Napoleon's retreat from Moscow
Soviets practice scorched-earth policies: As the Nazi German Army pushed the Soviets through the Ukraine in 1941 and 1942, Joseph Stalin ordered his army and civilians to destroy anything that could be useful to the Germans, including industrial facilities, rail lines, communication lines, and shelter. The Germans practiced their own scorched-earth policy in 1943 and 1944 as they retreated through Russia and Europe. As his country was collapsing in March 1945, Adolf Hitler ordered his armaments minister, Albert Speer, to destroy any German resources not yet in Allied hands. Unknown to Hitler, Speer never carried out the order
Dictionary:
scorched-earth policy
(skôrcht'ûrth')n.
The policy of devastating all land and buildings in the course of advancing or retreating troops so as to leave nothing salvageable to the enemy.
The scorched earth policy is actually a classic military strategy: generals would instruct troops to burn any land/crops/trees as they retreated so there would be no supplies to refresh the advancing army....
...Robert the Bruce counselled using these tactics to hold off the English King Edward’s forces when the English invaded Scotland, according to an anonymous 14th-century poem[2]:
...in strait places gar keep all store,And byrnen ye plainland them before,
That they shall pass away in haist
What that they find na thing but waist.
...This is the counsel and intent
Of gud King Robert's testiment....
...
Business
The scorched-earth defense is a form of risk arbitrage and anti-takeover strategy. When a target firm implements this provision, it will make an effort to make it unattractive to the hostile bidder. For example, a company may agree to liquidate or destroy all valuable assets, also called "crown jewels", or schedule debt repayment to be due immediately following a hostile takeover. In some cases, a scorched-earth defense may develop into an extreme anti-takeover defense called a "suicide pill"....
U.S. government seeks approval for $700B financial bailout
Proposal would raise U.S. debt limit to $11.3 trillion
The bailout of the U.S. banking industry would cost an estimated $700 billion US, according to a draft of the proposal.
President George W. Bush has asked Congress to approve the plan to stem losses from faltering mortgages, which analysts earlier predicted would cost anywhere from $500 billion to $1 trillion.
A copy of the draft legislation given to Congress on Saturday shows it would give the government broad power to buy the bad debt of any U.S. financial institutions for the next two years.
It also would raise the statutory limit on the national debt from $10.6 trillion to $11.3 trillion, making room for the massive rescue.
The proposal does not specify what the government would get in return from financial companies for the federal help.
With files from the Associated PressUS bailout bill puts focus on worst-case scenarios
The bailout bill facing US taxpayers from Washington's frantic efforts to prop up America's floundering financial institutions is growing ever larger as the drive to underpin a system in danger of meltdown becomes more desperate. While the firefighters of the US Federal Reserve and the US Treasury focus on stemming the financial conflagration on Wall Street, the mounting cost of forestalling disaster is intensifying anxiety for officials and markets.
The tab for the government-backed rescues has reached scary proportions, with commitments exceeding $900 billion (£494 billion) and no end to the crisis in sight. A further $85 billion was added to the tally with yesterday's crisis loan to AIG.
What will be the ultimate impact on the finances of the US Government, when America is already the world's biggest debtor nation? The answer to this multitrillion-dollar question remains as foggy as the fate of the rescued institutions on which it will depend. But the worst-case scenarios are alarming.
The best-case scenarios are more reassuring, of course. For example, the Treasury expects that ultimately it could see gains for taxpayers from its plan to underpin America's housing market by buying up new home loan debt issued as mortgage-backed securities. It expects these long-run gains because the cost of its borrowing will be less than the interest payments on the new mortgages issued. Yet such an outcome is a long way off and, as the crisis spirals, experts point to John Maynard Keynes's comment that “in the long run we are all dead”.
In the meantime, the worst-case scenarios will exercise financial markets and, more privately, the Treasury and Congress. Even if the present crisis ends with something short of a wholesale state recapitalization of the US banking system, these scenarios highlight the substantial jeopardy to American finances.
The threat is greatest from, and best illustrated by, the effective nationalization of Fannie Mae and Freddie Mac, the state-backed wholesale mortgage lenders. Together, these institutions have backed US mortgages worth about $6,000 billion. The Congressional Budget Office argues that these liabilities should count towards America's national debt.
