The new Brahmins
By Chan Akya
March 29 2008
Imagine if you fancied the roulette tables in Macau, but had a nasty habit of
losing US$10,000 every time you landed there. Most sane people would get some
kind of psychiatric treatment that prevented them from ever getting to Macau
under those circumstances. Supposing though that a rich uncle compensated you
for all your losses in Macau and also paid for your travel and hotel stay. Are
you likely to return to Macau after losing a whopper this week, or not?
Sitting back and absorbing the sheer scale of fraud that was perpetuated on the
global financial system last week in the name of a putative rescue of Bear
Stearns, I wrote "When trust goes down the drain", which laid out the sound
principles of central banking as enunciated by Walter Bagehot that have been
serially violated in this crisis. Even as most left-leaning commentators brush
off the concerns of the so-called "moral hazard" crowd of which this author is
a card-carrying member, the fact of the matter is that we are now in the middle
of a transformation.
Ruminating a bit more in the morass though, especially after the eager buyer
upped his price fivefold this week, it became apparent that the Ben Bernanke
Fed has merely emulated its alleged bete noire, namely the Bank of Japan, whose
failed policies in the 1990s caused a lost decade of growth for the country and
more importantly ensured that its demographic nightmare simply accelerated.
So "kudos" indeed to the Fed for achieving in a couple of months what the
Soviet Union could not muster in its seven decades of existence - namely to
destroy global market capitalism, chiefly through the demise of the Anglo-Saxon
system.
In rescuing Bear Stearns, the Fed was in good company, following the Bank of
England and the European Central Bank (ECB) in bailing out large financial
institution using taxpayers' money that they strictly did not have to account
for to anyone. Yes, the details are somewhat different, namely that
shareholders got different outcomes in each case and the level of oversight
responsibility was different, but the inescapable conclusion from all this is
that Group of Seven (G7)central bankers are utterly corrupt besides being
terrifyingly incompetent.
As I wrote in a previous article ("Euro-trash, Asia Times Online, March 11,
2008), the ECB sowed the seeds for its own policy inflexibility by blithely
rescuing every bank that came begging on its knees. The fractured nature of the
European economy, its lack of service and system integration and mind-numbing
political details all allowed the mandarins of the ECB to quietly pass favors
to their constituent banks.
While on the above-referenced article, a reader wrote in to complain that I had
merely misunderstood the superiority of Europe, and invited me to Sweden, which
is apparently the Mecca of something called market socialism. As it turns out,
the region boasts the worst record of banking losses and subsequent taxpayer
rescues, with an average of 18% of gross domestic product following the 1991-92
bust.
Since the government provided assistance without taking over equity capital,
tax burdens needed to be higher for longer for these countries to pay for the
mess. Thus, people's natural tendency to grow and become richer was sacrificed
at the altar of this demon called market socialism. The net result is that
Scandinavia boasts the highest incidence of suicides in the Western world -
yes, I am sure to tell the Asia Times Online reader to expect me to begin
living in this paradise soon enough.
To think that the original models for the Fed actions from the middle of last
year were set in the Scandinavian and Japanese crises of the last decade only
makes us more puzzled, rather than less. The aftermath of those crises was to
stunt the economic growth of both regions (Scandinavia and Japan) once specific
extraneous influences are removed from the picture - for example, the rise in
oil prices that benefited Norway and the technology bubble that helped a part
of the Japanese economy in the 1990s.
The Japanese merged a bunch of banks together but refused to take the necessary
steps that could have made the combined banks more efficient in terms of
utilizing scarce resources such as capital and good people. Scandinavian banks
attempted to split the "good" and "bad" banks, but eventually put everything
back together without any serious change in industrial structure.
Meanwhile, to absorb the costs of the rescues, the governments had to issue
billions in new debt, which had to be bought by the rescued banks at
artificially low yields because the governments would have themselves been
bankrupted by higher charges.
As the system's decline was arrested with the strong government backing, banks
found themselves in new problem areas - namely that they did not know what to
do with the billions in deposits that were sitting in their books. In the case
of Japan, this proved to be the main reason for a slew of misadventures ranging
from copper trading to the current bout of CDO (collateralized debt
obligations) investment losses.
Super-caste
For all the protests of the Fed and its lackeys on what was done last week, it
seems unavoidable that banks will not emerge as protected species, a
super-caste of companies, in the new economic environment. The Fed, along with
other G7 central banks, has clearly demonstrated that it will not allow any
financial company to go bust.
Having rescued a financial institution that was not even under its regulatory
purview, it seems only a matter of time before global central banks start
rescuing other frontiers of capitalism, namely finance companies, insurance
firms and investment management outfits. Thus, everything in the financial
world becomes superior to all else in the system, for the sake of national
cohesion or any other communist-era slogan that you care to mumble.
The banks are in turn likely to take more risk with their capital going
forward, not less, now that they know that the central banks can be counted on
to write them checks in perpetuity. Indeed, as Bear was merged into a
commercial bank, it stands to reason that the biggest risk-takers will feel
emboldened to trade their way out of billions in losses by putting on exotic
bets. Like the gambler in the first paragraph, today's banks know that central
banks are too afraid to call their bluff.
This super-caste of bankers get to lord it over the rest of Western capitalism
for the foreseeable future. Companies will have to accept higher borrowing
costs, individuals will see their credit cards shredded, all in order for
society to continue paying for the sins of bankers.
In ancient India, a bunch of people pulled off very nearly the same trick.
