Shepherd with his horse and dog on Gravelly Range, Madison County, Montana
Ilargi: There are days when I have to sit down and think deeply about what I’m going to write. Writing seven days a week is not easy, and it shouldn't be. And that's fine by me for now. Though having more than anywhere between 30 and 60 minutes to deliver an entire newspaper column each and every day would be nice.
Anyway, that’s the sort of day today is not. Where on many occasions, what I do is go through the news and try to pick the few raisins in the cake, this day is different. The criticism of the Obama finance team and their wild, expensive and purely double or nothing based plans is accelerating, and if left unchecked by proper responses from the government, may reach critical mass in the near future. And it's crucial to note that the critics are not in the right hand corner. People like William Black, Robert Reich and Jeffrey Sachs are, at least by American standards, left-leaning. As am I.
So instead of writing more, I want to ask you to go through the articles below and read as much as you can stomach and have the time for. And then, at the end, there's Joe Bageant.
The French are right (again)
The Europeans spend more money on social programs than we do -- and get great results, in everything from universal childcare to tuition-free higher education.
If the world is no longer enthralled by the "old Washington consensus" of privatization, deregulation and weak government, as British Prime Minister Gordon Brown proclaimed at the London G-20 summit, then now it is surely time to reconsider what that consensus has meant for us over the past three decades. We could begin by looking across the Atlantic at the "social market" nations of Europe -- where support for families and children is less rhetorical and more real than here. Most coverage of the summit failed to observe the stinging irony of the debate over stimulus spending that brought the United States into conflict with France and Germany. Today’s American demand that the French and Germans (along with the rest of wealthy Europe) should spend much more on government programs and infrastructure contrasts rather starkly with the traditional American criticism of Europeans for spending too much.
Not that the Obama administration’s complaint about the French and the Germans is necessarily wrong; the Europeans and especially France and Germany should overcome their fear of inflation and spend more to help relieve the global recession. But then we almost always have some complaint against the French -- and the French often turn out to be right, as they were when they objected to the invasion of Iraq. So when the French and other Europeans note pointedly that their societies routinely spend much more than ours to protect workers, women, the young, the elderly, and the poor from economic trouble, they’re merely making a factual observation. (France spends as much as 1.5 percent of GDP annually on childcare and maternity benefits alone.)
Different as we are in culture and history, we might even learn something from their example, now that the blinding ideology of the past has been swept away. By now, most Americans ought to know that Europeans treat healthcare as a public good and a human right, which means that they spend billions of tax dollars annually to insure everyone (although they spend less overall on the medical sector than we do). What most Americans probably still don’t know is that those European medical systems are highly varied, with private medicine and insurance playing different roles in different countries. Expensive as universal quality care has inevitably become, as technology improves and populations age, the Europeans broadly believe in their social security systems -- because they provide competitive advantage as well as moral superiority.
From Europe’s perspective, the same can be said of the support its governments provide to families, from the entitlements available to pregnant women and new mothers and fathers, to universal child care and tuition-free higher education, to the special benefits that assist single parents. The challenges that working families face in a globalizing world where both parents work are mitigated by policies designed to encourage balance between home and workplace and adequate attention to children. These "socialist" measures to protect families are far more effective, of course, than all of the Sunday shouting from American pulpits about the Biblical way of life. Perhaps the leadership of the religious right, still obsessed with stigmatizing gay couples, should take note.
To Americans unfamiliar with the "social market" approach to public policy, the specifics of the European programs are stunning. In France, for instance, women are entitled to 16 weeks of paid maternity leave following the birth of their first and second child -- and 26 weeks paid leave following the birth of each subsequent child, at 100-percent of their pre-maternity wages. Men are entitled to 11 days of fully-paid paternity leave, and both mom and dad can take advantage of an additional three years of parental leave with lower benefits. Childcare is subsidized by the state as early as 18 months and by the time children are 30 months old, they are guaranteed a place in France’s free public preschools, which are staffed by well-paid teachers with graduate training in early childhood education.
Similar systems and benefits can be found in countries across Western Europe (with the exception of the United Kingdom) -- and the effects on educational performance can be seen in many comparative studies. They’re happier, too, by the way (and evangelicals please note that the divorce rate in Norway has fallen by six percent over the past decade, possibly as a result of reduced pressure on families). In the Nordic countries, benefits are even more generous in certain respects. Sweden provides parents with 15 months of paid parental leave that can be divided as mom and dad think best, and they also can choose to work six hours per day, at pro-rated pay, until their children reach their eighth birthday. (In other words, one or both parents can be home every day when school gets out.)
Like most of their continental neighbors, the nations of the north provide free or highly subsidized, high-quality child care that begins as soon as new mothers return to work. Nearly every child between the ages of three and six is enrolled in the public child care system, because it is staffed by well-paid and well-trained workers overseen by the national ministry of education. The results include not only better socialization and education of young children, but far lower poverty rates, especially among single mothers. And the security of European families is enhanced as well by the universal provision of decent old-age pensions and health care, which relieves the financial burden of supporting elderly parents while trying to raise children. So does free or low-cost university education.
It is true that globalization, aging and immigration have imposed severe pressure on the budgets of European countries, and the trend of increasing benefits that continued until a decade ago has been reversed. But it is also undeniable that despite those pressures, public and political support for the social market economy remains strong across Europe, and that free-market fundamentalism is a thoroughly discredited alternative. The old argument that the social market is unsustainable and hinders growth was never persuasive on close inspection. And the old expectation that outmoded European systems would eventually collapse into imitating ours has been swept away, along with the rest of the Washington consensus. Now perhaps we can honestly consider what America might learn from them.
Ilargi: Good to know you're not alone: Joe Weisenthal at Business Insider says what I said when the PPIP plan came out and angry and dark stories of banks gaming the plan emerged:
There's not need to game the plan.The plan is the game.
Why We Shouldn't Worry If Banks Game The Bailout
Jeffrey Sachs is the latest economist to realize that -- gasp! -- scheming banks could game the bailout and screw the taxpayers by buying toxic assets from each other. It's not just your imagination. It really is everyday that someone trips over themselves to explain just what a scam the Geithner PPIP actually is. But here's the thing: that's a feature, not a bug. The system is meant to be gamed. Look, the government's actions all revolve around one overriding strategy: Moving more and more of our private debt to the public ledger. That's it! There's nothing more to it. The bet is that the public balance sheet can withstand a lot more leverage before it busts, and that a delevered private sector can return to health.
Thus all these bailout efforts are meant to be gamed. If there were no gaming going on, the schemes wouldn't be living up to their full potential, because that would represent debt staying in the private sector. Of course this strategy has drawbacks. For one thing, it's totally dishonest, because it's not being sold this way. It also is rewarding failure, maintaining a status quo that's proven to be unsustainable. And what's more, if Washington is wrong, and the public balance sheet can't withstand more leverage, the effects could be catastrophic. But really, for the bailouts to work, the private sector -- and, yes that includes homeowners who are figuring out ways to scam the mortgage mods -- needs to "game" the system as much as possible. After the big transfer is done, we just need to default on our Social Security payments and cut military spending and voila, problem solved.
William Black: Bank Stress Tests A "Complete Sham"
The bank stress tests currently underway are “a complete sham,” says William Black, a former senior bank regulator and S&L prosecutor, and currently an Associate Professor of Economics and Law at the University of Missouri - Kansas City. “It’s a Potemkin model. Built to fool people.” Like many others, Black believes the “worst case scenario” used in the stress test don’t go far enough.
He detailed these and related concerns in a recent interview with Naked Capitalism. But Black, who was counsel to the Federal Home Loan Bank Board during the S&L Crisis, says the program's failings go way beyond such technical issues. “There is no real purpose [of the stress test] other than to fool us. To make us chumps,” Black says. Noting policymakers have long stated the problem is a lack of confidence, Black says Treasury Secretary Tim Geithner is now essentially saying: “’If we lie and they believe us, all will be well.’ It’s Orwellian."
The former regulator is extremely critical of Geithner, calling him a “failed regulator” now “adding to failed policy” by not allowing “banks that really need desperately to be closed” to fail. (On Saturday, Geithner said on Face the Nation, if banks need "exceptional assistance" in the future "then we'll make sure that assistance comes with conditions," including potentially changing management and the board, but did not say they'd be shut down.)
Black says the stress test must also be viewed in the context of Geithner’s toxic debt plan, which he calls “an enormous taxpayer subsidy for people who caused the problem.” The fact bank stocks have been rising since Geithner unveiled his plan is “bad news for taxpayers,” he says. “It’s the subsidy of all history."
Will Geithner fire corporate America?
by Robert Reich
Tim Geithner said on Sunday's "Face the Nation" that the Treasury might fire the heads of big banks that depend on financing from the federal government, just as it summarily deposed Rick Wagoner, the former CEO of General Motors -- and before Wagoner, the heads of AIG, Fannie Mae and Freddie Mac. "Where that requires a change in management and the board, then we will do that," said Geithner. I suppose it's comforting to know our government stands ready to fire corporate executives and directors whenever taxpayer money is on the line. But I suspect Geithner's new tough line is mostly designed to reassure a public that's lost all faith in the wisdom of bailing out Wall Street.
For the sake of the argument, assume he's sincere. What criterion will an ax-wielding Geithner be using? If precipitous loss of shareholder value is enough to "require a change in management and the board," presumably every CEO and director of every big bank now being bailed out should be fired, starting with Ken Lewis of Bank of America. If the criterion is diversion of taxpayer money to uses other than Congress intended when it first authorized the $700 billion bailout, the list of soon-to-be-fired CEOs is a bit shorter but still large. Surely it includes all the bailed-out banks that continue to fly their executives around the world in company jets, award them extraordinary pay packages, and run junkets at fancy resorts. Citigroup's Vikram Pandit (who collected $38.2 million for his taxpayer-subsidized services in 2008) comes immediately to mind.
Why stop there? Perhaps Geithner intends to fire executives and directors of any company that's dependent on taxpayers and is now losing money. Just think of the corporate housecleaning this will mean. Hundreds of agribusiness executives are now at risk as are scores of military contractors. Hell, the whole pharmaceutical industry depends on taxpayer support (research subsidized by National Institutes of Health, sales subsidized through Medicare and Medicaid), and it's doing badly, so their executives and directors will be gone soon, too. All told, about one out of every five large American companies depends on government contracts, and a majority of these firms are losing money right now. So ... off with their heads.
A Rich Education for Summers (After Harvard)
Lawrence H. Summers plays down his stint in the hedge fund business as a mere part-time job — but the financial and intellectual rewards that he gained there would make even most full-time workers envious. Mr. Summers, the former Treasury secretary and Harvard president who is now the chief economic adviser to President Obama, earned nearly $5.2 million in just the last of his two years at one of the world’s largest funds, according to financial records released Friday by the White House. Impressive as that might sound, it is all the more considering that Mr. Summers worked there just one day a week. Much is known about Mr. Summers’s days in Washington and Cambridge, but little attention has been paid to his two years in New York, from late 2006 to late 2008, advising an elite corps of math wizards and scientists devising investment strategies for D. E. Shaw & Company.
Mr. Summers said in an interview that his experience at Shaw, however brief, gave him valuable insight into the practical realities of Wall Street, insight he is now putting to use in shaping economic policy in the White House. "I have a better sense of how market participants sort of think and react to things from sort of listening to the conversations and listening to the way the traders at D. E. Shaw thought," he said. Mr. Summers and Shaw executives say his role there was to be a sounding board for Shaw’s traders. But interviews with friends and former colleagues suggest that Mr. Summers’s role at D. E. Shaw was wider and more complex. Mr. Summers, these people say, was a marquee hire, a prized spokesman for Shaw. He routinely made himself available for private consultations with Shaw’s clients, an attractive perk for investing with the firm, as one client put it.
Mr. Summers, who taught economics and public policy at Harvard while advising Shaw, also met with investors in the United States, as well as in the cash-rich Middle East and Asia. He spoke at industry conferences, mixing with officials from public pension funds, endowments and other large institutions with many billions of dollars to invest. While at Shaw, Mr. Summers also peered into the inner workings of the $2 trillion hedge fund industry, which the Obama administration is now relying on to buy billions of dollars of worrisome assets from the nation’s beleaguered banks. Some of his critics worry that such ties raise questions about whether the government’s ever-changing effort to bolster the financial industry will benefit Wall Street in general, and hedge funds in particular, at the expense of taxpayers. "This is what might be called contamination," said Andrew Sabl, an associate professor of public policy at the University of California, Los Angeles. "Did Summers spend so much time with the hedge fund, or its investors, sovereign wealth funds and so on, that he started to think like them?"
