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A shattering moment in America’s fall from power
John Gray, The Observer
Our gaze might be on the markets melting down, but the upheaval we are experiencing is more than a financial crisis, however large. Here is a historic geopolitical shift, in which the balance of power in the world is being altered irrevocably. The era of American global leadership, reaching back to the Second World War, is over.
You can see it in the way America’s dominion has slipped away in its own backyard, with Venezuelan President Hugo Chávez taunting and ridiculing the superpower with impunity. Yet the setback of America’s standing at the global level is even more striking. With the nationalisation of crucial parts of the financial system, the American free-market creed has self-destructed while countries that retained overall control of markets have been vindicated. In a change as far-reaching in its implications as the fall of the Soviet Union, an entire model of government and the economy has collapsed.
Ever since the end of the Cold War, successive American administrations have lectured other countries on the necessity of sound finance. Indonesia, Thailand, Argentina and several African states endured severe cuts in spending and deep recessions as the price of aid from the International Monetary Fund, which enforced the American orthodoxy. China in particular was hectored relentlessly on the weakness of its banking system. But China’s success has been based on its consistent contempt for Western advice and it is not Chinese banks that are currently going bust. How symbolic yesterday that Chinese astronauts take a spacewalk while the US Treasury Secretary is on his knees.
Despite incessantly urging other countries to adopt its way of doing business, America has always had one economic policy for itself and another for the rest of the world. Throughout the years in which the US was punishing countries that departed from fiscal prudence, it was borrowing on a colossal scale to finance tax cuts and fund its over-stretched military commitments. Now, with federal finances critically dependent on continuing large inflows of foreign capital, it will be the countries that spurned the American model of capitalism that will shape America’s economic future.
Which version of the bail out of American financial institutions cobbled up by Treasury Secretary Hank Paulson and Federal Reserve chairman Ben Bernanke is finally adopted is less important than what the bail out means for America’s position in the world. The populist rant about greedy banks that is being loudly ventilated in Congress is a distraction from the true causes of the crisis. The dire condition of America’s financial markets is the result of American banks operating in a free-for-all environment that these same American legislators created. It is America’s political class that, by embracing the dangerously simplistic ideology of deregulation, has responsibility for the present mess.
In present circumstances, an unprecedented expansion of government is the only means of averting a market catastrophe.
(28 September 2008)
Tangled embrace of the three E’s
Asher Miller, Post Carbon Institute
One of the frightening consequences of the $700,000,000,000 government bailout of the financial sector is what it means for future energy policy. Both US Presidential Nominees have energy platforms that call for investments in renewable energy and green collar jobs. Putting aside for a moment legitimate questions about the proposed treasury bill and the wisdom of each candidate’s proposals, it’s clear that the current economic crisis is going to have an impact on the next administration’s climate and energy plans.
I haven’t yet seen a comment from the McCain campaign, but Barack Obama did recently state that the bailout could have a real impact on his administration, should he be elected president.
Democrat Barack Obama acknowledged this morning that the massive Wall Street bailout will likely postpone his sweeping proposals on healthcare, education, alternative energy, and other priorities.
And this makes me wonder if what many of us concerned about the interconnectedness of energy and the economy feared may actually be happening. Namely, that energy and the economy (oh, and don’t forget the environment) could find themselves in a sort of positive feedback loop death spiral. By that I mean, as energy costs climb, governments will have less money available to invest in alternatives to fossil fuels, not to mention other investments that are key to healthy, sustainable communities. The longer we remain dependent on depleting fossil fuels, the less time and money we’ll have left to transition away from them or mitigate the climate crisis. The more we deplete the higher the energy costs and the more instability and shortages we’ll experience. All this further weakens the economy, which leaves us with yet fewer resources to get out of the trap. You get the idea.
This, of course, is not rocket science. But it’s amazing how little discussion or thought seems to be put into policy decisions (see Richard Heinberg’s recent commentary on this).
