to find badly needed new capital. But in a time of crisis, with stock markets declining, it is doubtful that much private capital can be found. The recent association of Warren Buffett with Goldman Sachs may be more of an exception than a rule.

When private capital is not available, the government has no other choice but to inject equity (by buying the banks' preferred shares) into the national banking system, while taking steps to safeguard the public interest by obtaining common share warrants that can be resold profitably later, when the situation stabilizes.

In conclusion, we may ask if it is possible to avoid a repetition of the U.S. Great Depression of the 1930s or the more recent Japan's protracted recession of the 1990s, both the result of a similar severe banking crisis? The answer is yes, if the vicious cycle of asset price decline, banking credit crunch and money supply contraction can be avoided, or, at the very least, stopped and reversed. —In economics, as in medicine, it is never too late to do the right thing.


Sunday, September 28, 2008
Tragedy in the Making in Washington and on Wall Street: The Canadian Solution

"When troubles come, they come not single spies, but in battalions."
Shakespeare (1564-1616)

"The liberty of a democracy is not safe if the people tolerate the growth of private power to the point where it becomes stronger than the democratic state itself. That in its essence is fascism — ownership of government by an individual, by a group or any controlling private power."

Franklin D. Roosevelt (1882-1945), 32nd US president

"Our economy is facing a moment of great challenge. ... We're in the midst of a serious financial crisis.”
George W. Bush, September 24, 2008

The Washington gridlock about finding a solution to the subprime financial crisis in the United States is turning into a tragedy, seemingly because of a fundamental lack of understanding and communication about the causes of this financial crisis and the most efficient way to solve it. The nature of the crisis, the economic consequences if it is not solved, and how it could be solved without costing the government and U.S. taxpayers a single penny has not been properly explained to Congress and to the U.S. population.

Indeed, in this election period, there is a clear danger that the financial crisis is not going to be solved properly by the U.S. government and by Congress, and that there will be dire economic consequences in the months and years ahead, not only for the United States but also for the world economy. A similar subprime crisis has been solved in Canada, without costing the government and Canadian taxpayers a single cent. Although such a solution, i.e. transforming most of the subprime mortgage-back securities into medium term debentures, would have to be adapted to the peculiar American situation, this can be done.

The Canadian solution

In August 2007, it was discovered that Canada, just as the U.S., had a subprime mortgage-backed securities problem. Since the Canadian economy is more than ten times smaller than the American economy, the magnitude of the problem was also smaller, but it was nevertheless acute.

Indeed, Canada's subprime mortgage market was a smaller proportion of the total mortgage market than in the U.S. and mortgage defaults have not been as prevalent in Canada as in the United States. For instance, there has not been a housing bubble burst in Canada. Overall, risky mortgage-backed paper constituted, about 5 per cent of the total mortgage market, while in the U.S., subprime mortgage paper constitutes about 20 per cent of the total mortgage market, and mortgage defaults have been rising dramatically.
Nevertheless, there was some $32 billion (CAN) of non-bank asset-backed commercial paper in Canada. When this market became illiquid after August 2007, as a consequence of the global credit crisis that originated in the U.S., a restructuring committee was assembled in Canada by large pension plans, Crown corporations, banks and other businesses holding the bulk of $32 billion in non-bank asset-backed commercial paper (ABCP) in order to find a solution to the liquidity problem. (Large Canadian banks covered the asset-backed commercial paper that were on their books or in their money market funds). This was the Pan-Canadian Investors Committee for Third-Party Structured ABCP, chaired by a Toronto lawyer, Mr. Purdy Crawford, and created after a proposal that originated from the large Quebec pension fund, the Caisse de dépôt. This was the Montreal proposal.

The committee ended up proposing to restructure the frozen and illiquid securities into longer-term securities. It proposed that ABCP notes, initially intended as low-risk and short-term debt, be exchanged for new replacement notes or debentures that would not mature for years (seven or nine years) while earning interest originating from the underlying primary mortgages. The plan was approved by a Canadian court last June and is scheduled to close by September 30, after Canada's Supreme Court refused to hear an appeal against the plan.

The plan was designed to prevent a forced a fire sale of the asset-backed paper and to restore confidence in the Canadian financial system, especially in the money market funds. And it did all that without the government risking a penny of taxpayers' money.

Of course, those entities that had invested in what they believed to be liquid and relatively high-yield 30- to 90-day debt instruments had to accept new notes maturing within nine years, but most of them thought that this was better than the alternative of outright liquidation. Those investors can hold the newly-issued notes to maturity or they can try to trade them in the secondary market. A market for asset-backed securities was thus indirectly created where none existed before.

What lesson can be drawn for the current U.S. predicament?

The U.S. Problem: Real danger of a cascading debt-deflation spiral

The financial crisis is much more severe and much more widespread in the U.S. than in Canada. Therefore, a large scale Canada-like solution would have been, most likely, unrealistic. Could hundreds of American banks and pension funds get together to restructure the illiquid mortgage-backed paper? This is doubtful.

However, the principles behind the Canadian solution can be retained and the mortgage-backed securities could be restructured into longer-term securities carrying interest. But because of the size and complexity of the American financial system, this would have to involve the U.S. government as an intermediary.

In the U.S., for example, the mortgage market (residential and commercial) is about $14 trillion, that is a size equal to the annual gross domestic product (GDP). Overall, the U.S.'s total interest-bearing debts are now a staggering $51 trillion (consumer, corporate and government debt), that is to say a level of total debt more than three and a half times the annual GDP. For decades in the past, the ratio of debt to GDP was about 1.0. This shows the extent of American current over-indebtedness.

In the short run, however, there are two urgent problems faced by the U.S. economy that must be solved with as little economic perturbation as possible.

First, there is the most urgent problem of solving the overhang of illiquid mortgage-backed securities which were created as the equivalent of liquid commercial paper. They must be urgently aligned more closely with the more long term mortgages downstream they are based on. Since much of this illiquid mortgage-backed paper is found in the $4 trillion money market funds market, there was and there still is the danger of a run on such funds in the coming days and weeks if investors fear for the safety and liquidity of their balances. A collapse of the market in money market funds would be equivalent to the banking collapse of the 1930's, since this is where companies park most of their required cash flows in the short run.

The second American financial problem is related to the approximately $2.7 trillion in municipal securities outstanding, a large proportion of which have been relying on a bond insurance system that is teetering on the brink of collapse. The Fed partly solved this problem temporarily when it announced on Tuesday, September 16, that it had loaned $85 billion (for two years) to the largest world insurance company, American International Group (AIG), in exchange for a 79.9 percent stake in the company, thus avoiding a formal bankruptcy filing for AIG. This was, of course, after announcing that the U.S. Treasury promised to inject some $200 billion in the government sponsored Fannie Mae and Freddie Mac in preferred shares, in order to solidify their mortgage lending operations and their $5.3 trillion joint debt.

The Bush administration's proposal to create a fund of $700 billion to buy back illiquid mortgage-backed paper does not seem to have been structured in a manner that would avoid an outright subsidy to the American banking sector. If it were to be used to recapitalize private banks, this amount would be too small. This need not be. In fact, much of the legitimate fear that many Americans have that large amounts of public money are going to be used to subsidize Wall Street firms can be avoided, and the amount required to restructure the subprime-based securities market could be considerably reduced.

Indeed, there is a way for the U.S. Treasury to play an intermediary role in restructuring most of the illiquid mortgage-backed paper that creates so many problems today, not the least would be the possible collapse of large segments of the U.S. financial system.

Since time is of the essence, Congress could approve the creation of a U.S Government Mortgage Restructuring Trust (MRT), designed to exist for a twelve-year maximum period, that is, until 2020. Such a government trust could buy back, at a fair market value (including a substantial discount to reflect poor liquidity and poor marketability), illiquid but still solvent mortgage-backed securities, held by banks or money market funds.

Simultaneously, the government trust would have the power to reissue mortgage-backed debentures with a maturity of nine years or less and carrying interest financed by the underlying mortgages thus acquired, and in an amount large enough to cover at least the initial cost of acquisition. The Fed and its twelve regional banks, plus Fannie Mae and Freddie Mac, could play an important role in creating a liquid secondary market for such government-backed securities. Because of this reissuance feature, the $700 billion guarantee initially proposed by Sec. Henry Paulson could be reduced, possibly to a more palatable level of $250 billion.

Such an operation would relieve the U.S. banking system from short-term mortgage-backed securities that are presently de facto frozen, because there is no market for them. It would also allow American savers and investors to include in their IRAs or 401(k) plans safe and profitable investments. Moreover, it would provide capital to the mortgage market and help turn the housing slump around.

And, what's more, such a debt restructuring operation need not cost the government and American taxpayers a single penny, in the end. To the contrary, the program can be structured in such a way as to generate a fair return on the government's initial investment.

Simultaneously, a regulatory ban on the issuance of any new securitized mortgage-backed paper could be issued. The same could apply also to the dangerous practice of elevating the credit rating of certain bonds or debentures through reliance upon the credit-default (insurance) market. These were the two main corrosive “innovations” which have resulted in the present financial mess.

Moreover, such a restructuring plan could be kept simple and totally transparent.

In conclusion, this is something that the Bush administration and the U.S. Congress might want to consider if they hope to get out of the ideological and political deadlock they have talked themselves into.


Thursday, September 25, 2008

The Bush Administration's Banking Rescue Plan

"Those who cannot remember the past are condemned to repeat it."
George Santayana

"The bill gives [Sec.] Paulson the ability to nationalize an unlimited amount of private debt and force you and your children to pay for it.... I predict that if this passes it will precipitate the mother and father of all financial panics."
Karl Denninger (Market Ticker)

“Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.”
Section 8, Bush's administration proposed legislation to bailout U.S. banks [Legislative Proposal for Treasury Authority to Purchase Mortgage-Related Assets].

"The Fed is merely trying to inject money to keep prices not supported by fundamentals from falling. It is a prescription for hyperinflation. The only way to keep prices of worthless assets high is to lower the value of money. And that appears to be the Fed unspoken strategy."
Henry Liu, economist

If I may simplify somewhat the situation, (but only slightly) we can say that over the last quarter of century, Wall Street firms bought out Congress and the White House (and paid at wholesale prices). Now, they want the U.S. government to buy them back (and they want to sell at retail prices).

Over the years, indeed, Wall Street firms have lavished hundreds of millions of dollars in lobbying Washington D.C. so that their more and more complicated financial businesses would be less and less regulated. During the 1980s, the Savings & Loans industry (S&Ls) was the recipient of Washington largesse. The epitome was the lobbying by five prominent U.S. senators, one of them Sen. John McCain, to deregulate the borrowing and lending practices of savings and loans banks. During the Reagan-Bush era of the 1980's, such deregulation encouraged unsound real estate lending by Savings & Loans financial institutions and this led to the 1986-1995 Savings and Loans crisis. Some 747 savings and loans banks failed and about $160 billion was lost, most of it through a $124.6 billion bailout by the U.S. Government.

During the Clinton and Bush-Cheney eras, large banks were allowed to buy relatively long term subprime home mortgages from regional banks and other mortgage lending firms and repackage them, “securitize” them and resell them as sliced mortgage-backed securities. The banks sold them as short term-like commercial paper, but without guaranteeing them. In 1999, for example, the banking industry spent more than $300 million in lobbying Congress and the White House to repeal the 1933 Glass-Steagall Act that closely regulated banking activities. In November 1999, the Glass-Steagall Act was eviscerated after many years of lobbying efforts. It was replaced by theGramm-Leach-Bliley Act which established the new market-driven unregulated system for many financial institutions, the largest ones being the New York-based investment banks.

With scant regulation, banks could engage in highly leveraged new banking practices, in violation of sound banking practices. For example, regulated commercial banks normally keep a 1:10 ratio between reserves and loans.  But U.S. unregulated entities embarked upon highly leveraged finance, keeping a 1:30, 1:40 or even 1:50 ratio between reserves and risky loans. In so doing, the unregulated banks raked in huge fees at what (they thought) was very little risk for them, because they had hoped to transfer the inherent risk to the buyers of their repackaged securities.

However, when some of the original mortgages downstream became delinquent as the housing price bubble burst, in the spring of 2005, and home foreclosures began to rise, more than $1 trillion of the artificial mortgage-backed securities previously created thus became less secure and less liquid. As time went on, the market for such artificial securities de facto dried up. As a consequence, the issuing banks were left with a large inventory of now toxic securities that nobody wanted to buy. Huge permanent losses replaced huge but illusory short-term profits, although banking CEOs kept receiving large (some would say obscene) total corporate compensations.

The incestuous relationship between unregulated high finance and Washington politics is coming to a climax with the U.S. Treasury Secretary, a former Wall Street CEO of one of the Wall Street banks in relative distress, being declared by legislation a de facto economic tsar and a public Santa Claus. According to proposed legislation, indeed, Mr. Henry Paulson, the former Chairman and Chief Executive Officer (June 1998 – July 32006) of Goldman Sachs, would be entrusted with the power to buy from troubled banks, at his discretion, the bad financial assets they now have on their books. To accomplish that task, as much as $700 billion would be placed in his hands. It is said that Congress, in this election period, does not have time to create an independently-run Bank Resolution Trust under the model of the 1989 Resolution Trust Corpand all the power to intervene has to be concentrated in the person of the Treasury Secretary.

There you have it. —This is the overall feature of the Bush administration's plan to place hundreds of billion dollars of public money at risk to shore up the U.S. banking industry and prevent the unstable financial house of cards from collapsing.

At the bottom of the problem is the fact that American banks are presently very short of capital, to the point of being insolvent, because of overleveraged investments in the past and because of the huge losses they have suffered in illiquid mortgage-backed securities. The purchase by government of the most illiquid financial assets they have on their books could have the effect of providing some badly needed capital to banks through some form of public subsidies, provided it is done in a not too transparent way.

Indeed, the government rescue of U.S. banks comes down to this: How many of the toxic financial assets is Sec. Henry Paulson willing to buy from banks and at what prices?

The “Paulson put”

Henry Paulson is being placed in the role of a government financial plumber who promises to unplug the pipes of finance and cleanse them of the mortgage-backed sludge. He is asking taxpayers' representatives for a blank check, to create a huge slush fund, $700 billion, that he would be free to use to buy toxic depreciated securities from troubled banks and relieve their balance sheets from this undesirable load.

If Sec. Paulson were to pay a high price for the most illiquid bank-owned mortgage-backed securities, this would amount to a “Paulson put” because it would have the effect of guaranteeing the profitability of many risky financial operations that otherwise would have failed. As a matter of fact, at what price would Sec. Paulson buy the illiquid bank toxic assets? At 70 percent of initial book value, or at a price closer to market value which may be 20 to 30 percent of face value. Who would know? When? Under what guidance?

Answers to these questions are crucial because they will help to calculate what could be the final cost to the public purse of the bank bailout. But there is a fundamental dilemma here for the government. If Sec. Paulson were to overpay for the banks' garbage securities, the bailout would amount to a recapitalization of the banks, with taxpayers' money. This would not be a popular move, considering how much money the banks' CEOs made in driving their institutions into the ground. On the other hand, if Sec. Paulson were to pay strictly fair market value for those bad debts, priced at a substantial discount to reflect their poor liquidity and marketability, then the troubled banks would have to write down their losses and would still remain weak and unstable.

There is something surreal and profoundly immoral that the individuals who were front and center in creating the subprime financial meltdown are also those who have been entrusted by the government to solve the mess they have created. Are there not independent economic and financial experts in the United States who could have been assigned this task?


Even though it is the primary responsibility of a government to make sure that financial markets and institutions function properly, the Bush administration's banking rescue plan leaves a lot to be desired before being called economically efficient, and socially and politically acceptable.


Wednesday, September 17, 2008
The U.S. Financial System in Serious Trouble

“… a bailout of GSE (Fannie and Freddie) bondholders would be perhaps the greatest taxpayer rip-off in American history. It is bad economics and you can be sure it is terrible politics.”
Matt Kibbe, President of Freedom Works

"The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists."
Ernest Hemingway (1899-1961),  (September 1932)

[After the Bear Stearns bailout] "As more firms lost access to funding, the vicious circle of forced selling, increased volatility, ...  and margin calls that was already well advanced at the time would likely have intensified. The broader economy could hardly have remained immune from such severe financial disruptions."
Ben Bernanke, Fed Chairman (March 2008)

In August 2007, at the very beginning of the subprime financial crisis in the U.S., and referring to the alchemy-like practice of creating artificial financial instruments, such as mortgage-backed securities (MBSs), here is what I wrote:

 “Like all 'Ponzi schemes', such pyramidings of debts with no liquid assets behind them are bound to implode sooner or later.” I also wrote about the Fed's intervention in such cases, that “it alleviates the 'liquidity crisis', for sure, but this does nothing to cure the underlying 'solvency crisis' of institutions holding large chunks of non-performing mortgage-based assets. Sooner or later, such low-valued derivatives will have to be written off, and this will necessarily lead to an erosion of these institutions' capital base. Bankruptcies of the most leveraged and imprudent institutions are to be expected.

In fact, such bankruptcies of over-leveraged financial institutions become unavoidable. For a while, forced mergers between banks, initiated by the Fed or the Treasury, can soften the blow. But after a while, outright bankruptcies cannot be avoided and balance sheets have to be balanced.

What is the cause of this financial mess?

Last month, I provided a short answer:
At the center of current financial problems is the failure to adapt standard financial regulation to new financial institutions, such as broker-investment banks, off-shore based hedge funds and large derivatives markets that remain, for the most part, outside of the traditional authority of regulators. However, when things go wrong, as they did with Bear Stearns last March, their demise threatens to destabilize the entire financial system and handy government bailouts are quickly called in.”

Today I say that this major crisis has to be placed at the very feet of theWashington establishment. This is a politico-financial establishment that has pushed to the limits its ideology of deregulation of financial markets and stretched the working of unregulated corporate market capitalism to the breaking point. Now, the system is imploding under our very eyes and financial institutions are falling like dominos. As I wrote last August, and repeated in April of this year, the U.S. financial problem is not one of liquidity, (there is plenty of liquidity provided by the Fed when banks and brokers can borrow at will newly printed dollars from the Fed’s discount window) but one of solvency, weak balance sheets, risky assets and debt liquidation. That's a horse of a different color.

Over the last twenty-five years, beginning with the Reagan administration and culminating with the current Bush-Cheney administration, the Washington establishment dismantled piece by piece the system of protection that had been built since the 1930's economic depression and removed nearly all government regulations that could stand in the way of greed and gouging on the part of unscrupulous market operators.