Mr. Summers joined the hedge fund world after his tempestuous, five-year term as the president of Harvard came to an unhappy end in February 2006, after a statement he made that women might lack an intrinsic aptitude for math and science. It was at that time, to the surprise of some colleagues, that Mr. Summers seriously contemplated his options on Wall Street in part because he believed his chances to return to a prominent position in Washington had dimmed, friends say. Although he once compared finance to ketchup sales, Mr. Summers discussed job possibilities with Goldman Sachs, long considered the premier Wall Street bank, and with Citigroup, where Robert E. Rubin, Mr. Summers’s predecessor as Treasury secretary, had become a senior adviser. Then a young Harvard graduate named Julius Gaudio, whom Mr. Summers had met at alumni events, raised another possibility: D. E. Shaw, where Mr. Gaudio is a managing director. As part of Shaw’s rigorous screening process — the firm accepts perhaps one out of every 500 applicants — Mr. Summers was asked to solve math puzzles. He passed, and the job was his.
In a rare interview, David E. Shaw, who founded the firm in 1988 above a communist book shop in Greenwich Village, put it simply: Mr. Summers is "a brilliant, brilliant guy." That is from a former computer science professor at Columbia who now spends his time researching areas like treatments for cancer, while others run his hedge fund day-to-day. D. E. Shaw does not like to talk about what goes on inside its modish headquarters near Times Square. There, esoteric trading strategies are imagined, sketched on whiteboards and modeled on supercomputers by an elite corps of math wizards and scientists, most of them unknown to the outside world. It is nothing like a button-down Wall Street brokerage firm. Jeans, sweatshirts and sandals are common. The firm has not one, but two libraries, where textbooks on computer coding are stacked near academic finance journals dating to the 1960s. For a time, the décor included light bulbs strung from the ceiling on various lengths of wire, each determined by a computerized random-number generator. It is a quicksilver business and wildly lucrative. Mr. Shaw is said to be worth $2.7 billion, and today his firm manages $30 billion.
At Shaw, Mr. Summers, the professor, was often the student. The arrogant personal style that turned off some Harvard colleagues seemed to evaporate, Shaw traders say. Mr. Summers immersed himself in dynamic hedging, Libor rates and other financial arcana. He seemed to fit in among Shaw’s math-loving "quants," as devotees of math-heavy quantitative investing are known. Traders joked that Mr. Summers was the first quant Treasury secretary because he had once ordered dollar bills to be printed with the transcendental number pi — 3.14159... — as the serial number. "We could call or e-mail him anytime," a former Shaw trader said. "He always asked me more questions than I could ask him. He would dig through my entire way of thinking." At Harvard and at Shaw, Mr. Summers cultivated a small circle of financial professionals — particularly hedge fund managers — to serve as an informal brain trust. He consults with them on policy matters from his perch in the White House. Among these insiders are Kenneth D. Brody and Frank P. Brosens, the founding partners of another hedge fund, Taconic Capital Advisors, for whom Mr. Summers did consulting work from 2004 to 2006.
Mr. Summers reached out to Mr. Brosens in December to discuss the Obama administration’s economic priorities. This year, he campaigned to have him run the federal office overseeing the $700 billion bailout program. Mr. Brosens withdrew his name from consideration last month. Others in this inner circle include Nancy Zimmerman, a longtime friend and hedge fund manager in Boston; Laurence D. Fink, the chairman and chief executive of BlackRock, a large money management company that hopes to play a potentially lucrative role in the administration’s bank rescue plan; H. Rodgin Cohen, the chairman of the law firm Sullivan & Cromwell, who was briefly considered for a senior Treasury post; and three other top fund managers, Orin S. Kramer, Ralph L. Schlosstein and Eric M. Mindich. Friends of Mr. Summers say he has always been meticulous about avoiding conflicts of interest and that he was just as careful at D. E. Shaw. For instance, Mr. Summers went to lengths to pay the Social Security taxes on payments he made to even occasional babysitters from the 1980s, said Jeremy Bulow, an economics professor at Stanford, who has known Mr. Summers since graduate school.
"To Larry, it was not about figuring out where the line is and making sure you’re on one side of it," Mr. Bulow said. "He would never even get close to it." In addition to his salary at Shaw, Mr. Summers enjoyed growing wealth through investments in the firm’s funds. Unlike most hedge funds, which lost money as the markets plunged in 2008, Shaw posted returns of about 7 percent in its so-called macroeconomic fund. A separate multistrategy fund lost 8 percent, far less than most hedge funds. When investors rushed en masse to withdraw their money from hedge funds last year, Shaw asserted its right to block redemptions from its fund. An exception was made for Mr. Summers, however, because the White House job he was taking required him to divest. A spokesman for Shaw said Mr. Summers’s main job was not to act as a salesman. But in the fall of 2007, as the financial crisis simmered, Mr. Summers traveled to Dubai for a series of meetings with Shaw’s marketing staff and potential investors. Bankers from across the region flew in for the event. Mr. Summers spoke at several lavish dinners and met with local parties involved in Shaw’s real estate investments in the area, people briefed on his trip said.
Last September, Mr. Summers explained to Shaw traders what appeared to be an aberration in a key interest rate, the London interbank offered rate, or Libor, thus helping its traders avoid losses. He spoke at the firm’s 20th anniversary gathering for its investors and at a prominent hedge fund investor conference in Boston, weeks before the presidential election. In December, he attended the firm’s annual holiday party, held in the American Museum of Natural History in New York, beneath the giant model of a blue whale. Even so, Mr. Summers, who, before the crisis broke out, spoke and wrote about the need for greater financial regulation, has not resisted the efforts to tighten up on hedge funds like Shaw. The administration, for instance, is moving toward closing a tax loophole that these funds have long enjoyed. A White House spokeswoman says his actions supporting hedge fund regulation prove he is not biased. Some people in the financial world say they have more confidence in the White House’s plans because of Mr. Summers’ time at D. E. Shaw.
"He had insights into one of the best hedge funds in the world. That can only add value to the things the government is struggling with right now," said Robert Borden, chief investment officer of South Carolina’s pension fund, which has invested $350 million with Shaw. Mr. Borden met Mr. Summers to discuss how much money a large institution should allocate to hedge funds. "It was a nice perk to have access to some of his thoughts and insights," Mr. Borden said. Mr. Summers’s experience in hedge funds might leave some wondering if he will return to private investing when his latest White House assignment ends, perhaps even to run his own lucrative fund. Asked about that, Mr. Shaw laughed. "Oh, boy, I have no idea," he said. "Thankfully he’s doing what he’s doing. I’m really glad he’s running this. It’s a scary time, and I can’t think of anybody I’d rather see there."
Meredith Whitney: Don't Be Fooled By Bank Earnings
Following her interview with Steve Forbes, Meredith Whitney continued to do the media rounds today, landing on CNBC to discuss the banks' Q1. Her message: don't be fooled by the bank earnings. They may show a penny of profits this quarter, but it doesn't mean they've returned to health.
Ilargi: Nobody who's read Naomi Klein's The Shock Doctrine will ever for the rest of their lives trust another word coming out of Jeffrey Sachs. But we can read him.
The Geithner-Summers Plan is Even Worse Than We Thought
Two weeks ago, I posted an article showing how the Geithner-Summers banking plan could potentially and unnecessarily transfer hundreds of billions of dollars of wealth from taxpayers to banks. The same basic arithmetic was later described by Joseph Stiglitz in the New York Times (April 1) and by Peyton Young in the Financial Times (April 1). In fact, the situation is even potentially more disastrous than we wrote. Insiders can easily game the system created by Geithner and Summers to cost up to a trillion dollars or more to the taxpayers.
Here's how. Consider a toxic asset held by Citibank with a face value of $1 million, but with zero probability of any payout and therefore with a zero market value. An outside bidder would not pay anything for such an asset. All of the previous articles consider the case of true outside bidders. Suppose, however, that Citibank itself sets up a Citibank Public-Private Investment Fund (CPPIF) under the Geithner-Summers plan. The CPPIF will bid the full face value of $1 million for the worthless asset, because it can borrow $850K from the FDIC, and get $75K from the Treasury, to make the purchase! Citibank will only have to put in $75K of the total.
Citibank thereby receives $1 million for the worthless asset, while the CPPIF ends up with an utterly worthless asset against $850K in debt to the FDIC. The CPPIF therefore quietly declares bankruptcy, while Citibank walks away with a cool $1 million. Citibank's net profit on the transaction is $925K (remember that the bank invested $75K in the CPPIF) and the taxpayers lose $925K. Since the total of toxic assets in the banking system exceeds $1 trillion, and perhaps reaches $2-3 trillion, the amount of potential rip-off in the Geithner-Summers plan is unconscionably large.
The earlier criticisms of the Geithner-Summers plan showed that even outside bidders generally have the incentive to bid far too much for the toxic assets, since they too get a free ride from the government loans. But once we acknowledge the insider-bidding route, the potential to game the plan at the cost of the taxpayers becomes extraordinary. And the gaming of the system doesn't have to be as crude as Citibank setting up its own CPPIF. There are lots of ways that it can do this indirectly, for example, buying assets of other banks which in turn buy Citi's assets. Or other stakeholders in Citi, such as groups of bondholders and shareholders, could do the same.
Several news stories suggest some grounding for these fears. Both Business Week and the Financial Times report that the banks themselves might be invited to bid for the toxic assets, which would seem to set up just the scam outline above. What is incredible is that lack of the most minimal transparency so far about the rules, risks, and procedures of this trillion-dollar plan. Also incredible is the apparent lack of any oversight by Congress, reinforcing the sense that the fix is in or that at best we are all sitting ducks. The sad part of all this is that there are now several much better ideas circulating among experts, but none of these seems to get the time of day from the Treasury.
The best ideas are forms of corporate reorganization, in which a bank weighed down with toxic assets is divided into two banks -- a "good bank" and a "bad bank" -- with the bad bank left holding the toxic assets and the long-term debts, while owning the equity of the good bank. If the bad assets pay off better than is now feared, the bondholders get repaid and the current bank shares keep their value. If the bad assets in fact default heavily as is now expected, the bondholders and shareholders lose their investments. The key point of the good bank -- bad bank plans is an orderly process to restore healthy banking functions (in the good bank) while divvying up the losses in a fair way among the banks' existing claimants. The taxpayer is not needed for that, except to cover the insured part of the banks' existing liabilities, specifically the banks' deposits and perhaps other short-term liabilities that are key to financial market liquidity.
Cynics believe that the Geithner-Summers Plan is exactly what it seems: a naked grab of taxpayer money for Wall Street interests. Geithner and Summers argue that it's the least bad approach to a messy situation, in which we need to restore banking functions but don't have any perfect ways to do that. If they are serious about their justification, let them come forward to confront their critics and to explain to the American people why the other proposals are not being pursued. Let them explain the hidden and not-so-hidden risks to the American taxpayer of the plan that they have put forward. Let them explain why they are so intent on saving the banks' bondholders, even the long-term unsecured creditors who clearly knew they were taking market risks in buying Citibank bonds. Let them work with their critics to fashion a less risky and less costly plan. So far Geithner and Summers tell us that their plan is the only option, but without a word of further explanation as to why.
Ilargi: Will we finally see some motion around Uncle Bernie, or is Merkin just another bobble head left to rot? Merkin's name popped up on December 11, the day Madoff was arrested. Were a few names and a few billions scratched from the records in the past 4 months, before Merkin could be taken care of?
Cuomo Sues Financier Merkin for Fraud Over Funds Invested With Madoff
J. Ezra Merkin, a prominent New York financier whose private clients lost more than $2 billion in the collapse of Bernard L. Madoff’s Ponzi scheme, has been accused of fraud and deception in a civil lawsuit filed Monday by the New York attorney general, Andrew M. Cuomo. The lawsuit, filed under state charity and securities laws, claims that Mr. Merkin improperly collected more than $470 million in fees from his clients, who included more than a dozen nonprofit organizations, by "falsely claiming he actively managed their funds" when in fact he simply handed their money over to Mr. Madoff, without adequate investigation or oversight. The complaint charged that Mr. Merkin had failed to carry out the diligent research and investigation he had promised, and in some cases had deliberately deceived clients about investing with Mr. Madoff.
