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The Quiet Coup

Simon Johnson, The Atlantic
The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time.
-Atlantic editors

… I saw firsthand the steady flow of officials—from Ukraine, Russia, Thailand, Indonesia, South Korea, and elsewhere—trudging to the fund when circumstances were dire and all else had failed.

… to IMF officials, all of these crises looked depressingly similar. Each country, of course, needed a loan, but more than that, each needed to make big changes so that the loan could really work. Almost always, countries in crisis need to learn to live within their means after a period of excess—exports must be increased, and imports cut—and the goal is to do this without the most horrible of recessions. Naturally, the fund’s economists spend time figuring out the policies—budget, money supply, and the like—that make sense in this context. Yet the economic solution is seldom very hard to work out.

No, the real concern of the fund’s senior staff, and the biggest obstacle to recovery, is almost invariably the politics of countries in crisis.

Typically, these countries are in a desperate economic situation for one simple reason—the powerful elites within them overreached in good times and took too many risks. Emerging-market governments and their private-sector allies commonly form a tight-knit—and, most of the time, genteel—oligarchy, running the country rather like a profit-seeking company in which they are the controlling shareholders.

… The downward spiral that follows is remarkably steep. Enormous companies teeter on the brink of default, and the local banks that have lent to them collapse.

… Squeezing the oligarchs, though, is seldom the strategy of choice among emerging-market governments. Quite the contrary: at the outset of the crisis, the oligarchs are usually among the first to get extra help from the government, such as preferential access to foreign currency, or maybe a nice tax break, or—here’s a classic Kremlin bailout technique—the assumption of private debt obligations by the government.

… Becoming a Banana Republic

In its depth and suddenness, the U.S. economic and financial crisis is shockingly reminiscent of moments we have recently seen in emerging markets (and only in emerging markets): South Korea (1997), Malaysia (1998), Russia and Argentina (time and again). In each of those cases, global investors, afraid that the country or its financial sector wouldn’t be able to pay off mountainous debt, suddenly stopped lending. And in each case, that fear became self-fulfilling,

… But there’s a deeper and more disturbing similarity: elite business interests—financiers, in the case of the U.S.—played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them.
(May 2009 issue)
Jim Barton recommends a related article: After Capitalism in Prospect.


Too Big to Fail?

Arno J. Mayer, CounterPunch
Blaming the U.S. subprime mortgage meltdown for the global financial and economic blowout of 2008 is like blaming the assassination of Archduke Franz Ferdinand for World War I. In each case, a discrete event sparked a wider conflagration—but the tinder was already there.

In the early dawn of the 21st century, American capitalism continues to predominate and set the pace. But ever-more-frequent disturbances in the world economy undermine the pretended apoliticism of the econometrists who presume to legitimate and fine-tune capitalism in normal times. Acute convulsions invariably force a return to classical political economy rooted in moral philosophy and ethics, as practiced by Adam Smith, David Ricardo, Karl Marx, John Maynard Keynes, and Friedrich von Hayek.

… Obviously, the U. S. at present is not undergoing a crisis remotely as deep and broad as that of the 1930s, which was at once economic, political, social, cultural, and ideological. But that does not mean the orthodox academic monetarists are any better equipped to repair the shaky system. Just as their theory and computer models failed to grasp the non-economic dimensions of the Great Depression, they cannot explain the upheavals of a capitalism radically different from that of the inter- and post-war years. Having survived the somber thirties, World War II, and the postwar chaos of 1945-55, capitalism grew ever more concentrated, multinational, and global. And the expanding U. S. empire became its linchpin and powerhouse.

This imperial factor determines America’s present strengths and frailties. Having crested but not yet approaching collapse, the U. S. empire is bound to become economically less profitable and politically less consensual. The cost of maintaining an overstretched imperium at a time of rising great-power rivalries is steep. Besides the gargantuan regular military budget, Washington must fund recurrent wars as well as countless foreign-aid, intelligence, and soft-power missions. These burdens exacerbate budget deficits largely financed by private and public foreign lenders, including sovereign wealth funds, thereby unsteadying the dolla

… Today, the high-income world—the U.S., European Union, and Japan—is free of major ideological conflict, partly because capitalism holds sway over the entire world. Formerly communist nations such as China and Russia, long proto-socialist ones such as India, and even the Islamic nations have all taken the route to state or political capitalism.

… Clearly, what America exalts as democratic capitalism is itself becoming more concentrated and statist as it competes with the rising state-supported and -guided economies of the non-Western world, especially China, India, and resurgent Russia.

… Globalizing free-market finance capitalism is inherently and increasingly crisis-prone. But given the absence of a coherent and credible model of an alternative economy, polity, and society, the world seems not to be careening toward a historical crossroads, predictions to that effect notwithstanding. Precious few sober political parties or thinkers articulate a systematic critique of contemporary capitalism or propose a program of broad-based reform.

… Despite economic rivalries and diplomatic discords, the ruling classes of most “developed” nations fundamentally see eye to eye with their American counterparts. They do not long for a sudden twilight of U. S. power and demise of the dollar as the global reserve currency. Nor does Beijing, given its dire economic interdependence with America, despite its launching the idea of a “super-sovereign reserve currency.” To the rest of the world, the U.S. itself is too big to fail.
(27-29 March 2009)


Comparing the U.S. to Russia and Argentina

Glenn Greenwald, Salon
Desmond Lachman — the former chief strategist for emerging markets at Salomon Smith Barney and a long-time official with the IMF (no raving socialist he) — argues today that the most apt comparison for the U.S. now is not Japan’s “lost decade,” but rather, “that the United States is coming to resemble Argentina, Russia and other so-called emerging markets, both in what led us to the crisis, and in how we’re trying to fix it.” He begins by recounting an IMF trip to Yeltsin-era Russia:

I still recall the shock I felt at a meeting in Russia’s dingy Ministry of Finance, where I finally realized how a handful of young oligarchs were bringing Russia’s economy to ruin in the pursuit of their own selfish interests, despite the supposed brilliance of Anatoly Chubais, Russia’s economic czar at the time.