And that's where the rubber hits the road. Short of bankruptcies is the nationalization of the over-leveraged banks by the government. And the Bush-Cheney administration took a big step in that direction when it came to the rescue of the two largest mortgage financing institutions, Fannie Mae (Federal National Mortgage Association: FNM) and Freddie Mac, (Federal Home Loan Mortgage Corporation: FRE) which were close to being insolvent. This step was initiated after foreign central banks (in China, Japan, Europe, the Middle East and Russia) threatened to stop buying U.S. bonds and debentures issued by the two shaky financial institutions.

But the Bush-Cheney administration, while providing public money to keep the two lenders in operation, stopped short of nationalizing them. Indeed, the U.S. government committed to invest as much as $200 billion in preferred stock and extend credit through 2009, to keep the two mortgage lenders solvent and operating.

But instead of taking them over by placing them into administrative receivership, in order to change their business model, as they should have done since the government is now guaranteeing their outstanding debts, (more than $5 trillion US) the U.S. government chose rather to keep the appearance that these were still two privately run banks and only appointed a legal conservator for Fannie Mae and Freddie Mac. Even when they bail out what can be called two Government sponsored enterprises (GSEs), their market ideology prevents them from doing the right thing.

After years of irresponsible public deregulation and private mismanagement and irresponsible, pyramiding risk taking, the American financial system is now in serious trouble, and it may draw the U.S. economy further down with it in the months and years to come.

In the coming weeks, however, as other American financial institutions teeter on the brink of bankruptcy, the U.S. government will have to consider creating a Bank Resolution Trust under the model of the 1989 Resolution Trust Corp.which took over the savings and loans banks that were then in financial difficulties. For example, as recently as February 16 of this year, the British government did not hesitate to nationalize the Northern Rock bank and rescued this large British bank with about £55 billion ($107 billion) in public loans and guarantees. Sooner or later, the American government will have to do the same, in order to stabilize the financial system, because the financial problems in the U.S. are systemic and much more serious than elsewhere.

By the same token, maybe the U.S. government should correct an anomaly of the 20th Century, that is the semi-private status of its central bank. Indeed, the American Federal Reserve, is a semi-public and semi-private central bank organization that is as much responsible to large private banks as it is to the U.S. government and the population. This creates an unhealthy conflict of interests that is not fair to the American public. Indeed, the American practice of privatizing profits and socializing losses would be considered unacceptable in most other democracies.

What we are witnessing these days in the U.S. is a massive wealth transfer from taxpayers, savers and retirees to banks, their creditors and their managers. On the one hand, the Fed has pushed real interest rates deep into negative territory to help troubled banks, and, on the other hand, the American taxpayers have foot the bill for bailing out very large financial institutions.

I wonder what the two presidential camps, the Obama and the McCain camps, have to say about that! They both want to increase the federal deficit and add significantly to the already high national debt.


Monday, September 8, 2008

The U.S. 2008 Presidential Election: An Evaluation

"Bomb, bomb, bomb Iran."

"The issue of economics is not something I've understood as well as I should.. ... I know a lot less about economics than I do about military and foreign policy issues. I still need to be educated."

“I think that [to be rich] if you are only talking about income, how about $5 million?”
John McCain, 2008 Republican presidential candidate

"Our national leaders are sending them [American soldiers to Iraq] out on a task that is from God. ...That's what we have to make sure that we're praying for, that there is a plan and that plan is God's plan."
Alaska Gov. Sarah Palin (June 2008)

"She's not prepared to be governor. How can she be prepared to be vice president or president? Look at what she's done to this state. What would she do to the nation?” [About Gov. Sarah Palin, McCain's choice for a running mate]
Lyda Green, Republican Alaska State Senate President

“If my guesses are confirmed, then that raises the suspicion that somebody in the U. S. purposefully created this conflict [the August 7-8 Georgia-Russia conflict] with the aim of aggravating the situation and creating an advantage...for one of the candidates in the battle for the post of U.S. president.”
Vladimir Putin, Russian Prime Minister and former President (August 28, 2008)

Tradionally, American presidential elections get into full gear after Labor Day, once the political conventions have been completed, major speeches made and vice president running mates chosen. It is therefore a good time to make a general assessment of where this year's election stands, what political camp has the momentum (or is losing it) and what good or bad decisions have been made by either of the two major presidential candidates.

1. Let us start with the polls.

Three months ago, in mid June, at the end of the primary season, here was the standing in the polls of the two then presumptive main presidential candidates. The polls at that time showed Democratic candidate Sen. Barack Obamaleading his Republican opponent Sen. John McCain by a comfortable margin. This was on the aftermath of Obama's primary victory over Sen. Hillary Clinton. For instance, the USA Today/Gallup typically showed Sen. Obama leading Sen. McCain on the order of 50% to 44%, among likely voters.

In late August, according to the same USA Today/Gallup Poll, Sen. Obama still had a 48%–45% edge over his opponent among likely voters, but a few other polls showed him trailing McCain. A Saturday September 6 Gallup poll showed Obama leading McCain only by 47% to 45%, indicating that the two presidential tickets were statistically neck and neck after the two parties' back-to-back conventions.

It should be mentioned that 10 times out of 12, the presidential ticket ahead after the conventions wins in November. But this year, poll data have to be analyzed in light of a likely negative “Bradley Effect” for the Obama-Biden ticket (see below).

Therefore, the conclusion is clear: This is going to be a close U.S. presidential election, much closer than it should have been expected after eight years of crisis-prone Republican rule. Why is this so?

2. The Attacks on the Persona of the Democratic Candidate

It is generally recognized that if Americans elect Sen. Barack Obamapresident, it will be considered some sort of a political miracle. This is because Sen. Obama is not your usual American presidential candidate. A junior U.S. senator with little administrative experience, he has to counteract the charge that he is inexperienced and untested. Not that his adversary, Sen. John McCain, has had much more administrative experience, but being younger, it is assumed that Sen. Obama is less experienced. Because of that, his choice of vice-presidential running mate was crucial. This was a test he could not afford to fail (see below).

Sen. Obama is also the first person of African-American ancestry to run as a presidential candidate for one of the two dominant American political parties. This in itself is an historical challenge since he does not fit totally with the image that many Americans have of their president. Indeed, it was said by some observers that some segments of the American public are not completely comfortable with candidate Obama and his convoluted personal history.

More importantly, perhaps, is the fact that Sen. Obama is considered a progressive and on the left of many domestic policy issues. This may be less of a handicap with the average American voter, who has suffered miserably under the rule of far right politicians, than it is with the neoconservative nomenklatura who control the levers of many propaganda machines.

As with previous democratic presidential candidates of the recent past, it should have been expected that the ruling political cartel in the U.S. would be less than enthusiastic in allowing a relatively unknown and thus a somewhat more risky candidate get into the White House. It is obvious that there is a strong coalition of various interests that does not like the prospect of having Senator Obama become President Obama, and they are taking the necessary steps to attempt to deny him a victory.

For that, they have adopted the traditional Republican strategy of “attack and destroy.” The neocon propaganda machine, which controls 90 percent of the American corporate media, has already done an effective job of sabotaging the Obama campaign. Indeed, the mainstream network talking heads, cable paid demagogues and other smear artists have savaged him ferociously with innuendos, half-truths and calumnies in order to distance him from the average voter, whose interests Sen. Obama has espoused.

It is obvious that this powerful propaganda machine is bent on electing a neocon and pro-military-industrial complex candidate, no matter how flawed and unfit that candidate may be, and so far they have used their considerable resources, including those of nonprofit 501(c)4 organizations, to attain that goal. That flawed candidate himself, Sen. John McCain has reached new lows in dirty campaigning, in smears and in political lies, even stooping as low as to accuse Sen. Obama of being responsible for high gas prices, while exonerating as culprits the incumbent Bush-Cheney administration, its ineffective energy policy and its wars of aggression.

3. The Obama Camp's Weak Response

But the Republican “ad hominen” attack strategy was predictable, since they have used it before with success, and the Obama camp should have planned in accordance. It is said that candidate Obama “conceded” the crucial month of August to his adversaries. This is the same month that Democratic presidential candidates Michael Dukakis and John Kerry are also said to have conceded to their attackers during the 1988 and 2004 campaigns. Therefore, the fact that Sen. Obama remained on the defensive and did not strongly counterattack goes a long way in explaining his current lack of political momentum. To win, the Democrats cannot let the corrosive propaganda against them go unanswered, with only sporadic and weak rebuttals, while their opponent's flawed record and character remain largely off screen.

Since this is a mistake made by the Dukakis camp in 1988 and the Kerry camp in 2004, one would think that the Democrats would have learned from these two fiascos. But judging from what happened in August this year, it's obvious that they have not. A question therefore must be raised: Is there an ongoing attempt from within the Democratic Party to sabotage Obama's campaign? When something weird or unexplained happens, one has to ask if there is not a more rational reason that explains it.

4. The Republican Bag of Dirty Tricks

This election has been characterized so far by the McCain camp going deep into the bag of political dirty tricks to destroy the Democratic presidential candidate and derail his campaign. How come the McCain machine has been so amazingly successful in controlling the debate, especially in having foreign affairs and security issues dominate the presidential election campaign, at a time when millions of Americans are losing their homes, when the economy is going through one of the worst financial and banking crisis and is in the midst of an economic slump?

As for the question about the dominance of national security issues, it certainly can be asked whether Sen. Barack Obama has not already been the victim of an astute and wicked “Wag the Dog” scheme. Such a scheme could have been designed by the Bush-Cheney White House to place foreign affairs and security matters front and center at a strategically important time in the U.S. presidential campaign, in the month of August, in order to bolster McCain's campaign and help candidate McCain capitalize on his perceived advantage on such questions.

Indeed, the curious international crisis that McCain's personal friend Mikhail Saakashvili, President of Georgia, created from scratch at the outset of the 2008 Olympic Games, during the night of August 7-8 (a period when Sen. Obama was taking a holiday in Hawaii) has all the appearances of a “Wag the Dog” operation.

Ever since Western countries supported the break-away of the territory of Kosovo from Serbia in February 2008, and created a precedent to be applied elsewhere, Georgia's President Saakashvili knew perfectly well that Russia was prepared to react to any provocation in South Ossetia. Why then did the hothead Saakashvili go ahead and provoke Russia by bombing and invading S. Ossetia? And with American and Israeli “advisers” on the ground, in Georgia, we can rest assured that Saakashvili would never have sent Georgian tanks to South Ossetia without receiving some form of go-ahead signal from Washington. An ominous sign was the presence of a top national security aide to Vice President Dick Cheney in Georgia (Joseph R. Wood), just before the latter country's August 7-8 attack on South Ossetia. Therefore, we can be certain that there was a direct link between the Georgian government and the Dick Cheney White House while George W. Bush was at the Beijing Olympics.
Many consider that the hairy Georgian, Washington-backed plan to attack Russian soldiers in S. Ossetia was “beyond comprehension”. But was it? Was it intended, from Georgia's point of view, to draw the United States into a newly created de facto conflict with Russia, even thinking that the Georgian army could successfully occupy S. Ossetia with Russian soldiers stationed there, as some observers believed initially, or —was it not also, and this is more logical, part of a plan designed to boost Sen. John McCain's campaign for the American presidency, at a time when he was badly trailing in the polls? It is permitted, indeed, to suspect that the office of Vice President Cheney could have been interested in provoking a dispute with Russia over NATO, in order to shift the political debate in the U.S. away from the economy and more towards the issue of national security and international affairs.

The fact that the Georgian military incursions into S. Ossetia were followed with ready-made declarations by candidate McCain (“We are all Georgians”)in the aftermath of this provoked and gratuitous crisis points to a possibly more cynical political scenario. —It is said that when something looks like a duck, walks like a duck and goes “Quack! Quack!” like a duck, there is a good chance that it's a duck. At the very least, this is a hypothesis which deserves to be investigated with all the available clues. It is also a hypothesis that has received support from Russian President Vladimir Putin.

And you can rest assured that if the Bush-Cheney White House were to launch a gratuitous attack against Iran in the coming weeks, it would also be done with the current presidential election in mind. That's why there is always the fear that a miscalculation could lead to World War III.

5. An Assessment of the Republican Candidate

As compared to Sen. Barack Obama, it would seem obvious that Sen. John McCain would be a ticking time bomb as president. The man is an old stylemilitarist who confesses that he doesn't know anything about economics ("I still need to be educated").

These are the worst attributes one would like to see in a leader at this time of economic and financial stress, and with costly lingering wars in far away Iraq and Afghanistan draining the public budget. Indeed, if we study his pronouncements, all indicate that Sen. McCain would be a trigger-happy “roll-the-dice” president. He would be an interventionist president, who would gleefully start new wars, while his willingness to reinstitute the military draft would wreck havoc with thousands of families. That message does not seem to have been effectively conveyed to the American electorate. Why?

6. The Choice of Vice Presidential Candidates

On Saturday August 23, Sen. Barack Obama announced that he had chosen as running mate an old-timer senator. Indeed, Sen. Joe Biden (D. Del), the Democratic Vice President nominee, is an insider and a master of Washington politics, having been in the U.S. Senate some 35 years. A lawyer and an international affairs specialist, Sen. Biden is undoubtedly as qualified to be president as anyone can be.

But, the choice has the effect of somewhat negating Obama's central promise of a fundamental change in government. Moreover, since Sen. Biden supported the neocon-inspired October 2002 Iraq War Resolution”, his selection removed, to a large extent, the rationale for those opposed to the Iraq war to work extra hard on behalf of the Democratic ticket.

Let's keep in mind that one of Obama's most serious and effective charges against Sen. Hillary Clinton during the primaries was the fact that, from the start, he had shown “better judgment” than her in opposing the Iraq War. It has become much more difficult to make this charge against Sen. McCain, now that Sen. Biden is at his side. Also, on foreign policy, Sen. Obama wants to draw down American troops in Iraq at the same time that he proposes a military “surge” in Afghanistan, by sending two more American brigades into that ravaged country, and even possibly into Pakistan. All this blurs Sen. Obama's overall message and his pretense that he represented the hope for a fundamental change in American foreign policy.

Therefore, Sen. Obama's Vice Presidential choice, while not a bad choice, was certainly a conservative one. It could reinforce the idea, in the minds of some younger voters, that when it comes to American foreign policy there is really a single bipartisan and right wing pro-war party in Washington. This image is in contradiction to that projected earlier by Sen. Barack Obama when he was running for the Democratic nomination.

Indeed, many of his supporters may have trouble understanding how Sen. Obama could present himself as an anti-Establishment and an anti-war presidential candidate and then turn around and choose an Establishment and pro-war Vice Presidential candidate who has had a long and close association with the pro-war AIPAC organization. The rationale, of course, was that an insider senator such as Sen. Biden would help an Obama administration deal with Congress ...once elected. But before governing, one has to win the election. And on this score, it is questionable whether the chosen running mate was the best choice to unite a badly divided party between the Obama camp and the Clinton camp.

To close the gap and introduce energy into the Democratic party, Sen. Obama could have called on former Vice President Al Gore and brought him into the campaign. It is understandable that a young senator could have been afraid that such a high profile Democratic running mate might cast a shadow upon himself. But a decision in this direction would have electrified the Democratic Convention and gone a long way toward uniting the party.

Of course, the other obvious choice that could have united the Democratic Party would have been for Sen. Obama to swallow his pride and overcome his inferiority complex and choose as a running mate Sen. Hillary Clinton (D. NY), an adversary who received nearly as much support (18 million primary votes) as himself within the party. Indeed, Sen. Clinton could have helped the Democratic ticket win a strong majority of the crucial female vote, especially the vote of older white women, since it is widely acknowledged that Sen. Obama is not going to win the white male vote.

In 1960, for example, Sen. John F. Kennedy was less than personally enamored with Sen. Lyndon B. Johnson of Texas, but he needed to win that southern state to win the election. He overcame his personal feelings, and thanks to winning Texas, Kennedy won the election and became president. Therefore, in the end, it can be said that Sen. Obama has decided not to be audacious but to play it safe in his choice of a vice presidential running mate.

—The contrary can be said of Sen. McCain. In a cynical and blatantly calculated political move, John McCain announced on Friday, August 29, that he had chosen a relatively unknown and a relatively inexperienced woman, 44-year-old Sarah Palin, a former Miss Alaska beauty contest finalist in 1984 and a former sports reporter. This was reminiscent of George H. Bush who, in 1988, chose an obscure senator named Dan Quayle, then 41, to be his running mate. In the case of Ms. Palin, she is the former mayor of a small town and the recently elected Governor of Alaska, and has not an ounce of experience in world affairs. This is a good example of the dumbing-down of American politics where anything can be said (“She has foreign affairs experience because she lives in a state next to Russia”), done or sold, for expediency.

Therefore, since according to Sen. McCain himself he has no competence in economics or finance, one could have expected that he would have chosen someone better prepared in this crucial area. A candidate who fits the requirements would have been former Massachusetts Governor Mitt Romney, who has considerable business and executive experience. Instead, Sen. McCain chose a woman who has no background in economics or finance. Why? Essentially, because in the USA, religion trumps economics anytime. And, that's the problem.

7. A Republican Ticket as the Religious Far Right Likes It

In fact, what attracted candidate McCain to Sarah Palin was her far right religious credentials, being a fervent Pentecostal Christian who is anti-abortion (even for rape and incest victims), pro-state-imposed-death penalty,anti-sexual education, anti-same-sex marriage, anti-environment, pro-creationism, pro-censorship, pro-gun ownership, and pro-war. More to the right than that, and one falls over the cliff!

To get the evangelical vote, evangelical leaders had to be wooed. For the religious far right leaders, indeed, such as James Dobson, president of the Focus on the Family movement, the only issue that really matters is for them to take absolute control of the U.S. Supreme Court in order to impose their far right domestic cultural agenda. They particularly want the Court to repeal the 1973 decision of Roe v. Wade that gave American women control over their own body. Any politician who can help them achieve this goal is bound to receive their support, whatever his or her qualifications.

That is why Dobson declared upon learning that their favorite candidate had been selected, "I would pull that lever" [for John McCain – Sarah Palin],” after he had said earlier that he “cannot and will not vote for Senator John McCain.”

In 2004, the Dobson religious far right machine put its considerable media power (7 million American radio listeners) behind the disastrous Bush – Cheney ticket for a second term. And it won. In 2008, if the flawed and controversial McCain – Palin ticket were to win, it would be due in a large measure to the same religious far right support. People outside the United States must know such things if they are to understand American politics.

But was not Sen. McCain playing crass politics and demonstrating again a lack of judgment with such a surprising choice as a running mate? Indeed, if he had placed the welfare of his country first, would he have chosen such an inexperienced person to be a heartbeat away from the presidency, to be commander-in-chief, especially considering that he is himself already 72 years old and that, if elected, he would be the oldest American president ever inaugurated? [N.B.: Sen. John McCain's father (70) and grandfather (61) both died suddenly of heart attacks.]