"Merkin’s deceit, recklessness, and breaches of fiduciary duty have resulted in the loss of approximately $2.4 billion," according to the complaint filed by Mr. Cuomo’s office, which opened an investigation of Mr. Merkin soon after the Madoff scheme collapsed in mid-December. The accusations echo charges that have already been made against Mr. Merkin in private lawsuits filed by some of the affected charities and institutions, which include the New York University Law School and a charitable foundation established by Mortimer B. Zuckerman, the publisher and real estate executive. A lawyer for Mr. Merkin, Andrew J. Levander, could not immediately be reached for comment, but has said in the past that his client will "fully cooperate with any investigation by the New York attorney general’s office."
Exhibits filed with the complaint on Monday include transcripts of extensive interviews with Mr. Merkin, in which he was questioned about his relationship with Mr. Madoff, whom he said he had met in "the very late ’80s, maybe 1990." Mr. Madoff, who is in jail awaiting sentencing, has pleaded guilty to defrauding clients up more than $65 billion they believed they had in their Madoff accounts since the early 1990s, although federal prosecutors say the fraud began at least a decade earlier. Mr. Merkin’s three investment funds — Ascot Partners, Ariel and Gabriel — had been either fully or partially invested with Mr. Madoff since 1990, according to the complaints. The Ascot fund was formed in 1992 "for the sole, but undisclosed, purpose of serving as a feeder to Madoff," according to the state complaint. Despite what Mr. Cuomo’s office portrayed as a minimal role in actually managing his clients’ assets, Mr. Merkin collected hundreds of millions of dollars in management fees from his clients — fees which dwarfed Mr. Merkin’s personal losses in the Madoff fraud, according to the complaint.
Since Mr. Madoff’s arrest on Dec. 11, Mr. Merkin has avoided any public comment on the case. He retained his position as president of the Fifth Avenue Synagogue, but has left many of the other boards on which he served. New York University is suing Mr. Merkin over $24 million it lost. According to its lawsuit, its chief investment officer had specifically rejected a suggestion by Mr. Merkin last year that part of the school’s endowment be invested in a Madoff fund — without knowing, or being informed by Mr. Merkin, that he had been investing part of its endowment with Mr. Madoff for eight years. Other victims who had invested with Mr. Merkin include Yeshiva University, where he was a trustee and headed the investment committee. Yeshiva lost $110 million of the money invested with him. Marc Rich, the financier who was pardoned by President Bill Clinton, lost $10 million to $15 million. And Bard College, where Mr. Merkin sat on a board, estimates losses of $3 million of its $11 million investment.
Through its civil complaint, Mr. Cuomo’s office is seeking restitution and unspecified damages from Mr. Merkin, who has long been a formidable figure in finance and philanthropy. His father, Hermann Merkin, fled Nazi Germany and ultimately made a fortune in the shipping business. The elder Esther Merkin became a major figure in New York’s Jewish philanthropic elite and was a founder of the Fifth Avenue Synagogue, a center of modern Orthodox Judaism. He contributed millions to help build Yeshiva University and the Merkin Concert Hall near Lincoln Center. His son expanded does social connections with important links on Wall Street, specifically with Stephen A. Feinberg, head of Cerberus Capital Management, a private investment fund with big stakes in Chrysler and GMAC, the financing arm of General Motors. Mr. Merkin became an investor in Cerberus and put money from Merkin funds into Cerberus and its portfolio companies. In 2006, Cerberus appointed Mr. Merkin as nonexecutive chairman of GMAC, a position Mr. Merkin recently resigned early this year.
Canada February Building Permits Fall to Lowest in Seven Years
Canadian building permits declined for a fifth straight month in February, the longest streak since 1990, led by fewer plans for commercial and government construction. The total value of permits issued by municipalities fell 16 percent to C$3.67 billion ($2.99 billion), the lowest since January 2002, Statistics Canada said today in Ottawa. Economists surveyed by Bloomberg anticipated a 4 percent drop, the median of 15 estimates. The Bank of Canada estimated in January that housing will cut 1 percentage point from growth this year as lower business profits and a deteriorating economy slow new projects. The central bank has cut its benchmark borrowing costs to a record low of 0.5 percent.
The value of permits has fallen 47 percent since peaking at C$7 billion in May 2007. Permits for non-residential construction fell 31 percent to C$1.57 billion, the government agency said, led by a 56 percent decline in institutional buildings, such as hospitals, and a 20 percent drop in commercial structures. Industrial permits increased 14 percent to C$236 million, Statistics Canada said. Residential permits fell 0.3 percent to C$2.1 billion, as single-family home permits fell 5.5 percent to C$1.3 billion. The value of permits for multiple-unit dwellings, including condominiums and apartments, rose 11 percent to C$756 million.
European Producer Prices Fall More Than Expected
European producer prices fell more than economists forecast in February and retail sales dropped by a record, highlighting the increasing risk of deflation in the region. Factory-gate prices in the euro region fell 1.8 percent from the year-earlier month, the most since April 1999, the European Union’s statistics office in Luxembourg said today. Economists had forecast a 1.5 percent decline, according to the median of 21 estimates in a Bloomberg News survey. Retail sales dropped 4 percent from a year earlier, a separate report showed. The deepening of the global slump and a 60 percent drop in oil prices from a July record have eased inflation pressures across the euro area. The region may record a temporary decline in annual consumer prices this year, European Central Bank President Jean-Claude Trichet said on April 2 after cutting the benchmark interest rate by a quarter-point to 1.25 percent, less than the half-point reduction economists expected.
"With unemployment mounting, it is clear that euro-area consumers are keeping their hands in their pockets" which "raises the risk of deflation," said Colin Ellis, an economist at Daiwa Securities SMBC Europe Ltd. in London. "The ECB could have a fight on its hands to get consumer-price inflation back near" its 2 percent target in 2010. The euro pared some of its gains after the reports and was up 0.1 percent at $1.3501 at 11:07 a.m. in London. From the previous month, producer prices fell 0.5 percent in February. The monthly decline in January was revised to 1.1 percent from 0.8 percent. The annual drop in retail sales exceeded economists’ forecasts for a 2.5 percent decline and was biggest since the data series began in January 1996. From the previous month, sales declined 0.6 percent. "Spending is not benefiting from sharp falls in inflation,’ said Jennifer McKeown, an economist at Capital Economics Ltd. in London. "Given the rapid deterioration in labour market conditions, consumer spending will probably remain very weak."
Consumer-price inflation in the euro area slowed to a record low 0.6 percent last month, according to an estimate published on March 31. In Spain, consumer prices declined from a year earlier for the first time ever. While Trichet sees a "temporary" decline in euro area consumer prices during this year, this is a "disinflationary episode" and he doesn’t see a "materialization of deflationary risk," he said. Unemployment in the euro area rose to 8.5 percent in February, the highest since May 2006. The economy may shrink as much as 4.1 percent this year, according to the Organization for Economic Cooperation and Development. Energy prices at the producer level fell 4.5 percent in February from a year earlier, according to today’s report. From the previous month, energy prices declined 0.7 percent. The core rate of inflation, which excludes energy and construction, fell to 0.1 percent in February from 0.9 percent the previous month.
Swiss slide into deflation signals the next chapter of this global crisis
Watch Switzerland closely. It is tipping into deflation, the first Western country to succumb to Japan's disease. Swiss consumer prices fell 0.4pc in March (year-on-year). Swiss CPI will be minus 1pc at least by July, nearing the level where spending psychology changes. By the time you have a self-feeding spiral, it is too late. "This is something that we must prevent at all costs. The current situation is extraordinarily serious," said Philipp Hildebrand, a governor of the Swiss National Bank. The SNB is not easily spooked. It is the world's benchmark bank, the keeper of the monetary flame. Yet even the SNB's hard men have thrown away the rule book, taking emergency action to force down the exchange rate of the Swiss franc. Here lies the danger. If other countries try to export deflation by this means, we will face a second phase of the global crisis. Taiwan is already devaluing. Korea, Singapore, and Sweden all seem tempted to follow. Japan is chomping at the bit. "We don't fully realise in the West what a catastrophic collapse Japan has suffered," says Albert Edwards, global strategist at Société Générale. "The West has dumped a large part of its economic downturn onto Japan by devaluing against the yen."
This is about to go into reverse as Tokyo hits the ping-pong ball back across the net. "As the unfolding collapse in the yen gathers pace, the West will see its green shoots incinerated to dust," he said. Japan's industrial output fell 38pc in February (year-on-year), mostly concentrated into the last four months. No major economy imploded at this speed in the 1930s. The country has been hit by a double shock. As an export power it has taken the brunt of Anglo-Saxon belt-tightening: as the world's top creditor it is cursed by a "safe-haven" currency that soars in moments of danger – largely because the Japanese bring home their wealth till the storm passes. Normally, Japan can cope. This time, the yen's rise has pushed the economy over a cliff. The yen must come back down to earth, and soon, or Japanese society will start to disintegrate. If necessary, the Bank of Japan will force it down by intervention, as occurred in 2003-2004. Will China stand idly by as Japanese unleashes a shock to the global system through competitive devaluation? That depends whether you think China's spring recovery is the real thing, or an inventory build-up before the next downward slide. The Communist Party says 20m jobs have been lost since the bubble burst. This cannot be tolerated for long.
It is remarkable that China's fall into deflation has attracted so little notice. China's CPI was minus 1.6pc in February. The country has built too many factories producing goods that the world cannot absorb. The temptation is to shunt this excess capacity abroad. A faction of the politburo is already itching to devalue the yuan. Of course, Britain has already played the currency card. That is different. The pound's fall, though welcome, is a side-effect of the Bank of England efforts to stem the credit crunch. There has been no currency intervention. Crucially, Britain has a current account deficit. Many countries toying with devaluation are exporters with surpluses – 15.4pc of GDP for Singapore, 8.4pc for Switzerland, and 6.1pc for China. If these countries refuse to let their imbalances correct, world demand must implode. Mr Hildebrand denies that the SNB is pursuing a "beggar-thy-neighbour' strategy. Like the yen, the franc suffers from the safe-haven curse: everybody buys it in a storm. This tightens monetary conditions. The SNB cannot easily offset this. It has already cut interest rates to near zero. There are not enough Swiss government bonds in the market to rely on the sort of "QE" asset purchases being carried out by the Bank.
Ultimately, I suspect this crisis may mark the moment when the Swiss franc loses its safe-haven role. Credit default swaps (CDS) measuring risk on five-year government debt have reached 127 for Switzerland, higher than Britain at 118. Norway has the world's lowest CDS at 48, reflecting its status as a petro-democracy. Switzerland's banks are over-leveraged. Loans to emerging markets equal 50pc of GDP (half to Eastern Europe). Banking secrecy is dying. Fortunately for the Swiss, they have built up $700bn in net foreign assets for a rainy day. Improvident Britons are less lucky. But that is another story. What we risk now is a game of deflation "pass-the-parcel" worldwide. The economic establishment was caught off guard from 2003 to 2007 because it overlooked the way that Asia's unbalanced relationship with the West was feeding a credit bubble. It may be caught again as the same warped structure leads to a chain of (panicked) devaluations. Enjoy the "bear-trap" rally on global bourses this spring. But remember, we have only just begun to see the mass lay-offs and hardship caused by this slump. The politicians will act to save their skins. Markets may not like the result.
UK is urged to print money
The government will have to print money to finance public spending, moving quantitative easing to a new level, according to the manager of one of London’s biggest hedge funds. Mike Platt, co-founder and chief executive of BlueCrest, Europe’s fifth-largest hedge fund, had been predicting quantitative easing in the UK for six months before it was adopted by the Bank of England last month. But the bond trader said the government, facing plunging tax revenues, now had little choice but to move to "heavy" quantitative easing, printing money to buy new gilts to support public spending. Last month the Bank began buying up £75bn of outstanding gilts and corporate bonds in an effort to support spending by boosting the money supply. Mr Platt said "significantly" more quantitative easing was needed. "The easiest way for the system to be saved is to print money," he told the Financial Times. "It is the only policy option left."