He then describes the numerous similarities between the U.S. today and those corrupt, collapsing nations he studied in the past.

… Does anyone really doubt any more that the predominant characteristic of our political culture is “the incestuous relationship between governments and large [] corporate conglomerates”? Yet another former Goldman Sachs official and long-time derivatives advocate who played a major role in the repeal of key banking regulations, Gary Gesner, is now poised to become Obama’s chief of the Commodities Futures Trading Commission, the body charged with regulating commodities and financial futures.

… Despite the limitless gorging on public funds by the very oligarchs (government owners) who caused the financial crisis in the first place, the predominant sentiment from our establishment media now is that Obama needs to force ordinary Americans to “sacrifice more.” Back in 2006, Jonathan Schwarz wrote this very prescient post predicting that the U.S. would soon adopt the type of so-called “structural adjustments” which, through the IMF, we repeatedly forced upon other heavily indebted, defaulting nations: whereby we would demand that they pursue solutions that further enriched their economic elites while massively cutting the social spending that provided the barest of safety nets to their ordinary citizens.
(26 March 2009)


Matt Taibbi on Why Financial Institutions Should Be Broken Up

Rachel Maddow Show, MSNBC via YouTube
… MADDOW: … the AIG bonus outrage over the last couple of weeks was like stage two in the five stages of grief and loss about the economy. First there was denial. That would be the Bush era, quote, “recovery.”

Then there was stage two, anger, AIG bonuses.

Coming up next, stage three, bargaining. As in, please, we‘re sort of done worrying about this Great Depression stuff. Please we‘ll do anything. What do you want from us? This is where it might come in handy to actually have some idea of what we‘re talking about and what we‘re being asked to bargain away in our destination.

Matt Taibbi has a must-read explanatory piece on the mess that we‘re in in the next issue of “Rolling Stone”. Must-read. Do you want a taste?

Quote, “As complex as all the finances are, the politics aren‘t hard to follow. By creating an urgent crisis that can only be solved by those fluent in a language too complex for ordinary people to understand, the Wall Street crowd has turned the vast majority of Americans into non-participants in their own political future.

“There‘s a reason it used to be a crime in the confederate state to teach a slave to read. Literacy is power. In the age of the credit default swap and the collateralized dead obligation, most of us are financial illiterates.”

Matt Taibbi‘s article in “Rolling Stone” is called “The Big Takeover.”

… MADDOW: Is the solution, broadly speaking, to stop believing that Wall Street guys, like Goldman Sachs guys, are the only ones who have the expertise to fix this, to just not defer our oversight to people who say they—we ought to trust them?

TAIBBI: I think it‘s—can be proven with scientific certainty that the one group of people that we know, absolutely, is not competent to lead us out of this crisis is that group of people.

MADDOW: Right.

TAIBBI: They got us into this mess and you know, they‘ve proven time and time again that their solutions to all of these problems are not the right solutions. I think we need a fresh look at this. I think we need to start doing—you know some kind of new approach. And we really haven‘t done that.

I think the Obama administration has chosen to pursue a policy that represents more continuity with the previous administration and Hank Paulson and all that crowd.

MADDOW: Yes. It would be nice to see cops in the cops and robber metaphor here.
(24 March 2009)
Transcript
Rachel Maddow Explains AIG (early segment about AIG from March 17)


The Big Takeover

Matt Taibbi, Rolling Stone
The global economic crisis isn’t about money – it’s about power. How Wall Street insiders are using the bailout to stage a revolution

… So it’s time to admit it: We’re fools, protagonists in a kind of gruesome comedy about the marriage of greed and stupidity. And the worst part about it is that we’re still in denial — we still think this is some kind of unfortunate accident, not something that was created by the group of psychopaths on Wall Street whom we allowed to gang-rape the American Dream.

… People are pissed off about this financial crisis, and about this bailout, but they’re not pissed off enough. The reality is that the worldwide economic meltdown and the bailout that followed were together a kind of revolution, a coup d’état. They cemented and formalized a political trend that has been snowballing for decades: the gradual takeover of the government by a small class of connected insiders, who used money to control elections, buy influence and systematically weaken financial regulations.

… The mistake most people make in looking at the financial crisis is thinking of it in terms of money, a habit that might lead you to look at the unfolding mess as a huge bonus-killing downer for the Wall Street class. But if you look at it in purely Machiavellian terms, what you see is a colossal power grab that threatens to turn the federal government into a kind of giant Enron — a huge, impenetrable black box filled with self-dealing insiders whose scheme is the securing of individual profits at the expense of an ocean of unwitting involuntary shareholders, previously known as taxpayers.

… As complex as all the finances are, the politics aren’t hard to follow. By creating an urgent crisis that can only be solved by those fluent in a language too complex for ordinary people to understand, the Wall Street crowd has turned the vast majority of Americans into non-participants in their own political future. There is a reason it used to be a crime in the Confederate states to teach a slave to read: Literacy is power. In the age of the CDS and CDO, most of us are financial illiterates. By making an already too-complex economy even more complex, Wall Street has used the crisis to effect a historic, revolutionary change in our political system — transforming a democracy into a two-tiered state, one with plugged-in financial bureaucrats above and clueless customers below.
(19 March 2009)
Related:
Matt Taibbi on Democracy Now (Amy Goodman)
AIG Exec Whines About Public Anger, and Now We’re Supposed to Pity Him? Yeah, Right by Matt Taibbi, Alternet.