Chomsky: What America's 'Crisis' Means to the Rest of the World

The truly historical perspective of world events begins with the colonial era. It tells the story of the West stealing the world's wealth and creating the so called "third world" calling it "manifest destiny" and the "white man's burden".

One billion are facing starvation due to desertification. In part it is the result of global warming, in part, poor farming techniques. Yet, we in the west have more important news to hear, the President was called a liar by a Senator.

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As The New Nation anticipated, the “devastating news” released by the World Food Programme barely even reached the level of “mere ‘news.’” In The New York Times, the WFP report of the reduction in the meager Western efforts to deal with this growing “human catastrophe” merited 150 words on page ten under “World Briefing.” That is not in the least unusual. The United Nations also released an estimate that desertification is endangering the lives of up to a billion people, while announcing World Desertification Day. Its goal, according to the Nigerian newspaper THISDAY, is “to combat desertification and drought worldwide by promoting public awareness and the implementation of conventions dealing with desertification in member countries.” The effort to raise public awareness passed without mention in the national U.S. press. Such neglect is all too common.

It may be instructive to recall that when they landed in what today is Bangladesh, the British invaders were stunned by its wealth and splendor. It was soon on its way to becoming the very symbol of misery, and not by an act of God.

As the fate of Bangladesh illustrates, the terrible food crisis is not just a result of “lack of true concern” in the centers of wealth and power. In large part it results from very definite concerns of global managers: for their own welfare. It is always well to keep in mind Adam Smith’s astute observation about policy formation in England. He recognized that the “principal architects” of policy—in his day the “merchants and manufacturers”—made sure that their own interests had “been most peculiarly attended to” however “grievous” the effect on others, including the people of England and, far more so, those who were subjected to “the savage injustice of the Europeans,” particularly in conquered India, Smith’s own prime concern in the domains of European conquest.
Smith was referring specifically to the mercantilist system, but his observation generalizes, and as such, stands as one of the few solid and enduring principles of both international relations and domestic affairs. It should not, however, be over-generalized. There are interesting cases where state interests, including long-term strategic and economic interests, overwhelm the parochial concerns of the concentrations of economic power that largely shape state policy. Iran and Cuba are instructive cases, but I will have to put these topics aside here.

The food crisis erupted first and most dramatically in Haiti in early 2008. Like Bangladesh, Haiti today is a symbol of misery and despair. And, like Bangladesh, when European explorers arrived, the island was remarkably rich in resources, with a large and flourishing population. It later became the source of much of France’s wealth. I will not run through the sordid history, but the current food crisis can be traced directly to 1915, Woodrow Wilson’s invasion: murderous, brutal, and destructive. Among Wilson’s many crimes was dissolving the Haitian Parliament at gunpoint because it refused to pass “progressive legislation” that would have allowed U.S. businesses to take over Haitian lands. Wilson’s Marines then ran a free election, in which the legislation was passed by 99.9 percent of the 5 percent of the public permitted to vote. All of this comes down through history as “Wilsonian idealism.”

More via Chomsky: What America's 'Crisis' Means to the Rest of the World | | AlterNet.

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A year after financial crisis, the consumer economy is dead

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Remember the old sage advice, "Live beyond your means and you'll pay for it later"? It's come back to roost. Everyone, the banks, credit card companies, the government and you and I have been living off borrowed time and money. The money has run out, there is no credit to be easily had, probably not again in another generation.

One year after the near collapse of the global financial system, this much is clear: The financial world as we knew it is over, and something new is rising from its ashes.

Historians will look to September 2008 as a watershed for the U.S. economy.

On Sept. 7, the government seized mortgage titans Fannie Mae and Freddie Mac. Eight days later, investment bank Lehman Brothers filed for bankruptcy, sparking a global financial panic that threatened to topple blue-chip financial institutions around the world. In the several months that followed, governments from Washington to Beijing responded with unprecedented intervention into financial markets and across their economies, seeking to stop the wreckage and stem the damage.