His comments come as many hedge funds, including BlueCrest, are betting that printing money will lead to inflation in the medium term. But unlike many other big funds – including Greenlight Capital, TPG Axon, Paulson & Co and Third Point – he is not putting money into gold, arguing there are "better ways to play inflation". BlueCrest’s two main funds are doing well, with its $5.5bn computer-driven BlueTrend up 43 per cent last year while its $3.5bn Capital International, which trades bonds and fixed-income derivatives, up 6.2 per cent, according to investors. However, it is in the process of closing its $1.1bn BlueCrest Strategic fund after poor performance prompted it to retreat from emerging markets. The fund – once a vehicle for Mr Platt’s best ideas – was hit by heavy withdrawals after losing 21 per cent last year. The closure comes as many big hedge fund managers are retreating from positions they took in the past few years in order to focus on their core businesses. "The environment has definitely changed," Mr Platt said. "Eighteen months ago the emphasis for all firms was growth and expanding into new products. Now very much the name of the game is to focus on your relative strengths and the areas you excel at." The fund has already paid out about half its money, and is likely to take another year to close out all positions and repay investors.
HSBC completes record £12.5bn rights issue
HSBC on Monday completed a record £12.5bn ($18.7bn) rights issue after an overwhelming number of investors subscribed to the new shares. In total 97 per cent of investors subscribed to the shares, which were priced at 254p, and the remaining shares were sold on the open market. The sale of the rump 173m shares, which was co-ordinated by Goldman Sachs and JPMorgan Cazenove, and completed on Monday was priced at a 13?p premium to Friday’s closing price of 434?p. The offering is the biggest-ever in the UK, eclipsing Royal Bank of Scotland’s £12bn issue last year, and underlines the perceived strength of the UK’s largest bank compared with the problems that have weakened its rivals. The offer’s success was widely expected. Shares in the bank have risen by almost a quarter since the offering was announced early in March. On Monday they rose a further 4 per cent or 19p to 453?p. They have now risen nearly 50 per cent since the launch of the rights issue at the beginning of last month.
HSBC’s London-listed shares are down 49 per cent compared with their level of a year ago, but this is still far less than the 92 per cent fall in RBS stock or the 65 per cent slide in Barclays. The bank’s Hong Kong shares jumped more than 5 per cent on Monday to a five-week high. The stock closed at HK$52.05 and have risen 70 per cent since hitting a low of HK$30.55 before the rights issue was announced. The cash raised will be used to strengthen the bank’s capital ratios by about 1.5 percentage points each. Its core equity tier one level will rise to 8.5 per cent and its tier one ratio to 9.8 per cent. "This underlines our determination that HSBC should maintain its signature financial strength," said Stephen Green, HSBC group chairman, in a statement confirming the high take up of the new stock. "We remain confident that HSBC is well-placed in today’s environment and that our strength leads to opportunity." HSBC reported pre-tax profits of $9.3bn last year in spite of writing off $10.5bn of goodwill linked to its US consumer business. However, profits were less than half those of the previous year.
Fresh warning over UK deficit
The public finances have deteriorated so much since November that the basic rate of income tax would need to rise by the equivalent of 8 percentage points to bring government borrowing back on track by 2015-16, the Institute for Fiscal Studies said on Monday. Bringing its out-of-date forecasts into line with others, the independent institute said that there was a £40bn gap between the government’s hope of borrowing only for capital spending in 2015-16 and the likely outcome. The warning came ahead of a meeting on Monday between Gordon Brown, prime minister, Mervyn King, the bank of England governor, and Adair Turner, Financial Services Authority chairman, to take stock of the G20 conclusions. Even the figures presented by the IFS on Monday are already likely to be an underestimate of the true deterioration of the public finances.
They were based on the Bank of England’s central economic forecast from February, which suggested a contraction of 2.7 per cent in 2009. As Alistair Darling, the Chancellor, conceded at the weekend, the likely figure is worse than this. But the IFS analysis presents Mr Darling with difficult Budget choices. He ditched the government’s previous fiscal rules in November, replacing them with much weaker temporary constraints, but even these will be breached, the IFS analysis shows. It projects that a string of enormous deficits will lead to a growing burden of government debt in perpetuity. This contradicts the government’s new operating fiscal goal of having a declining burden of debt once the global economic shocks have worked through the economy. The IFS’s £40bn figure for additional borrowing in 2015-16 represents 2.7 per cent of national income, the same fiscal tightening as Mr Darling imposed in the pre-Budget report, when he took an axe to the government’s future capital spending programme.
The IFS was certain that a similar measure was needed in the Budget in two weeks, citing the intervention of Mervyn King, Bank of England governor, who "publicly and pre-emptively withheld" support for a further fiscal stimulus. If such a fiscal tightening was introduced in the Budget, it would be the equivalent of every family paying an additional £1,250 a year in taxes if public expenditure plans remained unchanged. If public spending plans were cut and no tax rises imposed, there would need to be a five-year freeze in total public spending after adjusting for inflation. Because some areas of government spending rise automatically faster than this, the IFS said, "this would require real cuts in most other areas of government spending, and even favoured areas such as health or education would undoubtedly see much lower spending growth than they have received in recent years". George Osborne, the shadow chancellor, told the BBC Today programme that he hoped public spending restraint would take the "bulk of the strain" in reducing ballooning government deficits. But he was reluctant to outline areas for pruning apart from suggesting that public sector pay should "reflect the prevailing economic conditions".
UK new car sales tumble in key month
The dramatic deterioration in the UK car industry accelerated last month as new car sales fell by 30.5pc compared to last year. The decline in registrations during March, traditionally a key month for buying cars because of the introduction of new number plates, marks a sharp drop from the 21.9pc fall reported in February. Sales have tumbled amid the economic downturn as consumers, short of confidence and credit, avoid spending heavily. Paul Everitt, the chief executive of the Society of Motor Manufacturers and Traders (SMMT), said: "March new car registrations are a barometer of confidence in the economy, from businesses and consumers alike. The fall in the market shows that government needs to do more to boost confidence." Hopes for a recovery in the market are pinned on Alistair Darling, the Chancellor, announcing support measures in his Budget later this month, he added. A total of 313,912 new cars were registered in March, taking the total in the first quarter of 2009 to 480,358, 29.7pc lower than last year. The SMMT had previously forecast a 20pc decline in registrations to 1.72m this year, but that will be reviewed following the release of the data for April next month. Since the switch to twice-yearly plate changes, March has been the top-selling month six out of the last ten years, including each of the last five years. In 2008, March accounted for 21.2pc of annual sales.
Car makers across the country have been forced to halt production, freeze pay and cut staff as the slump in sales worsens. Car parts group have also been struck by the downturn. Loans and assistance totalling around £1.5bn from Government and European Investment Bank sources are being lined up for Jaguar Land Rover, Nissan and Vauxhall largely for the development of more environmentally friendly 'green' models and technology. However, industry leaders are questioning whether the support packages are enough to restore confidence and ease the sales crisis. The SMMT and its members are anxious for early announcements about the creation of a new credit scheme to provide salesmen with better financial offers to customers and a German-style "new cars for old" programme to provide incentives for owners with vehicles more than nine-years-old to swap them for newer models. The success of the German scheme, in which sales rose 40pc last month compared with a year earlier, has added to the calls for a similar scheme here. However, critics claim that a scrappage incentive scheme in the UK will simply benefit foreign rather than British manufacturers as more than 70pc of cars sold in this country are built abroad. Details of some of the loan packages for car manufacturers are expected later this week. The Government is ready to provide £500m to Jaguar Land Rover from the £2.3bn promised to the industry by Lord Mandelson for new 'green' models with the EIB chipping in the rest.
Berlin to launch bond fund for retail clients
The German government plans to take advantage of private investors’ appetite for secure, state-backed investments by launching a bond fund for retail clients based on the nation’s cast-iron debt. Deutsche Finanzagentur, the agency in charge of Berlin’s bond issuance, is developing a basket of German sovereign paper in which retail clients would be able to buy stakes, Carl Heinz Daube, co-head of the agency, has told the Financial Times. The idea shows that even a benchmark bond issuer such as Germany is keen to increase retail interest in its debt at a time when the cost of bank rescues and fiscal stimulus is pushing up the amount of debt issuance by governments. Germany plans to raise €346bn in new and follow-on financing this year, including an additional €60bn in debt to fund its economic stimulus plans. The proposal follows the unexpectedly successful launch last July of the Tagesanleihe, or day bond, the government’s first new retail bond product for 40 years. It raised €3.2bn in its first six months compared with the €1.4bn at first expected. Any attempt to build on that success could antagonise financial institutions, some of which are critical of the financing agency’s foray into the retail market, which they think should be left to commercial banks.
Proceeds from selling bonds to retail clients account for only 3 per cent of the government’s funding needs, and Berlin will remain dependent on big institutional investors. However, the government would like to raise the proportion of bonds bought by retail customers at a time when investors have fled from stocks and other risky assets. "Our retail customers are also telling us they’d like a product through which they can save monthly amounts," Mr Daube said in an interview. "As a result, we’re working on a new retail product that will be a bit like a bond fund." The idea was to launch a product by the end of the year that would bundle "government bonds and bills of different maturities and rates of return", he said. Investors would get "one concise, regular statement of account" every month. The recently introduced day bond is in effect a money-market certificate pegged to the eurozone’s overnight interbank rate. Berlin decided three years ago to lure back retail investors to diversify its funding, both in terms of geography and type of investor.
International Monetary Fund says EU's Eastern European members should join euro
The International Monetary Fund says European Union members in debt-laden eastern and central European countries should consider scrapping their domestic currencies in favour of the euro to restore economic order, the Financial Times reports. In a confidential report, compiled a about a month ago, the IMF said the eurozone could relax its entry rules so countries could join as quasi-members without holding European Central Bank board seats. The recommendation formed part of a campaign by the IMF, the World Bank and the European Bank for Reconstruction and Development to persuade the EU and eastern European states to back a region-wide anti-crisis strategy, including a regional rescue fund. This failed amid widespread opposition from both west and east European states, according to the newspaper.
"For countries in the EU, euro?isation offers the largest benefits in terms of resolving the foreign currency debt overhang [accumulation], removing uncertainty and restoring confidence," the IMF report said. "Without euroisation, addressing the foreign debt currency overhang would require massive domestic retrenchment in some countries, against growing political resistance." The IMF has forcast a 2.5pc decline in regional gross domestic product in 2009. The report estimates that the money needed from international financial institutions, the EU and governments will be $123bn (£82.5bn) this year and $63bn next, or $186bn in total. Ashley Davies, an analyst at UBS said: "The nexus between eastern Europe and the Eurozone is still a key unsolved problem in the financial system. As such, we would continue to watch this space ahead of next month's ECB meeting where the ECB announces what (if any) non-conventional policies it adopts." He said leaving this problem to fester would be affect euro.
Fragile east European economies are the zombies stalking the IMF
When the leaders of the G20 sat down to their Jamie Oliver dinner at Downing Street last week there was a ghost at the feast. As they munched their way through Shetland salmon, slow-roasted shoulder of lamb and Bakewell tart, Gordon Brown, Barack Obama, Angela Merkel, "Lula" and the rest of them may have noticed a slight coldness in the air. Somewhere at the back of their minds may have arisen the chilling question – where will the next financial shock come from? Who is next? If they had bothered to read their briefing papers they would be only too well aware of the unholy spirit stalking the world – the fragile economies of eastern Europe. They are the weakest link in the international financial chain. But why should we in the West give a fig about Bulgaria and its lev, say? Simply because Western banks have lent that nation, and those like it, too much money, and are now in danger of making further huge losses on these exposures. Think of it as sub-prime, Balkan-style.
By now, we should all know what happens when our banks have to write off huge losses from bad debts; they stop lending to the rest of us. So Bulgaria does matter. The good news is that the G20 did do something about all this last week. The leaders were obviously well briefed. The one concrete result of the summit was the massive increase in funding for the IMF, as it will have to go in and rescue these soon to be stricken economies. The increase in resources, though subject to the usual double counting, multiple announcement and spin, remains substantial – a trebling to $750bn. That ought to take care of the bills from eastern Europe. The leaders, though not many have acknowledged this, were not doling out their cash to the IMF out of sheer altruism; it was part of a hard-headed calculation of the risk of further international turmoil that will make citizens from Canada to Korea much the poorer.