The truth is that the American religious far right had its doubts about candidate McCain and was about to sit the election out. Something had to be improvised to get the religious far right aboard. —And Ms. Palin fit the bill. Her far right credentials were bound to “energize” a strategic part of the Republican base. That was the calculation.

Of course, there was also the hope of killing two birds with one stone by attracting some inattentive pro-Hillary Clinton Democrats and Independent women who could have felt somewhat snubbed by Obama's choice of Sen. Joe Biden as his running mate. But considering how far right politically Ms. Palin is, it is dubious that many Democratic or Independent leaning American women are going to fall in the trap that the McCain camp has opened for them.

While it is true that the campaign that Sen. Hillary Clinton ran gave legitimacy to the possibility of a woman as president, this does not apply to any woman. Not to a woman because she is a woman. She has to be qualified for the job. In fact, the choice of Ms. Sarah Palin as his running mate and his sell-out to the far right may have been a major blunder on Sen. McCain's part, because such a rash and impulsive decision puts his judgment in doubt.

Overall, religion continues to be the most politically divisive factor in the United States. Gallup found, for example, that nearly two thirds (65%) of highly religious American white voters would vote Republican, no matter what their interests in other issues are. They are one-issue voters and their political behavior explains to a large extent why relatively poor people and those of the middle class in the U. S. continue to vote for far right policies which mainly profit the rich. And that one single issue is an unhealthy desire to infuse religious dogma into the law of the land, no matter what the U.S. Constitutionsays about the division between Church and State and the requirement not to have a religious litmus test for any public office [Article 6, clause 3 of the U.S. Constitution says: ... “no religious Test shall ever be required as a Qualification to any Office or public Trust under the United States.”]. The constitution says one thing, but the churches say another. That explains why candidate McCain felt obliged to pander to the American religious right movement.

Since economic studies show that when Democrats were in the White House, lower-income American families experienced slightly faster income growththan higher-income families, and that the reverse was true when Republicans were in control, one would expect the Democrats to be favorite in this year of economic hardship. That is if people vote rationally their economic interests rather than voting along religious lines.

8. The “Bradley Effect” cannot be underestimated

Because of the nature of the Democratic nominee, it would be imprudent to dismiss the possibility of a strong “Bradley effect.” To the contrary, a Pew Research Center poll taken during mid-August could indicate that this is going to be the case. For instance, a majority of McCain supporters (53%) rejected candidate Obama overwhelmingly and found nothing positive about him, while many Obama supporters are able to say something positive about candidate McCain. To me, this smells like a somewhat racist stand on the part of many American voters who are attracted to candidate McCain. They simply cannot stomach the idea of having a black person as their president.

This is a political fact that Obama's advisers have to deal with. Come November, indeed, the Obama-Biden ticket will have to be 2 or 3 percentage points ahead of the Republican ticket to counteract the expected “Bradley effect” in order to win.

Thus, one can wonder if their strategy of putting the emphasis on an “Obama: The Celebrity” campaign, rather than on an “issues-based” campaign is really what the situation would require. In other words, is it a good idea to turn the 2008 election into a popularity contest between Sen. Obama and Sen. McCain?

The reality is that Sen. Obama is also a candidate who has a high profile and outspoken wife who is certainly not your typical self-effacing American first lady (at least, before the election!). This may unduly reinforce the “celebrity” tone of the Democratic campaign. On the same level, it can be disputed whether the idea of having the Democratic candidate accept the nomination of his party before an imposing crowd of 75,000 at the Denver Broncos' footballInvesco Field Stadium, Mount Olympus-Parthenon-style, was the greatest. This has also reinforced the “celebrity” message. —It is too early to know if that was the wrong message at the wrong time. The answer will be delivered on November 4.

9. Obama the Good One vs. McCain the Nasty One?

Finally, on the character issue, I have the feeling that there is some appearance of a lack of moral fortitude on the part of Candidate Obama. Some may have the impression that Sen. Obama is not his own man. That he says and does what others tell him to say and do and that this may explain his occasional flip-flops. This image, even if unfair and untrue, can be dangerous in politics because voters sometime value character above everything else in a candidate to public office.

On the other hand, even though John McCain has often been referred to ever since his high school days by those who know him well as John “McNasty”,the Democrats seem incapable of conveying this information about McCain's character flaws to the public. If they do not do it themselves, they surely cannot rely on the neocon corporate media to do it in their place! So far, Obama's advisers have been pulling their punches. They keep repeating that “You have to be careful about attacking McCain." Well, the McCain camp has no such restraint in attacking Sen. Obama. They did exactly the same thing to Sen. John Kerry in 2004. In American politics, nice guys have the habit of finishing last.

10. Conclusion

The 2008 American presidential election is a most unusual and interesting election, and it will be studied intensively in the coming years. My preliminary assessment is that this is still a presidential election for the Democrats to lose, but they may lose it, at least at the strategic presidential level.

Of course, the Democrats have not yet lost the 2008 presidential election, far from it, but they must quickly regain the momentum and take control of the political agenda by reorienting their strategy and tactics. As President John Kennedy once said, “an error is not a mistake unless you refuse to correct it.”

For strategy, for instance, they would be wise to place less emphasis on the persona of Sen. Obama and his wife and more on issues. They must demonstrate to the American electorate that they are better prepared to tackle them, while their adversaries are likely to make matters worse.

Are Americans better off today than eight years ago? By most measures, they are not. It should be no surprise that Americans are eager for a change in leadership, especially as it is related to their number one preoccupation, the economy. If they were to vote for four more years of the same, it would only be by default. How could it be otherwise with the incumbent Republican George W. Bush having the highest disapproval rating (69%) ever of any American president?

Amazingly, however, the Democrats seem to have some problem zeroing in on a slogan. Perhaps they could adopt a slogan such as: “For a Better and More Prosperous America”. —I may be wrong, but I think that's what a majority of Americans want.


Wednesday, August 20, 2008
Why Not Simply Abolish NATO?

[NATO's goal is] "to keep the Russians out, the Americans in, and the Germans down."
Lord Ismay, first NATO Secretary-General

"We should immediately call a meeting of the North Atlantic Council to assess Georgia's security and review measures NATO can take to contribute to stabilizing this very dangerous situation."
Sen. John McCain, (August 8, 2008)

"If we would have preemptively worked with Russia, with Georgia, making sure that NATO had the kind of ability and the presence and the engagement, we could have perhaps avoided this” [The invasion of S. Ossetia by Georgia and the subsequent Russian response].
Tom Daschle, former Senate Majority Leader and adviser to Sen. Barack Obama, (August 17, 2008)

"Of all the enemies to public liberty, war is perhaps the most to be dreaded because it comprises and develops the germ of every other."
James Madison (1751-1836), fourth American President

The North Atlantic Treaty Organization (NATO) is a relic of the Cold War. It was created on April 4, 1949 as a defensive alliance of Western Europe countries plus Canada and the United States to protect the former countries from encroachments by the Soviet Union.

But since 1991, the Soviet empire no longer exists and Russia has been cooperating economically with Western European countries, supplying them with gas and oil, and all types of commodities. This has increased European economic interdependence and thus greatly reduced the need for such a defensive military alliance above and beyond European countries' own self-defense military system.

But the U.S. government does not see things that way. It would prefer keeping its role as Europe's patronizing protector and as the world's sole superpower. NATO is a convenient tool to that effect. But maybe the world should be worried about those who go around the planet with a can of gasoline in one hand and a box of matches in the other, pretending to sell fire insurance.

As of now, it is a fact that the U.S. government and the American foreign affairs nomenklatura see NATO as an important tool of American foreign policy of intervention around the world.  Since many American politicians do not anymore support de facto the United Nations as the supreme international organization devoted to maintaining peace in the world, a U.S.-controlled NATO would seem to be, in their eyes, a most attractive substitute to the United Nations for providing a legal front for their otherwise illegal offensive military undertakings around the world. They prefer to control totally a smaller organization such as NATO, even though it has become a redundant institution, than to have to make compromises at the U.N., where the U.S nevertheless has one of the five vetoes on the Security Council.

That is the strong rationale behind the proposals to reshape, reorient and enlarge NATO, in order to transform it into a flexible tool of American foreign policy. This is another demonstration that redundant institutions have a life of their own. Indeed, when the purpose for which they have been initially established no longer exists, new purposes are invented to keep them going.
Regarding NATO, the plan is to turn it into an aggrandized offensive imperialU.S.-dominated political and military alliance against the rest of the world. According to plan, NATO would be enlarged in the Central-Eastern European region to include not only most of the former members of the Warsaw Pact(Poland, the Czech Republic, Slovakia, Bulgaria, Romania, Albania and Hungary) and many of the former republics of the Soviet Union (Estonia, Lithuania, Latvia, Georgia and Ukraine), but also in Asia to include Japan, Australia, New Zealand, South Korea, and possibly admit Israel in the Middle East. Today the initially 12-member NATO has mushroomed into a 26-member organization. In the future, if the U.S. has its way, NATO could be a 40-member organization.
In the United States, both the Republicans and the Democrats see the old NATO transformed into this new offensive military alliance as a good (neocon) idea to promote American interests around the world, as well as those of its close allies, such as Israel. It is not only an idea actively promoted by the neocon Bush-Cheney administration, but also by the neoconservative advisers to both 2008 American presidential candidates, Sen. John McCain and Sen. Barack Obama. Indeed, both 2008 presidential candidates are enthusiastic military interventionists, and this is essentially because both rely on advisers originating from the same neocon camp.

For instance, the rush with which the Bush-Cheney recklessly promised NATO membership to the former Soviet republic of Georgia and American military support and supply is a good example of how NATO is viewed in Washington D.C. by both main American political parties. For one, Republican presidential candidate John McCain envisages a new world order built around neocon-inspired "League of Democracies" that would de facto replace the United Nations and through which the United States would rule the world. Secondly, Sen. Barack Obama's position is not that far from Sen. McCain's foreign policy proposals. Indeed, Sen. Obama advocates the use of U.S. military force and multilateral military interventions in regional crises, for “humanitarian purposes”, even if by so doing, the United Nations must be bypassed. Therefore, if he ever gains power, it is a safe bet that Sen. Obama would not have any qualms about adopting Sen. McCain's view of the world. For example, both presidential candidates would probably support the removal of the no “first strike” clause from the NATO convention. It can be taken for granted that with either politician in the White House, the world would be a less lawful and a less safe place, and would not be more advanced than it has become under the lawless Bush-Cheney administration.

However, it is difficult to see how this new offensive role for NATO would be in the interests of European countries or of Canada. Western Europe in particular has everything to fear from a resurgence of the Cold War with Russia, and possibly with China. The transformation of NATO from a North Atlantic defensive military organization into a U.S.-led worldwide offensive military organization is going to have profound international geopolitical consequences around the world, but especially for Europe. Europe has a strong economic attraction for Russia. Then why embark upon the aggressive Bush-Cheney administration's policy of encircling Russia militarily by expanding NATO right up to Russia's doorstep and by placing a missile shields right next to Russia? Wouldn't it be better for Europe to develop harmonious economic and political relations with Russia? Why prepare the next war?

And as for Canada, under the neocon minority Harper government, it has sadly become a de facto American colony as far as foreign affairs are concerned, and this, without any serious debate or referendum to that effect within Canada. The last thing Canada needs is to go further on that mined road.

In conclusion, it would seem that the humanist idea of having peace, free trade and international law as the foundations of the world order is being cast aside in favor of a return to great power politics and gunboat diplomacy. This is a 100-year setback.

It is a shame.


Wednesday, August 13, 2008

Irresponsible Risk-Takers in Command

“War prosperity is like the prosperity that an earthquake or a plague brings.”
“ harmful, not only to the conquered but to the conqueror.”
“To defeat the aggressors is not enough to make peace durable. The main thing is to discard the ideology that generates war.”
“The root of the evil is not the construction of new, more dreadful weapons. It is the spirit of conquest.”
Ludwig von Mises (1881-1973)

There are people in charge who think that provocation and aggression can be acceptable government policy. The sudden conflict between the former Soviet province of Georgia and Russia in the Caucasus in Eurasia is a good case in point.

What's behind this conflict that erupted last Friday at the outset of the Beijing Olympic Games? First and foremost, let us keep in mind that the real and first aggressors in this conflict is the belligerent government of Georgia, led by an impulsive politician named Mikhail Saakashvili, who is openly supported by the governments of the U.S. and of Israel. Early Friday, August 8, Georgian tanks and infantry, assisted by American and Israeli military advisers, launched an early morning massive artillery and rocket barrage on the capital of breakaway South Ossetia, Tskhinvali, thus directly provoking Russia, which had soldiers in that province.

At first blush, most people could easily arrive at the conclusion that Saakashvili is completely out of his mind for having declared war against its neighbor Russia, a country more than 50 times larger, with the goal of reoccupying the Russian-speaking province of South Ossetia, de factoindependent since 1992. The only logical explanation would seem to be that the Georgia President believed, or had some form of assurance, that the Bush-Cheney administration would side militarily with him. Did he really believe that the Bush-Cheney administration, already deeply involved in two military conflicts in Iraq and in Afghanistan, would risk a world war to salvage an oil pipeline and a newly acquired colony in that far away part of the world? This would seem to be another insane idea.

It is a little known fact that the U.S. and Israel have been training and arming the Georgian military since 2002. This situation is tantamount to risking a restart of the Cold War with Russia. It has also sown the seeds of a much larger conflict in that part of the world by encouraging Georgia to embark on military manoeuvres. Little Georgia (4.5 m. inhabitants) even has 2,000 troops in Iraq, soldiers that the U.S. is now quickly flying back to Georgia. This goes a long way towards explaining how involved the Bush-Cheney administration and its Israeli surrogates have been in sticking it in the eyes of Russia. And now, the Russian bear is reacting. This is brinkmanship at a high level.

In the summer of 1914, a similar miscalculation resulted in igniting World War I.
This was a conflict that started with a single death (the assassination of Archduke Franz Ferdinand on June 28, 1914) but which resulted, in the end, in 40 million deaths. The catastrophe was the result of a chain reaction of war declarations by various countries involved in the affairs of other countries. This remains an example of how relatively minor regional conflicts can escalate into conflagrations when hotheads are in command.

The Georgia-Russia spat represents a good opportunity for the U.N. Secretary-General, Mr. Ban Ki-moon, to show leadership and not to let things degenerate. Indeed, there is always the possibility that one politician after another will try not to lose face by escalating things. For example, the U.N Secretary-General should obtain from the Security Council the mandate to visit immediately the two capitals directly involved, and he should attempt to broker an immediate face-saving end to the hostilities. He should persuade the Russian leaders not to overreact to the Georgian President's provocations. As for the latter, he has demonstrated that he is not worthy of occupying his functions.

Time is of the essence in such circumstances, because there are always some interests that stand to profit from a worsening situation.

For one, the presumptive Republican presidential candidate John McCain,who never met a war he didn't like, has already tried to stoke the fire of conflict by calling for the 26-country NATO to get involved in what is essentially a local ethnic conflict. On the campaign trail, John McCain said: "We should immediately call a meeting of the North Atlantic Council to assess Georgia's security and review measures NATO can take to contribute to stabilizing this very dangerous situation."  

Incredibly, the republican candidate is attempting to profit politically from this faraway crisis by advancing the frightening prospect of turning a small regional conflict into a world war. This could have something to do with the fact that Mr. McCain's main foreign policy adviser is a former lobbyist for the government of Georgia and is a former neocon lobbyist for the U.S. military invasion of Iraq. This would seem to be a direct conflict of interests and reason enough for Mr. McCain to refrain from throwing oil on the fire.

I have said it before, and this incident confirms it; this man would seem to be unfit to be in charge of a heavily armed country.


Friday, August 1, 2008

The U.S. Economy and Bad Government Policies

"I think the [US financial] system is basically sound, I truly do."
George W. Bush, July 15, 2008

“Since 1951, the budget of the Department of Defense each year exceeds the net profits of all U.S. corporations. So, in finance capital terms, that means that the management of that budget controls the largest single block of finance capital resources.”
Seymour Melman (1917–2004)
"The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists."
Ernest Hemingway (1899-1961), (September 1932)

There have been many policy missteps over the last twenty some years, and this has amounted to a mismanagement of the U.S. economy. The result has been an unhealthy mixture of greed, shortsightedness and market manipulation. And now, all the chickens are coming home to roost and the crisis is deepening. This does not mean that the private side of the U.S. economy is not resilient and strong. It only means that government policies have often been misguided and have damaged the private economy and hurt the people economically.

Essentially, at the government level, each new economic crisis seems to have been “solved” by creating the conditions for the next one. This is particularly true in regards to regulation policymonetary policy, and fiscal policy. Each time a policy choice had to be made, it seems that short-term benefits were often privileged at the expense of long-term costs.

First, let us consider regulation policy for the crucial financial sector. Over the last twenty years, U. S. deregulation of the financial sector has been based on developing what I would call predator financial capitalism, that is to say the systematic encouragement of excessive risk taking (moral hazard) and of corporate greed in general, the development of the pyramidal $2.5 trillion hedge fund industry, the practice of highly-leveraged buyouts (LBOs) of healthy companies with their own high-yield debt, also known as "bootstrap" investments, and the practice of program trading. Moreover, this was a system that was not only risky but also fraught with shady activities.

To accomplish this deregulation or non-regulation of the financial sector and to encourage the over-indebtedness of the U.S. economy, a whole series of safeguards that had been wisely established to prevent a repeat of the financial and economic disasters of the 1930's were dismantled and cast aside. The last one in line was the reckless abolition by the U.S. Securities and Exchange Commission (SEC) of the speculative prevention rule called the downtick-uptick rule (which prohibited short-selling when stock prices were falling), in July 2007. Such safeguards had been put in place in order to avoid systemic financial instability, to make financial institutions more responsible to users and to avoid costly government bailouts when large financial institutions fail. Today, we are back to the 1930s with large financial institutions reaping huge profits and paying obscene salaries to their CEOs in good times and with government bailing them out with public money when things turn sour.

During the Reagan-Bush era of the 1980's, deregulation encouraged unsound real estate lending by Savings and Loans financial institutions  (S&Ls) and this led to the 1986-1995 Savings and Loan associations crisis, when about $160 billion was lost, most of it through a $124.6 billion bailout by the U.S. Government.