One year later, the easy-money system that financed the boom era from the 1980s until a year ago is smashed. Once-ravenous U.S. consumers are saving money and paying down debt. Banks are building reserves and hoarding cash. And governments are fashioning a new global financial order.

Congress and the Obama administration have lost faith in self-regulated markets. Together, they're writing the most sweeping new regulations over finance since the Great Depression. And in this ever-more-connected global economy, Washington is working with its partners through the G-20 group of nations to develop worldwide rules to govern finance.

"Our objective is to design an economic framework where we're going to have a more balanced pattern of growth globally, less reliant on a buildup of unsustainable borrowing . . . and not just here, but around the world," said Treasury Secretary Timothy Geithner.

The first faint signs that the U.S. economy may be clawing its way back from the worst recession since the Great Depression are only now starting to appear, a year after the panic began. Similar indications are sprouting in Europe, China and Japan.

Still, economists concur that a quarter-century of economic growth fueled by cheap credit is over. Many analysts also think that an extended period of slow job growth and suppressed wage growth will keep consumers — and the businesses that sell to them — in the dumps for years.

More via A year after financial crisis, the consumer economy is dead | McClatchy.

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WTO Bleeding American Economy Dry

It would appear that Fat Cats run our country. The rich get richer while many in the middle class fall into a growing underclass without housing, health care or a future.

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The World Trade Organization is an undemocratic organization run by the rich, for the rich. The bylaws of the organization supersede our own Constitution . If America is to recover economically it must either renegotiate or completely withdraw from the WTO.

The Constitution states that all treaties made under the authority of the United States become supreme law of the land. The U.S. invited the WTO to rule over us when our government signed the treaty, and now we have no choice but to conform U.S. laws, regulation and administrative procedures to the agreement.

[..] Since entering the WTO in 2001, trade with China has resulted in the loss of 2.3 million jobs through 2007, according to the Economic Policy Institute. In 2006 alone, the trade gap with China resulted in the loss of 366,000 American jobs. Those fortunate enough to retain their jobs witnessed their annual earnings decrease by roughly $1,400. American workers are put in direct competition with one another as more and more employers look to offshore production to nations with lower wage rates.

Those jobs losses have affected each and every sector of the economy in both white and blue-collar workers. Over that time the U.S. has lost 561,000 jobs in computer and electronic products, 153,000 in apparel and accessories, 139,000 in administrative support services and 128,000 in professional, scientific and technical services.

In all, those displaced workers lost an average of $8,146 annually - a total of $19.4 billion - as they moved into lower paying jobs.

Those job losses can be directly attributed to China’s rapidly growing trade surplus with the U.S., maintained by the systematic manipulation of the Chinese yuan. By purposely undervaluing their currency, they subsidized exports - some estimates put this subsidy at nearly 30 percent. This practice has allowed America’s trade deficit with China to balloon since China entered into the WTO. In 2001, when China joined the WTO, they held a small trade surplus of $84 billion with the U.S. By 2007, that number has grown exponentially to $262 billion. On average, that deficit will increase by $30 billion each and every year.

With the U.S-China trade deficit exploding, more job losses are forecast in the future. The Progressive Policy Institute, a moderate Democratic think tank aligned with the pro-free trade wing of the party, claims that unless the trade deficit is brought under control, 12 million information-based jobs in the U.S. are highly susceptible in the future.

[..]“The direct impact on incomes, more than $8,000 per displaced worker per year on average, is catastrophic for the individual workers and the single most visible cost of globalization for American workers,” EPI economist Josh Bivens said. “But it’s also critical to recognize the indirect impact of trade on workers. Trade with less developed countries has reduced the bargaining power of all workers in the U.S. economy who resemble those displaced workers in education, credentials and skill.”But beyond the quantifiable numbers of economic hardship in the U.S., the WTO is inherently wrong for other reasons. The organization remains indifferent to issues of workers rights, child labor and environmental protection standards. The organization has little to no transparency as all of its hearing are closed to the public. It is no wonder then that the U.S. comes out a loser in nine of 10 trade disputes brought before the body. The corporate agenda of the organization has destroyed the developing economies of the world, exploiting cheap resources and giving them little in return. This has come to represent the most efficient form of colonization the world has ever seen - reaping all the benefits with no downsides of occupation.

via Economyincrisis.org - America's Economic Report - Daily.

