Posted by: rotenochsen | October 16, 2008


Government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.��  —Ronald Reagan

In the US, the Federal Reserve and the Treasury Department are, contrary to free-market capitalistic logic, making all the major strategic decisions in the financial sector. Fear and panic have taken over as the beacon of world capitalism resorts to socialism and socialist measures of dealing with disaster. State intervention reigns supreme with the rescue of the American International Group (AIG) by the Bush administration. In other words, the US government has effectively nationalised banks, mortgage and lending institution and insurance companies.

By taking over AIG, and engineering the Bank of America’s takeover of Merrill Lynch, Washington acknowledged that socialism is the solution in times of crisis. “We have to pay for the sins of the past,” conceded Klaus Schwab, the organiser of the World Economic Forum.

Neo-liberal and laissez-faire measures have proved to be inadequate and incapable of securing effective regulatory mechanisms. The golden age of capitalism appears to be coming to an ignominious close.

Socialists and the champions of state intervention in the economy have been vindicated. This is the principal lesson for developing countries. Contrary to the supposed logic of capitalism, stagflation — the coexistence of low growth with high inflation — has taken hold of the economies of the North.

The Asian financial crisis of 1997-98 and the dubious role played by the International Monetary Fund (IMF) and the US Treasury Department comes to mind, with the deluge of foreign funds designed to garner the quickest and highest returns, i.e., the real estate and stock markets. Needless to say, stock and real estate prices are now plummeting, prompting the panicked withdrawal of funds, which of course merely makes things worse, wiping out billions of paper values. By 1997, the emerging markets of East Asia lost $100 billion in a couple of months. Capital flight not surprisingly induced an IMF bailout of foreign speculators. East Asia plunged into a deep recession in 1998. Only Malaysia, sensibly fixing its currency and taking firm government action, survived more or less unscathed.

This Wall Street bailout — yes, bailout, not “rescue” — is yet another boondoggle by the Congress, pulled out of bankers’ back pockets, and being enacted in an atmosphere of panic orchestrated and spread around the world to make sure it got passed ASAP. A bankers’ 9/11: implode a few bank towers to make sure the system as a whole survives.

As the dust settles, it is clear that nothing much about our casino capitalism is about to change at all. But what is to be expected from the likes of United States President George W Bush?
Joseph Stiglitz comments, “This ‘cure’ is another one of these rearrangements: by stripping out the bad assets from the banks and paying fair market value for them, the value of the banks will soar.” It is a ruse based on the “trickle-down economics” made famous by president Ronald Reagan. Throw enough money at Wall Street and a few drops are sure to hit Joe Public.

Legislation that shows a corner is being turned, a new leaf turned over, would require addressing issues such as the trade deficit, the very debt-based system of money creation — none of which got the time of day as legislators prepare to end their final working session this year.

Even Barack Obama would not be able to extricate himself from the spider’s web that is the US political system today, as his hearty support for the bill and support of President George W Bush show. Funny how Federal Reserve Chairman Ben Bernanke, accompanied by Secretary of the Treasury Henry Paulson, seemed to pull the $700 billion 450-page Emergency Economic Stabilisation Act out of his hat like a magician.

Was this plan in the wings, just waiting for its chance in the spotlight? And does it make sense to let the fox work out a plan to save the chickens as they come home to roost? Isn’t it more likely that he will ensure the long life of his progeny first, always keeping in mind that enough chickens must be kept alive to reproduce and feed the foxes? To use another metaphor, does it make sense to put the pilot who hit the iceberg in charge of the lifeboats?

Adam Smith writes in The Wealth of Nations : “The proposal of any new law or regulation of commerce which comes from this order [profit takers], ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but most suspicious attention. It comes from an order of men, whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it.”

Instead, it was railroaded through Congress and the Senate in a mood of hysteria, irresponsibly orchestrated by the very foxes who created the problem. The plan is intended to infuse the financial system with cash to “thaw” frozen credit markets (as if it is a natural process) and prevent a deep recession. Isn’t printing more dollars like pouring water through a sieve?

The program will send the federal deficit through the roof, even as it approaches record levels. The Treasury will have to borrow the money, requiring a bill increasing the government’s legal debt limit by — surprise — $700 billion, to $11.3trillion.

Then there is also “the Buffett model”: Warren Buffet put money into Goldman Sachs, getting preferred shares and warrants, i.e., both protection when prices slide and participation when they stabilise. This would have worked better as a way to save the banks and protect taxpayers, even if it didn’t address the underlying problems.

Two bright spots: insurance for deposit accounts was increased from $100,000 to $250,000 and pay for senior executives at firms participating in the programme was capped. CEO salaries have skyrocketed in the past two decades; for instance, Lehman Brothers’ Richard Fuld received $466 million from 1993-2008 and a whopping $62 million “golden parachute” exit pay on resigning last month, as his firm chalked up a $6 billion loss and declared bankruptcy. Executive “pay” does not include the de rigueur hefty stock options and perks.

The Treasury may now ban excessive salaries and bonuses, as well as these golden parachutes for executives at firms that receive direct infusions of federal cash. Companies that sell assets in government auctions will lose tax deductions if salaries for their top executives exceed $500,000 a year, and outgoing managers who take severance packages triple their annual salaries will be required to pay a 20 per cent excise tax. But over all it was still a bad deal, and the Congress is to blame,on both sides of the isle!
source:Investors Business Daily


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