choppedliver
03-30-2009, 06:05 PM
Dr. Doom and the Temple of Economic Pain
Written by Zoltan Zigedy
Friday, 20 March 2009
Dr. Doom, the moniker earned by NYU Business School Professor Nouriel
Roubini with his gloomy forecasts of economic catastrophe, stands out
among the batch of economic Pollyannas in the mainstream academic
world and the business media. A year ago, Roubini predicted an 18
month recession followed by a classic U-shaped recovery, the expected
trajectory of a serious business-cycle downturn. But now, as reported
on Bloomberg.com, the great pessimist suggests that the recession may
go out 36 months (last quarter of 2011). And instead of a U-shaped
recovery, Roubini foresees a "more virulent L-shaped near-depression."
The good Doctor has every reason to be even gloomier. The second wave
of bank crisis is now emerging with Fannie Mae listing and AIG and
Citigroup sinking rapidly. From appearances, it looks as though the
mortgage default tidal wave has been swept over by the full effects of
the credit default swap tsunami, though no one really knows the full
weight of these financial insurance policies – estimates range from
the trillions to the tens of trillions.
To Roubini's credit, he is one of the first to recognize the
symmetries between the current crisis and the Great Depression to the
point where he is beginning to prefer the dreaded D-word (depression)
over the conventional R-word (recession). Like the Great Depression,
the shock comes in waves, affecting different economic arenas,
sectors, and far-flung countries.
Like the Great Depression, cooperation and coordination are breaking
down. Germany has slammed the door on bailing out the newer EU members
from Eastern Europe who are currently on the economic ropes. Every EU
member state has a different economic base with reliance on different
economic markets, strategies, debt positions, development levels, and
labor conditions making it virtually impossible to craft an approach
that fits all. The crisis only exacerbates these differences, creating
centrifugal forces that threaten the very existence of the union.
Similarly, the Asian economies face differences that preclude common
action.
As economic nationalism advances, the world economies weaken even
further, making the grievously ill US economy appear to be the safest
haven for investment. We see this in the strengthening dollar and the
continued purchase of Treasury notes bereft of alluring interest
rates. Thus, US dominance of the global economy places both the
possibility and responsibility for recovery in the hands of US policy
makers. Little has changed since the Great Depression.
Waves of Crisis
Popular legend has it that the Great Depression began with a market
collapse in 1929 and sank to its bottom in 1933. But this is legend.
In truth, the decline came in waves: periods of hopeful recovery
followed by further declines. There is some reason to believe that we
are experiencing a second wave of bank crisis. AIG has become a focal
point for policy makers who have thrown 70 times the firm's current
market valuation into the company's coffers with no appreciable
affect. Currently, tax payers have $170 billion at risk to AIG despite
a loss of $99.3 billion in 2008. Tellingly, the losses accelerated to
$61.7 billion in the last quarter of 2008. Given these losses were
late in the year and primarily not attributable to direct mortgages,
one might surmise that they were connected with AIG's heavy engagement
with credit default swaps – the industry's insurance against
securitization failure. Further evidence comes from a suit by AIG's
"legendary" former chief executive Maurice "Hank" Greenberg.
Greenberg's suit alleges "securities fraud tied to misrepresentations
of billions of dollars in losses on the company's portfolio of credit
default swaps," according to The Wall Street Journal. Impudently, AIG
is currently suing the US government for back taxes in the midst of
overly generous tax payer support.
The government's generosity towards AIG – and also Citigroup and
Fannie Mae – demonstrates a determination not to let mega-corporations
fail as well as a distinct bias towards rescuing companies over
mortgage holders, the unemployed, and taxpayers. AIG has been "saved"
four times while working people are still awaiting salvation.