Although it is likely that Fannie and Freddie's assets would offset the debt total involved, the size of the headache is clear from the fact that, were all $6 trillion counted, US national debt would double to 80 per cent of GDP.
For now, the US Treasury is insistent - as Britain's Treasury was over Northern Rock - that Fannie's and Freddie's debt will not be counted this way. But the figures are telling, nonetheless.
More immediate are the implications of the Fannie and Freddie rescue for the US Government's deficit, its year-to-year borrowing. Again, the worst-case scenarios are frightening.
Paul Ashworth, of Capital Economics, notes that were the two agencies to be unable to raise more private funds through mortgage-backed securities, then the Treasury would need to spend about $450 billion a year to preserve the existing flow of home loans, while also shouldering the rising bill for existing mortgages going bad. On Mr Ashworth's bleakest case, this could triple the annual US budget deficit to more than $1,200 billion, or 8 per cent of GDP.
For now, no one expects such vast outlays. However, as the bills spiral by the day, the longer-term menace to America's national finances from the crisis remains all too clear.
Barney Frank Details Fed. Financial Intervention
Weekend Edition Saturday, September 20, 2008 · Rep. Barney Frank (D-MA) is among the members of Congress meeting with Treasury Secretary Henry Paulson to determine how the government will intervene in the financial crisis. Frank, who is chairman of the House Financial Services Committee, talks with Scott Simon about the nation's faltering financial institutions.
Rescue plan seeks $700B to buy bad mortgages
EnlargePresident Bush, right, talks with Colombian President Alvaro Uribe during a meeting in the Oval Office of the White House, Saturday, Sept. 20, 2008, in Washington. Associated Press © 2008
President Bush, right, shakes hands with Colombian President Alvaro Uribe during a meeting in the Oval Office of the White House, Saturday, Sept. 20, 2008, in Washington. Associated Press © 2008
The Bush administration is asking Congress to let the government buy $700 billion in toxic mortgages in the largest financial bailout since the Great Depression, according to a draft of the plan obtained Saturday by The Associated Press.
The plan would give the government broad power to buy the bad debt of any U.S. financial institution for the next two years. It would raise the statutory limit on the national debt from $10.6 trillion to $11.3 trillion to make room for the massive rescue. The proposal does not specify what the government would get in return from financial companies for the federal assistance.
"We're going to work with Congress to get a bill done quickly," President Bush said at the White House. Without discussing details of the plan, he said, "This is a big package because it was a big problem."
The White House and congressional leaders hoped the developing legislation could pass as early as next week.
Administration officials and members of Congress were to negotiate throughout the weekend. The plan is designed to let faltering financial institutions unload their bad debt on the government, and in turn the taxpayer, in a bid to avoid dire economic consequences.
Bush said he worried the financial troubles "could ripple throughout" the economy and affect average citizens. "The risk of doing nothing far outweighs the risk of the package, and over time we're going to get a lot of the money back."
He added, "People are beginning to doubt our system, people were losing confidence and I understand it's important to have confidence in our financial system."
"In my judgment, based upon the advice of a lot of people who know how markets work, this problem wasn't going to be contained to just the financial community," the president said. He said he was concerned about "Main Street" and that what happens on "Wall Street" affects "Main Street."
Democrats are insisting the rescue include mortgage help to let struggling homeowners avoid foreclosures. They also are also considering attaching additional middle-class assistance to the legislation despite a request from Bush to avoid adding controversial items that could delay action. An expansion of jobless benefits was one possibility.
Asked about the chances of adding such items, Bush sidestepped the question, saying only that now was not the time for political posturing. "The cleaner the better," he said about legislation he hopes Congress sends back to him at the White House.
If passed by Congress, the plan would give the treasury secretary broad power to buy and sell the toxic mortgage-related assets without any additional involvement by lawmakers. The proposal, however, would require that the congressional committees with oversight on budget, tax and financial services issues be briefed within three months of the government's first use of the rescue power, and every six months after that.