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De-Dollarization: Dismantling America's Financial-Military Empire

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Globalresearch.ca

The city of Yakaterinburg, Russia's largest east of the Urals, may become known not only as the death place of the tsars but of American hegemony too - and not only where US U-2 pilot Gary Powers was shot down in 1960, but where the US-centered international financial order was brought to ground.
Challenging America will be the prime focus of extended meetings in Yekaterinburg, Russia (formerly Sverdlovsk) today and tomorrow (June 15-16) for Chinese President Hu Jintao, Russian President Dmitry Medvedev and other top officials of the six-nation Shanghai Cooperation Organization (SCO). The alliance is comprised of Russia, China, Kazakhstan, Tajikistan, Kyrghyzstan and Uzbekistan, with observer status for Iran, India, Pakistan and Mongolia. It will be joined on Tuesday by Brazil for trade discussions among the BRIC nations (Brazil, Russia, India and China).
The attendees have assured American diplomats that dismantling the US financial and military empire is not their aim. They simply want to discuss mutual aid - but in a way that has no role for the United States, NATO or the US dollar as a vehicle for trade. US diplomats may well ask what this really means, if not a move to make US hegemony obsolete. That is what a multipolar world means, after all. For starters, in 2005 the SCO asked Washington to set a timeline to withdraw from its military bases in Central Asia. Two years later the SCO countries formally aligned themselves with the former CIS republics belonging to the Collective Security Treaty Organization (CSTO), established in 2002 as a counterweight to NATO.
Yet the meeting has elicited only a collective yawn from the US and even European press despite its agenda is to replace the global dollar standard with a new financial and military defense system. A Council on Foreign Relations spokesman has said he hardly can imagine that Russia and China can overcome their geopolitical rivalry,1 suggesting that America can use the divide-and-conquer that Britain used so deftly for many centuries in fragmenting foreign opposition to its own empire. But George W. Bush ("I'm a uniter, not a divider") built on the Clinton administration's legacy in driving Russia, China and their neighbors to find a common ground when it comes to finding an alternative to the dollar and hence to the US ability to run balance-of-payments deficits ad infinitum.
What may prove to be the last rites of American hegemony began already in April at the G-20 conference, and became even more explicit at the St. Petersburg International Economic Forum on June 5, when Mr. Medvedev called for China, Russia and India to "build an increasingly multipolar world order." What this means in plain English is: We have reached our limit in subsidizing the United States' military encirclement of Eurasia while also allowing the US to appropriate our exports, companies, stocks and real estate in exchange for paper money of questionable worth.
"The artificially maintained unipolar system," Mr. Medvedev spelled out, is based on "one big centre of consumption, financed by a growing deficit, and thus growing debts, one formerly strong reserve currency, and one dominant system of assessing assets and risks."2 At the root of the global financial crisis, he concluded, is that the United States makes too little and spends too much. Especially upsetting is its military spending, such as the stepped-up US military aid to Georgia announced just last week, the NATO missile shield in Eastern Europe and the US buildup in the oil-rich Middle East and Central Asia.
The sticking point with all these countries is the US ability to print unlimited amounts of dollars. Overspending by US consumers on imports in excess of exports, US buy-outs of foreign companies and real estate, and the dollars that the Pentagon spends abroad all end up in foreign central banks. These agencies then face a hard choice: either to recycle these dollars back to the United States by purchasing US Treasury bills, or to let the "free market" force up their currency relative to the dollar - thereby pricing their exports out of world markets and hence creating domestic unemployment and business insolvency.
When China and other countries recycle their dollar inflows by buying US Treasury bills to "invest" in the United States, this buildup is not really voluntary. It does not reflect faith in the U.S. economy enriching foreign central banks for their savings, or any calculated investment preference, but simply a lack of alternatives. "Free markets" US-style hook countries into a system that forces them to accept dollars without limit. Now they want out.
This means creating a new alternative. Rather than making merely "cosmetic changes as some countries and perhaps the international financial organisations themselves might want," Mr. Medvedev ended his St. Petersburg speech, "what we need are financial institutions of a completely new type, where particular political issues and motives, and particular countries will not dominate."