Citigroup has only merited saving three times, but the government has
stooped lower in its slavish efforts to stave off collapse. Already
possessing preferred stock paying a high dividend, the field
commanders of the bank rescue operation devised a sneaky plan to
convert $25 billion of the preferred stock into common stock, giving
up the dividend and paying $3.25 a share. On the same day, a share of
Citigroup stock sold for less than two and a half bucks and the total
market capitalization of the company stood at about $8 billion. What a
deal for the tax payer! It is possible that this shrewd $25 billion
dollar deal may have gotten the public as much as a 36% of a company's
shares, priced, by the market, at $8 billion on that trading day! I
don't think I want Geithner and company as my financial adviser.
Apart from the sleazy stealth gifts to AIG and Citigroup, it is
important to note that two other things are operant here. Firstly, the
Treasury Secretary and his cohorts will go to any lengths to save
their corporate cronies including violating the sacred value assigned
by the market. Currently, they are favoring a new scheme of valuation
that assigns greater value towards a bank's solvency based upon
placing greater weight upon common stocks. Thus, the purchase of
common stock by the government will enhance Citigroup's TCE (tangible
common equity) ratio by this sleight-of-hand, making the corporation
look much more stable than more conventional gauges of financial health.
Why would they do this?
The "stress tests" that will be applied to financial institutions to
assess their health will reveal much of the clandestine assets – both
real and toxic – to government policy makers and allow them to better
craft effective solutions, but these policy makers also fear that this
information itself would be toxic to capitalism's tarnished image.
Public knowledge of these "assets" would likely expose the
corporations for the insolvent creatures they are. Thus, the TCE
ratios will magically make the insolvent appear salvageable.
And this is the second point: the policy makers fear nothing more than
a public outcry for nationalization of banks. On Friday, February 27,
the government could have bought every existing common stock - with a
generous incentive - in Citicorp for less than $10 billion dollars,
effectively owning the corporation while making every stock holder
whole. Instead, they gave Citicorp billions in forgiven dividend
payments and billions secured by paying above the market price while,
at the same time, diluting the values of shares held by stockholders.
All of this was done to bolster Citigroup's appearance of solvency and
quiet the handful of public figures entertaining the notion that
nationalization is the best solution.
Con Game
We now know that securities derived from complex combinations of basic
units of debt – mortgages, loans, "derivatives," so called – stand as
a root cause of the financial
crisis. The financial industry sold and
resold layer upon layer of these exotic derivatives to one another.
Firms like AIG, in turn, sold insurance policies on these instruments
to any and all. Through these practices, an enormous pool of virtual
value was created that served further as a basis for even more
securitization and investment. It was this huge reservoir of debt-
based "value" that stood as a foundation – albeit, a shaky foundation
– for the recovery from the high-tech collapse. I posed the following
question in an article posted on MLToday (Capital Surplus, Marx, and
Crisis) in December 2005:
Of course this is the interesting question from a Marxist perspective.
We know, of course, that the world's wealth has been growing, though
not at a historically uncommon pace. We also know that the world's
money supply has been expanding at a consistent 6% rate over the last
decade, in step with historic trends. So how do we account for the
fact that since 2000, central bank reserves have doubled, mutual
funds, insurance funds, and pension funds have grown by nearly a
third, hedge funds have more than doubled, and US companies now have
over $1.3 trillion in liquidity? Given that capital growth has been
out of step with economic growth, what is its source?
The answer – unclear to me at the time – lies, to a great extent, in
the massive creation of debt-based exotic securities. They, along with
the super-exploitation of workers, account for the enormous growth of
liquidity seeking new investment opportunities in the years leading to
the crash. Moreover, to achieve a return on this pool of investment
required taking greater and greater risk.
Of course this virtual edifice is collapsing; there is a near complete
consensus that the underlying "values" are toxic. That is, they are
unwanted, dispersed, and impossible to value.
One would think that this process of creating exotic, volatile and
dangerous new financial instruments would be avoided at all costs.