In a briefing to lawmakers Friday, Paulson and Federal Reserve Chairman Ben Bernanke painted a grave picture of an economy on the edge of a major recession and telling them that action was urgent and imperative.
In a session with House Democrats, they described a plan where the government would in essence set up reverse auctions, putting up money for a class of distressed assets — such as loans that are delinquent but not in default — and financial institutions would compete for how little they would accept for the investments, said Rep. Brad Sherman, D-Calif., who participated in the conference call.
"You give them good cash; they give you the worst of the worst," Sherman said. A critic of the plan, he complained that Bush and his economic advisers were trying to panic lawmakers into rubber-stamping it.
Paulson said the new troubled-asset relief program must be large enough to have the necessary impact while protecting taxpayers as much as possible.
"I am convinced that this bold approach will cost American families far less than the alternative — a continuing series of financial institution failures and frozen credit markets unable to fund economic expansion," Paulson said. "The financial security of all Americans ... depends on our ability to restore our financial institutions to a sound footing."
Administration officials hoped the rescue plan could be finalized this weekend, to lend calm to Monday morning's market openings, said Keith Hennessey, the director of the president's economic council. The goal is to have something passed by Congress by the end of next week, when lawmakers recess for the elections.
By DAVID LIGHTMAN
(09/19/08 14:37:38)
The next president will take office in January with little hope of getting his pet programs enacted quickly, if at all, because of already-massive budget deficits likely to balloon even further from the hundreds of billions expected to be used to bail out Wall Street.
"The next president is just not going to have the money to meet his promises," said Maya MacGuineas, the president of the Committee for a Responsible Federal Budget, a nonpartisan budget-research group.
Democratic nominee Barack Obama and Republican rival John McCain have big plans that would add substantially to the deficit.
By 2013, when his changes would be fully implemented, Obama would boost the deficit by $360 billion with his tax cuts and by another $65 billion with his health-care plan while partially offsetting that with $139 billion saved through winding down the Iraq war and making other spending cuts, according to US Budget Watch, a nonpartisan research group.
McCain's tax cut plan would add $417 billion to $485 billion to the deficit, while his health-care policies would cost another $54 billion to $65 billion. Iraq troop reductions and "unspecified cuts to balance the budget" could save $291 billion to $304 billion, however.
The bottom line: Both would sharply increase the deficit, which already is headed to record territory.
"They've got to be asleep not to see this is bad news," said David Walker, the president and chief executive officer of the Peter G. Peterson Foundation, which promotes sound fiscal policy.
The Congressional Budget Office has estimated that the deficit for fiscal 2008, which ends Sept. 30, will rise to $407 billion, while next year's figure could hit $438 billion, shattering the record of $413 billion in fiscal 2004.
The 2008 and 2009 numbers are conservative estimates, since they don't include the federal bailouts of mortgage giants Fannie Mae and Freddie Mac or failed insurer American International Group.
Friday, the government unveiled what's likely to be the most expensive twist of all: a still-evolving plan to create a way for the government to buy troubled bank assets, probably the biggest bailout in U.S. history.
"We're talking hundreds of billions" of dollars, Treasury Secretary Henry Paulson said.
As a result, "what was already a very difficult decision for the next president - how to deal with taxes and spending - has now become extremely difficult," said Brian Riedl, senior policy analyst at Washington's Heritage Foundation, a conservative research group.
Traditionally, the first few months of a new presidency are the White House's most successful. Ronald Reagan won approval of his 25 percent, three-year tax cut in July 1981. Bill Clinton saw his $496 billion, five-year deficit-reduction plan pass in August 1993, and George W. Bush got his $1.35 trillion tax cut through Congress in May 2001.
McCain and Obama are touting ambitious efforts to revamp health care and provide tax breaks.
Add to that billions in new spending. McCain would increase funding to the No Child Left Behind education program, which would cost an estimated $13 billion in 2013, and would boost the size of the military, a $10 billion plan. Obama also would spend more on education - an estimated $18 billion - would create an "infrastructure reinvestment bank" for $6 billion, would double foreign aid - a $25 billion expense - and increase the size of the military, which would carry a $20 billion price tag.