When foreign military spending forced the US balance of payments into deficit and drove the United States off gold in 1971, central banks were left without the traditional asset used to settle payments imbalances. The alternative by default was to invest their subsequent payments inflows in US Treasury bonds, as if these still were "as good as gold." Central banks now hold $4 trillion of these bonds in their international reserves - land these loans have financed most of the US Government's domestic budget deficits for over three decades now! Given the fact that about half of US Government discretionary spending is for military operations - including more than 750 foreign military bases and increasingly expensive operations in the oil-producing and transporting countries - the international financial system is organized in a way that finances the Pentagon, along with US buyouts of foreign assets expected to yield much more than the Treasury bonds that foreign central banks hold.
The main political issue confronting the world's central banks is therefore how to avoid adding yet more dollars to their reserves and thereby financing yet further US deficit spending - including military spending on their borders?
For starters, the six SCO countries and BRIC countries intend to trade in their own currencies so as to get the benefit of mutual credit that the United States until now has monopolized for itself. Toward this end, China has struck bilateral deals with Argentina and Brazil to denominate their trade in renminbi rather than the dollar, sterling or euros,3 and two weeks ago China reached an agreement with Malaysia to denominate trade between the two countries in renminbi.[4] Former Prime Minister Tun Dr. Mahathir Mohamad explained to me in January that as a Muslim country, Malaysia wants to avoid doing anything that would facilitate US military action against Islamic countries, including Palestine. The nation has too many dollar assets as it is, his colleagues explained. Central bank governor Zhou Xiaochuan of the People's Bank of China wrote an official statement on its website that the goal is now to create a reserve currency "that is disconnected from individual nations."5 This is the aim of the discussions in Yekaterinburg.
In addition to avoiding financing the US buyout of their own industry and the US military encirclement of the globe, China, Russia and other countries no doubt would like to get the same kind of free ride that America has been getting. As matters stand, they see the United States as a lawless nation, financially as well as militarily. How else to characterize a nation that holds out a set of laws for others - on war, debt repayment and treatment of prisoners - but ignores them itself? The United States is now the world's largest debtor yet has avoided the pain of "structural adjustments" imposed on other debtor economies. US interest-rate and tax reductions in the face of exploding trade and budget deficits are seen as the height of hypocrisy in view of the austerity programs that Washington forces on other countries via the IMF and other Washington vehicles.
The United States tells debtor economies to sell off their public utilities and natural resources, raise their interest rates and increase taxes while gutting their social safety nets to squeeze out money to pay creditors. And at home, Congress blocked China's CNOOK from buying Unocal on grounds of national security, much as it blocked Dubai from buying US ports and other sovereign wealth funds from buying into key infrastructure. Foreigners are invited to emulate the Japanese purchase of white elephant trophies such as Rockefeller Center, on which investors quickly lost a billion dollars and ended up walking away.
In this respect the US has not really given China and other payments-surplus nations much alternative but to find a way to avoid further dollar buildups. To date, China's attempts to diversify its dollar holdings beyond Treasury bonds have not proved very successful. For starters, Hank Paulson of Goldman Sachs steered its central bank into higher-yielding Fannie Mae and Freddie Mac securities, explaining that these were de facto public obligations. They collapsed in 2008, but at least the US Government took these two mortgage-lending agencies over, formally adding their $5.2 trillion in obligations onto the national debt. In fact, it was largely foreign official investment that prompted the bailout. Imposing a loss for foreign official agencies would have broken the Treasury-bill standard then and there, not only by utterly destroying US credibility but because there simply are too few Government bonds to absorb the dollars being flooded into the world economy by the soaring US balance-of-payments deficits.
Seeking more of an equity position to protect the value of their dollar holdings as the Federal Reserve's credit bubble drove interest rates down China's sovereign wealth funds sought to diversify in late 2007. China bought stakes in the well-connected Blackstone equity fund and Morgan Stanley on Wall Street, Barclays in Britain South Africa's Standard Bank (once affiliated with Chase Manhattan back in the apartheid 1960s) and in the soon-to-collapse Belgian financial conglomerate Fortis. But the US financial sector was collapsing under the weight of its debt pyramiding, and prices for shares plunged for banks and investment firms across the globe.