Nothing could be further from the truth. On March 17, 2009 the Federal
Reserve will begin a new program to encourage the creation of a whole
new set of these potentially toxic derivatives. The Fed is offering
$200 billion designated for the bundling and sales of newly
constructed securities based not upon mortgages, but car loans,
student loans and other consumer loans. The so-called TALF program
(Term Asset-Backed Securities Loan Facility) will make low interest
loans available for the purchase of these potentially vile
instruments. The minimum loan for these purchases will be $10 million,
according to The Wall Street Journal. In addition, the Fed will
guarantee these instruments against default. So, in essence, the Fed
is urging the return to financial practices that brought the financial
empires down, but this time with public funds. And, we must add, at no
risk to the financial players. Could there be a more foolish recipe
for disaster?
So why would the Fed encourage another dose of risk (with our money)
on the heels of the earlier securitization fiasco?
The answer lies in making the financial industry profitable. Contrary
to what some suggest, there is enough liquidity to support ordinary
mortgages and loans. Yet they fail to generate the kind of profits
that the industry has grown accustomed to receiving. Therefore, the
Fed is collaborating to encourage the very practices that brought the
financials to enjoy over 40% of total corporate profits before the
collapse. Of course the same practices brought on the financial
disaster. The latest Fed move borders on the insane and marks a new
level of desperation. Again, policy makers will do anything to stave
off the talk of nationalization.
Nationalization
It is tempting to forego the term "nationalization" since it has been
so widely misused and abused. Some – idiotically – posed the original
TARP bailout as a kind of incipient nationalization. Still others
hysterically viewed government oversight as a version of
nationalization. Wiser heads – like Krugman, Stiglitz, and even
Roubini – understand nationalization as an ill-defined variety of
government ownership and control – but quickly assure us that this
remedy must be temporary and quickly reversed. As best as I can tell,
the only reason offered for reversal was, like fear of the dark, a
widespread, but unfounded dread that the untried path might prove to
hold some irrational danger. These academic economists cannot escape
the deeply ingrained axiom that private is always better than public
enterprise. Despite the evidence of a disastrous collapse of the
private economy, their limited vision will not allow an unconditional
embrace of public ownership. To borrow and update an analogy from the
Fed chair, Bernenke: Re-privatizing the banks is like buying a pack of
cigarettes for the neighbor who has set his house on fire after
smoking in bed.
However, there are hopeful signs – apart from the calls of important
bourgeois economists – that nationalization is achieving some traction
with mass organizations. The AFL-CIO adopted the following resolution
on March 4:
The AFL-CIO calls on the Obama administration to get fair value for
any more public money put into the banks. In the case of distressed
banks, this means the government will end up with a controlling share
of common stock. The government should use that stake to force a
cleanup of the banks' balance sheets. The result should be banks that
can either be turned over to bondholders in exchange for bondholder
concessions or sold back into the public markets. We believe the
debate over nationalization is delaying the inevitable bank
restructuring, which is something our economy cannot afford.
Like the esteemed academics, the labor federation cannot bring itself
to support a once-and-for-all nationalization of the financial
industry. Fear of the charge of socialism – an idea purged from the
labor movement in the nineteen fifties – stops them short of this
commitment. Nonetheless, this statement is a welcome step forward for
the usually tame organized-labor leadership.
We must build on this. The first order of business is to get clear
that we really mean public ownership and not some public-private-
partnership, a scheme that engages public financing, risk, and
responsibility for private profit-making. So far, the creeping
"nationalizations" of financial institutions have taken this long
favored form of pillaging the public sector. Private developers and
contractors have proposed these PPP strategies when they lacked the
capital and credibility to tackle large, risky projects. Similarly,
public policy makers have poured billions into banks with no other
purpose than to restore profitability and keep a private hand in the
banking industry.
Public ownership invests all the functions of management, direction,
and purpose squarely in the hands of those duly authorized by the
owners – the public. What banks do, how they do it, and for whom they
do it would be determined both with the consent and for the interests
of the public. The mechanisms for achieving these ends represent an
exciting, bold challenge that could energize millions of people to
participate in meaningful change and energize generations to come.