Getting any expansion of health care will be particularly tough, MacGuineas said. "There's no bigger budget buster than health care," she said, as Medicare and Medicaid costs are projected to continue increasing steadily.
Both candidates want to preserve at least some of the tax cuts that are due to expire Jan. 1, 2011. McCain would keep all the key cuts, while Obama would end most of those that affect individuals who earn more than $200,000 a year and families that make more than $250,000.
Analysts think they eventually may be able to get some of their more ambitious plans enacted, but they warn that there are a lot of "ifs."
Experts agree on this much: It'll be hard to do in 2009.
"I suspect what may have been economically and politically palatable six months ago will have to be reviewed," said Doug Rediker, co-director of the New America Foundation's Global Strategic Finance Initiative.
James Horney, the director of federal fiscal policy at Washington's Center on Budget and Policy Priorities, thought that one way the new president could use his mandate is to say, "The short-term problems are worse than expected, but let's look ahead to 2012. Everything I planned still makes sense."
Looking ahead has other dangers, however, notably the rising costs of Social Security and Medicare.
There's one glimmer of hope.
David Wyss, chief economist at Standard & Poor's, recalled that when the government set up the Resolution Trust Corp. in 1989 to help ailing savings and loan institutions, "the cost was less than expected."
When the government bailed out Chrysler Corp. in 1979 with a $1.2 billion loan, it earned an estimated $300 million profit.
However, even if the government winds up in the black from this financial crisis, it's unlikely that that'll show up on next year's balance sheet. No one knows how much the bailouts will cost at first, but most see the new president as inheriting a huge deficit.
As MacGuineas put it, "It's stifling."
PAYGO
From Wikipedia, the free encyclopedia
PAYGO (pay-as-you-go) is a term used to refer to financing where budgetary restrictions demand paying for expenditures with funds that are made available as the program is in progress....
Weekend Edition
September 20 / 21, 2008
The Market and the Terminator Machines
America's Own Kleptocracy
By MICHAEL HUDSON
Nobody expected industrial capitalism to end up like this. Nobody even saw it evolving in this direction. I’m afraid this failing is not unusual among futurists: The natural tendency is to think about how economies can best grow and evolve, not how it can be untracked. But an unforeseen road always seems to appear, and there goes society goes off on a tangent.
What a two weeks! On Sunday, September 7, the Treasury took on the $5.3 trillion mortgage exposure of Fannie Mae and Freddie Mac, whose heads already had been removed for accounting fraud. On Monday, September 15, Lehman Brothers went bankrupt, when prospective Wall Street buyers couldn’t gain any sense of reality from its financial books. On Wednesday the Federal Reserve agreed to make good for at least $85 billion in the just-pretend “insured” winnings owed to financial gamblers who bet on computer-driven trades in junk mortgages and bought counter-party coverage from the A.I.G. (the American Insurance Group, whose head Maurice Greenberg already had been removed a few years back for accounting fraud). But it is Friday, September 19, that will go down as a turning point in American history. The White House committed at least half a trillion dollars more to re-inflate real estate prices in an attempt to support the market value junk mortgages – mortgages issued far beyond the ability of debtors to pay and far above the going market price of the collateral being pledged.
These billions of dollars were devoted to keeping a dream alive – the accounting fictions written down by companies that had entered an unreal world based on false accounting that nearly everyone in the financial sector knew to be fake. But they played along with buying and selling packaged mortgage junk because that was where the money was. Even after markets collapse, fund managers who steered clear were blamed for not playing the game while it was going. I have friends on Wall Street who were fired for not matching the returns that their compatriots were making. And the biggest returns were to be made in trading in the economy’s largest financial asset – mortgage debt. The mortgages packaged, owned or guaranteed by Fannie and Freddie alone exceeded the entire U.S. national debt – the cumulative deficits run up by the American Government since the nation won the Revolutionary War!
This gives an idea of just how large the bailout has been – and where the government’s (or at least the Republicans’) priorities lie! Instead of waking up the economy to reality, the government has thrown all its resources to promote the unreal dream that debts can be paid – if not by the debtors themselves, then by the government – “taxpayers,” as the euphemism goes.