The 1980s also saw the flourishing of vulture or predatory capitalism when financial operators were allowed to raid profitable companies and saddle them with the debt incurred to take them over. In 1989, for example, the corporate raider firm of Kohlberg Kravis Roberts (KKR) closed in on a $31.1 billion dollar hostile takeover of RJR Nabisco. It was, at that time, the largest hostile leverage buyout in history. The event was chronicled in the book (and later the movie), Barbarians at the Gate: The Fall of RJR Nabisco. To this day, nothing has been done to stop this practice that rewards irresponsible gambling and punishes prudent behavior. For the time being, however, it can be said that the practice of leveraged finance and of high-yield debt was somewhat stalled last August (2007) when the subprime crisis began to unfold.

At the center of current financial problems is the failure to adapt standard financial regulation to new financial institutions, such as broker-investment banks, off-shore based hedge funds and large derivatives markets that remain, for the most part, outside of the traditional authority of regulators. However, when things go wrong, as they did with Bear Stearns last March, their demise threatens to destabilize the entire financial system and handy government bailouts are quickly called in.

Second, let us consider monetary policy.

Over the last few years, U.S. monetary policy has resulted in a massive wealth transfer from savers, retirees and money holders in general to banks, mortgage lenders and debtors in general as the purchasing power of the dollar has plummeted. Last September, after the Bernanke Fed decided to drop interest rates as the U.S. dollar was already in the downtrend, I wrote, "foreign (dollar)investors have been 'taxed' by the American Fed's policy of benign neglect regarding the dollar."

Since then, the Bernanke Fed has gone much further. It has pushed the Federal funds rate to the 2 percent level from the 5.25 percent level it was in mid-September 2007. In so doing, by pushing real interest rates deep into negative territory and by depreciating the U.S. dollar, the Fed has heavily taxed retirees and savers in its rush to shore up American financial institutions. Indeed, it can be said that the semi-private Fed has been floating American financial problems in a sea of new money by running the printing press.

The act of printing excessive amounts of bills is the worst enemy of sound money. It is a way to destroy fiat currenciesIt is the main source of inflationand, sometimes, of hyperinflationIn the end, we know that it robs people of their savings and lowers their standards of living.

Paradoxically, while the Fed is lending heavily to financial institutions in trouble by discounting their bad subprime loan paper through its so-called new special lending facilities (at 2% annual interest rate), banks become more selective in extending credit to borrowers, forcing companies and consumers alike to cut down on their investment and consumption projects.

The economy is thus placed in a sort of “liquidity trap” where everybody wishes to remain short term and liquid. There is a lot of money around, as the monetary base, or "High-powered money", is increasing rapidly, certainly enough to feed inflation, depreciate the U.S. dollar and push long term bonds down (long term interest rates are on their way up), but banking credit as such remains scarce and may be getting more scarce as banks attempts to recapitalize themselves.

What the Bernanke Fed is doing nowadays is a continuation, although at a much higher level, of what the Greenspan Fed did in the late 1990's. At that time, then Fed Chairman Alan Greenspan reacted to the collapse of an investment firm specializing in hedged funds, Long-Term Capital Management, by pumping large amounts of liquidity into capital markets and by lowering interest rates. This approach was called a "Greenspan put",because it had the effect of guaranteeing the profitability of many risky financial operations that otherwise would have failed. That policy paved the way for the dot-com stock market bubble of 1999-2000.

In the same spirit, some refer to the Fed's bailouts of troubled investment banks as a sort of Bernanke put, because of the Fed's aggressive policy of reducing interest rates to fight market falls or to bail out financial companies in trouble.

Because of the current economic slowdown, the inflationary consequences of such a policy is not apparent yet, but it could be the foundations of future inflation down the road. Let us keep in mind that historically-low interest rates, lax lending standards, and inadequate regulation were behind the U.S. housing bubble. The seeds are now sown for the next bubble.

Third, let us look quickly at fiscal policy.

The Bush-Cheney administration's fiscal policy has been characterized by budget deficit upon budget deficit, whatever the state of the economy. In its entire eight years in office, in fact, it has never balanced the budget. On the contrary, it has even spent the budget surplus that it inherited from the Clinton administration. And it has announced that it plans to leave the coming administration with a record 2009 deficit of half a trillion dollars. Indeed, the previous Bush-Cheney administration's record was its 2004 $413 billion deficit.

Although such deficits at about 3.3 percent of the gross national product (GDP) are lower than the 6.0 percent of GDP we saw in the early 1980's, they are cumulative, and they have occurred at a time when U.S. foreign indebtedness is much higher and the U.S. dollar much weaker. It can be said that they have contributed to weakening the United States and making it more vulnerable to economic and financial shocks.


In economics, bad decisions and bad policies do not always result in immediate negative consequences. It takes time for them to work their way through the economy and produce their corrosive effects. Many of the current economic and financial problems of today are the result of bad policies of the past.


Monday, July 7, 2008

Candidate Obama: A Less Risky Alternative

"All you have to do is to tell them [the people] they are being attacked, and denounce the pacifists for lack of patriotism and exposing the country to danger. It works the same in any country."
Hermann Goering, Germany's Nazi leader

"Essential to this strategy is the UN Security Council, which should impose progressively tougher political and economic sanctions [on Iran]Should the Security Council continue to delay in this responsibility, the United States must lead like-minded countries in imposing multilateral sanctions outside the UN framework."
Sen. John McCain, June 2, 2008, before the annual AIPAC Conference, Washington D.C.

“The Iranian threat must be stopped by all possible means, and [it was a global duty to take] drastic measures' to prevent it.”
Ehud Olmert, Israeli Prime Minister, June 4, 2008, before the annual AIPAC Conference, Washington D.C.

 “I have proposed a responsible, phased redeployment of our troops from Iraq. We will get out as carefully as we were careless getting in.
...[The] “danger from Iran is grave, [and I would] do everything in my power to prevent Iran from obtaining a nuclear weapon - everything.”
Sen. Barack Obama, June 4, 2008, before the annual AIPAC Conference, Washington D.C.

“...I know that when I visit with AIPAC, I am among friends. Good friends. Friends who share my strong commitment to make sure that the bond between the United States and Israel is unbreakable today, tomorrow, and forever.”
Sen. Barack Obama, June 4, 2008, before the annual AIPAC Conference, Washington D.C.

few weeks ago, I analyzed the relative worthiness of the candidacy of presumptive Republican Candidate McCain. In all fairness, a similar assessment of Senator Barack Obama's candidacy would appear necessary.

Indeed, the Bush-Cheney administration will be history at 11:59 pm on January 20, 2009. On November 4, 2008, their successors, a new president and a new vice president, will have been chosen. Will it be an Obama team or a McCain team?

SenBarack Obama (D. IL) is the presumptive Democratic presidential candidate and the U.S.'s first African-American presidential nominee from a major party. Considering the racial past of the United States, if he were to be elected President, this will have to be considered close to being a political revolution. The political climate for such an important shift in American politics is, as of now, most favorable to electing a Democrat as President.

For one, the current Republican administration, after eight years of blunder upon blunder, is the most unpopular of any administration in a long time, with a massive 65 percent disapproval rating, according to a recent Associated Press-Ipsos pollwhile President George W. Bush is in the political cellar with a 28 percent approval rating. Even more revealing perhaps, very few Americans say their country is heading in the right direction.

Secondly, the American electorate is moving toward the Democrats with registration in both parties running 41 percent to 32 percent in favor of the Democrats. Thirdly, candidate Obama is much more intelligent, much younger, much more appealing and much more charismatic than candidate McCain. And, on issues, the Democrats should have a huge edge because people are tired of an expensive and unpopular war, because the economy is in bad shape and getting worse with the deepening financial crisis, and because a lot of people are suffering economically and financially, while oil prices are going through the roof. Many middle class Americans also have concluded that the time has come to improve the American health care system and the American pension system.

Therefore, since a Democratic presidential candidate should logically be theoverwhelming favorite to defeat the Republican nominee in November, is this an election for Sen. Obama to lose? Will there be a “Bradley effect” with white voters telling pollsters they intend to vote for a black candidate, such as Senator Obama, but could instead vote their prejudice? Will there be a backlash from progressive Democrats as their candidate moves more and more to the right?

In theory, candidate Obama and his advisers would have to make a bundle of mistakes and come out with very bad decisions to lose this election, when everybody is expecting the Democrats to gain several seats in both the Senate and House of Representatives on November 4.

As of now, it is widely recognized that candidate Obama has begun his official presidential campaign on the wrong foot by disillusioning his own progressive political base by wavering on issues.

Indeed, on June 4, candidate Obama went before the 2008 annual AIPAC conference and mimicked nearly word for word his hawkish Republican opponent, candidate McCain.

In fact, you would not believe from the quotes placed above this article that the two main American presidential candidates are from two different parties, at least, as they position themselves toward AIPAC's political agenda regarding U.S. foreign policy. When it comes to AIPAC, both presidential candidates seem to have the same speechwriters and they behave as if they were members of a common plutocratic one party political system.

They both would not hesitate to bomb Iran and they both are pledging to make the world safe for Israel. One can also expect that neither would refrain from fomenting armed conflicts around the world. Even on some crucial domestic issues, such as government warrantless electronic surveillance, both candidates seem to be in agreement. Indeed, Sen. Obama has sided with the AIPAC-inspired so-called Bush Democrats in approving warrantless surveillance of citizens by the government. On that issue, he has flip-flopped in approving immunity for George W. Bush and the telecom companies who wiretapped American citizens without a warrant before 9/11. Both candidates also rely on rich lobbyists for political advice. Last June 11, for example, candidate Obama had to remove longtime Washington lobbyist Jim Johnson from his vice president running-mate search team after it became known that Mr. Johnson had received preferential loan terms from the large mortgage lender Countrywide Financial, a firm that Sen. Obama had sharply criticized before.

On constitutional matters, Sen. Obama would not be that reluctant in emulating George W. Bush by using public funds to finance church-run activities. Indeed, he even wants to expand tax-financed faith based programs. The American military-industrial complex has also little to fear from an Obama presidency, since Sen. Obama intends to maintain the high level of U.S. military spending.

All this smacks of some improvisation, despondency and an absence of firm ideological commitments on Sen. Obama's part, and this plays into his opponent's charges. But more risky for him, this may persuade some voters that the two main presidential candidates are only marginally different and are controlled by the same plutocratic interests.

What the two presumptive U.S. presidential candidates also have in common is that both have been raised partly outside their own country, Obama in Indonesia and McCain in Panama. On this score, they are most unusual candidates and can be expected to be sensitive to international issues. In fact, both would be expected to be interventionist, McCain being only slightly more a military interventionist than Obama. This is because both adhere to the hubristic and imperialistic ideology that the United States government, without any democratic or legal mandate to that effect whatsoever, should rule the worldOn the whole, however, it is to be expected that a President Obama would adopt a somewhat more "pragmatic" and a somewhat more “realist” foreign policy, in the Bill Clinton administration's style, while a President McCain would be inclined to duplicate more closely George W. Bush in following a more “rigidly ideological” and a more unilateral foreign policy.

It is probably on the question of the Iraq war that Sen. Obama  and Sen. McCain would seem to differ the most. Foremost among Sen. Obama's objectives is his desire to extirpate his country from the presently occupied Iraq and stop spending more than one hundred billion dollars a year in that never-ending war and to devote that money to domestic social programs. On that score, a strong majority of Americans would side with him. Sen. Obama's official timetable is to remove all U.S. combat brigades from Iraq within sixteen months after becoming president. However, Sen. Obama now says that he can be flexible on this pledge and that he is keeping some room to manoeuvre based on future advice that he could receive from military commanders in the field!

This is still at variance with Sen. McCain's position on Iraq, which is closer to the current incumbent, George W. Bush.  Indeed, McCain voted for the Iraq war in October 2002, and he would be very happy to continue Bush's policy in Iraq, even to the point of extending the military occupation of that country “one hundred years” into the future. On Iraq, therefore, the choice would seem to be clear: those who oppose the Iraq war should vote for Sen. Obama, and those who favor the Iraq war and other non U.N. approved wars would find in Sen. McCain a candidate more to their liking.

President George W. Bush sees that very clearly. Last May 15, (2008) President George W. Bush went to Israel and, speaking to the Israeli parliament (the Knesset), he did a most unusual thing: he attacked an American presidential candidate, Sen. Barack Obama, while in a foreign country. It was certainly most inappropriate for a sitting president to campaign against a fellow American in a foreign land.

On some narrowly defined social issues, Sen. Barack Obama and Sen. John McCain are further apart and it can be said that they offer a real choice. Indeed, on social issues, on the economy, and on budget priorities, Sen. Obama can be considered a progressive while Sen. McCain is a conservative. In fact, on the whole, Sen. McCain can be seen as the status quo candidate, while Sen. Obama is the candidate for change and reform.

Let us see the differences on key social and economic issues between Sen. Obama and Sen. McCain.

1. On Social Security, for instance, an issue closely followed by senior citizens and future retirees, Sen. McCain is on record as favoring a privatization of Social Security, while Sen. Obama strongly opposes such a privatization, as it could place retirees' incomes at the whim of the stock market. Here the choice is clear.

2. On Health care, Sen. Obama favors public health care and cheaper drugs; Sen. McCain opposes this approach. Sen. Obama would like to see a comprehensive health care system that would be compulsory for children but voluntary for adults. Sen. McCain wants to keep the current health system pretty much intact, while providing individuals with a $2500 refundable tax credit for health expenditures. Here again the choice is pretty clear.

3. On the social issue of women's rights, Sen. Obama clearly sides on the side of women and their right to control their own body. Therefore, he considers that decisions about abortion must remain a matter between a woman and her doctor, and not be dictated by religious or political authorities. By contrast, Sen. McCain has moved closer to religious activists and now favors overriding the Roe v. Wade Supreme Court decision, while keeping incest and rape as the only exceptions for abortion. It would seem that those who believe in women's rights should vote for Sen. Obama and those who believe that the state should impose its decisions on women should vote for Sen. McCain.

4. On the crucial related issue of who should sit on the U.S. Supreme Court,the choice between the two presidential candidates would also seem to be clear-cut. Sen. Obama could be expected to nominate progressive judges on the Supreme Court, while Sen. McCain would like to push the Supreme Court even further to the right than it is now. For instance, Sen. Obama opposed Judge Samuel Alito's confirmation (Jan. 2006) and Judge John Roberts' nomination for Chief Justice of the Supreme Court (Sept. 2005). That could be the most long-term contentious difference between the two candidates.

5. On taxes and budget choices, the two candidates are way apart. For one, Sen. McCain was initially against the Bush administration tax cuts in 2003. Since then, he has embraced those cuts and the resulting deficits, while proposing a sizeable increase in defense spending. Sen. McCain would even go as far as requiring a two-thirds majority of Congress before raising taxes. Since expenditures would not be so constrained, this would insure permanent budgetary deficits for years to come. On the other side, Sen. Obama proposes that very wealthy individuals contribute more to financing Social Security. He would repeal Bush's tax cuts for the wealthy. He would also like to make the U.S. tax system more progressive by requiring wealthy individuals to contribute proportionally more than those with lower incomes, while providing tax relief to the majority of American taxpayers. On that score, Sen. McCain is more a follower of George W. Bush, while Sen. Obama adopts the standard Democratic position of favoring the middle class and the poor at the expense of the very rich. The choice on this issue is fairly clear.

Overall, Sen. Obama seems to be surrounding himself with intelligent, competent and experienced advisers such as former Security adviser Zbigniew Brzezinski and former general William Odom. On the other hand, Sen. McCain seems to be emulating President George W. Bush by surrounding himself with lobbyists, and with neocon and far right advisers.

To conclude, Sen. Obama may be a better alternative than Sen. McCain, but his propensity to double-talk can be disconcerting. Let's say that he is possibly the least worst of the two main presidential candidates. It is my contention that former Vice President Al Gore, the candidate for whom a majority of Americans voted in 2000, would have been a better and more logical, and most likely, a more successful Democratic choice as a presidential candidate.

Monday, June 16, 2008

The Illegitimate and Disastrous U.S. Military Occupation of Iraq

"The president [George W. Bush] is strongly motivated to string out the [Iraq] war until he leaves office, in order to avoid taking responsibility for the defeat he has caused and persisted in making greater each year for more than three years."
General William Odom, former head of the National Security Agency (NSA) under President Ronald Reagan

"In beloved Iraq, blood is flowing between brothers, in the shadow of an illegitimate foreign occupation, and abhorrent sectarianism threatens a civil war."
King Abdullah of Saudi Arabia, March 29, 2007

After [this] war [against Iraq] has ended, the United States will have to rebuild much more than the country of Iraq. We will have to rebuild America's image around the globe.”
Sen. Robert Byrd, (D-W.Va), March 19, 2003

The Iraqi Parliament is on record as being against the US-led militaryoccupation of their countryMoreover, most Iraqis resent Americans occupying their country and the Bush-Cheney administration's requests to do it forever by maintaining nearly 60 military bases in their country. The Bush-Cheney administration has even threatened the puppet Iraqi government to withhold some $50 billion of Iraq's money held as reserves at the Federal Reserve Bank of New York, if the Iraqi government does not sign what is also called a "strategic alliance" agreement to prolong U.S. occupation indefinitely and turn Iraq into a permanent American colony.

Indeed, after the illegal military invasion of Iraq in March 2003, the United Nations was forced to extend a mandate of occupation to the United States.Thus, in June 2004, the U.N. Security Council adopted Resolution 1546 that recognized the de facto occupation of Iraq by American-led military forces and kept Iraq subject to the Chapter VII of the U.N. Charter, which authorizes the use of force in Iraq. The mandate was supposed to be terminated at the end of 2005, but was extended. It is that U.N. mandate authorizing an American presence in Iraq that finally expires on December 31 of this year. After that date, there will be no legal basis for U.S. military forces to be on Iraqi soil and the Iraqi government would regain its entire authority.

That's what the Bush-Cheney administration wants to avoid by pressing the Iraqis to sign a so-called long-term “security agreement”, which would not require approval by the U.S. Congress (because it would not be a treaty, although this is playing with words in order to escape the scrutiny of U.S. lawmakers), and which would keep real Iraqi authority to a nominal level and concentrate most of political power in American hands. In other words, the Bush-Cheney administration wants a puppet government in Baghdad in perpetuity. We may add that this is precisely what Republican presidential Candidate McCain also wants.

In the future, as now, Americans in Iraq (American troops, contractors and private security guards) would have full legal immunity for their actions, even when they steal, rape, kidnap, torture, or murder Iraqis, and could arrest Iraqis and put them in American-run jails. Moreover, the American occupiers would have key Iraqi departments such as Defense, Interior and National Security ministries, as well as armament contracts, under their supervision for ten years, would keep control of Iraqi airspace, would maintain permanent military bases in the country and would retain the right to strike, from within Iraqi territory, any country (read Iran and Syria) they consider to be a threat to their security or contrary to U.S. or Iraqi interests. Some sovereignty and some independence indeed! Even the weak Nouri al-Maliki government thinks it's too much, while Shia Grand Ayatollah al-Sistani is tinkering with the idea of issuing a religious fatwa against the Bush-Cheney's so-called proposed agreement, a move that would likely kill it.