Clarity comes when we abandon the profit-driven, market-oriented world
of consultants, marketers, and ad agencies. Clarity comes when we
reject the dictatorship of corporate hierarchies. Clarity comes when
we identify the productive
functions of finance and discard those
elements that accumulate vast sums of wealth in the pockets of the few.
Yet we must not deceive ourselves. The history of previous efforts to
establish and maintain public ownership reveals great difficulties.
Without people's power – the ability to protect the people's interests
– past nationalizations have been eroded and corrupted by the
concerted efforts of the private sector. Without a countervailing
force, corporate power would, over time, bring a public enterprise
back into the orbit of private interests. We see the parasitic role of
capital in undermining our public schools, utilities, transportation,
recreation, wild lands, criminal justice system, and the military. The
wave of privatizations and commercialization of these public functions
in the era of neo-liberalization clearly demonstrate their
vulnerability without the people's vigilance. Profit-making is the flu
that invariably infects public institutions; as long as we suffer
capitalism, the predations of private firms will always threaten
public ownership.
To the argument that the government – demonized by liberals and the
Right alike – could not run the banks effectively, we only have to
point to the People's Republic of China. The Wall Street Journal
(March 7/8, 2008) concedes that there is no financial crisis in the
PRC thanks to the state-run banks: "But while financial systems sag in
many countries, Chinese banks – state-run, stodgy and opaque though
they may be – continue to pump money through the economy." Zang Ping,
of the PRC economic planning agency is quoted: "For us the biggest
impact has been on the real economy, while in the West there has been
a major impact on the financial system". PRC central bank governor,
Zhou Xiaochuan also noted: "The size of total lending in January was
beyond our expectations." Thus, thanks to publicly owned banks, the
PRC has been immune to the financial disaster that tore through all of
the major capitalist countries. As a result, "It's probably the only
country in the world with a big expansion in private credit" according
to Ronald McKinnon, professor of international economics at Stanford,
as quoted in the Journal. One might hope that this would be a powerful
consideration in favor of nationalizing banks in the US… and keeping
them nationalized.
Keeping Score
Now that the bloom is off the electoral rose, we need to frequently
tally up the score of the Obama Administration's policy initiatives.
On the economic front, there are three areas of consideration: the
financial bailout, the stimulus package, and the budget.
Risking the ire of many of my Marxist colleagues, I would grade the
Administration B on the budget. Certainly it's far from a people's
budget. Yet there are important elements that could serve as a point
of departure for even more gains for working people. In many ways, it
breaks with not only the extreme right, but with the more conservative
officials of the Democratic Party, including the remnants of
Clintonism. Nonetheless, it's meaningless, if labor and progressives
do not join the struggle to protect and expand its better elements.
It's meaningless if Obama continues his heralded "bi-partisan
pragmatism" and allows the political opposition to gut it. But even
more to the point, in times of great crisis like this, budgets lose
their political importance, trumped by the extraordinary imperatives
of taming the harsh realities of unemployment, poverty, and despair.
No one – check the history books – remembers the Roosevelt budgets,
except when he foolishly sought to balance the budget in 1937.
The stimulus package merits a D-. It is ill-conceived, under funded
and guaranteed to make it more difficult to produce further stimuli at
a later date when it will again be needed. Obama's promise to run 90%
of the works projects through the private sector is unconscionably
wasteful and worthy of Herbert Hoover. The expanded tax relief is a
repeat of the failed Bush/Paulson stimulus. History teaches that half-
steps are less than useful.