Overnight, the U.S. Treasury and Federal Reserve have radically changed the character of American capitalism. It is nothing less than a coup d’êtat for the class that FDR called “banksters.” What has happened in the past two weeks threatens to change the coming century – irreversibly, if they can get away with it. This is the largest and most inequitable transfer of wealth since the land giveaways to the railroad barons during the Civil War era.
Even so, there seems little sign that it even may end the free-market patter talk by financial insiders who have managed to avert public oversight by appointing non-regulators to the major regulatory agencies – and thus created the mess that Treasury Secretary Henry Paulson now says threatens the bank deposits and jobs of all Americans. What he really means, of course, are simply the largest Republican campaign contributors (and to be fair, also the largest contributors to Democratic candidates on key financial committees).
A kleptocratic class has taken over the economy to replace industrial capitalism. Franklin Roosevelt’s term “banksters” says it all in a nutshell. The economy has been captured – by an alien power, but not the usual suspects. Not socialism, workers or “big government,” nor by industrial monopolists or even by the great banking families. Certainly
not by Freemasons and Illuminati. (It would be wonderful if there were indeed some group operating with centuries of wisdom behind them, so at least someone at least had a plan.) Rather, the banksters have made a compact with an alien power –not Communists, Russians, Asians or Arabs. Not humans at all. The group’s cadre is a new breed of machine. It may sound like the Terminator movies, but computerized Machines have indeed taken over the world – at least, the White House’s world.
Here is how they did it. A.I.G. wrote insurance policies of all sorts of that people and businesses need: home and property insurance, livestock insurance, even aircraft leasing. These highly profitable businesses were not the problem. (They therefore will probably be sold off to pay the company’s bad gambles.) A.I.G.’s downfall came from the $450 billion – almost half a trillion – dollars it was on the hook for as a result of guaranteeing hedge-fund counterparty insurance. In other words, if two parties played the zero-sum game of betting against each other as to whether the dollar would rise or fall against sterling or the euro, or if they insured a mortgage portfolio of junk mortgages to make sure that they would get paid, they would pay a teeny tiny commission to A.I.G. for a policy promising to pay if, say, the $11 trillion U.S. mortgage market should “stumble” or if losers placing trillions of dollars in bets on foreign exchange derivatives, stock or bond derivatives should somehow find themselves in a position that so many Las Vegas patrons are in, and be unable to come up with the cash to cover their losses.
A.I.G. collected billions of dollars on such policies. And thanks to the fact that insurance companies are a Milton Friedman paradise – not regulated by the Federal Reserve or any other nation-wide agency, and hence able to get the proverbial free lunch without government oversight – writing such policies was done by computer printouts, and the company collected massive fees and commissions without putting in much capital of its own. This is what is called “self-regulation.” It is how the Invisible Hand is supposed to work.
It turned out, inevitably, that some of the financial institutions that made billion-dollar gambles – usually in the form of a thousand million-dollar gambles in the course of a few minutes or so, to be precise – couldn’t pay up. These gambles all occur in microseconds, at strokes of a keyboard almost without human interference. In that sense it is not unlike alien pod people taking over. But in this case they are robot-like machines, hence the analogy I drew above with the Terminators.
Their sudden rise to dominance is as unforeseen as an invasion from Mars. The nearest analogy is the invasion of the Harvard Boys, World Bank and U.S.A.I.D. to Russia and other post-Soviet economies after the Soviet Union was dissolved, pressing free-market giveaways to create national kleptocracies. It should be a worrying sign to Americans that these kleptocrats have become the Founding Fortunes of their respective countries. We should bear in mind Aristotle’s observation that democracy is the political stage immediately preceding oligarchy.
The financial machines that placed the trades that bankrupted A.I.G. were programmed by financial managers to act with the speed of light in conducting electronic trades often lasting only a few seconds each, millions of times a day. Only a machine could calculate mathematical probabilities factored in regarding the squiggles up and down of interest rates, exchange rates and stock and bonds prices – and prices for packaged mortgages. And the latter packages increasingly took the form of junk mortgages, pretending to be payable debts but in reality empty flak.