Let's keep in mind that the Bush-Cheney's military occupation of Iraq is doubly illegitimate, besides having been illegal from day one according to international law. First, a solid majority of Americans want American soldiers out of Iraq. Second, a vast majority of Iraqis also want American soldiers out of their country. The irony is that the Bush-Cheney regime pretends to be in Iraq for the sake of "democracy", while they trample on people's demands both in Iraq and in the United States. Some "democracy" indeed. How about fascism and imperialism!

When both the president of Iraq and the King of Saudi Arabia say that the ongoing U.S. military occupation of Iraq is 'illegitimate', and when Turkey has acted on its threats to bomb and invade Northern Iraq, it becomes obvious that the entire Middle East is now turning against the U.S. Bush-Cheney regime and its colonial adventure in that part of the world. The Bush-Cheney regime likes to delude itself and to play on words when it pretends that Iraq is not under an "illegitimate foreign occupation" but that U.S. troops are in that far away country at Iraq's invitation (sic!), citing the after-the-fact U.N. mandate. This is an example of fuzzy and circular thinking. When you don't think straight, you don't act straight. And, on this score, the Bush-Cheney administration is the most crooked you can find.

All that remains to see is whether the Bush-Cheney administration will succeed on three fronts, that is to say, 1- force its puppet government in Baghdad to sign a long-term agreement of dependence toward the United States, 2- bypass Congress and the U.S. Constitution in adopting what would clearly be an international treaty, and finally, 3- tie up the hands of the next president and prevent him from withdrawing U.S. forces from Iraq. When you think of it, this is a cynical game of brinksmanship, always on the edge of legality, morality and decency.


Monday, June 2, 2008

Candidate McCain: A Risky Choice

"I believe that the Iraqi people will greet us as liberators."
Sen. John McCain, (March 20, 2003)

"As you know, there are al Qaeda operatives that are taken back into Iran, given training as leaders, and they're moving back into Iraq."
Sen. John McCain, 2008 presumptive Republican presidential nominee, (In Amman, Jordan, March 18, 2008)

“Iran obviously is on the path toward acquiring nuclear weapons." ...“At the end of the day we cannot allow Iran to have a nuclear weapon."
Sen. John McCain

“Anyone who worries about how long we [the United States]’re in Iraq does not understand the military.”

Sen. John McCain

"John McCain will make [Dick] Cheney look like Gandhi."
Pat Buchanan, journalist and political figure

"McCain was a fighter pilot, who dropped laser-guided missiles from 35,000 feet. He was long gone when they hit. What happened when they [the missiles] get to the ground? He doesn't know. You have to care about the lives of people. McCain never gets into those issues."
Sen. Jay Rockefeller (D-W.Va.)

Many people write to me asking what I think of the current batch of presidential candidates in the U.S. —First, let me make a general observation. The American political process, especially at the presidential level, is inhuman and inefficient. It is a gruesome meat grinder where candidates have to campaign for months in primaries or caucuses in all 50 states, raise tens of millions dollars and see their private lives exposed and criticized. With such a system, it is no wonder that few Americans with high intellect and character are willing to submit themselves to such an ordeal. The current batch of presidential candidates is the result of such a system. You will find no great personalities of the caliber of Abraham Lincoln, Franklin D. Roosevelt, Dwight Eisenhower or John F. Kennedy, even though the more nutty ones have been eliminated. The three remaining candidates are not the best of what America can offer and afford.

Let me begin with the presumptive Republican presidential nominee, Senator John McCain (R-AZ)My appreciation is, on the whole, relatively negative.

On the positive side, Senator McCain has built a long history of independence in the U.S. Senate, so much so that he is often referred to as a maverick. For example, Sen. McCain has displeased many Republicans by supporting political finance reform, by denouncing state torture and even by criticizing initially the way the Bush-Cheney administration launched the Iraq war. On the last issue, however, it can be said that Sen. McCain has since backed off and he has aligned himself more closely with the current Republican White House.

On the question of torture, Sen. McCain has promised to close the detention center in Guantanamo Bay. He has declared that he would engage more actively in climate talks (as long as China and India agreed to emissions cuts). It can also be said that Sen. McCain does not consider himself a “religious” candidate, and I doubt very much that he will be holding weekly Bible sessions, as George W. Bush is reported having done within the walls of the White House. These may be inconsequential differences with the current administration, but I think they are real.

On the negative side, however, the issues on which Sen. McCain agrees with President George W. Bush and Vice President Dick Cheney are much more numerous and much more important. On most of the important issues, it would be “more of the same” with John McCain. That is why President George W. Bush has said that he is ready to do anything to have Senator John McCainelected president and that he is going to raise funds for him. Bush knows perfectly well that a McCain presidency would be like a third term for his own failed presidency. Indeed, people who like what Bush has done or undone during the last eight years should vote for McCain with little fear of being disappointed. In particular, they would love his militarism and his bellicose character. On the other hand, those who have felt betrayed or have been the victims of the Bush-Cheney administration, and that includes the 81 percent of Americans who believe their country is on the wrong track, should think twice before de facto extending the disastrous Bush presidency one day further than necessary.

Let us look at the situation.

For one, Sen. McCain is expected, as one commentator put it, to behave as a George W. Bush on steroids. Some go as far as depicting him as a candidatewho aspires to become President McBush, because so many of his policies would duplicate Bush's policies. For example, Sen. McCain is partisan of the imperial presidency theory, advanced and practiced in recent years by the Bush-Cheney administration. As recently as last May 6, he confirmed that if he were elected President, he would enthusiastically throw out the restraint on power established by the constitutional checks and balances and wouldembrace the Bush-Cheney's claim of near absolute executive power. McCain is especially worried that the courts could stick to the letter and spirit of the U.S. Constitution and reject attempts by the President to establish a quasi dictatorship while dismissing Congress' prerogatives. In McCain's words, presidential executive power in the U.S. is too constrained by a judiciary that "show[s] little regard for the authority of the president." On this very question, however, Sen. McCain seems to want it both ways.  Is this sincere or is it solely a way to create confusion? For instance, on May 15, he tried to distance himself from the Bush-Cheney administration and professed that he now embraces the constitutional concept of checks and balances. Which McCain is the real McCain? Obviously, further clarifications are urgently needed.

Secondly, on foreign policy more than anywhere else, McCain can be expected to be a McBush plus. He can be expected to be a mixture of a simplistic George W. Bush and of a rabidly nationalistic and interventionist Dick Cheney, the last two always ready to immorally bomb people and ask questions later. McCain stands ready to continue the Bush-Cheney's insane foreign policy. Therefore, no one should expect that he would be much different than what this duo has stood for over the last eight years, which is aggressive globalinterventionism, disastrous unilateralism and excessive militarism. Under McCain, the United States would still be the global bully of the planet. This will lead to more geopolitical instability worldwide, more debt for the United States, and more economic disruptions in trade, especially for oil and commodities. There will be a high economic price to pay with a McCain presidency, make no mistake about it. The current slowdown or recession may be only a harbinger of things to come.

Indeed, listening to him, one has the feeling that Sen. McCain has never met a war he didn't like. For instance, if it were only up to him, American soldiers would still be in Vietnam, where he was a pilot, flying fighter-bombers that dropped bombs over North Vietnam. He has also said that he would like to intervene even more directly in South America. And in the Middle East, he has said that he would not mind having an American military occupation of that region for another one hundred years. In McCain's view, Iraq is an American colony forever, thus making sure there will be permanent war and permanent military occupation in that part of the world. In 1999, McCain even lobbied the Clinton administration to have the U.S. invade Yugoslavia with ground troops. America's Founders would be turning in their graves if they could see their cherished republic becoming a militaristic empire!

Thirdly, Sen. McCain does not seem to know or care about international law. Indeed, not only is Sen. McCain constantly confusing the Sunnis and the Shi'ites in Iraq, after all these years, but he seems to be completely lost as to the true meaning of "preemptive" war versus "preventive" war. A preemptive war or a preemptive strike is a self-defensive measure which is taken against a foreign country that poses an imminent and inevitable threat because it is about to invade, or is threatening to attack shortly. A preventive war is rather a war of choice or a war of aggression that is launched in anticipation of a loss of security or strategic advantage in a more or less far away future, or to gain foreign territories and resources. While a preemptive war is essentially defensive in nature, a preventive war is fundamentally imperialistic. In McCain's vocabulary, the two notions are confused since he says that he would not rule out launching preemptive warswhen in fact he means launching preventive wars of aggression “against future enemies” who pose no immediate threat to the United States.

A preemptive war can sometimes be legal and justifiable, and be in accordance with Article 51 of the United Nations Charter. But a preventive war, because it is a planned and overt act of aggression, is never legal according to international law.

Fourthly, it seems that Mr. McCain is a man who has a chip on his shoulder, which is also reminiscent of George W. Bush, and that makes him a dangerous man to be trusted as leader of a heavily armed country like the United States. For example, remembering his days as a Navy pilot and a prisoner during the Vietnam Warnearly fifty years ago, he now says that he would like to go to Cuba to “punish” those Cuban soldiers who hurt his buddies in Vietnam. The Cuban government has answered him that there were no Cuban soldiers in Vietnam, but he keeps the grudge.

Another parallel with Mr. Bush is the fact that Mr. McCain, who will be 72 years old in August, attended a naval academy at Annapolis where he ranked near the end of this class, 894th out of 899 students. Thus, he cannot be expected to be a "philosopher president," and would be expected to lead with his guts rather than his head.

Fifth, Sen. McCain is a neocon candidate. The Israel Lobbyindeed, and the Neocons, that is to say the small clique of misguided ideologues who have whispered advice into George W. Bush's ears for years, and who have begun whispering into McCain's ears, would be delighted to have a militarily hawkish and neoconservative McCain in the White House. For them, this would be a dream come true. Their pet project—a war against Iran—would become a reality.

Sen. McCain was born on a U.S. military base in a foreign country (Panama), and he is the son and grandson of military career individuals. That may explain why he is enamored with anything military. This is a man who believes there is a military solution to any political problem. He would be expected to follow the neocon-inspired so-called "Bush Doctrine." He would also be expected to embrace the Neocons' imperialistic and extreme Right Wing Project for the New American Century (PNAC) that calls for American global dominance. Armed with these two “doctrines”, Sen. McCain, if elected President, would stand ready to launch future gratuitous and illegal wars of aggression around the world to ensure American supremacy. Those who liked George W. Bush will love John McCain. They will get all the fireworks and more. Whether this approach is good for the United States, for its economy and for its reputation, and for stability in the world, is another matter.

Sixth, a John McCain as president would be a gift from heaven to the American military industrial complex. It's easy to see why. —Sen. McCain is on record for advocating to increase the size of the U.S. armed forces from the current 750,000 to 900,000 members. Under his governance, the Pentagon and a host of defense contractors would see the U.S. defense budget, already bloated to a point of being larger than the defense spending of all 191 other countries taken together, would increase even further. Another red flag is the fact that McCain has surrounded himself with a host of far right lobbyists to run his campaign and raise money. This means that if ever he is elected, he will be a prisoner of these far right elements. Not a promising perspective.

Seventh, Senator John McCain has supported George W. Bush's huge tax cuts for the rich, which have resulted in large budget deficits and which have contributed so much to placing the United States in its current precarious economic situation, that is to say, being saddled with a falling currency and a spreading financial crisis. It is no wonder that George W. Bush has enthusiastically endorsed John McCain, although such an endorsement could prove to be a double-edged sword, since Bush's approval rating in the U.S. is the lowest of any American president, while a large majority of Americans believe their country is heading in the wrong direction.

Eighth, McCain's personal character is open to question. He is known, and this from his early childhood, to be prone to sudden and uncontrollable fits of temper tantrums. It is reported by biographer Robert Timberg (“John McCain: An American Odyssey”) that right up into his twenties, he remained a strikingly violent man, "ready to fight at the drop of a hat". This rage seems to be at the core of his personality: describing his own childhood, McCain has admitted to having a quick temper and a short fuse (see his book “Worth the Fighting for: A Memoir”) and he has confessed that as a youngster “at the smallest provocation I would go off into a mad frenzy, and then suddenly crash to the floor unconscious. When I got angry I held my breath until I blacked out!” Then, his parents would be forced to soak him in cold water, clothes and all, to wake him up.

A man with such a character is a dangerous man to be entrusted with the responsibility of custody of nuclear weapons. Even some of his Republican Senate colleagues say that he is too reckless to be commander-in-chief. And this is on top of his aggressive militarist stance in foreign policy and his obvious and avowed lack of knowledge in economic matters.

Ninth, there is the legitimate question of his age and personal health. The New York Times has recently been complaining about the lack of medical information regarding the presumptive Republican candidate and how little people know about his health. After all, this is not a trivial matter, since Sen. McCain will be 72 years old in August and he is recovering from an August 2000 surgery for a melanoma cancer, the deadliest of all cancers. A recently released medical report does not alleviate a bit concerns about this very issue.

And ten: Since the media have criticized Senator Barak Obama for his close association with an outspoken black minister, it is worth noting that Senator John McCain has also been endorsed by probably one of the worst right-wingreligious bigots in the U.S. today, Texan anti-Catholic televangelist John Hagee.

Let us remember that televangelist (San Antonio megachurch) leader John Hagee, has said that the 2005 hurricane Katrina was God's punishment to New Orleans; he has also referred to the Roman Catholic Church as "the great whore" and called it a "false cult system" and "the apostate church." (There are 60 million Catholics in the U. S. and they could resent such insinuations.) And to top that, he has also declared that God sent [Adolf] Hitler to perpetrate the Holocaust in order to force Jews to move to Israel!

Therefore, it is certainly legitimate to ask why there is all the media attention on Senator Barack Obama's association with a controversial pastor, and hardly any directed at Senator McCain's association with another controversial pastor. Does this not smack of double standards?

In conclusion, when all the dots are connected, it would seem to be clear: Senator "100 Years" John McCain must be considered a man too dangerous and too unpredictable to be entrusted with the presidency of a heavily armed country. Do Americans really want a man whom some call  "Senator Hothead", to become "President Hothead" and place him in a position of high responsibility? Let's hope that enough Americans will reflect about all that before the events unfold, not after. If Americans really believe that their country is headed in the wrong direction, does it really make sense to line up behind a candidate who wants to go even further in the same direction?

There are many more important issues regarding Mr. McCain that the media should raise, but they don't.

For example, let me point out that Senator McCain is still against public regulation of corporate fat cats who have in the past, and who continue today to milk the public for billions of dollars. For instance, Sen. McCain recently opposed a farm bill because the bill proposed to regulate energy futures trading, a market that was famously abused when Enron Corp. manipulated California’s electricity prices in 2001, and robbed Californians of hundreds of millions of dollars.

Let us also remember that about twenty years ago, Sen. McCain was accused of corruption after it was discovered that he was deeply involved in the Savings & Loans scandal, after it was found that he and four other senators had intervened to prevent necessary regulation by the Federal Home Loan Bank Board of some of the most risky thrifts and loans companies, such as the Lincoln Savings and Loan Association of Irvine in California. Indeed, Sen. McCain and the other four senators (the Keating Five: John McCain plus John Glenn and Alan CranstonDon Riegle, and Dennis DeConcini) had received $1.3 million in campaign contributions from chairman Charles Keating of the Lincoln Saving and Loan Ass. —Sen. McCain was rebuked by the Senate Ethics Committee for exercising "poor judgment" for intervening with the federal regulators on behalf of Keating. The other four senators have since quit politics, but McCain is still running strong and is the presumptive Republicancandidate in the 2008 U.S. presidential election.

Let's keep in mind that Sen. McCain has been behind Bush's Iraq War from day oneIndeed, Sen. John McCain is the very one who delivered a response to Sen. Robert Byrd's magistral denunciation of Bush's war, on March 19, 2003, and who defended the Bush-Cheney administration's decision to go to war. Therefore, those who opposed the Iraq War cannot vote for McCain, lest they betray their own conscience. Those who like unprovoked wars of aggression should vote for McCain.

They are many skeletons in Sen. McCain's closet. If only the media were doing their job, the public would know better before voting for him. This does not seem to be the case.


Friday, May 16, 2008
In a Casino Mentality, The Economy Goes From Bubble to Bubble

[U.S.] "strategy should aim, above all, at the removal of Saddam Hussein’s regime from power."...[His removal is absolutely vital to] "the security of the world in the first part of the 21st century" and for "the safety of American troops in the region, of our friends and allies like Israel and the moderate Arab states, and a significant portion of the world's supply of oil."
Neocons' January 26, 1998 letter to President Bill Clinton

[About the Iraqis] “If they turn on their radars we're going to blow up their goddamn missiles. They know we own their country. We own their airspace... We dictate the way they live and talk. And that's what's great about America right now. It's a good thing, especially when there's a lot of oil out there we need.”
U.S. Air Force Brig. General William Looney, head of the US-UK flying operation south of the 32nd parallel over Iraq (no-fly zones), interview reproduced in the Washington Post, August 30 1999, [quoted in William Blum's book, Rogue State, Common Courage Press, 2005, p. 159]

"Focus your operations on the oil, especially in Iraq and in the Gulf, as this would mean[the West's] death."
Osama bin Laden, December 2004

"The high crude oil prices do not have any relation to production or consumption,"... [It is] "because of the decrease in the value of the dollar."
Mahmoud Ahmadinejad, Iran President, April 2008

The American economy seems to be going from bubble to bubble: in 2000, it was the tech bubble; in 2005, it was the housing bubble; and now, it is the oil and commodities bubble. In fact, the entire world of investment is now a giant casino where speculators are in charge and where governments look the other way. For many basic marketable staples (rice, wheat, and corn) and commodities (oil, gas, metals), prices have no relation to the underlying values of what is being traded. Such prices are mostly driven by bad policies and by the pyramidal “greatest fool” technique by which large off-shore speculators navigate through unregulated derivatives to push prices up ever further, until the bubble burst. Meanwhile, a lot of disruptions may be created and people's lives may have been endangered or lost. The current famine in many countries is the end result of such government approved manipulation of markets, by OPEC and a host of other cartels and so-called speculative hedge funds.

Is it possible for an economy to grow and prosper without always being on a roller coaster? Indeed, does the current explosion in oil and commodities prices reflect real supply and demand shifts, such as supply disruptions, or is it also or even mainly driven by geopolitical factors and financial speculation that fuel an ever larger insatiable artificial demand?