Now, it’s one thing if you don’t believe that our government should guarantee things like retirement income or welfare. But what I just don’t get is where anti-government people think they or their kids are going to live in the future when we have no oil or roads left to get us and the things we need around, or when global warming has really hit.
(26 September 2008)
The Canadian solution to the subprime credit crisis
Rodrigue Tremblay, Information Clearing House
… In August 2007, it was discovered that Canada, just as the U.S., had a subprime mortgage-backed securities problem. Since the Canadian economy is more than ten times smaller than the American economy, the magnitude of the problem was also smaller, but it was nevertheless acute.
Indeed, Canada’s subprime mortgage market was a smaller proportion of the total mortgage market than in the U.S. and mortgage defaults have not been as prevalent in Canada as in the United States. For instance, there has not been a housing bubble burst in Canada. Overall, risky mortgage-backed paper constituted, about 5 per cent of the total mortgage market, while in the U.S., subprime mortgage paper constitutes about 20 per cent of the total mortgage market, and mortgage defaults have been rising dramatically.
Nevertheless, there was some $32 billion (CAN) of non-bank asset-backed commercial paper in Canada. When this market became illiquid after August 2007, as a consequence of the global credit crisis that originated in the U.S., a restructuring committee was assembled in Canada by large pension plans, Crown corporations, banks and other businesses holding the bulk of $32 billion in non-bank asset-backed commercial paper (ABCP) in order to find a solution to the liquidity problem. (Large Canadian banks covered the asset-backed commercial paper that were on their books or in their money market funds). This was the Pan-Canadian Investors Committee for Third-Party Structured ABCP, chaired by a Toronto lawyer, Mr. Purdy Crawford, and created after a proposal that originated from the large Quebec pension fund, the Caisse de dépôt. This was the Montreal proposal.
The committee ended up proposing to restructure the frozen and illiquid securities into longer-term securities. It proposed that ABCP notes, initially intended as low-risk and short-term debt, be exchanged for new replacement notes or debentures that would not mature for years (seven or nine years) while earning interest originating from the underlying primary mortgages.
The plan was approved by a Canadian court last June and is scheduled to close by September 30, after Canada’s Supreme Court refused to hear an appeal against the plan. The plan was designed to prevent a forced a fire sale of the asset-backed paper and to restore confidence in the Canadian financial system, especially in the money market funds. And it did all that without the government risking a penny of taxpayers’ money.
Of course, those entities that had invested in what they believed to be liquid and relatively high-yield 30- to 90-day debt instruments had to accept new notes maturing within nine years, but most of them thought that this was better than the alternative of outright liquidation. Those investors can hold the newly-issued notes to maturity or they can try to trade them in the secondary market. A market for asset-backed securities was thus indirectly created where none existed before.
Rodrigue Tremblay is professor emeritus of economics at the University of Montreal …
(28 September 2008)
Recommended by Dmitry Orlov in post at Club Orlov. He writes:
I just happened across this gem, excerpted from here. Solving the subprime mortgage crisis is simple; unless, that is, your country is in the process of being hijacked by a bunch of 9/11 con artists, that is.
A ‘Wise Energy Use’ Stock Portfolio
Bill Paul, Energy Tech Stocks
Starting today – with the story right below this one on our Home Page – EnergyTechStocks.com is rolling out a new kind of stock index not to be found on Wall Street. The time has come for a “Wise Energy Use” index — a strictly informal stock index intended to start every investor thinking about building a portfolio of companies whose fundamental business is to save their customers money by saving them energy.
“Wise Energy Use” is the new name of the game, not just in energy investing but, we suspect, in investing per se. As we emphasize in this week’s five-part Special Report highlighting 23 companies to consider, with a massive government bailout of the U.S. financial system looming, to be followed in all likelihood by a prolonged and quite possibly deep recession, businesses and consumers must find a way to cut their expenses.
Energy stands out as probably the quickest, most cost-effective way to trim a budget without inflicting long-term damage.
There’s more, however, to why “Wise Energy Use” is about to catapult to prominence, and it has a lot to do with things going on in the U.S. state of Michigan.
(29 September 2008)