While the Brahmins of today's India face wrenching socio-political changes that
have helped to turn the clock back on their dominance and allowed greater
opportunities to emerge for other groups, the very opposite event has taken
place in G7 countries over the course of the past 12 months. Welcome then to
the new caste system that appears set to take over the global economy, led by
its new Brahmins - namely the bankers.
http://www.atimes.com/atimes/Global_Economy/JC29Dj02.html
~~~
Why Bush Watergated Eliot Spitzer
By F. William Engdahl, 17 March 2008
The spectacular and highly bizarre release of secret FBI wiretap data to the
New York Times exposing the tryst of New York state Governor, Eliot Spitzer,
“No.9” with a luxury call-girl, had less to do with the Bush Administration’s
high moral standards for public servants. Spitzer was the target of a White
House and Wall Street dirty tricks operation to silence one of its most
dangerous critics in handling the current financial market Tsunami crisis.
A useful rule of thumb in evaluating spectacular scandals around prominent
public figures is to ask what and who might want to eliminate that person. In
the case of Governor Spitzer, a Democrat, it is clear that the spectacular
“leak” of government FBI wiretap records showing that Spitzer paid a high-cost
prostitute $4,300 for what amounted to an hour’s personal entertainment, was
politically motivated. Why?, is the interesting question.
Spitzer became Governor of the State following a record as a relentless State
Attorney General going after financial crimes such as the Enron fraud and
corruption by Wall Street investment banks during the 2002 dot.com bubble era.
He was bitterly hated on Wall Street for that. He had made his political career
on being ruthless against financial corruption. Most recently, from his
position as Governor of the nation’s second largest state, and home to its
financial industry, Spitzer had begun making high profile attacks on the
complicity of the Bush Administration in covertly arranging bailout if its Wall
Street financial friends at the expense of ordinary homeowners and citizens,
paid all with taxpayer funds.
Curiously, Spitzer, who had been elected governor in 2006 defeating a
Republican winning nearly 70 percent of the vote, has been not charged in any
crime. However, New York Assembly Republicans immediately announced plans to
impeach Spitzer or put him on public trial were he to refuse resignation.
Spitzer could be asked to testify in any trial involving the Emperors Club
prostitution ring. But so far he hasn’t been charged with a crime. Prostitution
is illegal in most US states, but clients of prostitutes are almost never
charged. The Spitzer case is in the hands of Washington and not state
authorities, underscoring the clear political nature of the Spitzer
“Watergate.”
The New York Times said Spitzer was an individual identified as Client 9 in
court papers filed last week. Client 9 arranged to meet with "Kristen," a
prostitute who charged $1,000 an hour, on February 13 in a Washington hotel and
paid her $4,300, according to the court documents. The case is clearly
political when compared with more egregious recent cases involving Republicans.
Republican Mark Foley was exposed propositioning male interns in Congress and
Rudolph Giuliani was discovered cheating on his wife but no Republican calls
for resignations.
Why the attack now?
Spitzer had become increasingly public in his blaming the Bush Administration
for the nation’s current financial and economic disaster. He testified in
Washington in mid-February before the US House of Representatives Financial
Services subcommittee on the problems in New York-based specialized insurance
companies, known as “monoline” insurers (monoline Versicherung). In a national
TV interview the same day, he laid blame for the crisis and its broader
economic fallout on the Bush Administration.
Spitzer recalled that several years ago the US Office of the Comptroller of the
Currency went to court and blocked New York State efforts to investigate the
mortgage activities of national banks. Spitzer argued the OCC did not put a
stop to questionable loan marketing practices or uphold higher underwriting
standards.
"This could have been avoided if the OCC had done its job," Spitzer said in the
interview. "The OCC did nothing. The Bush Administration let the housing bubble
inflate and now that it's deflating we're dealing with the consequences. The
real failure, the genesis, the germ that has spread was the subprime scandal,"
Spitzer said. Fraudulent marketing and very low “teaser” mortgage rates that
later ballooned higher, were practices that should have been stopped, he
argued. "When mortgages are being marketed, there is a marketplace obligation
to ensure the borrower can afford to pay back the debt," he said.
That TV interview was only one instance of Spitzer laying blame on the Bush
Republicans. On February 14, Spitzer published a signed article in the
influential Washington Post titled, “Predatory Lenders' Partner in Crime: How
the Bush Administration Stopped the States From Stepping In to Help Consumers.”
That article appeared the day after his ill-fated tryst with the prostitute at
the Mayflower Hotel. Coincidence? Spitzer wrote, “"In 2003, during the height
of the predatory lending crisis, the OCC invoked a clause from the 1863
National Bank Act pre-empting all state predatory lending laws, thereby
rendering them inoperative. The OCC also promulgated new rules that prevented
states from enforcing any of their own consumer protection laws against
national banks.”
In his article Spitzer charged, "Not only did the Bush administration do
nothing to protect consumers, it embarked on an aggressive and unprecedented
campaign to prevent states from protecting their residents from the very
problems to which he federal government was turning a blind eye." Bush, said
Spitzer right in the headline, was the "Predator Lenders' Partner in Crime."
The President, said Spitzer, was a fugitive from justice. And Spitzer was in
Washington to launch a campaign to take on the Bush regime and the biggest
financial powers on the planet. Spitzer wrote, "When history tells the story of
the subprime lending crisis and recounts its devastating effects on the lives
of so many innocent homeowners the Bush administration will not be judged
favorably."
With that article, some Washington insiders believe, Spitzer signed his own
political death warrant.
http://www.engdahl.oilgeopolitics.net/Financial_Tsunami/Watergating_Spitzer/watergating_spitzer.html