The machines employed by hedge funds in particular have given a new meaning to Casino Capitalism. That was long applied to speculators playing the stock market. It meant making cross bets, lose some and win some – and getting the government to bail out the non-payers. The twist in the past two weeks’ turmoil is that the winners cannot collect on their bets unless the government pays the debts that the losers are unable to cover with their own money.
One would have thought that this requires some degree of control over the government. The activity probably never should have been licensed. In fact, it never was licensed, and hence nor regulated. But there seemed to be a good reason: Investors in hedge funds had to sign a paper saying that they were rich enough to afford to lose their money on this financial gambling. Your average mom and pop investors were not permitted to participate. Despite the high rewards that millions of tiny trades generated, they were deemed too risky for the uninitiated lacking trust funds to play with.
A hedge fund does not make money by producing goods and services. It does not advance funds to buy real assets or even lend money. It borrows huge sums to leverage its bet with nearly free credit. Its managers are not industrial engineers but mathematicians who program computers to make cross-bets or “straddles” on which way interest rates, currency exchange rates, stock or bond prices may move – or the prices for packaged bank mortgages. The packaged loans may be sound or they may be junk. It doesn’t matter. All that matters is making money in a marketplace where most trades last only a few seconds. What creates the gains is the price fibrillation – volatility.
This kind of transaction may make fortunes, but it is not “wealth creation” in the form that most people recognize. Before the Black-Scholes mathematical formula for calculating the value of hedge bets, this kind of put and call option was too costly to provide much profit to anyone except the brokerage houses. But the combination of powerful computers and the “innovation” of almost free credit and free access to the financial gambling tables has made possible a frenetic back-and-forth maneuvering.
So why has the Treasury found it necessary to enter this picture at all? Why should these gamblers be bailed out, if they had enough to lose without having to become public wards by going on welfare? Hedge fund trading was limited to the very rich, for investment banks and other institutional investors. But it became one of the easiest ways to make money, loaning funds at interest for people to pay out of their computer-driven cross-trades. And almost as fast as it was made, this revenue was paid out in commissions, salaries and annual bonuses reminiscent of America’s Gilded Age in the years prior to World War I – years before the income tax was introduced in 1913. The remarkable thing about all this money was that its recipients didn’t even have to pay normal income tax on it. The government let them call it “capital gains,” which meant that the money was taxed at only a fraction of the rate that incomes were taxed.
The pretense, of course, is that all this frenetic trading creates real “capital.” It certainly does not do so in the classical 19th-century concept of capital. The term has been decoupled from producing goods and services, hiring wage labor or from financing innovation. It is as much “capital” as the right to conduct a lottery and collect the winnings from the hopes of the losers. But then, casinos from Las Vegas to riverboats have become a major “growth industry,” muddying the language of capital, growth and wealth itself.
For the gaming tables to be closed and the money paid out, the losers must be bailed out – Fannie Mae, Freddie Mac, A.I.G. and who knows what to come? This is the only way to solve the problem of how companies that already have paid out their revenue to their managers and stockholders instead of putting it in reserves are to collect their winnings from insolvent debtors and insurance companies. These losers also have paid out their income to their financial managers and insiders (along with the usual patriotic contributions to the political candidates on the key committees in charge of deciding the nation’s financial structuring).
This has to be orchestrated well in advance. It is necessary to buy politicians and give them a plausible cover story (or at least a well-crafted set of poll-tested euphemisms) to explain to voters just why it was in the public interest to bail out gamblers. Good rhetoric is needed to explain why the government should let them go into a casino and let them keep all their winnings while using public funds to make good on the losses of their counterparties.
What happened on September 18-19 took years of preparation, capped by a faux ideology crafted by public-relations think tanks to be broadcast under emergency conditions to panic Congress – and voters – right before the presidential election. This seems to be our September election surprise. Under staged crisis conditions, Pres. Bush and Treasury Secretary Paulson are now calling for the country to come together in a War on Defaulting Homeowners. This is said to be the only hope to “save the system.” (What system is this? Not industrial capitalism, or even banking as we know it.) The largest transformation of America’s financial system since the Great Depression has been compressed into just two weeks, starting with the doubling of America’s national debt on September 7 with the nationalization of Fannie Mae and Freddie Mac. (My computer’s spellchecker will not permit me to use the euphemism “conservatorship” that Mr. Paulson applied to bailing out the Fannie Mae and Freddie Mac fraudsters.)