Finally, the financial bailout deserves an emphatic F, for the reasons
I give above. It should be clear to all that the Geithner, Summers,
Volker, et al team must go. They are distinguished only by their
slavish loyalty to the banking industry and their poverty of ideas. If
"Rumsfeld must go" became a rallying cry for the anti-war movement,
"Geithner and Summers must go" serves the same purpose in these
critical times. The sooner, the better.
http://mltoday.com/en/dr.-doom-and-the-temple-of-economic-pain-577.html
Written by Zoltan Zigedy
Friday, 20 March 2009
Dr. Doom, the moniker earned by NYU Business School Professor Nouriel
Roubini with his gloomy forecasts of economic catastrophe, stands out
among the batch of economic Pollyannas in the mainstream academic
world and the business media. A year ago, Roubini predicted an 18
month recession followed by a classic U-shaped recovery, the expected
trajectory of a serious business-cycle downturn. But now, as reported
on Bloomberg.com, the great pessimist suggests that the recession may
go out 36 months (last quarter of 2011). And instead of a U-shaped
recovery, Roubini foresees a "more virulent L-shaped near-depression."
The good Doctor has every reason to be even gloomier. The second wave
of bank crisis is now emerging with Fannie Mae listing and AIG and
Citigroup sinking rapidly. From appearances, it looks as though the
mortgage default tidal wave has been swept over by the full effects of
the credit default swap tsunami, though no one really knows the full
weight of these financial insurance policies – estimates range from
the trillions to the tens of trillions.
To Roubini's credit, he is one of the first to recognize the
symmetries between the current crisis and the Great Depression to the
point where he is beginning to prefer the dreaded D-word (depression)
over the conventional R-word (recession). Like the Great Depression,
the shock comes in waves, affecting different economic arenas,
sectors, and far-flung countries.
Like the Great Depression, cooperation and coordination are breaking
down. Germany has slammed the door on bailing out the newer EU members
from Eastern Europe who are currently on the economic ropes. Every EU
member state has a different economic base with reliance on different
economic markets, strategies, debt positions, development levels, and
labor conditions making it virtually impossible to craft an approach
that fits all. The crisis only exacerbates these differences, creating
centrifugal forces that threaten the very existence of the union.
Similarly, the Asian economies face differences that preclude common
action.
As economic nationalism advances, the world economies weaken even
further, making the grievously ill US economy appear to be the safest
haven for investment. We see this in the strengthening dollar and the
continued purchase of Treasury notes bereft of alluring interest
rates. Thus, US dominance of the global economy places both the
possibility and responsibility for recovery in the hands of US policy
makers. Little has changed since the Great Depression.
Waves of Crisis
Popular legend has it that the Great Depression began with a market
collapse in 1929 and sank to its bottom in 1933. But this is legend.
In truth, the decline came in waves: periods of hopeful recovery
followed by further declines. There is some reason to believe that we
are experiencing a second wave of bank crisis. AIG has become a focal
point for policy makers who have thrown 70 times the firm's current
market valuation into the company's coffers with no appreciable
affect. Currently, tax payers have $170 billion at risk to AIG despite
a loss of $99.3 billion in 2008. Tellingly, the losses accelerated to
$61.7 billion in the last quarter of 2008. Given these losses were
late in the year and primarily not attributable to direct mortgages,
one might surmise that they were connected with AIG's heavy engagement
with credit default swaps – the industry's insurance against
securitization failure. Further evidence comes from a suit by AIG's
"legendary" former chief executive Maurice "Hank" Greenberg.
Greenberg's suit alleges "securities fraud tied to misrepresentations
of billions of dollars in losses on the company's portfolio of credit
default swaps," according to The Wall Street Journal. Impudently, AIG
is currently suing the US government for back taxes in the midst of
overly generous tax payer support.
The government's generosity towards AIG – and also Citigroup and
Fannie Mae – demonstrates a determination not to let mega-corporations
fail as well as a distinct bias towards rescuing companies over
mortgage holders, the unemployed, and taxpayers. AIG has been "saved"
four times while working people are still awaiting salvation.
