by Alex Evans | Sep 23, 2008 | Influence and networks, UK
Listening to Gordon Brown’s speech today, Philip Stephens notes that “Mr Brown kept his audience in its comfort zone”:
Though he set out the challenges Britain faces in a period of tumultuous global upheaval, Mr Brown did little to challenge his audience’s preconception that the present mess was all the fault of greedy capitalists.
Reading that brought to mind another Labour Conference speech in times of global upheaval: Tony Blair’s back in 2001. Remember this?
This is a moment to seize. The kaleidoscope has been shaken. The pieces are in flux. Soon they will settle again. Before they do, let us re-order this world around us.
I re-read the whole thing this afternoon, and was struck by a) its brilliance, b) its insight, c) how it soars compared to Brown’s speech today and d) the extent to which – in retrospect, with all that’s happened since – it shines with an eerie messianic fervour. It’s well worth another look: full text below the jump.
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by Alex Evans | Sep 23, 2008 | Global system, North America
Via Steve Clemons, this excerpt from a speech by Leo Hindery – an Obama economic adviser and Chair of the New America Foundation’s Smart Globalisation Initiative – which is due to be delivered later today at a conference organised by NAF:
As we all know, the Bush administration is asking Congress to let the government buy $700 billion in troubled mortgages, which would raise the statutory limit on the national debt to $11.3 trillion from $10.6 trillion. This $700 billion is over and above the $85 billion already committed to AIG, the $29 billion related to Bear Stearns, and the very conservative $25 billion associated with the bailouts of Fannie Mae and Freddie Mac.
The solutions being proposed are the most expensive combined bailout in the nation’s history and will sharply curtail the ability of the next president to push for tax cuts or new spending. And yet I believe they are not nearly enough, since they do not adequately cover the exposure associated with leveraged loans and, especially, the credit-default swaps market which has ballooned to a nearly unimaginable $45.5 trillion, from $900 billion in 2001.
This credit-default swaps market, which was developed by financiers who hired the best lobbyists they could to keep regulators away, is essentially nothing more than insurance on debt, but because there are now many more credit-default swaps outstanding than there are bonds for them to cover, it could potentially be a black hole of distress at least as large as the sub-prime mortgage crisis. Tens of trillions of dollars ago these swaps became nothing more than a way to gamble with almost no money down.
Alan Blinder suggested over the weekend that “the root cause of all of [our credit problems] is declining house prices”, and he is correct – but his observation ignores the fact that to this particular root ball were grafted a lot of other financial instruments which have together grown into one heck of a tree.
Senators Kent Conrad, Byron Dorgan and Richard Shelby of Alabama, and others, were more right than wrong when they said last week that more than likely “we’re talking about a trillion dollars.”
by Alex Evans | Sep 22, 2008 | Africa, Conflict and security, Influence and networks
Yet another ship was hijacked by pirates off the coast of Somalia on Sunday, bringing the total of ships seized there to over 30 this year alone. The current tally is that up to 200 seafarers are being held hostage for ransom.
The US Navy has said bluntly that it can’t guarantee security and that “shipping companies must take measures to defend their vessels and their crews”; shipowners, for their part, are urging EU governments to “recognise the seriousness of the situation and to urgently deploy more warships to the Gulf of Aden and to the seas off the coast of Somalia with the required rules of engagement to enable direct action to be taken against the pirates”. But as US vice-admiral Bill Gortney notes, “this is a problem that starts ashore and requires an international solution. We made this clear at the outset — our efforts cannot guarantee safety in the region”.
In other words, failed states – right? Well, perhaps not entirely. After all, “failed” implies that some kind of effort was underway in the first place, whereas the reality is that for some at least, the absence of formal state control was always the design. Peter Lamborn Wilson notes that:
The sea-rovers and Corsairs of the 18th century created an “information network” that spanned the globe: primitive and devoted primarily to grim business, the net nevertheless functioned admirably. Scattered throughout the net were islands, remote hideouts where ships could be watered and provisioned, booty traded for luxuries and necessities. Some of these islands supported “intentional communities,” whole mini-societies living consciously outside the law and determined to keep it up, even if only for a short but merry life.