The G20 recognised that another financial panic sparked by the failure of an Austrian or Swedish bank, say, with the contagion rapidly passing through the globalised financial system and markets could bring the twist to the recession that turns it into a slump. So they stumped up. Is the threat that real? Yes and most observers did regard it as a matter of if rather than when such a crisis would arrive, that is before the G20 took evasive action. The IMF warned as much, in unusually explicit terms, in its preparatory note for the meeting. Despite the ghoulishness of the fund's warnings, few gave them the attention they deserved, though the G20 leaders did take note. The IMF's staffers couldn't have been scarier if they'd dressed up in white sheets and haunted the ExCeL Centre.
The fund wrote: "Emerging and developing economies continue to face acute external financing pressures. This is particularly the case for emerging economy corporates facing large rollover requirements, threatening large-scale private sector defaults that could potentially undermine growth prospects. This in turn would worsen prospects in the advanced economies and trigger a vicious spiral." So there was more than one ghost at the Downing Street feast – Turkey, Ukraine, Serbia, Latvia, Romania and others are already zombie states, in the process of receiving IMF assistance to rescue their finances. More will surely follow. The IMF says that some Western banking systems are peculiarly exposed to the potential trauma. How big? Well, analysts at Capital Economics say that about $500bn (£335bn) of maturing debt is due to be rolled over this year, of which the $100bn emanating from Russia can be discounted, given her vast foreign currency reserves. So that leaves about $400bn, and if the losses on that debt spiralled to say 50 per cent that leaves an exposure of $200bn, some way less than the extra resources the IMF has been promised.
Who is threatened, precisely? Here again the IMF was unafraid to name those at risk: "the vulnerabilities of banks with substantial exposure to central and eastern Europe are raising perceptions of sovereign risk in advanced economies. Many banks' exposures are high relative to their home country's GDP. Austrian banks' exposures, for example, amount to about 75 per cent of Austria's GDP. Other countries with relatively high exposures include Switzerland, Belgium, the Netherlands and Sweden". (See chart) Note the two eurozone member states. After the downgrading of Irish, Spanish, Portuguese and Greek sovereign debt by the ratings agencies you can see the dangers for the credibility of the euro if those nations too see their ratings trashed. Apparently, in some sort of modern day economic version of the Austro-Hungarian empire, the Austrian banks have taken on the task of financially supporting their Danubian neighbours. The Swedes similarly decided to demonstrate their Nordic solidarity by doing business in Estonia, Latvia and Lithuania. No doubt their executives thought they were being good neighbours. It certainly came at a price.
But before we declare the crisis fully averted, we should also note what the G20 did not do for the east Europeans. They did not, it must be stressed, do anything concrete to lessen the risks of protectionism, to which these states are peculiarly vulnerable. Think of the champion exporting nations of the world, and how much they earn from the goods and services they sell abroad. The Germans are top among the older established large economies; 30 per cent of their income derives from exports. In Japan it is a surprisingly low 10 per cent: in the US and UK around 15 per cent. Now consider how much eastern Europe relies on exports. The Czechs' reliance on exports – 80 per cent of GDP – makes most countries look isolationist (see chart). The Hungarians and Poles are also heavily reliant on trade. So the 13 per cent decline in world trade predicted by the OECD will have a potentially devastating impact on those already bruised economies.
True, imports will also be depressed, but such a loss of foreign earnings is doubly unwelcome when Western banks are no longer willing to plug the gap. Look too at the countries of fast-growing Asia – with Malaysia's exports exceeding 100 per cent of GDP. Most of the east Asian powers have built up large foreign exchange reserves so their crisis will not be so severe. Even so, the protectionist polices increasingly being pursued by the G20 are the biggest single threat to these nations trade and, thus, to the immediate financial stability of the world. The G20 have promised the IMF the resources to rescue these economies; but avoiding protection might be the more rational and cheaper answer to the challenge of keeping Bulgaria and the others solvent.
Putin Says $90 Billion Stimulus Plan to Ease 'Very Hard' Year
Prime Minister Vladimir Putin said the government is planning 3 trillion rubles ($90 billion) of stimulus measures this year to help the economy survive a "very hard" year. About 1.4 trillion rubles of emergency spending will be included in this year’s budget, with the rest of the stimulus coming from tax breaks and central bank lending, Putin told lawmakers in the lower house of parliament today. "We managed to avoid the worst scenario," Putin said. "At the same time, 2009 will be very hard for us." The government abandoned the three-year budget it approved last year and has delayed passing the 2009 spending bill as it debates ways to minimize the first economic contraction in a decade. The government and central bank have already spent or pledged more than $150 billion in emergency funding since September to cope with the country’s worst financial crisis since the debt default and ruble devaluation of 1998.
"Could Russia have avoided the crisis or completely escaped its negative effects?" Putin said in the State Duma. "Of course not, it’s impossible, an illusion. The problems didn’t arise here and they weren’t our fault." Russia’s economy grew at the slowest pace in almost a decade in the fourth quarter as the global credit squeeze and falling commodities prices pushed the world’s biggest energy exporter to the brink of recession. Unemployment rose to a four- year high of 8.5 percent in February and Finance Minister Alexei Kudrin expects a "second wave of problems" as companies fail to repay loans. Russian began tapping its two sovereign wealth funds, which hold windfall oil revenue, last month to cover the first budget deficit in a decade. The stimulus package in the 2009 budget is identical to the planned deficit and equals 7.4 percent of projected gross domestic product. The measures include increased spending on the military and infrastructure and additional support for commercial banks.
The revised budget is aimed at "ensuring the optimal combination of anti-crisis measures and long-term plans," Putin said today. "So that we don’t just defend ourselves, but attack; so that we build a new, more effective economy," he said, adding that supporting uncompetitive industries would mean "throwing away" taxpayer money and "conserving yesterday’s economy." Putin’s address to parliament today was the first of its kind and gave lawmakers a chance to question the premier on his government’s handling of the crisis. President Dmitry Medvedev, who replaced Putin 10 months ago, said in November that the prime minister would start giving an annual performance report as part of an expansion of parliament’s "control functions." Putin, 56, heads the United Russia party that controls 315 seats in the 450-seat chamber. Another pro-government party, Fair Russia, has 38 seats, while the Liberal Democratic Party of Russia, which tends to support Putin, has 40. The opposition Communist Party holds the remaining 57 seats.
Insolvency vs. Liquidity, or Austrians vs. Keynesians
An economics debate of very great importance is surfacing. Is the government's economic rationale for bailing out the banks valid? If it is not, then the entire case for the bank bailouts fails.
On one side of the debate are Austrians using Austrian economics, on the other side are Keynesians using Keynesian economics. Gary North writes "The government, which is running a trillion-dollar deficit this fiscal year, is adding ever more debt to save the favored banks. It is buying the banks' insolvency in the name of future taxpayers." North sees the bank problem as insolvency. Concerning FED and government power to create money and "fix the crisis," Lew Rockwell writes "Good liquidity needs to be based on savings and capital, and it cannot be created by decree. Decrees end up creating money out of thin air, which ends up overriding market preferences and generating inflation. Everything officials do to fix the crisis ends up prolonging it." Rockwell sees the FED's provision of liquidity as impossible to reconcile with preferences, and with the attempt to provide it being counterproductive.
Observing a marked widening of credit spreads for many kinds of bonds, the Keynesians conclude that there is a liquidity problem in bank-held assets. Not accepting or applying either Austrian or finance theory, they fail to appreciate that the re-pricing of bonds from 2007 onwards is due to a higher price of insuring against recession and a correction to prior bubble prices. There is no liquidity problem in the credit markets.
Important new research supports the Austrians and suggests that the government's rationale for bank bailouts is invalid. This research is highly technical, but it uses mainstream, basic, and widely-accepted finance theory. It shows that the higher required returns (or higher spreads) on toxic credit assets are not unusual in light of increased stock market volatility and other financial factors. The authors
"...conclude that the pricing of investment-grade corporate credit has largely been consistent with that of the equity market when viewed through the structural model. In other words, from the context of the structural model, there should be nothing particularly surprising about the severe widening of credit spreads in the investment grade CDX [credit index] and the underlying cash bond credit spreads. Indeed the observed widening of the CDX spread is, if anything, somewhat low relative to what the structural model forecasts conditional on the market declining by 40% and its long-term volatility doubling. The out-of-sample results challenge the commonly advocated view that the pricing of credit securities has become distressed, and instead suggest that spreads on the synthetic securities are unusually low."
The pricing of the toxic assets of the banks is in line with the pricing of other risky assets. There is no evidence that prices of credit instruments are now reflecting fire sales or distress selling. The evidence, if anything, suggests that the prices are actually on the high side. This means that the liquidity rationale of the Keynesians has no basis in fact.
The findings are sure to be contested in the literature, as most research is. In the end, they will prove robust. They will hold up.
The debate on bank bailouts is broader than economics. It goes to a question of justice. Should one group, taxpayers, be forced to pay for the mistakes of another group, bankers? It goes to a question of freedom versus socialism and fascism. Should banks operate in a profit and loss system and bear the losses that they incur, or should they not, in which case the financial system becomes more socialist and fascist? Even before addressing these questions, if the Keynesian policy does not do what it is claimed, then in economic terms the Keynesian case falls.
The government and FED claim that the financial system lacks liquidity. They say that there is a market pricing defect or failure. This, they say, is why the bad loans (toxic assets) held by the banks are worth more than the prices that they are fetching in the market. These prices, they claim, are fire sale prices. The remedy, they call for and implement, is for the Treasury and FED to supply the banks with liquidity, i.e., bail them out. Thus, the government and the FED are directing trillions of taxpayer dollars to shore up weak banks by buying their bad loans rather than overseeing a judicial-like process of re-organizing the banks and cleaning out these loans in established bankruptcy-like procedures.
The Austrian position is that the financial system does not lack liquidity. The bad loans were overpriced to begin with, largely because the FED and government engineered a speculative bubble. The bubble burst. The loans were repriced in the market. The loans are now worth what they are bringing in the market. Thus, the government has no liquidity justification for bailing out the banks. The government's economic rationale has no merit. Many banks are insolvent. On the economic merits, they should be allowed to fail, not bailed out.
The study released by Coval, Jurek, and Stafford, appears here. It entirely supports the Austrian position. Their article examines the pricing of the bank toxic assets using the best available sophisticated financial techniques. It is done by researchers who are not Austrian economists. They unambiguously deny the government's explanation.
Professors Coval and Stafford work at Harvard Business School, both in the area of finance. Professor Jurek is at Princeton in the economics department, where he teaches finance. None of these researchers does research in or associates himself with Austrian economics. None of their 60 references is to Austrian work. Most are to technical finance articles. The article itself makes no mention of Austrian economics.
Are major banks insolvent, or does the financial system lack liquidity? This question is in some ways a no-brainer, because it is obvious that as home prices fall substantially, those banks with very high leverage and lots of mortgage loans made with high loan-to-equity ratios are wiped out. This happens because the equity (home values) behind the loans becomes less than the face value of the loans. Superior and superb analysts like Reggie Middleton recognized this very early and explained it at length (see here.) Furthermore, there are major pools of liquid assets in the economy, such as huge amounts in money-market funds.
Nevertheless, Keynesians argue that the bank assets are being underpriced due to illiquidity. They argue that the bank problem is a liquidity problem, and that this justifies bank bailouts. Austrians view the FED and government as having promoted the bank loans that went bad via inflation and other housing policies. These loans went sour and were revealed as mal-investments when the boom ended and housing prices fell. The problem is not liquidity but bad loans and, in many cases, bank insolvency. This argument then insolvency vs. liquidity has emerged as a key difference in the last two years between Austrians and Keynesians.