It is my feeling that the plummetting U.S. dollar is having serious unintended economic consequences worldwide. Indeed, such a panic devaluation of the most widely used key currency is fueling a major rush out of dollar holdings into hard assets, such as oil, gold and other commodities. Central banks, companies and individuals are losing faith in the dollar paper currency, which has been depreciating fast against other currencies, but whose intrinsic value is also expected to be eroded further by the coming inflation that will inevitably follow the Fed's current liquidity creation. All these problems are interconnected.

Let us remember that the oil problem in the U.S. is largely a self-inflicted predicament since the U.S. government opted to move away from a self-sufficiency and a renewable-energy based economy. In 1982, for example, the U.S. daily consumption of oil had been brought down to about 9 million barrels a day, from 14 million barrels a day before the 1973 OPEC-initiated oil shock. Since the U.S. was producing about 9 million barrels of oil a day, it can be said the American economy was then self-sufficient in that form of energy needs. The Reagan administration changed all that: No more 55 an hour driving limits; reduced obligations for car manufacturers to raise gas mileage; no more restrictions, fiscal or otherwise, on the purchase of gas guzzlers, etc. The result is that the United States, with less than five percent of the world population, now consumes 25 percent of the daily world oil output, roughly 22 million barrels a day out of about 88 million barrels produced daily worldwide. And, here's the gist, 60 percent of that oil has to be imported. What's more, for the world as a whole, also 60 percent of oil imports come from the unstable Middle East. That's what we can call playing with fire!

Therefore, since oil access under American control played an important part in the Bush-Cheney's decision to launch an unprovoked war against Iraq in the spring of 2003, in order to turn that sovereign country into an American oil protectorate under management by a few major Anglo-American oil companies, it can said that the seeds for this illegal war were sown way back, during the Republican Reagan administration. That was when the philosophy of deregulation was rampant and was then hailed as a success. But, as a consequence, twenty-five precious years have been lost in preparing the U.S. economy for the time when oil would become a scarce energy source. Now, this time has arrived, but this is still the era of Hummer type vehicles that can only run on large quantities of costly and risky imported oil.

Indeed, in the U.S., there are now three cars for four adults and those cars are larger and have more powerful engines than anywhere else in the world. If only a few countries, such as China and India, were to emulate the United State in that regard, as their income levels rise, world oil consumption would more than double. But with no known (conventional) oil reserves to meet such an expanded demand, oil prices would skyrocket, crushing the purchasing power of consumers and raising inflation. The result would be a major worldwide economic crisis before economically viable alternative energy sources could be developed. This could take ten to twenty years.

Are we there now? If not, we are moving fast toward that day of reckoning, while do-nothing or complicit governments hope for a miracle or some magic solution. The main consequences will be rising inflation, 19th century wars for securing resources, and a worldwide economic slowdown in production and trade. The next twenty years should prove to be interesting for a few, but taxing for the many.


Thursday, May 1, 2008
Permanent Wars for Oil and Permanent Terrorism

“Oil in the next war will occupy the place of coal in the present war, or at least a parallel place to coal. The only big potential supply that we can get under British control is the Persian [now Iran] and Mesopotamian [now Iraq] supply....Control over these oil supplies becomes a first class British war aim.”
Sir Maurice Hankey, Britain’s First Secretary of the War Cabinet, 1918

"Whatever their publicized angst over Saddam Hussein's 'weapons of mass destruction,' American and British authorities were also concerned about violence in an area that harbours a resource indispensable for the functioning of the world economy."
Alan Greenspan, Fed Chairman 1987-2006

[We cannot leave Iraq because] "extremists [may] be in a position to use oil as a tool to blackmail the West... and they will do so unless we abandon Israel "
George W. Bush, November 1, 2006

"When there is a regime change in Iraq, you could add 3 million to 5 million barrels of production to world supply,"
Lawrence Lindsey, former George W. Bush's then-chief economic adviser, 2002

"Secure supplies of energy are essential to our prosperity and security. The concentration of 65 percent of the world's known oil reserves in the Persian Gulf means we must continue to ensure reliable access to competitively priced oil and a prompt, adequate response to any major oil supply disruption.":
U.S. White House, "National Security Strategy of the United States", March 1990

When the Bush-Cheney administration took over in January 2001, the international price of oil was about $22 a barrel. Now, nearly eight years later, the price of oil is hovering around $120 a barrel, a more than five hundred percent increase. Thus, as far as oil is concerned, things have not unfolded in Iraq as planned and expected by the Neocons in the Bush-Cheney administration. First, they thought that gushing Iraqi oil would pay for the invasion and occupation of the country. Instead, the cash outlay for this adventure is likely to reach one trillion dollars, and the total cost to the U.S. economy will likely surpass three trillion dollars. Second, the price of oil is reaching record levels with no top in sight and this is threatening to tip the U.S. and the world economies into a protracted economic recession. This is partly due to the fact that Iraqi oil output has not increased as planned and is rather below where it was when the United States invaded and occupied Iraq in 2003. From a macroeconomic point of view, this ill-advised and illegal war has been an unmitigated disaster.

Nevertheless, despite sporadic pious declarations about leaving Iraq when asked, the Bush-Cheney administration is planning a 50-Year American military occupation of Iraq. They do not want to set a date to end the occupation of Iraq, because they see it as an open-ended military occupation. —This is to be expected, since the real reasons they invaded Iraq in the first place was to pursue the long run goal of controlling Middle East oil and of protecting the state of Israel from its Muslim neighbors. Indeed, everybody knows that the military invasion of Iraq by American forces had nothing to do with "democracy" or the wishes of the people. It had everything to do with securing Iraq's oil reserves and with removing one of Israel's enemies in the person of Saddam Hussein.

Last May 31 (2007), Secretary of Defense Robert Gates confirmed these long-term plans when he said that the United States was looking for a "long and enduring presence" in Iraq. That is the reason the U.S. has built the largest embassy in the world21 buildings on a 100-acre site on the banks of the Tigris, which will be capable of housing one thousand employees. That is also why they are consolidating some 100 plus military bases in that Muslim country into 14 permanent super-military bases – all geared to control militarily that part of the world for a very long time.

This is also why the Bush-Cheney administration is pushing the Iraqi Parliament hard to adopt a law that would privatize the Iraqi oil industry. If the current puppet regime now in place in Iraq were to refuse passing such a law, the so-called "Hydrocarbon Act", it would lose over a billion dollars inreconstruction funds that would be blocked by the Bush-Cheney administration.

This overt military grab of the oil resources of a Middle East nation is a sure recipe for feeding permanent terrorism in the world and permanent war in the Middle East for as long as one can see. And if Americans elect a Republican president for a third term next November, by voting for presumptive Republican presidential nominee, Senator John McCain (R-AZ)that is what will happen since this politician is already committed to a one hundred year war in that part of the world.

According to polls, a vast majority of Iraqis is opposed to the privatization of their oil industry. Nevertheless, privatization of Iraqi oil  is one of the main"benchmarks" that the Bush-Cheney administration is imposing on the Iraqi government.

It has installed in occupied Iraq a puppet government of its own that is delivering the merchandise, even though some arm-twisting pressure has been necessary. Last July 3 (2007), for instance,  the U.S.-controlled al-Maliki's Cabinet approved, with no Sunni ministers present, a US-backed draft oil law that will share Iraqi oil wealthbetween the three main Iraqi groups, but which will, above all, let American and foreign oil companies into the Iraqi oil sector and enact privatization under so calledproduction sharing agreements. This has been a key political target and even a "benchmark" set by the Bush-Cheney White House, but so far the Iraqi Parliament has balked in approving the required controversial legislation, because there have been many protests, many Iraqis being very reluctant to adopt a policy of sharing oil production and revenues with foreign oil companies, especially when they have been taken away from them "at gunpoint".

The Iraqi oil industry has been nationalized since 1975, some thirty-three years ago. Indeed, before the American-led military invasion and occupation of Iraq, the Iraqi oil fields were controlled by the Iraqi government through a state-owned corporation. This was the foundation for a relatively high standard of living in Iraq, which had one of the best health care systems in the region and was producing more Ph.D.s per capita than the U.S. It is this prosperity and this wealth that are being destroyed by the Bush-Cheney administration. Under their military occupation of Iraq and the contemplated oil arrangements, much of Iraqi oil production and oil revenues would fall under the control of foreign oil companies, mainly American and British [Exxon/Mobil, Chevron/Texaco, BP/Amoco, and Royal Dutch/Shell].

One of the two main rationales for launching the illegal invasion of Iraq would have been accomplished, i.e. to keep the flow of oil going, under the surveillance of American troops, the other rationale being the destruction of one of Israel's strategic enemies. — Many knowledgeable observers, such as Australian Defense Minister Brendan Nelson, have confirmed that Oil Supply Security was a paramount reason for the Iraq invasion and occupation when hesaid that maintaining "resource security" in the Middle East was a priority. That is the reason why, when the American armies arrived in Baghdad, in early April 2003, their orders were to secure only one kind of public buildings, those of the Iraqi Oil Ministry. All the rest did not matter.

Finally, let us remember that on October 11, 2002, the U.S. Senate voted 77-23 to give George W. Bush and Dick Cheney a blank check authorization to launch a war of aggression against Iraq.  Two current presidential candidates, John McCain and Hillary Clinton voted for the resolution. Let us remind ourselves also that ten days earlier, the Central Intelligence Agency (CIA) had issued a confidential 90-page classified version of the National Intelligence Estimate, which contained a long list of dire consequences to follow if the USA were to invade Iraq. The report was made available to all 100 senators, but only six of them bothered to avail themselves of the opportunity to read it. Thanks to that knowledge, people have a glimpse now about how decisions were made in Washington D.C. before the onset of this war. Even on questions of life and death, improvisation prevailed on a high scale. And now, the seeds have been sown for permanent military occupations, permanent wars and permanent terrorism in the Middle East and in the world.

The price for such a misguided policy will be high and will linger on for years to come. Indeed, many Americans are beginning to see that there is a link between Iraq war spending and deficit, and the ongoing recession and accelerating inflation. Such waste and spending on wars reduce the amount of financial resources available to finance other essential government programs at home, from education to infrastructure. They increase the balance of payments deficit and force the U.S. to borrow abroad. And when the Fed lowers interest rates to mitigate the banking crisis, the dollar plummets, which feeds inflation further when oil prices and all other prices connected with transportation and world-traded commodities go up. The current stagflation is a direct consequence of excessive U.S. military spending abroad. The sooner a majority of Americans see that, the better.


Saturday, April 12, 2008

When the Fed Goes into the Investment Business

" The power to determine the quantity of money... is too important, too pervasive, to be exercised by a few people, however public-spirited, if there is any feasible alternative. There is no need for such arbitrary power... Any system which gives so much power and so much discretion to a few men, [so] that mistakes - excusable or not - can have such far reaching effects, is a bad system. It is a bad system to believers in freedom just because it gives a few men such power without any effective check by the body politic - this is the key political argument against an independent central bank."
Milton Friedman (1912-2006)

"The system of banking [is] a blot left in all our Constitutions, which, if not covered, will end in their destruction... The issuing power should be taken from the banks and restored to the people to whom it properly belongs."
Thomas Jefferson, (1743-1826), 3rd U.S. President

"If the American people ever allow private banks to control the issue of their money, first by inflation and then by deflation, the banks and corporations that will grow up around them(around the banks), will deprive the people of their property until their children will wake up homeless on the continent their fathers conquered."
Thomas Jefferson, (1743-1826), 3rd U.S. President

In 1989, the U.S. government created the Resolution Trust Corp., in effect nationalizing many savings and loans banks that were in financial difficulties. Similarly, on February 16, 2008, the British government nationalized the Northern Rock bank and rescued this bank with about £55 billion ($107 billion) in public loans and guarantees.

During the weekend of March 14-16, 2008, the Federal Reserve, a semi-public and semi-private American central bank organization, accepted to create a Delaware-based corporation in partnership with a (regulated) private bank, the JP Morgan Chase bank, in order to buy and manage $30 billion of distressed mortgage-backed securities acquired from a New York-based global but unregulated investment bank, Bear Stearns, about to go bankrupt. JP Morgan Chase put $1 billion in the new corporation, while the Fed invested $29 billion, an amount that was quickly transferred to JP Morgan Chase, the new owner of Bear Stearns.

In so doing, the Fed has de facto nationalized a portion of the portfolio of Bear Stearns, and become an "investor of last resort" rather than a "lender of last resort", besides facilitating the take-over of this investment bank by JP Morgan Chase. A private company, BlackRock Financial Management, was also hired to administer the new Delaware-based corporation and will attempt to liquidate the acquired securities gradually over time. The Fed could then recuperate part or all of its non-recourse "loan" to JP Morgan Chase, and would retain any excess amount on its unusual  "investment", in the event there is a profit.

There you have it. For the first time since its creation in 1913, the Fed has turned itself into a government of the banks, and has invested risky public capital in a business that was in need to be saved quickly from bankruptcy and liquidation. Thus, the Fed has not only decided that it is its duty to solve "liquidity crises", but also "solvency crises" in the regulated and non-regulated banking sector. In other countries, such public investments to resolve a solvency crisis are decided and handled by the Treasury and the Government, and are later voted into law. Even in the U.S., that is the way the Resolution Trust Corp. was created by the Reagan administration in the late 1990's. In fact, the current banking crisis is very reminiscent of the U.S. Savings and Loan crisis of the 1980's and 1990's, although this time the banking crisis is much more severe and much more widespread.

I personally do not question the need for avoiding a panic liquidation of the subprime and other exotic assets of Bear Stearns, in order to avoid a contagious domino effect of bank failures and a worldwide credit crunch, which could have duplicated the failure of the Creditanstalt bank in September 1931, an event that precipitated the 1930's depression. After all, the Fed was established in 1913 to avoid banking panics. What can be questioned is the way this has been done, the end result being in effect to subsidize the U.S. banking sector by privatizing most of the profits derived from the rescue operation in the hands of a private bank, and nationalizing the most likely losses in the hands of the Fed and its backer, the U.S. government. The U.S. Treasury should have played a much larger role in this bailout, so as to protect the public interest.

Make no mistake about it. This transaction may turn out to be enormously profitable to JP Morgan Chase, if the actions of the Fed were to stabilize the market for mortgage-backed financial assets in the coming months, while the Fed guarantees that the new owner of Bear Stearns would not suffer any loss on a vulnerable portion of its acquired portfolio.

A more transparent and a more democratic approach would have called for the Treasury to establish the equivalent of the old Resolution Trust Corp. to acquire insolvent Bear Stearns and gradually liquidate its mortgage-backed and other risky financial assets over time. The salvaged investment bank could have later on be sold to an existing bank at a fair market value, or reinstated as an independent viable financial entity. The public good could have been protected by avoiding a financial panic, while simultaneously precluding a massive liquidation of jobs at Bear Stearns, and a possible private enrichment of a private entity under the umbrella of an unusually risky public investment by the Fed.

I have been an adviser to central banks over my career, and that is what I would have recommended.


Sunday, March 30, 2008
Economic Cycles and Political Trends in the United States (Part I)

"The issue today is the same as it has been throughout all history, whether man shall be allowed to govern himself or be ruled by a small elite."
Thomas Jefferson (1743-1826), 3rd U.S. President

"I have learned to hold popular opinion of no value. "
Alexander Hamilton (1755-1804)

"Those who cannot remember the past are condemned to repeating it."
George Santayana (1863-1952)

[N.B.: This article is drawn from a conference to be pronounced by Dr. Tremblay before the Florida Renaissance Academy, Marco Island Yacht Club, on April 4, 2008. Those wishing to attend can call: 239-394-3089 or 239-434-4737]


have been a student of cycles, both of economic cycles and of political trends, for a very long time. To try to understand the economy or politics for that matter without having a knowledge of cycles and trends is like sailing without a compass, a weather report or a GPS (Global Positioning System).

There are four main types of cycles in economics, some relatively short, such as the slightly less than four year long inventory cycle, or the standard 10-year technology cycle, and some longer, such as the 18-year long real estate cycle (N.B.: We are presently in the downward part of this cycle, which should last until 2010-11), and some called long waves, such as the 54- to 60-year long Kondratieff cycle of a debt and price inflation-then disinflation-followed by a debt and price deflation (N.B.:  We are presently in the deflation phase of this long cycle, a good example being the debt deflation of heavily levered banks and hedged funds and of price deflation in housing) such a deflation phase expecting to last also until 2010-11.

As I mentioned, the shorter cycle is the inventory cycle (Kitchin), which lasts slightly less than four years. This cycle has become very much less pronounced in recent years for two reasons. 1) First, the service sector as a percentage of the entire economy is much larger than it was 100 or even 50 years ago. In the United States, the service sector accounts for approximately three quarters of GDP. Today, four out of every five private sector non-farm jobs (80 percent) are in the economy's service sector (federal, state and local government, wholesale trade, retail trade, transportation, public utilities, construction, finance, insurance, real estate, telecommunications, computer and related services, energy services, distribution, express delivery and audio-visual services, etc.). —50 years ago, the service sector accounted for about 60 percent of U.S. output and employment. Today, the information age has generated new forces that have driven the shift to a more services-oriented economy.
For the U.S., services exports represent approximately 30 percent of the total value of America’s exports, and it is in surplus. This sector of the economy is much less volatile than manufacturing, agriculture or mining.

2) Second, over the years, businesses have embraced the use of the computer and the digital revolution to manage inventories. This has lead to the "Just-in-time" inventory management method, which has considerably reduced fluctuations in the inventory stocks of distributors, thus smoothing the production cycle of producers.

During the entire twentieth century, as the economy moved from agriculture and industry and more and more toward service industries, the volatility of the US economy became less and less pronounced. As a consequence, recessions have been shallower and of shorter duration. And, of course, there has not been another economic depression, like the 10-year Great Depression that lasted from 1929 to 1939.

—There was another structural development on the inflation side. Indeed, the internationalization of national economies has acted as a damper on price increases, as new low cost producers, such as China and other emerging economies, have entered the markets. For instance, exports and imports used to represent 20 percent of the U. S. economy; nowadays, it is 30 percent.

Sometimes we measure these cycles from bottom to bottom, and sometimes from top to top. For the 10-year cycle (the Juglar cycle), it often coincides with normal recurring recessions. In the U.S., there were recessions, for example, in 1969, in 1973-75, in 1980 and 1981-82, in 1990-91 and in 2001, most of them within about a 9-10 year interval. According to this cycle, there could be a somewhat severe recession in 2010-11, possibly following the slowdown or recession expected to occur this year.