Lamborn Wilson is the creator of the idea of Temporary Autonomous Zones, which are more or less what they say on the tin: places where, at least for a while, a zone outside of state control is created. Now while one permutation of TAZs sees them as bases for crime, terrorism and so forth, Lamborn – an anarchistically minded fellow – is as a rule positively enthusiastic about TAZs, as indeed are his libertarian followers (hence the popularity of the concept in rave culture, where free parties can be seen as TAZs).
But where the idea of TAZs really starts to get interesting is when you watch the counter-insurgency / 4GW crowd start to play with it.
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by Alex Evans | Sep 22, 2008 | Global system, North America, UK
I’m not even going to try to form any kind of overview while things are moving so fast, but here are a few observations in no particular order:
First, just look at what happens to US indebtedness if the Paulson proposal proceeds. Alan Beattie moots the prospect of “the first trillion dollar deficit in history”. Today, the US federal government has $5,400 in debt, and according to the Congressional Budget Office planned to run a deficit next year of $438bn (3% of GDP). Now the Paulson plan is for $700bn over 2 years, meaning that next year’s federal deficit could easily top the $1,000bn mark. Former IMF chief economist Ken Rogoff concludes: “I can’t imagine this crisis is going to end up costing the government less than six to seven per cent of GDP.” Liam Halligan observes that “default by the US government is no longer unthinkable”. [Incidentally, UK government borrowing also looks set to double next year, to £90bn rather than £43bn as planned.]
Push-back against the Paulson plan is starting in earnest. Paul Krugman: “I hate to say this, but looking at the plan as leaked, I have to say no deal. Not unless Treasury explains, very clearly, why this is supposed to work, other than through having taxpayers pay premium prices for lousy assets.” He continues:
Here’s the thing: historically, financial system rescues have involved seizing the troubled institutions and guaranteeing their debts; only after that did the government try to repackage and sell their assets. The feds took over S&Ls first, protecting their depositors, then transferred their bad assets to the RTC. The Swedes took over troubled banks, again protecting their depositors, before transferring their assets to their equivalent institutions.
The Treasury plan, by contrast, looks like an attempt to restore confidence in the financial system — that is, convince creditors of troubled institutions that everything’s OK — simply by buying assets off these institutions. This will only work if the prices Treasury pays are much higher than current market prices; that, in turn, can only be true either if this is mainly a liquidity problem — which seems doubtful — or if Treasury is going to be paying a huge premium, in effect throwing taxpayers’ money at the financial world.
And there’s no quid pro quo here — nothing that gives taxpayers a stake in the upside, nothing that ensures that the money is used to stabilize the system rather than reward the undeserving.
Sebastian Mallaby agrees: “The plan is being marketed under false pretenses. Supporters have invoked the shining success of the Resolution Trust Corporation as justification and precedent. But the RTC, which was created in 1989 to clean up the wreckage of the savings-and-loan crisis, bears little resemblance to what is being contemplated now. The RTC collected and eventually sold off loans made by thrifts that had gone bust. The administration proposes to buy up bad loans before the lenders go bust.”
But as Gillian Tett notes this morning, the flipside problem is that if the Paulson plan doesn’t go ahead, it’s not clear what the alternatives are: “the unpalatable truth is that if this latest salvo does not calm the panic, then Mr Paulson simply does not have many more bazookas left in his arsenal … recent events have left market participants so exhausted that nerves are stretched to breaking point. That creates the risk that euphoria could flip to terror again. And while the equity markets might have ended last week in a jubilant mood, in the arena where it matters most – the murky bowels of the credit and debt world – terror remains widespread”.
Nouriel Roubini, meanwhile, reckons that in the wake of the first four elements of the crisis (collapse of the Structured Investment Vehicle system; a run on big US broker-dealers like Bear Stearns, Lehman and Merrill Lynch; the collapse of other leveraged institutions like Fannie Mae, Freddie Mac and AIG; and panic in the money markets), “the next stage will be a run on thousands of highly leveraged hedge funds“.
One last thought: the intellectual bankruptcy of the left in all this. A confident, forward-looking centre left would right now be moving forward into the breathtaking amounts of political space suddenly opening up as the ‘liberal capital markets’ storyline collapses. (Let’s remind ourselves of Milton Friedman’s sage advice once again:
Only a crisis — actual or perceived — produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes politically inevitable…)
But instead, the left is (as usual) unable to move beyond the politics of whingeing, offering its usual lame messages about “fat cats” and so on – which is why, as Gordon Brown seeks to play to the gallery at Labour Conference this week, his key lines lead on “irresponsible” City bonuses. Sure, let’s stuff the City and Wall Street; but could we focus on sorting out the mess first?