Economic theory used to explain that profits and interest were a return for calculated risk. But today, the name of the game is capital gains and computerized gambling on the direction of interest rates, foreign currencies and stock prices – and when bad bets are made, bailouts are the calculated economic return for campaign contributions. But this is not supposed to be the time to talk of such things. “We must act now to protect our nation’s economic health from serious risk,” intoned Pres. Bush on September 19. What he meant was that the White House must make the Republican Party’s largest group of campaign contributors whole – Wall Street, that is – by bailing out their bad gambles. “There will be ample opportunity to debate the origins of this problem. Now is the time to solve it.” In other words, don’t make this an election issue. “In our nation’s history there have been moments that require us to come together across party lines to address major challenges. This is such a moment.” Right before the presidential election! The same guff was heard earlier on Friday morning from Sec. Paulson: “Our economic health requires that we work together for prompt, bipartisan action.” The broadcasters said that half a trillion dollars was discussed for this day’s maneuverings.
Much of the blame should go to the Clinton Administration for leading the call to repeal Glass-Steagall in 1999, letting the banks merge with casinos. Or rather, the casinos have absorbed the banks. That is what has put the savings of Americans at risk.
But does this really mean that the only solution is to re-inflate the real estate market? The Paulson-Bernanke plan is to enable the banks to sell off the homes of five million home mortgage debtors faced with default or foreclosure this year! Homeowners with “exploding adjustable-rate mortgages” will lose their homes, but the Fed will pump enough credit into the mortgage-lending agencies to enable new buyers to go deeply enough into debt to take the junk mortgages off the hands of the gamblers who presently own them. Time for another financial and real estate bubble to bail out the junk mortgage lenders and packagers.
America has entered into a new war – a War to Save Computerized Derivative Traders. Like the Iraq war, it is based largely on fictions and entered into under seeming emergency conditions – to which the solution has little relation to the underlying cause of the problems. On financial security grounds the government is to make good on the collateralized debt obligations packaged (CDOs) that Warren Buffett has called “weapons of mass financial destruction.”
Hardly by surprise, this giveaway of public money is being handled by the same group that warned the country so piously about weapons of mass destruction in Iraq. Pres. Bush and Treasury Secretary Paulson have piously announced that this is no time for partisan disagreements over this shift of public policy to favor creditors rather than debtors. There is no time to make the biggest bailout in election history an election issue. Not an appropriate time to debate whether it is a good thing to re-inflate housing prices to a level that will continue to oblige new home buyers to go so deeply into debt that they must pay some 40 percent of their take-home pay on housing.
Remember when President Bush and Alan Greenspan informed the American people that there was no money left to pay Social Security (not to mention Medicare) because at some future date (a decade from now? 20 years? 40 years?) the system might run a deficit of what now seems to be merely a trivial trillion dollars spread over many, many years. The moral was that if we can’t figure out how to pay, let’s plow the program under right now.
Mr. Bush and Greenspan did have a helpful solution, of course. The Treasury could turn Social Security and medical insurance money over to Bear Stearns, Lehman Brothers and their brethren to invest at the “magic of compound interest.”
What would have happened to U.S. Social Security had this been done? Perhaps we should view the past two weeks’ events as having assigned to Wall Street gamblers all the money that has been set aside since the Greenspan Commission in 1983 shifted the tax burden onto FICA wage withholding. It is not retirees who are being rescued, but the Wall Street investors who signed papers saying that they could afford to lose their money. The Republican slogan this November should be “Gambling insurance, not health insurance.”