What is of interest is that the real estate cycle or housing cycle (the Kuznets cycle) is also scheduled to bottom in this period. This is a cycle of about 12 years of price increase and of 5 or 6 years of price decline. The previous cycle, from top to top went from 1987 to the spring of 2005. A bottom would therefore be normal in 2010-11 and a future top around 2023.

But the multi-generation Kondratieff cycle is perhaps even more ominous in its influence on the economy. From bottom to bottom, this very long cycle began in 1949, when wartime prices were unfrozen, reached a top in inflation in 1980 at 13-14 percent levels, and is expected to bottom between 2003 and 2010. The current financial crisis and the credit crunch that accompanies it are the main players in this long cycle.

As you see, the table is set for an important economic bottom in the next two years. That is why I recommend being careful and alert financially during this turbulent period.

There are also cycles and trends in politics, and they sometimes coincide with economic cycles. For example, it would surprise no one to know that during the early inflationary phase of the Kondratieff cycle, a philosophy of government social spending would tend to prevail. In the U.S., this would be a period where the Democrats would be expected to be in power. When there is a need to fight inflation, a conservative philosophy of government would tend to prevail, and this would favor the Republicans. The Kennedy-Johnson administration of the 1960s is a case in point, while the Reagan-Bush Sr. administration is the other.

See graph Economic Cycles.

(To be continued next week)
Sunday, April 6, 2008
Economic Cycles and Political Trends in the United States (Part II)

"I would rather be exposed to the inconveniences attending too much liberty than to those attending too small a degree of it."
Thomas Jefferson (1743-1826), 3rd U.S. President

"The people are turbulent and changing, they seldom judge or determine right."
Alexander Hamilton (1755-1804)

"I believe in an America where the separation of church and state is absolute––where no Catholic prelate would tell the President (should he be Catholic) how to act, and no Protestant minister would tell his parishioners for whom to vote–– where no church or church school is granted any public funds or political preference––and where no man is denied public office merely because his religion differs from the President who might appoint him or the people who might elect him."
President John F. Kennedy, September 12, 1960

[N.B.: This article is drawn from a conference pronounced by Dr. Tremblay before the Florida Renaissance Academy, Marco Island Yacht Club, on April 4, 2008.]


There are even much longer political cycles and trends in political philosophies and ideologies, and social trends, some lasting more than 100 years. Thus, some people may live an entire life without encountering their more extreme occurrences. These are the very long trends I am dealing with here.

Indeed, historically, we can identify three major trends and sources of disagreement in American political philosophy. Such swings in political ideas are developed more fully in my book "The New American Empire" (a book which has also been published in French in Canada and in France and which has just been published in Turkish, (in Ankara). I believe it is important to understand the sources of these trends and cycles in order to understand contemporary politics.

I- First, let's go back to the Mayflower in order to show the tensions that have existed in the U.S., since the very beginning, between the religious view of the world and the business view of the world.

On November 10, 1620, a group of English families left Holland (where some had been living for 11 years, after fleeing England where they had been persecuted for their religion) and landed at what became Plymouth, Massachusetts. For them, American offered them a land of religious freedom where they could freely practice their religion and not be subjected to the exactions of a state-run official religion. — It is therefore no accident that nearly 200 years later, in the first amendment of the Founding Fathers' Bill of Rights, adopted two years after the 1787 Constitution, the government is expressly prohibited from infringing upon freedom of religion, among other freedoms, such as freedom of speech, freedom of the press, the right of assembly, and the right to petition the Government.

What is less well known is the fact that the 104 passengers (some of them called themselves "The Pilgrims") were divided into two nearly equal-sized groups. *One group of 50 people was composed of the more religious ones. They called themselves the "Saints" and they called the other 54 passengers the "Foreigners" because these were people who had been recruited by London merchants and who essentially were mainly interested in the economic opportunities that the new colony, they hoped, would offer them.

During the trip, there were continuous quarrels between the two groups. This was settled by the signing of an agreement between the two, proclaiming equality among the colonists (whether religious or not) and the establishment of a "Civill body Politick", governed by "just and equall Lawes" (sic). This agreement, called the Mayflower Compact, represents the beginning of the American civil government. It is fundamentally a compromise between religion and business.

There was also another permanent European colony, which was established by the London Company in Jamestown, Virginia, on May 14, 1607, thirteen years earlier. Captain John Smith was the leader of 105 men, whose principal mission was to find gold and to become rich.

Therefore, among the first 209 Americans of European origin, about one fourth were deeply religious, but the other three quarters came to make money and get rich. —I sort of think that this is about the same thing today between the business-oriented people and the very religious people, although the latter group has been gaining importance and influence over the last half century.

As to the right to free enterprise, it can be said that the 14th Amendment of the U.S. Constitution somewhat guarantees such a right since it is says "No State shall deprive any person of life, liberty, or property, without due process of law."

As to freedom of religion, this may explain why there is no official state religion in the United States. Even before the War of Independence (1776 to 1783), a majority of American colonists had been anxious to preserve freedom of religion, and they had revolted against British rule, when the British attempted to establish the Anglican Church as the state religion, as they did in the states of Virginia and New York.

That may explain why, after the War of Independence, the leaders of the new nation chose to establish a fundamentally lay republic that is expected to remain neutral on matter of religion. The Preamble to the 1787 United States Constitution states clearly that the new constitution promotes secular political objectives, not religious ones: "We, the people of the United States, in order to form a more perfect Union, establish justice, insure domestic tranquility, provide for the common defense, promote the general welfare, and secure the blessings of liberty to ourselves and our posterity, do ordain and establish this Constitution for the United States of America." There is no reference to religion there. And, for good measure and to be clearly understood, the Founding Fathers added Article VI to the Constitution, which says expressly that there should be no religious litmus test to occupy any public function in the United States.

That is why, unlike the constitutions of some other countries, the U.S. Constitution makes no reference whatsoever to a deity. In Canada, which remained within the British Empire much longer, our constitution makes a direct reference to God, declaring that our constitution is based upon "the supremacy of God and the rule of law".

The United States Constitution is much closer to the French Constitution, which expressly defines France as a secular nation: "France is an indivisible, secular, democratic, and social Republic, assuring equality before the law of all citizens without distinction of origin, race, or religion, and respecting all beliefs."

The two constitutions, both the American and the French, derive their inspiration from the same democratic principle of governmentIndeed, in a democracy, the right to vote and to engage in political activity changes the balance of power in a country and it opens the door for the establishment of a government, in Lincoln's famous words, "of the people, by the people, and for the people."

The French and the American constitutions have brought democracy to the world because they proclaim the important religion-neutral principle that all political power emanates from the consent of the people, and that, consequently, it is not in the government's domain to concern itself with religious matters. This is the principle of the neutrality of the state in matters of religion.

While less explicit than the French Constitution, the United States Constitution implies, at least, the principle of laicity and secularism in the First Amendment (the Establishment Clause), which I have already mentioned: "Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof." . Indeed, to make things clear enough, President Thomas Jefferson, on New Year's Day, 1802, explained in a widely known official letter that the Establishment Clause meant that there should be “a wall of separation between church and state,”—not a door—a wall.

In the past, American courts have interpreted the First Amendment and Jefferson's explanation to mean that there is an obligation, on the part of the government, not to get involved in churches' activities, not to spend public money on religions and not to favor any one religion over another. They have also referred, for example, to the 1797 Treaty of Tripoli. The Treaty of Tripoli, initiated by president George Washington (1732-1799) and signed into law by president John Adams (1735-1826), officially proclaimed that: " the Government of the United States of America is not, in any sense, founded on the Christian religion; as it has in itself no character of enmity against the laws, religion, or tranquility, of Mussulmen; and, as the said States never entered into any war, or act of hostility against any Mahometan nation, it is declared by the parties, that no pretext arising from religious opinions, shall ever produce an interruption of the harmony existing between the two countries."
Treaty of Tripoli, Article XI, 1797.

President James Madison (1751-1836) is probably the American president who expressed himself the most clearly on the question, stating that there should be a total separation between church and state: “The number, the industry, and the morality of the priesthood, and the devotion of the people have been manifestly increased by the total separation of the Church from the State.” Thus, for James Madison and other American founders, the separation of church and state was not only a requirement of political freedom, it was also a mean to safeguard religion from being encroached upon by politics and politicians.

It is paradoxical, indeed, that in Canada, where the titular head of state is also the head of a church (the Church of England), we have a tradition and a political culture which are decidedly more secular that those of the United States, especially as it has been witnessed in recent years in the U.S. with the establishment of faith-based public programs and in the speeches of American politicians.

Enough of this Church and state stuff. My coming book "The Code for Global Ethics" will deal in much deeper detail on this topic.

II- The second important political tension in the U.S. is between the Jefferson and Hamilton political philosophies of democratic rule versus an aristocratic rule.

Just as some wanted to establish a theocracy in early America, the early American leaders were divided on the question of democracy, and as to whether a popular and decentralized democratic republic was better than a centralized aristocratic republic.

On the question of democracy vs. aristocracy, the two American polar personalities were Thomas Jefferson (Secretary of State in the first Washington government) and Alexander Hamilton (Secretary of the Treasury in the same government). Each was a follower of one of two opposite British political philosophers.

Jefferson (who became the 3rd U.S. President) was a disciple of both the French political thinker Montesquieu (1689-1755)("The Spirit of the Laws", 1748), and of the British philosopher John Locke (1632-1704). In his classic book, ("Second Treatise of Government", 1690), Locke refuted the divine right of kings and argued that people were sovereign and had the right overthrow their governments. This was of course the credo of most of the 55 "Founding Fathers" who supported and fought the War of Independence against royalist Great Britain and George the 3rd, and who signed the US Constitution.

And, when came the time to write a constitution, the founders did not want absolute power concentrated in one man or one branch of government, but rather they wanted a decentralization of power which would protect individual rights from government, with "checks and balances" within government, first between the states and the federal government (federalism), but also with "checks and balances" or the separation of powers between the Judiciary, the Legislative and the Executive.

For example, they introduced a clause in the Constitution requiring that only Congress could declare a war (Art. I, Sect. 8- cl. 11); that the Right of Habeas Corpus cannot be suspended except for cause (Art. I, Sect.9-cl. 2); that the President, Vice President and all civil Officers of the United States can be removed from Office by Impeachment (Art. II, Sect. 4) and that "no religious Test shall ever be required as a Qualification to any Office or public Trust under the United States." (Art. VI, cl. 3).

On the other hand, there were those, like Alexander Hamilton, who were wary of giving so much power to the people. They feared that the government would be weak and unstable. They were followers of the British political philosopher Thomas Hobbes (1588 - 1679). Hobbes did not believe in democratic rule as such, but rather defended the right of kings and aristocracies to rule the masses, for their own good. For instance, Hobbes wrote that people have no right to revolt against the government, no matter how oppressive, but they should instead, and I quote him, "expect their reward in Heaven.” Thus, long before Karl Marx, the idea that religion is the opiate of the masses was clearly expressed by Hobbes.

For Jefferson, Hamilton was a "monarchist" at heart and an aristocrat. Indeed, Hamilton had argued in favor of a President elected, yes, but for life, and a Senate modeled on the British Chamber of Lords, also elected for life. In his plan, the President would have an absolute veto. Only the House of Representatives would have had to be elected.

If Hamilton were alive today, he would be an ally of President George W. Bush and of Vice President Dick Cheney and he would be in favor of the notion of a Unitary Executive or of an "imperial presidency", i.e. a president with de facto dictatorial powers and a subservient Congress. (Hamilton even proposed the abolition of state governments and that the federal government should appoint the State governors.) President George W. Bush has added clause to more than 750 laws passed by Congress that he has signed, stating that they may not apply to the president and that he may bypass them if he chooses to do so.

Hamilton, if no democrat, had other qualities: he fostered the development of capital markets, he encouraged commerce, and he stood for sound fiscal policy. On the whole, he was more interested in the economy than in politics per se.

As we know, Hamilton was killed in a duel with Vice President Aaron Burr on July 12 1804, and his portrait is on the $10 bill. Jefferson died the same day as John Adams, on July 1, 1826 and he his portrait appears on the $2 bill and on the 5-cent nickel. Jefferson's face is also on Mount Rushmore.

III- Americans have also been divided regarding isolationism in international affairs versus active foreign interventionism.

This is the third big trend and dilemma in American political philosophy.

On the whole, America's Founding Fathers tended to be isolationists and did not want to get involved in the games that European empires (the British, the French, the Portuguese, the Spaniards which all had so-called colonies) were playing around the world. For example, George Washington (1732-1799)said: "It is our true policy to steer clear of permanent alliances with any portion of the foreign world." Besides, they were too busy developing the Louisiana Territory that Jefferson had bought from Napoleon in 1806 for $14 million [$11,250,000 plus cancellation of debts worth $3,750,000]. This was a territory, East of the Rockies and located on both sides of the Mississippi River that went from New Orleans to the Canadian border. That's 23 percent of the territory of the United States today.

This approach began to change in 1823 with the Monroe Doctrine, when President James Monroe (1758-1831) declared that the USA would not tolerate any European nation trying to establish a colony in the Americas, This had the effect of placing the entire South American continent under American influence.

This was followed by the U.S.-Mexican War of 1846 to 1848, after the U.S. annexed the independent state of Texas in 1845, under President James K. Polk with the emerging doctrine of "Manifest Destiny."

Most of the Republicans (then called Whigs) in the North and South, including then Congressman Abraham Lincoln, opposed the war on the grounds that Texas was a Mexican province, but most of the Democrats in the South supported it. In the nineteenth century, this became the main feature of American politics: Republicans tended to be isolationists, while Democrats tended to be more interventionists in foreign affairs.

This all changed at the turn of the twentieth century with the Republican administration of William McKinley (1841-1901), a very religious man. McKinley, and one of his principal secretaries, Teddy Roosevelt, crafted an imperialist foreign policy on the commonly held belief that it was America's duty as a Christian republic to spread democracy throughout the world. Armed with this new ideology, they launched the first American foreign war of aggression against Spain, in 1898.

The U.S. launched the Spanish-American war after the  U.S.S. Maine incident in the port of Havana, when an explosion in the visiting battle ship killed 266 American sailors. The explosion took place on February 15, 1898. Although it was most likely an accident, the media empires of Hearst and Pulitzer stoked the fire of war against Spain, and there was a war, even if the pretext was somewhat flimsy. The Spanish-American war allowed the United States to de facto annex the island of Cuba, the Island of Puerto Rico and the Islands of the Philippines. In 1903, Teddy Roosevelt's administration took over the country of Panama.

Therefore, we can say that the first part of the twentieth century saw the triumph of the ideology of foreign intervention, especially in Central and South America and in the Caribbean. After the McKinley administration, which had an openly imperialistic foreign policy, the Woodrow Wilson administrationtried to abandon the previous administrations' imperialist and unilateralist foreign policy by promoting the right of self-determination for all peoples throughout the world. They believed the people in every country should have the right to choose their own governments. This was the famous Wilsonian idealistic, progressive and multilateralist American foreign policy that many successive administrations would try to adhere to. The last one in line was the Bill Clinton administration (1992-2000).

But even for President Wilson, events that took place in other countries forced him to embark upon foreign interventions to "make the world safe for democracy." For example, Mexico fell into a bloody revolution in 1913, when Mexican general Victoriano Huerta overthrew and assassinated the duly elected Mexican President Francisco Madero. The next year, Wilson sent troops to Mexico, and peace with Mexico was achieved only in 1916, through complex negotiations.

Wilson also intervened in Nicaragua to fight rebels, and the same happened in Haiti and in the Dominican Republic. American troops ended up occupying these Caribbean islands for many years.

Altogether, it has been estimated that between 1898 and 1934, the United States intervened four times in Cuba, five times in Nicaragua, seven times in Honduras, four times in the Dominican Republic, twice in Haiti, once in Guatemala, twice in Panama, three times in Mexico and four times in Columbia.

During the other two thirds of the twentieth century, the United States was involved somewhat defensively in the two World Wars against Germany, and in the Cold War against the Soviet Union, until the later collapsed in 1991. There was also the involvements in the Korean war and in the Vietnam war, but generally, U.S. foreign policy, while interventionist, was also multilateralist.

And that brings us to the twenty-first century.

The Bush-Cheney administration that came into power on January 20, 2001, has been a direct successor to the McKinley-Roosevelt administrations, of one hundred years earlier. Its 2002 so-called "Bush Doctrine" promoted unilateral foreign interventionism and the self-proclaimed right to launch "preventive wars" against other countries, notwithstanding international law or international institutions such as the United Nations. Here we are today with this "Bush Doctrine" back one hundred years in international relations.—In my book "The New American Empire", I delve more deeply into this issue.—Of course, the title of  my book is somewhat misleading, because the Bush-Cheney's empire building efforts of today are not new in American history: They are but the old McKinley-Roosevelt imperial foreign policy cloaked in new clothes. Perhaps the book's title should have been "The New, New American Empire"!

My general conclusion, therefore, is that for two thirds of the twentieth century, various U.S. administrations, beginning with the Franklin D. Roosevelt administration (1932-1945), which was mainly responsible for establishing the United Nations, in 1945, have built a reputation for the United States as a protector of international law, of the right for peoples to self-determination and of international peace. For example, the United States opposed the Soviet Union when it invaded Hungary in 1956 and Czechoslovakia in 1968, under what came to be known as the "Brezhnev Doctrine".

When the Bush-Cheney administration invaded Iraq on March 20, 2003, under a similar "Bush Doctrine" and without the United Nations' authorization, this had the effect of a shock to a lot of people around the world.

This goes a long way in explaining why President George W. Bush is presently the most unpopular politician around the world that the U.S. has ever had.

A recent Harris Poll taken in Europe gave these dismal figures on Mr. Bush's approval rating in five representative countries:

In Italy: 8 percent of approval;
In the UK: 7 percent;
In Spain, 7 percent;
In Germany, 5 percent;
In France, 3 percent.

Considering these figures, maybe some American politicians would do well to meditate about what Benjamin Franklin called his seven "great virtues" that politicians should practice in public affairs. They are:
-aversion to tyranny;
-support for a free press;
-a sense of humor;
-idealism in foreign policy;
-and, tolerance and respect for compromise.

I leave you to be the judge if many contemporary politicians meet Ben Franklin's standards.

Finally, I would say that the three fundamental influences that are observed throughout history in American politics seem to be following a very long cycle of occurrence. In fact, they seem to confirm British historian Arnold Toynbee's one hundred-year cycle. Indeed, Toynbee identified what he called a century-long cycle of colonial or imperialist-like wars over time. And, in this regard, the beginning of the twenty-first century looks like a duplicate of the beginning of the twentieth century: then, Great Britain was involved in the Boer War in South Africa while the U.S. was involved in the Spanish-American War. Today, both countries are involved in the Middle East wars, the Afghanistan war and the Iraq war.