PS: great aside from Niall Ferguson in the FT –
The bad news is that emerging markets tend to experience more violent financial reactions to reductions in growth … Russia, having shot itself in the foot with its 1930s-style escapade in Georgia, is bottom of the heap – with its stock markets forced to close temporarily last week in order to avoid a complete collapse. (So much for “the return of history”. Memo to Vladimir Putin, Russian prime minister: when Hitler invaded neighbouring countries, he had capital controls in place.)
by Alex Evans | Sep 17, 2008 | East Asia and Pacific, Global system, North America
I’m out in China, where I’ve just spent a couple of weeks visiting Hong Kong, Beijing and the rural province of Yunnan. Some observations on China and sustainable development to follow in a separate post, but for now let’s focus on the big news of the week: the latest burst of financial meltdown. Lehman Brothers have filed for bankruptcy protection; Merrill Lynch have been bought out; the US Treasury has bailed out Fannie Mae, Freddie Mac and today AIG; every time I look at my blackberry, some new catastrophe seems to be unfolding.
As I’ve been chugging around China, I’ve been re-reading James Kynge’s excellent China Shakes the World – and noting with interest what Kynge has to say about the issue of bad debts. For example:
The ‘big four’ banks, which control more than half the country’s deposits and loans, are all owned by the state … The central bank, which regulates the banking industry alongside the recently established China Banking Regulatory Commission, has a track record of bailing out the ‘big four’ every time they need it … If the various cash infusions and bad debt relief for the state banks over the last five years are added together, it transpires that China has allocated nearly $250 billion to clean up its banking system.
But now fast-forward to today, a mere couple of years after Kynge’s words were first published. Fannie and Freddie have already been bailed out – a move which, according to Nouriel Roubini, at a stroke injected around $200 billion of capital into the two of them, and took on $6 trillion of debt. As Roubini concludes,
The nationalization of Fannie and Freddie is the most radical regime change in global economic and financial affairs in decades. For the last twenty years after the collapse of the USSR, the fall of the Iron Curtain and the economic reforms in China and other emerging market economies the world economy has moved away from state ownership of the economy and towards privatization of previously stated owned enterprises. This trend was aggressively supported the United States that preached right and left the benefits of free markets and free private enterprise.
Today instead the US has performed the greatest nationalization in the history of humanity. By nationalizing Fannie and Freddie the US has increased its public assets by almost $6 trillion and has increased its public debt/liabilities by another $6 trillion. The US has also turned itself into the largest government-owned hedge fund in the world: by injecting a likely $200 billion of capital into Fannie and Freddie and taking on almost $6 trillion of liabilities of such GSEs the US has also undertaken the biggest and most levered LBO (“leveraged buy-out”) in human history that has a debt to equity ratio of 30 ($6,000 billion of debt against $200 billion of equity).
So now Comrades Bush, Paulson and Bernanke (as originally nicknamed by Willem Buiter) have now turned the USA into the USSRA (the United Socialist State Republic of America). Socialism is indeed alive and well in America; but this is socialism for the rich, the well connected and Wall Street. A socialism where profits are privatized and losses are socialized with the US tax-payer being charged the bill…
And that was before today’s news that the US Treasury is taking on AIG as well, to the tune of another $85 billion, which (as the BBC observes) is “viewed by some as the most radical intervention in private business in [the Fed’s] history”. For Roubini, this is just confirmation of the worst fears:
At least in the case of Fannie and Freddie these two institutions were semi-public to begin with as they were Government Sponsored Enterprises (GSEs). Now we get instead the first pure case of a fully private company, actually the largest insurance company in the world, being nationalized. So the US government is now the largerst insurance company in the world. So the transformation of the USA into the USSRA goes a step further.
From where I’m currently sitting in Hong Kong, it’s hard not to cast your mind back a decade to 1997/8 and the South East Asian economic crisis, when the Washington Consensus still prevailed and liberalisation was the war cry. As Steely Dan sagely put it: “those days are gone for ever; over a long time ago…”