This is not how the much-vaunted Road to Serfdom was mapped out to be. Frederick Hayek and his Chicago Boys insisted that serfdom would come from government planning and regulation. This view turned upside down the classical and Progressive Era reformers who depicted government as acting as society’s brain, its steering mechanism to shape markets – and free them from income without playing a necessary role in production. The theory of democracy rested on the assumption that voters would act in their self-interest. Market reformers made a kindred happy assumption that consumers, savers and investors would promote economic growth by acting with full knowledge and understanding of the dynamics at work. But the Invisible Hand turned out to be accounting fraud, junk mortgage lending, insider dealing and a failure to relate the soaring debt overhead to the ability of debtors to pay – all of this mess seemingly legitimized by computerized trading models, and now blessed by the Treasury.
Michael Hudson is a former Wall Street economist specializing in the balance of payments and real estate at the Chase Manhattan Bank (now JPMorgan Chase & Co.), Arthur Anderson, and later at the Hudson Institute (no relation). In 1990 he helped established the world’s first sovereign debt fund for Scudder Stevens & Clark. Dr. Hudson was Dennis Kucinich’s Chief Economic Advisor in the recent Democratic primary presidential campaign, and has advised the U.S., Canadian, Mexican and Latvian governments, as well as the United Nations Institute for Training and Research (UNITAR). A Distinguished Research Professor at University of Missouri, Kansas City (UMKC), he is the author of many books, including Super Imperialism: The Economic Strategy of American Empire (new ed., Pluto Press, 2002) He can be reached via his website, mh@michael-hudson.com
William R. Halstead28 November 2006
American Government Professor Leonard Riley II
A Basic Analysis of the Impact of the USA PATRIOT Act in a Post-9/11 America
A major reshaping of our civil liberties and national security has taken place in the United States since 11 September 2001. The horror that was unleashed on American soil was unprecedented in the memories of the majority of American citizens alive at the time. The PATRIOT Act was authorized and passed by an overwhelming majority vote in both chambers of Congress as an anti-terrorism piece of legislation in direct response to this horrific attack on American soil. While it may be argued that there is indeed a greater need for security and an appropriate expansion of governmental and law enforcement agencies’ power in light of the perceived and real threat of terrorism on our soil, it is also essential to consider whether the Uniting and Strengthening America by Providing Appropriate Tools Required to Interrupt and Obstruct Terrorism Act of 2001 (Public Law 107-56), commonly referred to as the PATRIOT Act, has been an appropriate and successful tool in combating this threat. The purpose of the PATRIOT Act is simple. By expanding the ability for various law enforcement agencies to share information with each other, America could be made a safer place by allowing a greater cooperation among organizations to track down potential terrorists and their supporters. President George W. Bush reports . . . that prior to the PATRIOT Act, intelligence officials could not exchange information. Now, this is a different kind of war . . . See, in this war, we have to find people—find their intentions and bring them to justice before they come and hurt us again.1 The legal problem with the above observation is that the president is calling for law enforcement people to arrest people who lack actus reus, the actual commission of a criminal act. Obviously, this flies in the face of our legal system’s concept of nullen crimen, nulla poena, sine lege.2 The PATRIOT Act is seen as necessary to theoretically save American lives. To oppose the Act is to oppose saving lives because such opposition, in the president’s words, “endangers the lives of our citizens.”3 Of course, it would be easy to extend this line of reasoning to assert that opposition to the PATRIOT Act is tantamount to treason. This would fit in rather well with Bush’s contention that he has almost dictatorial powers when it comes to war and terrorism.4 Perhaps George Orwell was warning us of a world where something as innocent sounding as a PATRIOT Act was to be nothing more than a precursor for a realized Ministry of Love where secret interrogations and torture could be carried out for the good of the Party. Indeed, as President George W. Bush has observed Now, I’ve always . . . you know a dictatorship would be a heck of a lot easier, there’s no question about it. 5 1 President George Walker Bush (October 9, 2006) “Remarks at a Reception for Gubernatorial Candidate Bob Beauprez and the Colorado Republican Part in Englewood, Colorado” Weekly Compilation of Presidential Documents 42, pp. 1745, 1746 – 1747. 2 th John M. Scheb and John M. Scheb II (2005) Criminal Law and Procedure (5 . Edition) Belmont, California: Thomson Wadsworth, p. 3. 3 David Jackson. “White House tries to make the message louder, clearer.” USA Today 19 December 2005, 16 November 2006
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