US Crisis, A Better Idea

Some reasonable analyses of the economic downturn:

Doug Henwood’s great radio broadcasts are here. He takes issue with Dean Baker and pounds a little hard on the theme of We Must Bail the Rich Out Because If The Economic System Collapses The Poor Will Be Hurt the Most. I am not so convinced–not by repetition, not by vehemence. It’s a hypothesis. Henwood, whom I usually learn from and love as one of those rare American intellectuals…and who also has great musical taste, is nonetheless a far-too-cranky guy, and in the spirit of MR’s John Bellamy Foster, is overly prone to going after some of the other 8 or 9 leftist American (or Canadian in the case of Naomi Klein) intellectuals with a super-persnickety beating stick.

(Henwood: If you want the full materialist philosophical justification / a more intellectually-legitimate substitute for Klein’s “The Shock Doctrine” thesis, go back and read Elaine Scarry’s beautiful opus magnum “The Body in Pain.”)

I’m never crazy about the tactic of establishing legitimacy with liberals by cartoonizing and carping about other lefties; but I understand why folks feel sanctified in doing it. It aint easy bein’ red around here.

Anyway, I highly recommend Henwood’s intervju med Ogmundur Jonasson of the Althingi. I loves me some Scandinavian red-greens–they are rays of sanity piercing through the miasma. (Also, if you listen to the Jonasson interview, first check out Rebecca Solnit’s piece on neoliberal Icelandic complacency in the October (2008) issue of Harper’s. As Jonasson points out, these days Iceland is a metonym for all of us.)

Mark Weisbrot’s (September 2008) “The United States and the World: Where are We Headed?” is easy to read and it is not too long. It assesses not just the financial collapse, but the wider economic problems and political failures that are the result of hegemonic conservative ideology.

Robin Blackburn’s (March 2008) “The Subprime Crisis” is very long (40+ pages) and somewhat difficult to read. It could have been better organized, and it contains tons of financial jargon. It would have been nice if it had included appendices explaining financial theories, concepts, and definitions, and you might want to read it with a copy of Henwood’s “Wall Street” at your side. On the other side of the coin, Blackburn’s piece gives more detailed insider information into the financial collapse in particular. It also offers policy fixes at the end, and I’m always glad to see Rudolf Meidner’s economics invoked.

At MRZine, James K. Galbraith’s “A Bailout Plan We Don’t Need” provides progressive alternatives to the current rich men’s bailout proposals, as they threaten to simply motivate capital to fail again. Such policy poverty reflects the US’s failure and powerlessness to regulate and discipline capital, due to the power of politically-organized capital, the power of finance capital in the Anglo-American economic model, and conservatism’s ideological head lock on the US. Galbraith’s piece here is short.

At CEPR, Dean Baker’s “Progressive Conditions for A Bailout” is not too long, but it does assume some knowledge of finance. I haven’t screened it, but somebody recommended a primer to understand Baker’s prescriptions: “The Giant Pool of Money” by Ira Glass on “This American Life”. Normally, NPR makes my blood freeze and I want to throttle those propaganda pricks. But maybe this particular show is useful.

Baker also has written a piece questioning bailout, “Why Bail?” As for all those gambling-happy Peter Pans who hope that tax money will be dedicated to preventing housing prices from normalizing, the CEPR observes that 15% of Americans spend over half their income on housing costs.


According to MR Zine, “The Israel Project, an international non-profit formed to present a ‘more positive public face’ for Israel” is not only cooking up unverifiable survey data to show that Americans want to destroy Iran or at least support Israel in destroying Iran, the organization “is also currently engaged in a major TV and print ad campaign at the Democratic and Republican National Conventions focusing on the threat of a nuclear-armed Iran.” Jennifer Laszlo Mizrahi, founder and president of The Israel Project, urges Americans to believe that ‘The nuclear clock is ticking faster than the diplomatic clock and time is running out.'”

Resources on the US Terror War

Al Jezeera. News, world perspective.

Amnesty International. Human rights issues by country and issue; human rights programs; news.

Angry Arab News Service. News and analysis in blog format.

Chomsky.Info. Political analysis by Noam Chomsky, one of the US’s leading intellectuals. News analysis.

Congressional Quarterly. Information for US political leaders.

Democracy Now! News, analysis, and news correction.

The Dossier. Documentaries on the US’s Terror War.

Edward Said Archive. Archive of works (including political analysis) by the late leading American intellectual, Edward Said.

Empire Burlesque. News analysis and correction.

Documentaries (free). Includes free documentaries on war.

Glenn Greenwald. News analysis and correction.

Harpers. News analysis.

Human Rights Watch.

Information Clearinghouse. News.

J Street. Issues presented by progressive Jewish lobby in DC.

Lapham’s On-Air. Analysis radio.