Citigroup has only merited saving three times, but the government has
stooped lower in its slavish efforts to stave off collapse. Already
possessing preferred stock paying a high dividend, the field
commanders of the bank rescue operation devised a sneaky plan to
convert $25 billion of the preferred stock into common stock, giving
up the dividend and paying $3.25 a share. On the same day, a share of
Citigroup stock sold for less than two and a half bucks and the total
market capitalization of the company stood at about $8 billion. What a
deal for the tax payer! It is possible that this shrewd $25 billion
dollar deal may have gotten the public as much as a 36% of a company's
shares, priced, by the market, at $8 billion on that trading day! I
don't think I want Geithner and company as my financial adviser.
Apart from the sleazy stealth gifts to AIG and Citigroup, it is
important to note that two other things are operant here. Firstly, the
Treasury Secretary and his cohorts will go to any lengths to save
their corporate cronies including violating the sacred value assigned
by the market. Currently, they are favoring a new scheme of valuation
that assigns greater value towards a bank's solvency based upon
placing greater weight upon common stocks. Thus, the purchase of
common stock by the government will enhance Citigroup's TCE (tangible
common equity) ratio by this sleight-of-hand, making the corporation
look much more stable than more conventional gauges of financial health.
Why would they do this?
The "stress tests" that will be applied to financial institutions to
assess their health will reveal much of the clandestine assets – both
real and toxic – to government policy makers and allow them to better
craft effective solutions, but these policy makers also fear that this
information itself would be toxic to capitalism's tarnished image.
Public knowledge of these "assets" would likely expose the
corporations for the insolvent creatures they are. Thus, the TCE
ratios will magically make the insolvent appear salvageable.
And this is the second point: the policy makers fear nothing more than
a public outcry for nationalization of banks. On Friday, February 27,
the government could have bought every existing common stock - with a
generous incentive - in Citicorp for less than $10 billion dollars,
effectively owning the corporation while making every stock holder
whole. Instead, they gave Citicorp billions in forgiven dividend
payments and billions secured by paying above the market price while,
at the same time, diluting the values of shares held by stockholders.
All of this was done to bolster Citigroup's appearance of solvency and
quiet the handful of public figures entertaining the notion that
nationalization is the best solution.
Con Game
We now know that securities derived from complex combinations of basic
units of debt – mortgages, loans, "derivatives," so called – stand as
a root cause of the financial
crisis. The financial industry sold and
resold layer upon layer of these exotic derivatives to one another.
Firms like AIG, in turn, sold insurance policies on these instruments
to any and all. Through these practices, an enormous pool of virtual
value was created that served further as a basis for even more
securitization and investment. It was this huge reservoir of debt-
based "value" that stood as a foundation – albeit, a shaky foundation
– for the recovery from the high-tech collapse. I posed the following
question in an article posted on MLToday (Capital Surplus, Marx, and
Crisis) in December 2005:
Of course this is the interesting question from a Marxist perspective.
We know, of course, that the world's wealth has been growing, though
not at a historically uncommon pace. We also know that the world's
money supply has been expanding at a consistent 6% rate over the last
decade, in step with historic trends. So how do we account for the
fact that since 2000, central bank reserves have doubled, mutual
funds, insurance funds, and pension funds have grown by nearly a
third, hedge funds have more than doubled, and US companies now have
over $1.3 trillion in liquidity? Given that capital growth has been
out of step with economic growth, what is its source?
The answer – unclear to me at the time – lies, to a great extent, in
the massive creation of debt-based exotic securities. They, along with
the super-exploitation of workers, account for the enormous growth of
liquidity seeking new investment opportunities in the years leading to
the crash. Moreover, to achieve a return on this pool of investment
required taking greater and greater risk.
Of course this virtual edifice is collapsing; there is a near complete
consensus that the underlying "values" are toxic. That is, they are
unwanted, dispersed, and impossible to value.
One would think that this process of creating exotic, volatile and
dangerous new financial instruments would be avoided at all costs.