In the past two years, the Federal Reserve (FED) and two federal government administrations have been disbursing trillions of dollars to banks, insurance companies, other financial institutions, and industrial firms. During this period, officials have again and again insisted that the economy was mal-functioning by not providing liquidity to viable firms. They argued that this lack of liquidity made it necessary to provide government resources to these firms, paid for by taxpayers, and to flood the banking system with Federal Reserve dollars, which, by the way, constitute a very serious inflation of the currency. For example, Ben S. Bernanke, the FED chairman, made the liquidity argument at length on December 1, 2008. A few quotes:
"...to offset to the extent possible the effects of the crisis on credit conditions and the broader economy, the Federal Open Market Committee (FOMC) has aggressively eased monetary policy...The Committee's rapid monetary easing was not without risks. Some observers expressed concern at the time that these policies would stoke inflation... the second component of the Federal Reserve's strategy has been to support the functioning of credit markets and to reduce financial strains by providing liquidity to the private sector that is, by lending cash or its equivalent secured with relatively illiquid assets.
"To ensure that adequate liquidity is available, consistent with the central bank's traditional role as the liquidity provider of last resort, the Federal Reserve has taken a number of extraordinary steps...
"Judging the effectiveness of the Federal Reserve's liquidity programs is difficult. Obviously, they have not yet returned private credit markets to normal functioning. But I am confident that market functioning would have been more seriously impaired in the absence of our actions."
More recently, the U.S. Treasury on March 23, 2009, issued a white paper on the Geithner Public-Private Investment Program (PPIP). It says
"Troubled real estate-related assets, comprised of legacy loans and securities, are at the center of the problems currently impacting the U.S. financial system...The resulting need to reduce risk triggered a wide-scale deleveraging in these markets and led to fire sales. While fundamentals have surely deteriorated over the past 18-24 months, there is evidence that current prices for some legacy assets embed substantial liquidity discounts...This program should facilitate price discovery and should help, over time, to reduce the excessive liquidity discounts embedded in current legacy asset prices."
The notion of fire sales and liquidity discounts on the bad loans (called legacy loans) is firmly embedded in the rhetoric of U.S. policy makers. They are leaning heavily on this idea to sell the merits of their enormous wealth transfers to banks.
By contrast, the Austrians, as well as other financial analysts, have argued from the outset that the basic problem is not liquidity of the financial system. The argument on the Austrian side is that the banks and other financial institutions have not been in trouble because there is not enough liquidity to buy their loans. They are in trouble because they made bad loans that are worth far less than their values as carried on the banks' books. The banks are often insolvent. Furthermore, these banks do not want to and refuse to sell these loans at the low values to get the liquid funds they want. They are playing politics. They are getting a better deal (a) by shifting some of these loans to the FED in return for Treasury securities, and (b) getting bailed out by taxpayer funds.
In the Austrian interpretation, the banks have waited while the government came up with various devices to bail them out with other people's money. The latest is the Geithner PPIP that uses an FDIC guarantee to private parties to buy the bank loans at prices above market value. In the same vein, the accounting regulatory authority known as FASB has just allowed the banks leeway not to carry these bad loans at their market value by voiding the mark-to-market rule.
In April of 2008, Austrian economist Bill Anderson wrote:
"The Fed's latest move permitting reeling financial institutions to use near-worthless mortgage securities as collateral for about $200 billion in loans is yet another example of Bernanke's promise to 'provide liquidity' at every step, as though the real crisis here is the lack of play money in the nation's financial system...The simple issue is not lack of liquidity. It is the fact that billions make that trillions of dollars were malinvested in markets where the increasing values could not be sustained."
In October of 2008, I explained that the FED could not create liquidity in a market without destroying that market. For months, I have referred to the banking system as insolvent, such as here. More recently, I wrote that
"The entire thrust of FED policy as geared to liquidity is questionable. The banking problems center on bad bank loans and the reluctance of lenders to roll over short-term loans to banks whose assets are questionable. Like the TARP loans, the FED loans cannot resolve these problems. They have prolonged them by removing the incentive for banks, which otherwise would have been under greater market pressure, to resolve them. These loans have simply replaced private market capital that might have been supplied under more stringent conditions that would have forced the banks to face the problems and deal with them."
The government and FED story, which parrots the bankers' story, is that the banks do not really have such bad loans. As their story goes, the loans are really worth more than what they are fetching in the market. The market pricing reflects distress sales or fire sales. The loans should not be marked to market, because the market doesn't know what it's doing. The banks were not badly managed in making these loans. If only these loans are given time to work out, their true worth will be discovered. It behooves the taxpayers to tide the banks over. It behooves the FED to take on these loans even if it means inflating the currency.
Coval et al. frame the dispute as follows:
"The government's view is that a disappearance of liquidity has caused credit market prices to no longer reflect fundamentals...The main objective of this paper is to determine whether fire sales are required to explain prices currently observed in credit markets...A key distinction between the fire sale view and the other possibilities is that only the fire sale view requires that current prices are incorrect."
Their findings are as follows:
"The analysis of this paper suggests that recent credit market prices are actually highly consistent with fundamentals. A structural framework confirms that bonds and credit derivatives should have experienced a significant repricing in 2008 as the economic outlook darkened and volatility increased. The analysis also confirms that severe mispricing existed in the structured credit tranches prior to the crisis and that a large part of the dramatic rise in spreads has been the elimination of this mispricing."
Bank loan assets were overpriced during the boom. The risk premiums were too low. The overpricing of these long-term assets during the boom is consistent with the Austrian view of a speculative bubble. The market break in 2008 corrected the prices to levels consistent with the pricing of other risky assets. Coval et al. write
"In contrast to the main argument in favor of using government funds to help purchase structured credit securities, we find little evidence that suggests these markets are experiencing fire sales."
This implies that"...many major US banks are now legitimately insolvent. This insolvency can no longer be viewed as an artifact of bank assets being marked to artificially depressed prices coming out of an illiquid market. It means that bank assets are being fairly priced at valuations that sum to less than bank liabilities."
In turn, this means that propping up the prices of toxic assets by flooding the banking system and the banks with money (inflation) serves no economic purpose. But, importantly, it transfers massive wealth from taxpayers to banks:
"...any taxpayer dollars allocated to supporting these markets will simply transfer wealth to the current owners of these securities."
The readable and non-mathematical discussion that begins on p. 16 of their paper pulls no punches. They end up with a conclusion made many times by those adhering to the Austrian analysis:
"...policies that attempt to prevent a widespread mark-down in the value of credit-sensitive assets are likely to only delay and perhaps even worsen the day of reckoning."
It is good to see mainstream support for the Austrian position. While it is late in the day to stop these bailouts and reverse them, it is not too late to put an end to the myth that the government is saving the banks by improving market liquidity. If the banks end up being saved by taxpayer dollars, we should know that it is because of an enormous wealth transfer to banks, bank stockholders, and bank creditors. We should know that it is at the cost of inflation and the costs of debt and taxes imposed on American taxpayers now and into the far future.
Resist or Become Serfs
America is devolving into a third-world nation. And if we do not immediately halt our elite’s rapacious looting of the public treasury we will be left with trillions in debts, which can never be repaid, and widespread human misery which we will be helpless to ameliorate. Our anemic democracy will be replaced with a robust national police state. The elite will withdraw into heavily guarded gated communities where they will have access to security, goods and services that cannot be afforded by the rest of us. Tens of millions of people, brutally controlled, will live in perpetual poverty. This is the inevitable result of unchecked corporate capitalism. The stimulus and bailout plans are not about saving us. They are about saving them. We can resist, which means street protests, disruptions of the system and demonstrations, or become serfs.
We have been in a steady economic decline for decades. The Canadian political philosopher John Ralston Saul detailed this decline in his 1992 book “Voltaire’s Bastards: The Dictatorship of Reason in the West.” David Cay Johnston exposed the mirage and rot of American capitalism in “Free Lunch: How the Wealthiest Americans Enrich Themselves at Government Expense (and Stick You With the Bill),” and David C. Korten, in “When Corporations Rule the World” and “Agenda for a New Economy,” laid out corporate malfeasance and abuse. But our universities and mass media, entranced by power and naively believing that global capitalism was an unstoppable force of nature, rarely asked the right questions or gave a prominent voice to those who did. Our elites hid their incompetence and loss of control behind an arrogant facade of specialized jargon and obscure economic theories.
The lies employed to camouflage the economic decline are legion. President Ronald Reagan included 1.5 million U.S. Army, Navy, Air Force and Marine service personnel with the civilian work force to magically reduce the nation’s unemployment rate by 2 percent. President Bill Clinton decided that those who had given up looking for work, or those who wanted full-time jobs but could only find part-time employment, were no longer to be counted as unemployed. This trick disappeared some 5 million unemployed from the official unemployment rolls. If you work more than 21 hours a week—most low-wage workers at places like Wal-Mart average 28 hours a week—you are counted as employed, although your real wages put you below the poverty line. Our actual unemployment rate, when you include those who have stopped looking for work and those who can only find part-time jobs, is not 8.5 percent but 15 percent. A sixth of the country is now effectively unemployed. And we are shedding jobs at a faster rate than in the months after the 1929 crash.
The consumer price index, used by the government to measure inflation, is meaningless. To keep the official inflation figures low the government has been substituting basic products it once measured to check for inflation with ones that do not rise very much in price. This sleight of hand has kept the cost-of-living increases tied to the CPI artificially low. The New York Times’ consumer reporter, W.P. Dunleavy, wrote that her groceries now cost $587 a month, up from $400 a year earlier. This is a 40 percent increase. California economist John Williams, who runs an organization called Shadow Statistics, contends that if Washington still used the CPI measurements applied back in the 1970s, inflation would be 10 percent.
The corporate state, and the political and intellectual class that served the corporate state, constructed a financial and political system based on illusions. Corporations engaged in pyramid lending that created fictitious assets. These fictitious assets became collateral for more bank lending. The elite skimmed off hundreds of millions in bonuses, commissions and salaries from this fictitious wealth. Politicians, who dutifully served corporate interests rather than those of citizens, were showered with campaign contributions and given lucrative jobs when they left office. Universities, knowing it was not good business to challenge corporatism, muted any voices of conscience while they went begging for corporate donations and grants. Deceptive loans and credit card debt fueled the binges of a consumer society and hid falling wages and the loss of manufacturing jobs.
The Obama administration, rather than chart a new course, is intent on re-inflating the bubble. The trillions of dollars of government funds being spent to sustain these corrupt corporations could have renovated our economy. We could have saved tens of millions of Americans from poverty. The government could have, as consumer activist Ralph Nader has pointed out, started 10 new banks with $35 billion each and a 10-to-1 leverage to open credit markets. Vast, unimaginable sums are being placed into these dirty corporate hands without oversight. And they will use this money as they always have—to enrich themselves at our expense.
"You are going to see the biggest waste, fraud and abuse in American history," Nader warned when I asked about the bailouts. "Not only is it wrongly directed, not only does it deal with the perpetrators instead of the people who were victimized, but they don’t have a delivery system of any honesty and efficiency. The Justice Department is overwhelmed. It doesn’t have a tenth of the prosecutors, the investigators, the auditors, the attorneys needed to deal with the previous corporate crime wave before the bailout started last September. It is especially unable to deal with the rapacious ravaging of this new money by these corporate recipients. You can see it already. The corporations haven’t lent it. They have used some of it for acquisitions or to preserve their bonuses or their dividends. As long as they know they are not going to jail, and they don’t see many newspaper reports about their colleagues going to jail, they don’t care. It is total impunity. If they quit, they quit with a golden parachute. Even [General Motors CEO Rick] Wagoner is taking away $21 million."
There are a handful of former executives who have conceded that the bailouts are a waste. American International Group Inc.‘s former chairman, Maurice R. Greenberg, told the House Oversight and Government Reform Committee on Thursday that the effort to prop up the firm with $170 billion has “failed.” He said the company should be restructured. AIG, he said, would have been better off filing for Chapter 11 bankruptcy protection instead of seeking government help.
"These are signs of hyper decay," Nader said from his office in Washington. "You spend this kind of money and do not know if it will work." "Bankrupt corporate capitalism is on its way to bankrupting the socialism that is trying to save it," Nader added. "That is the end stage. If they no longer have socialism to save them then we are into feudalism. We are into private police, gated communities and serfs with a 21st century nomenclature."