Le Monde Diplomatique. News and analysis, world perspective.

Left Business Observer. Includes some war-related broadcasts.

National Security Archive. Access to a sampling of critical declassified records on issues including U.S. national security, foreign policy, diplomatic and military history, intelligence policy, and more.

New York Times. News and analysis.

John Pilger. News, analysis, documentaries.

Rightweb. Includes summary information on US pro-war groups.

Sourcewatch. News correction.

US Military Overseas Timeline.

Fannie Mae & Freddie Mac

Excerpt from Krugman, Paul. 2008. “Fannie, Freddie, and You.” New York Times, July 14.

In which Mr. Krugman explains that while “profits are privatized” and “losses are socialized” (the defining feature of American capitalism) in the federally-sponsored private mortgage companies Fannie Mae and Freddie Mac, in this particular case, and by the fluke of good timing, the government actually briefly REGULATED these companies, reducing the threat of capitalist irresponsibility.

“The case against Fannie and Freddie begins with their peculiar status: although they’re private companies with stockholders and profits, they’re “government-sponsored enterprises” established by federal law, which means that they receive special privileges.

The most important of these privileges is implicit: it’s the belief of investors that if Fannie and Freddie are threatened with failure, the federal government will come to their rescue.

This implicit guarantee means that profits are privatized but losses are socialized. If Fannie and Freddie do well, their stockholders reap the benefits, but if things go badly, Washington picks up the tab. Heads they win, tails we lose.

Such one-way bets can encourage the taking of bad risks, because the downside is someone else’s problem. The classic example of how this can happen is the savings-and-loan crisis of the 1980s: S.& L. owners offered high interest rates to attract lots of federally insured deposits, then essentially gambled with the money. When many of their bets went bad, the feds ended up holding the bag. The eventual cleanup cost taxpayers more than $100 billion.

But here’s the thing: Fannie and Freddie had nothing to do with the explosion of high-risk lending a few years ago, an explosion that dwarfed the S.& L. fiasco. In fact, Fannie and Freddie, after growing rapidly in the 1990s, largely faded from the scene during the height of the housing bubble.

Partly that’s because regulators, responding to accounting scandals at the companies, placed temporary restraints on both Fannie and Freddie that curtailed their lending just as housing prices were really taking off. Also, they didn’t do any subprime lending, because they can’t: the definition of a subprime loan is precisely a loan that doesn’t meet the requirement, imposed by law, that Fannie and Freddie buy only mortgages issued to borrowers who made substantial down payments and carefully documented their income.”

Sliding Into an Extraordinary Recession

New York Times
January 23, 2008
Worries That the Good Times Were Mostly a Mirage

So, how bad could this get?

Until a few months ago, it was accepted wisdom that the American economy functioned far more smoothly than in the past. Economic expansions lasted longer, and recessions were both shorter and milder. Inflation had been tamed. The spreading of financial risk, across institutions and around the world, had reduced the odds of a crisis.

Back in 2004, Ben Bernanke, then a Federal Reserve governor, borrowed a phrase from an academic research paper to give these happy developments a name: “the great moderation.”

These days, though, the great moderation isn’t looking quite so great — or so moderate.

The recent financial turmoil has many causes, but they are tied to a basic fear that some of the economic successes of the last generation may yet turn out to be a mirage. That helps explain why problems in the American subprime mortgage market could have spread so quickly through the world’s financial system. On Tuesday, Mr. Bernanke, who is now the Fed chairman, presided over the steepest one-day interest rate cut in the central bank’s history.

The great moderation now seems to have depended — in part — on a huge speculative bubble, first in stocks and then real estate, that hid the economy’s rough edges. Everyone from first-time home buyers to Wall Street chief executives made bets they did not fully understand, and then spent money as if those bets couldn’t go bad. For the past 16 years, American consumers have increased their overall spending every single quarter, which is almost twice as long as any previous streak.

Now, some worry, comes the payback. Martin Feldstein, the éminence grise of Republican economists, says he is concerned that the economy “could slip into a recession and that the recession could be a long, deep, severe one.” In Monday’s Democratic presidential debate, Barack Obama made the same argument: “We could be sliding into an extraordinary recession,” he said.

In the next breath, of course, Mr. Obama suggested that the right policies might still help, while Mr. Feldstein has said that a recession isn’t yet a sure thing. And much of the great moderation is real. Computers allow managers to run their businesses more efficiently and avoid some of the wild swings. The Fed and central banks in other countries have learned from their past mistakes.

But a recession is now more likely than not. It may well have started already. The Philadelphia Fed reported Tuesday that the economy shrank in 23 states last month, including Ohio, Missouri and Arizona, and was stagnant in seven others. California and Florida, with their plunging home values, may soon join the recession list.