Nothing could be further from the truth. On March 17, 2009 the Federal
Reserve will begin a new program to encourage the creation of a whole
new set of these potentially toxic derivatives. The Fed is offering
$200 billion designated for the bundling and sales of newly
constructed securities based not upon mortgages, but car loans,
student loans and other consumer loans. The so-called TALF program
(Term Asset-Backed Securities Loan Facility) will make low interest
loans available for the purchase of these potentially vile
instruments. The minimum loan for these purchases will be $10 million,
according to The Wall Street Journal. In addition, the Fed will
guarantee these instruments against default. So, in essence, the Fed
is urging the return to financial practices that brought the financial
empires down, but this time with public funds. And, we must add, at no
risk to the financial players. Could there be a more foolish recipe
for disaster?
So why would the Fed encourage another dose of risk (with our money)
on the heels of the earlier securitization fiasco?
The answer lies in making the financial industry profitable. Contrary
to what some suggest, there is enough liquidity to support ordinary
mortgages and loans. Yet they fail to generate the kind of profits
that the industry has grown accustomed to receiving. Therefore, the
Fed is collaborating to encourage the very practices that brought the
financials to enjoy over 40% of total corporate profits before the
collapse. Of course the same practices brought on the financial
disaster. The latest Fed move borders on the insane and marks a new
level of desperation. Again, policy makers will do anything to stave
off the talk of nationalization.
Nationalization
It is tempting to forego the term "nationalization" since it has been
so widely misused and abused. Some – idiotically – posed the original
TARP bailout as a kind of incipient nationalization. Still others
hysterically viewed government oversight as a version of
nationalization. Wiser heads – like Krugman, Stiglitz, and even
Roubini – understand nationalization as an ill-defined variety of
government ownership and control – but quickly assure us that this
remedy must be temporary and quickly reversed. As best as I can tell,
the only reason offered for reversal was, like fear of the dark, a
widespread, but unfounded dread that the untried path might prove to
hold some irrational danger. These academic economists cannot escape
the deeply ingrained axiom that private is always better than public
enterprise. Despite the evidence of a disastrous collapse of the
private economy, their limited vision will not allow an unconditional
embrace of public ownership. To borrow and update an analogy from the
Fed chair, Bernenke: Re-privatizing the banks is like buying a pack of
cigarettes for the neighbor who has set his house on fire after
smoking in bed.
However, there are hopeful signs – apart from the calls of important
bourgeois economists – that nationalization is achieving some traction
with mass organizations. The AFL-CIO adopted the following resolution
on March 4:
The AFL-CIO calls on the Obama administration to get fair value for
any more public money put into the banks. In the case of distressed
banks, this means the government will end up with a controlling share
of common stock. The government should use that stake to force a
cleanup of the banks' balance sheets. The result should be banks that
can either be turned over to bondholders in exchange for bondholder
concessions or sold back into the public markets. We believe the
debate over nationalization is delaying the inevitable bank
restructuring, which is something our economy cannot afford.
Like the esteemed academics, the labor federation cannot bring itself
to support a once-and-for-all nationalization of the financial
industry. Fear of the charge of socialism – an idea purged from the
labor movement in the nineteen fifties – stops them short of this
commitment. Nonetheless, this statement is a welcome step forward for
the usually tame organized-labor leadership.
We must build on this. The first order of business is to get clear
that we really mean public ownership and not some public-private-
partnership, a scheme that engages public financing, risk, and
responsibility for private profit-making. So far, the creeping
"nationalizations" of financial institutions have taken this long
favored form of pillaging the public sector. Private developers and
contractors have proposed these PPP strategies when they lacked the
capital and credibility to tackle large, risky projects. Similarly,
public policy makers have poured billions into banks with no other
purpose than to restore profitability and keep a private hand in the
banking industry.
Public ownership invests all the functions of management, direction,
and purpose squarely in the hands of those duly authorized by the
owners – the public. What banks do, how they do it, and for whom they
do it would be determined both with the consent and for the interests
of the public. The mechanisms for achieving these ends represent an
exciting, bold challenge that could energize millions of people to
participate in meaningful change and energize generations to come.