Foreigners see the IMF, World Bank and World Trade Organization as Washington surrogates in a financial system backed by American military bases and aircraft carriers encircling the globe. But this military domination is a vestige of an American empire no longer able to rule by economic strength. US military power is muscle-bound, based more on atomic weaponry and long-distance air strikes than on ground operations, which have become too politically unpopular to mount on any large scale.
On the economic front there is no foreseeable way in which the United States can work off the $4 trillion it owes foreign governments, their central banks and the sovereign wealth funds set up to dispose of the global dollar glut. America has become a deadbeat - and indeed, a militarily aggressive one as it seeks to hold onto the unique power it once earned by economic means. The problem is how to constrain its behavior. Yu Yongding, a former Chinese central bank advisor now with China's Academy of Sciences, suggested that US Treasury Secretary Tim Geithner be advised that the United States should "save" first and foremost by cutting back its military budget. "U.S. tax revenue is not likely to increase in the short term because of low economic growth, inflexible expenditures and the cost of 'fighting two wars.'"6
At present it is foreign savings, not those of Americans that are financing the US budget deficit by buying most Treasury bonds. The effect is taxation without representation for foreign voters as to how the US Government uses their forced savings. It therefore is necessary for financial diplomats to broaden the scope of their policy-making beyond the private-sector marketplace. Exchange rates are determined by many factors besides "consumers wielding credit cards," the usual euphemism that the US media cite for America's balance-of-payments deficit. Since the 13th century, war has been a dominating factor in the balance of payments of leading nations - and of their national debts. Government bond financing consists mainly of war debts, as normal peacetime budgets tend to be balanced. This links the war budget directly to the balance of payments and exchange rates.
Foreign nations see themselves stuck with unpayable IOUs - under conditions where, if they move to stop the US free lunch, the dollar will plunge and their dollar holdings will fall in value relative to their own domestic currencies and other currencies. If China's currency rises by 10% against the dollar, its central bank will show the equivalent of a $200 million loss on its $2 trillion of dollar holdings as denominated in yuan. This explains why, when bond ratings agencies talk of the US Treasury securities losing their AAA rating, they don't mean that the government cannot simply print the paper dollars to "make good" on these bonds. They mean that dollars will depreciate in international value. And that is just what is now occurring. When Mr. Geithner put on his serious face and told an audience at Peking University in early June that he believed in a "strong dollar" and China's US investments therefore were safe and sound, he was greeted with derisive laughter.7
Anticipation of a rise in China's exchange rate provides an incentive for speculators to seek to borrow in dollars to buy renminbi and benefit from the appreciation. For China, the problem is that this speculative inflow would become a self-fulfilling prophecy by forcing up its currency. So the problem of international reserves is inherently linked to that of capital controls. Why should China see its profitable companies sold for yet more freely-created US dollars, which the central bank must use to buy low-yielding US Treasury bills or lose yet further money on Wall Street?
To avoid this quandary it is necessary to reverse the philosophy of open capital markets that the world has held ever since Bretton Woods in 1944. On the occasion of Mr. Geithner's visit to China, "Zhou Xiaochuan, minister of the Peoples Bank of China, the country's central bank, said pointedly that this was the first time since the semiannual talks began in 2006 that China needed to learn from American mistakes as well as its successes" when it came to deregulating capital markets and dismantling controls.8
An era therefore is coming to an end. In the face of continued US overspending, de-dollarization threatens to force countries to return to the kind of dual exchange rates common between World Wars I and II: one exchange rate for commodity trade, another for capital movements and investments, at least from dollar-area economies.
Even without capital controls, the nations meeting at Yekaterinburg are taking steps to avoid being the unwilling recipients of yet more dollars. Seeing that US global hegemony cannot continue without spending power that they themselves supply, governments are attempting to hasten what Chalmers Johnson has called "the sorrows of empire" in his book by that name - the bankruptcy of the US financial-military world order. If China, Russia and their non-aligned allies have their way, the United States will no longer live off the savings of others (in the form of its own recycled dollars) nor have the money for unlimited military expenditures and adventures.
US officials wanted to attend the Yekaterinburg meeting as observers. They were told No. It is a word that Americans will hear much more in the future.
Notes