We will not be able to raise another 3 or 4 trillion dollars, especially with our commitments now totaling some $12 trillion, to fix the mess. It was only a couple of months ago that our expenditures totaled $9 trillion. And it was not long ago that such profligate government spending was unthinkable. There was an $800 billion limit placed on the Federal Reserve a year ago. The economic stimulus and the bailouts will not bring back our casino capitalism. And as the meltdown shows no signs of abating, and the bailouts show no sign of working, the recklessness and desperation of our capitalist overlords have increased. The cost, to the working and middle class, is becoming unsustainable. The Fed reported in March that households lost $5.1 trillion, or 9 percent, of their wealth in the last three months of 2008, the most ever in a single quarter in the 57-year history of record keeping by the central bank. For the full year, household wealth dropped $11.1 trillion, or about 18 percent. These figures did not record the decline of investments in the stock market, which has probably erased trillions more in the country’s collective net worth.
The bullet to our head, inevitable if we do not radically alter course, will be sudden. We have been borrowing at the rate of more than $2 billion a day over the last 10 years, and at some point it has to stop. The moment China, the oil-rich states and other international investors stop buying treasury bonds the dollar will become junk. Inflation will rocket upward. We will become Weimar Germany. A furious and sustained backlash by a betrayed and angry populace, one unprepared intellectually and psychologically for collapse, will sweep aside the Democrats and most of the Republicans. A cabal of proto-fascist misfits, from Christian demagogues to simpletons like Sarah Palin to loudmouth talk show hosts, who we naively dismiss as buffoons, will find a following with promises of revenge and moral renewal. The elites, the ones with their Harvard Business School degrees and expensive vocabularies, will retreat into their sheltered enclaves of privilege and comfort. We will be left bereft and abandoned outside the gates.
Ilargi: Joe Bageant is rare American treasure, a writer who makes you take a new look at yourself. If you have the guts, that is.. His Deer Hunting with Jesus is the best book I read last year.
We've Let Corporations and Media Rob Our Souls -- It's Time to Do Something Meaningful
by Joe Bageant
The most chilling accomplishment of American capitalist culture is that we have commodified our own consciousness.
I just returned from several months in Central America. And the day I returned I had iguana eggs for breakfast, airline pretzels for lunch and a $7 shot of Jack Daniels for dinner at the Houston Airport, where I spent two hours listening to a Christian religious fanatic tell about Obama running a worldwide child porn ring out of the White House. Entering the country shoeless through airport homeland security, holding up my pants because they don't let old men wear suspenders through security, well, I knew I was back home in the land of the free.
Anyway, here I am with you good people asking myself the first logical question: What the hell is a redneck writer supposed to say to a prestigious school of psychology? Why of all places am I here? It is intimidating as hell. But as Janna Henning and Sharrod Taylor here have reassured me that all I need to do is talk about is what I write about. And what I write about is Americans, and why we think and behave the way we so. To do that here today I am forced to talk about three things -- corporations, television and human spirituality.
No matter how smart we may think we are, the larger world cannot and does not exist for most of us in this room, except through media and maybe through the shallow experience of tourism, or in the minority instance, we may know of it through higher education. The world however, is not a cultural history course, a National Geographic special or recreational destination. It is a real place with many fast developing disasters, economic and ecological collapse being just two. The more aware among us grasp that there is much at stake. Yet, even the most informed and educated Americans have cultural conditioning working against them round the clock.As psych students, most of you understand that there is no way you can escape being conditioned by your society, one way or another. You are as conditioned as any trained chicken in a carnival. So am I. When we go to the ATM machine and punch the buttons to make cash fall out, we are doing the same thing as the chickens that peck the colored buttons make corn drop from the feeder. You will not do a single thing today, tomorrow or the next day that you have not been generally indoctrinated and deeply conditioned to do -- mostly along class lines.
For instance, as university students, you are among the 20% or so of Americans indoctrinated and conditioned to be the administrating and operating class of the American Empire in some form or another. In the business of managing the other 75% in innumerable ways. Psychologists, teachers, lawyers, social workers, doctors, accountants, sociologists, mental health workers, clergy -- all are in the business of coordinating and managing the greater mass of working class citizenry by the Empire's approved methods, and toward the same end: Maximum profitability for a corporate based state. Yet it all seems so normal. Certainly the psychologists who have prescribed so much Prozac that it now shows up in the piss of penguins, saw what they did as necessary. And the doctors who enable the profitable blackmail practiced by the medical industries see it all as part of the most technologically advanced medical system in the world. And the teacher, who sees no problem with 20% of her fourth graders being on Ritalin, in the name of "appropriate behavior," is happy to have control of her classroom. None of these feel like dupes or pawns of a corporate state. It seems like just the way things are. Just modern American reality. Which is a corporate generated reality.
Given the financialization of all aspects of our culture and lives, even our so-called leisure time, it is not an exaggeration to say that true democracy is dead and a corporate financial state has now arrived. If you can get your head around that, it's not hard to see an ever merging global corporate system masquerading electronically and digitally as a nation called the United States. Or Japan for that matter. The corporation now animates us from within our very selves through management of the need hierarchy in goods and information. As students, even in such an enlightened institution as this one, you are being subjected to at least some sort of pedagogy of the corporate management of society for maximum profit. Unarguably your training will help many fellow human beings. But in the larger scheme of things, you are part of an institution, the American Psycho-socio-medical complex, and thus authorized to manage public consciousness, one person at a time. Remember that the entire pedagogy in which you are immersed is itself immersed in a corporate financial state. Even if some of what you do is alternative psychology, that is a reaction to the state, and therefore a result of it. It's still part of the financialization of consciousness. And, I might add that none you expect to work for nothing.
This financialization of our consciousness under American style capitalism has become all we know. That's why we fear its loss. Hence the bailouts of the thousands of "zombie banks," dead but still walking, thanks to the people's taxpayer offerings to the money god so that banks will not die. We believe that we dare not let corporations die. Corporations feed us. They entertain us. Corporations occupy one full half of our waking hours of our lives, through employment, either directly or indirectly. They heal us when we are sick. So it's easy to see why the corporations feel like a friendly benevolent entity in the larger American consciousness. Corporations are, of course, deathless and faceless machines, and have no soul or human emotions. That we look to them for so much makes us a corporate cult, and makes corporations a fetish of our culture. Yet to us, they are like the weather just there.
All of us live together in this corporate fetish cult. We agree upon and consent to its reality, just as the Aztecs agreed upon Quetzalcoatl and the lost people of Easter Island agreed that the great stone effigies of their remote island had significance.
We are not unique
Strangely enough, even as a population mass operating under unified corporate management machinery, most Americans believe they are unique individuals, significantly different from every other person around them. More than any other people I have met, Americans fear loss of uniqueness. Yet you and I are not unique in the least. Despite the American yada yada about individualism, you are not special. Nor am I. Just because we come from the manufacturer equipped with individual consciousness, does not make us the center of any unique world, private or public, material, intellectual or spiritual. The fact is, you will seldom if ever make any significant material or lifestyle choices of your own in your entire life. If you don't buy that house, someone else will. If you don't marry him, someone else will. If you don't become a psychologist, lawyer or a clergyman or a telemarketer, someone else will. We are all replaceable parts in the machinery of a capitalist economy. "Oh but we have unique feelings and emotions that are important," we say. Psychologists specialize in this notion. Yet I venture to say that none of us will ever feel an emotion that someone long dead has not felt, or some as yet unborn person will not feel. We are swimmers in an ancient rushing river of humanity. You, me, the people in my Central American village, the child in Bangladesh, and the millionaire frat boys who run our financial and governmental institutions with such adolescent carelessness. All of our lives will eventually be absorbed without leaving a trace.
Still though, for Western peoples in particular, there is the restless inner cultural need to differentiate our lives from the other swimmers. Most of us, especially as educated people in the Western World, will never beat that one. Fortunately though, we can meaningfully differentiate our lives (at least in the Western sense) in the way we choose to employ our consciousness. Which is to say, to own our consciousness. If we exercise enough personal courage, we can possess the freedom to discover real meaning and value in our all-too-brief lives. We either wake up to life, or we do not. We are either in charge of our own awareness or we let someone else manage it by default. That we have a choice is damned good news.
The bad news is that we nevertheless remain one of the most controlled peoples on the planet, especially regarding control of our consciousness, public and private. And the control is tightening. I know it doesn't feel like that to most Americans. But therein rests the proof. Everything feels normal; everybody else around us is doing the same things, so it must be OK. This is a sort of Stockholm Syndrome of the soul, in which the prisoner identifies with the values of his or her captors, which in our case is of course, the American corporate state and its manufactured popular culture.
When we feel that such a life is normal, even desirable, and we act accordingly, we become helpless. Learned helplessness. For instance, most Americans believe there is little they can do in personally dealing with the most important moral and material crises ever faced, both in America and across the planet, beginning with ecocide, war making, and the grotesque deformation of the democratic process we have settled for. Citizenship has been reduced to simple consumer group consciousness. Consequently, even though Americans are only six percent of the planet's population, we use 36% of the planet's resources. And we interpret that experience as normal and desirable and as evidence of being the most advanced nation in the world. Despite that our lives have been reduced to a mere marketing demographic. Let me digress for just a moment, to tell you about how life is outside the marketing demographic. I live much of the year in the Third World country of Belize, Central America, a nation so damned poor that our cash bounces. True, it ain't Zimbabwe, or the Sudan -- there are no dying people in the streets. But food security is easily the biggest problem and growing by the day.
Yet, despite our meager and diminishing resources down there, and much government corruption, people are still citizens, not marketing demographics, not yet anyway. Citizens who struggle toward a just society. They have made more progress than the United States in some respects. For instance, we have: A level of free medical care for the poor, though we lack much equipment and facilities. Maternity pay if either you or your spouse are employed. Retirement on Social Security at age 60. Worker rights, such as mandatory accrued severance pay for workers, even temporary workers. Most Belizeans own their homes outright, and all citizens are entitled to a free piece of land upon which to build one. Employment is scarce, and that has a down side: Many folks waste a lot of valuable time having sex , perhaps because they have too much time on their hands. The Jehovah's Witnesses missionaries are working hard to fix that problem. Anyway, American and Canadian tourists drive by in their rented SUVs and you can see by their expressions they are scared as hell of those bare footed black folks in the sand around them. Central America sure as hell ain't heaven. But lives there are not what we Americans are told about the Third World either. It's not a flyblown, dangerous place run by murdering drug lords, and full of miserable people. It's just a whole lot of very poor people trying to get by and make a decent society.
I mention these things because it's a good example of how North Americans live in a parallel universe in which they are conditioned to see everything in terms of consumer goods and "safety," as defined by police control. Conditioned to believe they have the best lives on the planet by every measure. So when they see our village and its veneer of "tropical grunge," they experience fear. Anything outside of the parameters of the cultural hallucination they call "the first world" represents fear and psychological free fall. Yet, even if we think in that sort of outdated terminology, first, second and Third World, and most Americans do, then America is a second world nation. We have no universal free health care (don't kid yourself about the plan underway), no guarantee of anything really, except competitive struggle with one another for work and money and career status, if you are one of those conditioned to think of your job and feudal debt enslavement as a "career." High infant mortality rates, abysmal educational scores, poor diet, no national public transportation system, crumbling infrastructure, a collapsed economy, even by our own definition we are a second world nation.
Learning to love shiny objects
But there is a shiny commercial skin that covers everything American, a thin layer of glossy throwaway technology, that leads the citizenry to believe otherwise. That slick commercial skin, the bright colored signs for Circuit City and The Gap (rest in peace), the clear plastic that covers every product from CDs to pre-cut vegetables, the friendly yellow and red wrapper on the burger inside its bright red paper box, the glossy branding of every item and experience. These things are the supposed tangible evidence that the slick conditioned illusion, the one I call The American Hologram, is indeed real. If it's bright and shiny and new, it must be better. Right? It's the complete opposite of tropical grunge. Last week when I got back to the States I took a shower in an American friend's new $30,000 gleaming remodeled bathroom. It felt like a surgical operating room experience, compared to wading into the Caribbean surf in the tropical dusk with a bar of soap. Like a parallel universe straight out of The Matrix.