Clarity comes when we abandon the profit-driven, market-oriented world
of consultants, marketers, and ad agencies. Clarity comes when we
reject the dictatorship of corporate hierarchies. Clarity comes when
we identify the productive
functions of finance and discard those
elements that accumulate vast sums of wealth in the pockets of the few.
Yet we must not deceive ourselves. The history of previous efforts to
establish and maintain public ownership reveals great difficulties.
Without people's power – the ability to protect the people's interests
– past nationalizations have been eroded and corrupted by the
concerted efforts of the private sector. Without a countervailing
force, corporate power would, over time, bring a public enterprise
back into the orbit of private interests. We see the parasitic role of
capital in undermining our public schools, utilities, transportation,
recreation, wild lands, criminal justice system, and the military. The
wave of privatizations and commercialization of these public functions
in the era of neo-liberalization clearly demonstrate their
vulnerability without the people's vigilance. Profit-making is the flu
that invariably infects public institutions; as long as we suffer
capitalism, the predations of private firms will always threaten
public ownership.
To the argument that the government – demonized by liberals and the
Right alike – could not run the banks effectively, we only have to
point to the People's Republic of China. The Wall Street Journal
(March 7/8, 2008) concedes that there is no financial crisis in the
PRC thanks to the state-run banks: "But while financial systems sag in
many countries, Chinese banks – state-run, stodgy and opaque though
they may be – continue to pump money through the economy." Zang Ping,
of the PRC economic planning agency is quoted: "For us the biggest
impact has been on the real economy, while in the West there has been
a major impact on the financial system". PRC central bank governor,
Zhou Xiaochuan also noted: "The size of total lending in January was
beyond our expectations." Thus, thanks to publicly owned banks, the
PRC has been immune to the financial disaster that tore through all of
the major capitalist countries. As a result, "It's probably the only
country in the world with a big expansion in private credit" according
to Ronald McKinnon, professor of international economics at Stanford,
as quoted in the Journal. One might hope that this would be a powerful
consideration in favor of nationalizing banks in the US… and keeping
them nationalized.
Keeping Score
Now that the bloom is off the electoral rose, we need to frequently
tally up the score of the Obama Administration's policy initiatives.
On the economic front, there are three areas of consideration: the
financial bailout, the stimulus package, and the budget.
Risking the ire of many of my Marxist colleagues, I would grade the
Administration B on the budget. Certainly it's far from a people's
budget. Yet there are important elements that could serve as a point
of departure for even more gains for working people. In many ways, it
breaks with not only the extreme right, but with the more conservative
officials of the Democratic Party, including the remnants of
Clintonism. Nonetheless, it's meaningless, if labor and progressives
do not join the struggle to protect and expand its better elements.
It's meaningless if Obama continues his heralded "bi-partisan
pragmatism" and allows the political opposition to gut it. But even
more to the point, in times of great crisis like this, budgets lose
their political importance, trumped by the extraordinary imperatives
of taming the harsh realities of unemployment, poverty, and despair.
No one – check the history books – remembers the Roosevelt budgets,
except when he foolishly sought to balance the budget in 1937.
The stimulus package merits a D-. It is ill-conceived, under funded
and guaranteed to make it more difficult to produce further stimuli at
a later date when it will again be needed. Obama's promise to run 90%
of the works projects through the private sector is unconscionably
wasteful and worthy of Herbert Hoover. The expanded tax relief is a
repeat of the failed Bush/Paulson stimulus. History teaches that half-
steps are less than useful.
Finally, the financial bailout deserves an emphatic F, for the reasons
I give above. It should be clear to all that the Geithner, Summers,
Volker, et al team must go. They are distinguished only by their
slavish loyalty to the banking industry and their poverty of ideas. If
"Rumsfeld must go" became a rallying cry for the anti-war movement,
"Geithner and Summers must go" serves the same purpose in these
critical times. The sooner, the better.
http://mltoday.com/en/dr.-doom-and-the-temple-of-economic-pain-577.html