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Angry America and the Bailout

The Nation

Obtuse hardly does justice to the social stupidity of our late, unlamented financial overlords. John Thain of Merrill Lynch and Richard Fuld of Lehman Brothers, along with an astonishing number of their fraternity brothers, continue to behave like so many intoxicated toreadors waving their capes at an enraged bull, oblivious even when gored.
Their greed and self-indulgence in the face of an economic cataclysm for which they bear heavy responsibility is, unsurprisingly, inciting anger and contempt, as daily news headlines indicate. It is undermining the last shreds of their once exalted social status--and, in that regard, they are evidently fated to relive the experience of their predecessors, those Wall Street "lords of creation" who came crashing to Earth during the last Great Depression.
Ever since the bailout state went into hyperdrive, popular anger has been simmering. In fact, even before the meltdown gained real traction, a sign at a mass protest outside the New York Stock Exchange advised those inside: "Jump, You Fuckers."
You can already buy "I Hate Investment Banking" T-shirts on line. All the Caesar-sized salaries and the Caligula-like madness as the economy crashes and burns, all the bonuses, dividends, princely consulting fees for learning how to milk the Treasury, not to speak of those new corporate jets, as well as the government funds poured down the black hole of mega-mergers, moneys that might otherwise have spared citizens from foreclosure--all of this is making ordinary Americans apoplectic.
Nothing, however, may be more galling than the rationale regularly offered for so much of this self-indulgence. Asked about why he had given out $4 billion in bonuses to his Merrill Lynch staff in a quarter in which the company had lost a staggering $15 billion dollars, ex-CEO John Thain, typically, responded: "If you don't pay your best people, you will destroy your franchise. Those best people can get jobs other places, they will leave."
Apparently it never occurs to those who utter such perverse statements about rewarding the "best people," or "the best men," that we'd all have been better off, and saved some serious money, if they had hired the worst men. After all, based on the recent record, who could possibly have done more damage than the "best" Merrill Lynch, Wachovia, WaMu, Citigroup, AIG, Bank of America and so many other top financial crews had to offer?
The "Best Men" Fall
Now even the new powers in Washington are venting. Vice President Biden has suggested that our onetime masters of the universe be thrown "in the brig"; Missouri Senator Claire McKaskill has denounced them as "idiots...that are kicking sand in the face of the American taxpayer," and even the new president, a man of exquisite tact with an instinct for turning the other cheek, labeled Wall Street's titans as reckless, irresponsible and shameful.
To those who remember the history, all this bears a painfully familiar ring. Soon enough, that history tells us, Congressional investigators will start hauling such people into the public dock and the real fireworks will begin. It happened once before--a vital chapter in the ongoing story of how an old regime dies and a new one is born.
After the Great Crash of 1929, those at the commanding heights of the economy who had enriched themselves and deluded others into believing that, under their leadership, the United States had achieved "a permanent plateau of prosperity"--sound familiar?--were subject to a whirlwind of anger, public shaming and withering ridicule. Like the John Thains of today, Jack Morgan, Charles Mitchell, Richard Whitney, Albert Wiggins and others who headed the country's chief investment and commercial banks, trusts, insurance companies and the New York Stock Exchange never knew what hit them. They, too, had been steeped in the comforting bathwaters of self-delusion for so long that they believed, like Thain and his compadres, that they were indeed the "best," the wisest, the most entitled, and the most impregnable men in America. Even amid the ruins of the world they had made, they were incapable of recognizing that their day was done.