Meat space versus the parallel universe
So how is it that we Americans came to live in such a parallel universe? How is it that we prefer such things as Facebook (don't get me wrong, I'm on Facebook too), and riding around the suburbs with an iPod plugged into our brain looking for fried chicken in a Styrofoam box? Why prefer these expensive earth destroying things over love and laughter with real people, and making real human music together with other human beings -- lifting our voices together, dancing and enjoying the world that was given to us? Absolutely for free. And the answer is this: We suffer under a mass national hallucination. Americans, regardless of income or social position, now live in a culture entirely perceived inside a self-referential media hologram of a nation and world that does not exist. Our national reality is staged and held together by media, chiefly movie and television images. We live in a "theater state."
In our theater state, we know the world through media productions which are edited and shaped to instruct us on how to look and behave and view the outside world. As in all staged productions and illusions, everyone we see is an actor. There are the television actors portraying what supposedly represents reality. Non-actors in Congress perform in front of the cameras, as the American empire's cultural machinery weaves and spins out our cultural mythology. Cultural myth production is an enormous industry in America. It is very similar to the national projects of pyramid-building in Egypt, or cathedral-building in medieval Europe. And in our obsession with violence and punishment, two characteristics of a consensual police state reality, we are certainly similar to prison camp building in Stalinist Russia. Actually, we're pretty good in that department too. Consider that one fourth of all the incarcerated people on earth are in U.S. prisons. U.S. citizens imprisoned by their own government.
Good guys and bad guys at the chariot races
In any case, the media culture's production of martyrs, good guys and bad guys, fallen heroes and concept outlaws, is not just big corporate business. It is the armature of our cultural behavior. It tells us who to fear (Middle Eastern terrorists, Mr. Chavez in Venezuela, and foreign made pharmaceuticals), who to scorn (again the same candidates, along with Brittney Spears for her lousy child rearing skills). Our daily news is the modern version of Roman coliseum shows. Elections are personality combat, chariot races, not examinations of solutions being offered. None are offered.
What are being offered are monkey models. Man as a social animal necessarily mimics the behavior he sees around him, whether it be by real people or moving images of people. This eye-to-brain to mimicry connection does not care. Consequently, we know how to act and what the things around us are because television and media tell us. Television is the software, the operating instructions for our society. Thus, social realism for us is a television commercial for the American lifestyle: what's new to wear, what to eat, who's cool (Obama), what and whom to fear (that perennial evil booger, Castro) or who to admire (Bill Gates, pure American genius at work). This societal media software tells us what music our digitized corporate complex is selling, but you never see images of ordinary families sitting around in the evenings making music together, or creating songs of their own based upon their own lives and from their own hearts. Because that music cannot be bought and sold, and is not profitable. I think about that when the children and their parents sing and dance on the sand in front of my shack in Central America. We Americans are not offered that choice.
So instead of a daily life in the flesh, belly to belly and soul to soul, lived out in the streets, and parks and public places, in love and the workplace, we get 40-inch televisions, YouTube, Cineplexes, and the myths spun out by Hollywood. Now for a national mythology to work, it has to be accessible to everyone all the time, it has to be all in one bundle. For example, in North Korea, it is wrapped up in a single man, Kim. In America, as we have said, it is the media and Hollywood in particular. Hollywood accommodates Imperial myths, melting pot myths, and hegemonic military masculinity myths, and glamour myths. It articulates our culture's social imaginary: "the prevailing images a society needs to project about itself in order to maintain certain features of its organization." And the features of our media mythology are terrifying when you think about them. As a writer friend says, It is watching "Man on Fire," with Denzel Washington's tragic pose and his truthful bullets, and his willingness to saw the fingers off of Mexicans to get the information on time to protect us from The Evil. It is the absorption of that electronic mythology that allowed us to co-sign the torture at Abu Ghraib.
Incidentally, speaking of Abu Ghraib, I am a friend of Ray Hardy, lawyer to Lynndie England, the leash girl of Abu Ghraib. He has copies of thousands of other, far more grisly Abu Ghraib photos. Believe me, they picked the gentlest ones to release. Anyway, when the media and government people in power made that selection, they were managing your consciousness. What you know and don't know. Keeping you calmer by withholding the truth. Rather like not upsetting little children so they will continue to quietly behave the way you want.
But, like children, the American public got bored with the subject of torture long ago, so we quit seeing the victims. Plenty of new evidence has been coming out for years since Lynndie's famous pics from Abu Ghraib. But the short American attention span, created by our rapid fire media, says, "Move on to the next hologram please. Whoa! Stop the remote. Nice butt shot of Sarah Palin there!"
The result is that Americans cannot achieve the cathexis we need. Cathexis is the ground zero psychic and emotional attachment to the world that cannot be argued. It is "beyond ideological challenge because it is called into existence affectively." Americans are conditioned to reject any affective attachment that does not have a happy ending. And in that, we remain mostly a nation of children. We never get to grow up. So we tell ourselves the Little Golden Book fairy tales -- that we are a great and compassionate people, and that we are personally innocent of any of our government's horrific crimes abroad. Guiltless as individuals. And we do remain innocent, in a sense, as long as we cannot see beyond the media hologram. But it is a terrible kind of self-inflicted innocence that can come to no good. We are a nation latch key kids babysat by an electronic hallucination, the national hologram.
The TV goldfish bowl
You may or may not watch much television, but the average American spends almost one-third of his or her waking life doing so. The neurological implications of this are so profound that they cannot even be comprehended in words, much less described by them. Television constitutes our reality in the same fashion that water constitutes the environment in a goldfish bowl. It's everywhere and affects everything, even when we are not watching it. Television regulates our national perceptions and our interior ideations of who we Americans are. It schedules our cultural illusions of choice. It pre-selects candidates in our elections. By the way, as much as I like Obama, I fully understand he is there because he was selected by the illusion producing machinery of television, and citizens under its influence. It is hard to underestimate the strength of these illusions. TV regulates holiday marketing opportunities and the national neurological seasons. It tells us, "It's Christmas! Time to shop!" Or "it's election season, time to vote." Or "it's football season, let us rally passions and buy beer and cheer." Or that America's major deity, "The Economy," is suffering badly. "Sacred temples on Wall Street make great sickness upon the land!" Or most ominous of all, "It's time to make war! Again."
It is fair to say that television and the American culture are the same thing. More than any other factor, it is the glue of society and the mediator of our experience. American culture is stone cold dead without it. If all the TVs in America went black, so would most of America's collective consciousness and knowledge. Because corporate media have replaced nearly all other previous forms of accumulated knowledge. Especially the ancient forms, such as contemplation of the natural world, study and care of the soul. And I do not mean soul in the religious sense either. I mean the deeper self, the one you go to sleep with every night. The media have colonized our inner lives like a virus. The virus is not going away. This commoditization of our human consciousness is probably the most astounding, most chilling accomplishment of American capitalist culture.
Escape from the zombie food court
Capitalist society however, can only survive by defying the laws of thermodynamics, through endlessly expanding growth, buying and using more of everything, every year and forever. Thus the cult of radical consumerism. It has been the deadliest cult of all because, so far, it has always triumphed, and has now spread around the earth and its nations. Why has it been so viral, so attractive to so many for so long? How did it come to grip the consciousness of so much of mankind, from Beijing to Bangladesh? Thuggish enforcement accounts for part of it, of course. But it has succeeded too because it requires no effort. No critical thinking. Not even literacy. Just passive consumption. That the easy addiction to consumption is probably hard wired into us. Every one of us will go right out this door tonight and continue to play out our lives as contributors to ecocide and global warming, mainly because it's easier. And besides, we are not offered any other real options, and we don't know any other way. Nor can we ever know any other way without making a great effort.
How to make that effort? (Assuming you even want to.) As we said, consuming images, goods or buying your identity at Old Navy or a retro clothing shop takes no real effort or thought. Just money. Text messaging your whereabouts at the mall may be a technological wonder, but you're still absolutely nowhere if you are just one more oral grooved organism in the food court at the mall moving in a swarm toward Quiznos. So how do you escape the programming of the food court, and, I might include, escape even those parts of this school that may serve more to indoctrinate than enlighten you? All pedagogy, even the best, is nevertheless about control. How does one escape such a total system?
In a word, service. Humble and thoughtful service to the world. It is heartening that we do have concerned Americans studying to alleviate the great suffering of so much of humanity. I have no proof of it, but it seems like earnest idealism is making a comeback since its decline following the optimistic 1960s. People and institutions such as this one are attempting to move American society forward again, heal us of our national sickness to the extent you can, after decades of regression, not to mention repression. Of course, to solve problems you must first identify them. Let me say here that one of the most profound things I have learned from the Third World, perhaps the only thing I have learned, and as psychologists you've surely heard it before, is this: The diagnosis is not the disease. Which is why our prescribed treatment never seems to work in places like Africa. Or even in the Bronx or South Philly.
Even our most well intentioned thinking and study of the afflictions of Africa and Latin America, American inner cities or Appalachia, suffers from hubris, because they are necessarily the products of western propertized and monetized thinking that cause the problem. So now we study our victims with great piety. And supposedly teach them solutions to the problems we continue to cause for them. Western people studying globalization's horrific effects, or rape in Africa, or world poverty are doing so under the assumption that such things can be dealt with through some social mechanistic means, through analysis and unbiased reason and rational value-free science. Or by a network of officially sanctioned agencies. For years I have wanted to see the opposite take place. To see well fed, educated Americans learn from the poor of the earth. Do what Gandhi advised, let the poor be the teachers. Go among them with nothing, one set of clothing and no money, keep your mouth shut, and do your best not to affect anything (which is impossible, I know. But you can come, as they say, "close enough for government work.")
Then just let the world happen to you, like they do in the so-called "passive societies," instead of trying to happen to it in typical Western fashion. Not trying to "improve" things. Maybe practice milpa agriculture with Mayans on the Guatemalan border, watching corn grow for three months. Fish in a lonely dugout, sun-up to sun-down, in the dying reefs of the Caribbean, with only a meal or two of fish as your reward. Do such things for a month or two. First you will experience boredom, then comes an internal psychic violence and anger, much like the experience of zazen, or sitting meditation, as the layers of your mind conditioning peel away. Don't quit, keep at it, endure it, to the end. And when you return you will find that deeply experiencing a non-conditioned reality changes things forever. What you have experienced will animate whatever intellectual life you have developed. Or negate much of it. But in serious, intelligent people, experiencing non-manufactured reality usually gives lifelong meaning and insight to the work. You will have experienced the eternal verities of the world and mankind at ground zero. And you will find that the healthy social structures our well intentioned Western minds seek are already inherent in the psyche of mankind, but imprisoned. And the startling realization that you and I are the unknowing captors.
In conclusion, I would point out that the high technological imprisonment of our consciousness has been fairly recent. There are still those among us who remember when it was not so entrapped. A few of us still know what it was like to experience non-manufactured realities -- life outside our mass produced kitsch culture. Particularly some aging Sixties types, who sought to pass through the doors of perception. Many made it through. But in my travels to places such as this one, I also meet a new breed of younger people, who get it completely. I meet them in the more advanced psychological venues such as Adler. And especially in the ecological movement. They seem to already know what it took me a lifetime to learn: that each of us is but one strand in the vast organic web of flesh and blood chlorophyll. All things and all beings are inextricably connected at the most profound level. Any physicist will confirm this. We are bound by its every wave and particle, all of us -- the lonely night clerk at Motel 6 and the leviathans of the deep, the sleeping grandmother in New Haven, Connecticut and the maimed Iraqi child in Kirkuk. It can be understood by anyone though, simply by owning one's own consciousness. And in doing so we find that ownership and domination are both temporary and meaningless. And that the animating spirit of the earth is real and within us and claimable.
The purpose of life is to know this. Einstein glimpsed it. Lao-Tzu knew it. So did St. Francis. But you and I are not supposed to. It would shatter the revered, digitized, super-sized, utterly meaningless hologram. The one that mesmerizes us, and mediates our every experience, but isolates us from universal humanness and its coursing energies. Such as love. Or mercy. Compassion. Existential pain. Hunger. Or the unmitigated joy of simply being alive one finds in children everywhere, even among the poorest. Most of the human race still lives in that realm. Blessed is the one who joins them. Because he or she learns that the truth is not relative, and that because the human mind seeks balance, social justice is not only inescapable in the long run, but inevitable. I won't be around for that, but on a clear day if I squint real hard I can see down that road ahead. And on that road I can see the long chain of decent human beings like yourselves walking toward the light. And for your very presence on this earth and in this room, I am grateful. Thank you all from the bottom of my heart.