The bigger question is how severe the recession will be if it does come to pass. The last two, in 1990-1 and 2001, have been rather mild, which is a crucial part of the great moderation mystique. There are three reasons, though, to think the next recession may not be.

First, Wall Street hasn’t yet come clean. Even after last week, when JPMorgan Chase and Wells Fargo announced big losses in their consumer credit businesses, financial service firms have still probably gone public with less than half of their mortgage-related losses, according to Moody’s They’re not being dishonest; they just haven’t untangled all of their complex investments.

“Part of the big uncertainty,” Raghuram G. Rajan, former chief economist at the International Monetary Fund, said, “is where the bodies are buried.”

As Mr. Rajan pointed out, this situation is more severe than the crisis involving Long Term Capital Management in the late 1990s. That was a case in which a limited set of bad investments, largely at one firm, had the potential to drive down the value of other firms’ holdings in the short term. Those firms then might have stopped lending money because they no longer had the capital to do so. But their own balance sheets were largely healthy.

This time, the firms are facing real losses, which will almost certainly curtail lending, and economic growth, this year.

The second problem is that real estate and stocks remain fairly expensive. This shows just how big the bubbles were: despite the recent declines, stock prices and home values have still not returned to historical norms.

David Rosenberg, a Merrill Lynch economist, says that the stock market is overvalued by 10 percent relative to corporate earnings and interest rates. And remember that stocks usually fall more than they should during a bear market, much as they rise more than they should during a bull market.

The situation with house prices looks worse. Until 2000, the relationship between house prices and rents remained fairly steady. The same could be said about house prices relative to household incomes and mortgage rates. But the boom of the last decade changed this entirely.

For prices to return to the old norm, they would still need to fall 30 percent across much of Florida, California and the Southwest and about 20 percent in the Northeast. This could happen quickly, or prices could remain stagnant for years while incomes and rents caught up.

Cheaper stocks and houses will benefit many people — namely those who don’t yet own a home and still have most of their 401(k) investing in front of them. But the price declines will also lead directly to the third big economic problem.

Consumer spending kept on rising for the last 16 years largely because families tapped into their newfound wealth, often taking out loans to supplement their income. This increase in debt — as a recent study co-written by the vice chairman of the Fed dryly put it — “is not likely to be repeated.” So just as rising asset values cushioned the last two downturns, falling values could aggravate the next one.

“What people have done is make an assumption that these prices could continue rising at the rate they had been,” said Ed McKelvey, an economist at Goldman Sachs. “And that does seem to have been an unreasonable assumption.”

Certainly, there are some forces to push in the other direction. Outside of Wall Street, corporate balance sheets remain remarkably strong, while the recent fall in the dollar will help American companies to sell more goods overseas.

But it’s hard not to believe that the economy will pay a price for the speculative binge of the last two decades, either by going through a tough recession or an extended period of disappointing growth. As is already happening, banks will become less willing to lend money, households will become less willing to spend money they don’t have and investors will become more alert to risk.

The Narrow World of Neoliberalism

ALAN GREENSPAN: Well, I stated that I’m a libertarian Republican, which means I believe in a series of issues, such as smaller government, constraint on budget deficits, free markets, globalization, and a whole series of other things, including welfare reform. And as you may remember, Bill Clinton was pretty much in the same—was doing much that same agenda. And so, I got to consider him as someone—as he described it, we were both an odd couple, because he is a centrist Democrat. And that’s not all that far from libertarian Republicanism.

September 24, 2007. Greenspan interviewed by Amy Goodman on Democracy Now.


The transcript of this interview is from “Alan Greenspan vs. Naomi Klein on the Iraq War, Bush’s Tax Cuts, Economic Populism, Crony Capitalism and More.” Hit the “Narrow World of Neoliberalism” title above to get to the Democracy Now page. It shows how unused Greenspan is to being confronted by real journalists. He flops terribly in efforts to misdirect, evade, and dissimulate (lame efforts that would work with a teevee reporter or newspaper reporter), because Goodman and Klein have done their research. Check out how he tries to present an alternate case for “pre-emptively” invading Iraq–that both avoids the WMD excuse debacle and mentioning Israel’s imperial interests in the region–but manages to promote violating international law. Check out how he tries to pretend his Republican libertarianism has had nothing to do with crony capitalism graft: “Ohh, well now that you confront me with the evidence, let me stutter on here for awhile…”

A Nation on Borrowed Time

Mike Whitney (11/12/07) has an article on the elite-engineered US economic situation at

Basically, after we strip away all the Experts’ guano layers of justification, it turns out that the reason why we have allocated absolute power to financial capital is not because it’s a good idea, but rather because they had considerable power in the capitalist system and a lot of people could make a living off of doing them favors. For a while. We are such freakin disaster monkeys.

Bye bye, carkeys. Hello, sparkles and flies. I keep them they’re mine.