It may not be a complete coincidence that such periods, marked by colonial zeal, are also periods when religious sentiment is running high. And, since wars require a concentration of power, it may not be a coincidence either that it is during such periods that political theories about the need for a strong presidency and the Unitary Executive abound, with the purpose of turning the presidency into a virtual dictatorship. These three powerful social and political trends seem to go parallel to each other.

Therefore, the question seems to be obvious: To what extent do the three main social and political trends that I have observed in American politics tend to reinforce each other at certain periods? This is a question that political scientists and historians should investigate further.


 Friday, February 22, 2008
The U.S Financial System, the Debt Bubble and the Cancer of Excessive Deregulation

"It's...poetic justice, in that the people that brewed this toxic Kool-Aid found themselves drinking a lot of it in the end."
Warren Buffett, American investor

“By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”
John Maynard Keynes (1883-1946)

"New money that enters the economy does not affect all economic actors equally nor does new money influence all economic actors at the same time. Newly created money must enter into the economy at a specific point. Generally this monetary injection comes via credit expansion through the banking sector. Those who receive this new money first benefit at the expense of those who receive the money only after it has snaked through the economy and prices have had a chance to adjust."
Friedrich A. Hayek (1899-1992), Austrian economist

When Fed Chairman Ben Bernanke  says the economic situation is worsening, you'd better believe him. In fact, the U.S. credit markets are collapsing under our very eyes, and there is no end in sight as to when this will stop, let alone reverse itself. 1- Leading economic indicators for the U.S. economy are falling; 2- Consumer confidence sentiment is falling as mortgage equity withdrawals are drying up; 3-employment numbers are falling; 4- the January 2008 report on the U.S. service economy indicates that it contracted early in the year for the first time in 58 months; 5- the number of new jobless claims is still dangerously high; 6- The housing crisis is getting up steam; banks have to place larger and larger subprime losses on their balance sheets, thus undermining their capital bases and bringing many of them to the brink of insolvency; 7- the credit-ratings agencies are under siege; 8- bond guarantee insurance companies are in the process of loosing their triple-A ratings and some are on the brink of bankruptcy; 9- the $2.6 trillion municipal bond market is about to take a nose dive, if and when the bond insurers do not pull it through; 10- the leveraged corporate loan market is in disarray; 11- the more than a trillion dollar market for mortgage- and debt-backed securities could collapse completely if the largest American mortgage insurers continue to suffer crippling losses; 12- large hedge fundsare losing money on a high scale and they are suffering from a run on their assets; 13- in the U.S., total debt as a percentage of GDP is at more than 300 percent, a record level (N.B.: in 1980, it was 125 percent!); 14- and, finally, the worldwide hundreds-of- trillion dollar derivatives market could implode anytime, if too many financial institutions go under during the coming months, as most of these transactions are inter-institution trades.

There are a few positive straws in the wind, such as the fact that manufacturing output seems to be holding up pretty well, as the devalued dollar stimulates exports, but the overall economic picture remains bleak. This is a tribute to the U.S. economy's resiliency.

This mess all begun in the early 2000s, and even as far back as the early 1980s, when the Fed and the SEC adopted a hands-off approach to financial markets, guided by the new economic religion that "markets can do no wrong." What we are witnessing is the failure of nearly thirty years of so-called conservative debt-ridden and deregulation-ridden economic policies.

It must be understood that the most recent subprime problem really began in 2000, when the credit-rating agency of Standard & Poors issued a pronouncement saying that "piggyback" mortgage financing of houses, when a second mortgage is taken to pay the down-payment on a first mortgage, was no more likely to lead to default than more standard mortgages. This encouraged mortgage lending institutions to relax their lending practices, going as far as lending on mortgages with no down-payment whatsoever, and even postponing capital and interest payments for some time. And, with the Fed and the SEC looking the other way, a fatal next step was taken. Banks and their subsidiaries decided to follow new toxic and risky rules of banking. 

Indeed, while traditionally banks would borrow short and lend long, they went one giant step further: they began transforming long term loans, such as mortgages, car loans, student loans, etc., into short term loans. Indeed, they got into the alchemist business of bundling together relatively long term loans into packages that they sliced into smaller credit instruments that had all the characteristics of short-term commercial paper, but were carrying higher yields. They then sold these new "structured investment vehicles" (SIVs), for a fee, to all kinds of investors who were looking for higher yields than the meager rates that alternatives were paying. And, since banks were behind these new artificial financial assets, the credit-agencies gave them an AAA-rating, which allowed regulated pension funds and insurance companies to invest in them, believing they were both safe and liquid. —They were in for a shock. When the housing bubble burst, the value of real assets behind the new financial instruments began declining, pulling the rug out from underneath the asset-backed paper market, (ABCP) which became illiquid and toxic. With hardly any trading on the new instruments, nobody knew the true value of the paper, and thus nobody was willing to buy it. This crisis of confidence has now permeated to other credit markets and is threatening the entire financial system as the contagion spreads.

As late as 2003-04, then Fed Chairman Alan Greenspan was not the least worried by the subprime-financed-housing-mortgage bubble but was instead encouraging people to take out adjustable-rate mortgages, even though interest rates were at a thirty-year low and were bound to increase. Even in late 2006, newly appointed Fed Chairman Ben Bernanke professed not to be preoccupied by the housing bubble, saying that high prices were only a reflection of a strong economy. Mind you, this was more than one year after the housing market peaked in the spring of 2005. History will record that the Fed and the SEC did nothing to prevent the debt pyramid from reaching the dangerous levels it attained and which is now crushing the economy.

On a longer span of time, when one looks at a graph provided by the U.S. Bureau of Economic Analysis (BEA) and which shows the relativeimportance of total outstanding debt (corporate, financial, government, plus personal) in relation to the economy, one is struck by the fact that this ratio stayed around 1.2 times GDP for decades. Then, something big happened in the early 1980s, and the ratio started to rise, with only a slight pause in the mid-1990s, to reach the air-rarefied level of 3.1 times GDP presently, nearly 200 percent more than it used to be.

The adoption of massive tax cuts coupled with government deficit spending policies, and deregulation policies, by the Reagan and subsequent GOP administrations, all culminating in a grotesque way under the current administration, contributed massively to this unprecedented debt bubble. It took many years to build up the debt pyramid, and it will take many years to unwind it and to reduce this cumulative mountain of debt to a more manageable size.

That is the big picture behind this crisis. It is much bigger than the S&L crisis of the 1980s, which looks puny in comparison with the current one. That is why I think this crisis will linger on for at least a few more years, possibly until 2010-11.


Friday, January 25, 2008
Stagflation is Here

War—after all, what is it that the people get? Why—widows, taxes, wooden legs and debt.
Samuel B. Pettengill

"Armies, and debts, and taxes are the known instruments for bringing the many under the domination of the few.
James Madison, 4th U.S. President (April 20, 1795)

Last summer, I observed that there was a "solvency crisis"   underneath the ongoing subprime mortgage liquidity squeeze. Central banks can alleviate a "liquidity crisis", but they cannot solve a solvency crisis. Last year also, before the events, I warned that the U.S. was heading toward stagflation. This was due to three fundamental factors. First, the structural fiscal imbalances of the federal budget in a period of prosperity, as a result of the Bush-Cheney administration's continuous deficit spending linked to the Iraq and Afghanistan wars and to its large tax cuts; second, the over-indebtedness of the overall U.S. economy coupled with an overall saving rate close to zero (in 1981, it was 12 percent), and, as a consequence, the rapidly increasing foreign debt of the U.S.; and, third, the required decline in the U.S. dollar to reverse and correct the deteriorating American balance of payments. The second factor was a harbinger of less consumer spending in the coming months while the third factor would stoke the fire of overall inflation. And with already high budget deficits, there would be less leeway for an aggressive fiscal policy to sustain economic activity. The table was thus set for a bout of stagflation, i.e. slow growth and rising inflation.

Now, stagflation is here. —Economic growth is slowing down, M3 money supply numbers, as a measure of overall liquidity in the economy, are in the double digits range, the yield curve has inverted and become negative (short term rates higher than longer term rates) and the U.S. dollar has become one the weakest currencies in the world. All this as American twin deficits (balance of trade and federal government budget deficits) are at record levels. —As I pointed out last year, " A lower currency translates into more imported inflation and makes it difficult to maintain low interest rates," even if, in due time, it will improve the trade balance. This means that, for all practical purposes, monetary policy is also severely constrained in what it can now accomplish. For all of 2007, inflation hit 4.1 percent, which is two-thirds more than in 2006 when inflation registered at 2.5 percent. Moreover, the surge in wholesale prices announces even higher inflation in the months ahead.

With inflation being on the rise and real interest rates already in negative territory, aggressive monetary stimulus would likely be counterproductive, because too low interest rates would encourage capital outflows, pushing the dollar further down, and translating into more imported inflation. On top of that, one has to remember that monetary policy shifts take at least nine to twelve months before impacting the real economy. One has also to keep in mind that the U.S. operates, more and more, in an international environment, and is less and less capable of influencing the domestic economy by manipulating one variable only, such as the interest rate.

Of course, the Fed could have played a better preventive regulatory role if it had intervened in 2003-04 to reign in the unsound banking lending practices that have led to the subprime debacle. But the milk is out of the bottle now, and nothing can erase the damage done to the housing construction sector and other parts of the economy because of this lack of oversight.

After seven years of continuous indulging, of borrowing and debt building, the U.S. federal government is also in a fiscal bind and will find it difficult to effectively counteract the slowdown in the economy. Indeed, over the last seven years, the Bush-Cheney administration has run fiscal deficits on the average of $461.29 billion each year, for a grand total of $3,229 billion of cumulative of on-budget deficits.

This makes it harder to embark upon a new round of deficit spending to stimulate the economy. For one, fiscal policy shifts have even a longer time horizon before impacting the real economy. Secondly, the coming slowdown and recession will worsen an already high federal government deficit, as government receipts decline with the rise in unemployment and the drop in income growth. On the spending side, the Iraq war, in particular, is a black hole that siphons off more than $100 billion each year, with no end in sight. Oil prices are also very high, partly because of high world demand, partly because of geopolitical instability and partly because of the lowered dollar.

After seven years of foreign policy madness and of empire building on a mountain of debt, and of public indulging and private gouging, the financial crisis and credit crunch, the plummeting dollar, the high price for oil will all contribute to the 2008 economic slowdown, which is likely to turn into a recession, during the first half of the year, if it is not already into one since last December. The downturn in the world stock markets during this month is another clear indication that something is wrong, not only with the U.S. economy, but also with the world economy.

All that would seem to be very bad news for George W. Bush's Republicans, just as it was bad news for the Democratic Carter administration in the late '70s. Indeed, over the last century, the U.S. economy has been in a recession four times in the early part of a presidential election year, according to the National Bureau of Economic Research. In each of those years — 1920, 1932, 1960 and 1980 — the party of the incumbent president lost the election.


 Monday, January 14, 2008
Mr. Ban Ki-moon and the Future of the United Nations

[The] "recognition of the inherent dignity and of the equal and inalienable rights of all members of the human family is the foundation of freedom, justice and peace in the world."
Preamble- United Nations Universal Declaration of Human Rights

"Today's human rights violations are the causes of tomorrow's conflicts."
Mary Robinson, former United Nations High Commissioner for Human Rights

"The United States...simply doesn't give a damn about the United Nations, international law or critical dissent, which it regards as impotent and irrelevant."
Harold Pinter, 2005 Nobel Laureate for Literature

"The United Nations charter has a provision which was agreed to by the United States, formulated by the United States in fact, after World War II. Its says that from now on, no nation can use armed force without the permission of the U.N. Security Council. They can use force in connection with self-defense, but a country can't use force in anticipation of self-defense. —Regarding Iraq,...the United States went to war, in violation of the charter."
Benjamin Ferencz, Chief prosecutor at the Nuremberg Trials

A new Secretary-General has presided over the United Nations for more than a year, but most people ignore this fact. They can be forgiven, because very little has resulted from the October 13, 2006 election by the 192-member United Nations General Assembly of a shy South Korean diplomat, Mr. Ban Ki-Moonas the U.N. Secretary-General. On January 1, 2007, Mr. Ban Ki-moon took office as the eighth U. N. Secretary-General, succeeding Mr. Kofi Annan, for a first term lasting until December 31, 2011. He was a compromise candidate among seven candidates for the post, and he succeeded in avoiding a veto from any of the five permanent members of the Security Council. He was particularly popular with the Bush-Cheney administration because, in his capacity of Minister of Foreign Affairs and Trade, he had pushed his own government to send South Korean troops to Iraq.

We should recall that one of the first moves by Mr. Ban Ki-moon, soon after he took office, was to reverse a long-standing United Nations opposition to the death penalty as a human rights concern. Indeed, he condoned the death penalty that had been handed down on the deposed Iraqi President Saddam Hussein by the Iraqi High Tribunal, stating, "The issue of capital punishment is for each and every member State to decide."
Mr. Ban Ki-moon has also been criticized for appointing a large number of his fellow South Korean nationals to key U. N. posts, and for showing nepotismin appointing his own son-in-law to a key United Nations post in Iraq.

It remains to be seen if Mr. Ban Ki-moon has the vision, the credibility and the moral authority to bring forward the reforms that the United Nations urgently needs, if it is going to avoid the fate of irrelevancy that beset the League of Nations. So far, the only reforms the new Secretary-General has espoused have been minor administrative arrangements—and even those were contested—such as splitting the U. N. peacekeeping operation into one department handling operations and another handling arms. His proposal to combine the political affairs and disarmament department was even rejected outright.

What the United Nations needs is more than simply shuffling the chairs on the deck of the Titanic. It needs a fundamental structural reorganization if it is to play the role it was assigned originally in 1945, that is to say to promote international cooperation and to maintain international peace and security. This overall goal can only be achieved if the United Nations has the legitimacy and the means to prevent wars and to promote human rights throughout the world.

But, what should the Secretary-General, with the support of member states, do? —Logically, Mr. Ban Ki-moon should begin by declaring that the post World War II era is over and that the main obstacle to any substantial reform of the U. N. should be removed. There is, indeed, a relic of the Second World War which is still in place, It is the veto power that the five winning nations (USA, Russia, China, U.K. and France) gave themselves after WWII in the functioning of the U. N. Security Council. Mr. Ban Ki-moon should plead with the five above countries to show magnanimity and, while retaining their permanent status at the Security Council as an historical given, convince them that they should voluntarily forgo the antiquated veto that paralyses any attempt at reforming the United Nations and at making it a functional organization. Presently, because of the veto feature, each time one of the five permanent member states is involved in a crisis or in an international dispute, the Security Council and the entire United Nations are paralyzed.

The Secretary-General should tackle the task of improving the U. N.'s democratic legitimacy and operational efficiency through fundamental reforms of the Security Council and the General Assembly. Both bodies are antiquated and ill adapted to fulfill their tasks.

First, in a true 21st century spirit, the United Nations Security Council (UNSC)should better reflect the new demographic, political, and economic realities that have emerged over the last sixty years. There is a wide consensus that political and economic powerhouses such as Japan, India, Brazil and Germany, the G4 nations, should join the current five permanent members in the Security Council. These countries are large and stable democracies and economic giants that should not be left out of the world decision process.

With the current ten countries that join the Council on a regional basis, in a rotating system, for two-years terms, after having been elected by the General Assembly, a new 19-member Security Council would remain small enough to be efficient. As a substitute to the present veto enjoyed by a few members, a three-quarters majority rule could be implemented in order to guarantee that the Council's decisions reflect at all times a worldwide consensus. This would mean that the decisions and measures, couched in the form of resolutions, and which are arrived at by the Council, would have to be supported by at least fifteen members. Since all Members of the United Nations agree to accept and carry out the decisions of the Security Council, under the U. N. Charter, such a requirement would seem to be necessary if the U. N. actions are to carry a wide acceptance.

One big obstacle to enlarging the Security Council comes from the insistence of some African countries to have a permanent representative of their continent on the Council. While this is a most legitimate claim in principle, it is a difficult one to achieve in practice. First, there is no consensus in Africa about which candidate among three possible candidates (Egypt, Nigeria or South Africa) should be elected. And second, even among the later, none seems to meet the requirements of long-term political stability and economic dynamism and leadership that one would expect from a permanent member. It would be most unfortunate if the movement to reform the U. N. were to be paralyzed because of these facts.

Presently, the presidency of the Security Council rotates among the members of the Council monthly, in alphabetical order. This leaves the U. N. Secretary-General somewhat out of the loop, even though he should be seen as the main spokesperson for the United Nations. An obvious reform would be to designate the Secretary-General as the ex officio presiding officer of the Council. He would then cease to be regarded as simply a dignified bureaucrat who heads the U. N. Secretariat, rather than being the main spokesperson for the whole United Nations.

While it is true that the U.N. is not a world government, but rather a forum for the world's 192 sovereign states to debate issues and determine collective courses of action, this does not mean that it should not improve its democratic legitimacy, especially as the world has become more and more globalized and is in need of new institutions to reflect this new reality.

Presently the General Assembly is composed of all member nations, and each one of them has an equal number of representatives designated by their respective governments. This world parliament, which meets annually from September to December, has important responsibilities, such as to oversee the budget of the U. N., appoint the non-permanent members to the Security Council, and receive reports from other bodies of the U. N. —Such important issues have to be decided by a two-thirds majority of those members present and voting. —The General Assembly can also adopt resolutions on other subjects and this then only requires a simple majority. —Each member country has one vote. —On the other hand, such resolutions are not binding on the member states and the Security Council has no obligation to implement them, with the consequence that in most cases, they remain pious wishes. We can therefore say that the General Assembly de facto functions as a limited world parliament, but only for governments.

A possible reform designed to raise the democratic profile and prestige of the General Assembly among people worldwide would be to assign four representatives to each member country and to encourage countries to have half of them, or better still, all of them, elected in country-wide general elections. This could be the most important step to insure that the United Nations be seen as a truly representative international body.

On the other hand, since there is no proportional representation in the U. N., and to insure that its decisions are made and supported by a large worldwide consensus, and especially to avoid a potentially disastrous structural North-South split, a three-quarters majority or even an eighty-percent decision rulecould be mandated for important decisions. Presently, because of the one state, one vote system, it is theoretically possible for small states comprising just eight percent of the world population to pass a resolution by a two-thirds vote. No large country would ever accept to place its fate and interests in the hands of such a small group of people.

This, of course, is an incomplete list of issues and ideas about how to proceed to reform the United Nations. You are most welcome to add your own views to this important subject.