Under the merciless glare of Congressional hearings, above all the Senate's Pecora Committee (named after its bulldog chief counsel Ferdinand Pecora), it was revealed that Jack Morgan and his partners in the House of Morgan hadn't paid income taxes for years; that "Sunshine" Charlie Mitchell, head of National City Bank (the country's largest), had been short-selling his own bank's stock and transferring assets into his wife's name to escape taxes; that other financiers just like him, who had been hero-worshiped for a decade or more as financial messiahs, had regularly engaged in insider-trading schemes that made them wealthy and fleeced legions of unknowing investors.
The Pecora Committee was not the only scourge of the old financial elite. Franklin Delano Roosevelt, as publicly mild-mannered as and perhaps even more amiable and charming than President Obama, began excoriating them from the moment of his first inaugural address. He condemned them in no uncertain terms for misusing "other people's money" and for their reckless speculations; he blamed them for the sorry state of the country; he promised to chase these "unscrupulous money changers" from their "high seats in the temples of American civilization."
Jack Morgan, called to testify by yet another set of Congressional investigators, had a circus midget plopped in his lap to the delight of a swarm of photo-journalists who memorialized the moment for millions. It was an emblematic photo, a visual metaphor for a once proud, powerful elite, its gravitas gone, reduced to impotence, ridiculed for its incompetence and no longer capable of intimidating a soul.
What happened to Jack Morgan or later Richard Whitney--a crowd of 6,000 turned out at New York's Grand Central Station in 1938 to watch the handcuffed former president of the New York Stock Exchange be escorted onto a train for Sing Sing, having been convicted of embezzlement--was the political and social equivalent of a great depression. It represented, that is, a catastrophic deflation of the legitimacy of the ancien régime. It was part of what made possible the advent of something entirely new.
Speculators and Con Men
Under normal circumstances, most Americans have been perfectly willing to draw a relatively sharp distinction between the misguided speculator and the confidence man's outright felonious behavior. One is a legitimate banker gone astray, the other an outlaw.
Under the extraordinary circumstances of terminal systemic breakdown, that distinction grows ever hazier. That was certainly true in the early years of the first Great Depression, when a damaging question arose: just exactly what was the difference between the behavior of Charles Mitchell, Jack Morgan and Richard Whitney, lions of that era's Establishment, and outliers like "Sell-em" Ben Smith; Ivar Kreuger, "the match king"; Jesse Livermore, "the man with the evil eye"; William Crappo Durant, maestro of investment pool stock-kiting; or the onetime Broadway ticket agent and stock manipulator Michael Meehan--men long barred from the walnut-paneled inner sanctums of white-shoe Wall Street?
Admittedly, their daredevil escapades had often left them on the wrong side of the law and they would end their days in jail, as suicides or in penury and disgrace. Nonetheless, as is true today, many Americans then came to accept that between the speculating banker and the confidence man lay a distinction without a meaningful difference. After all, by the early 1930s, the whole American financial system seemed like nothing but a confidence game deserving of the deepest ignominy.
In that sense, Bernie Madoff, a former chairman of the NASDAQ stock exchange, already seems like a synecdoche for a whole way of life. Technically speaking, he ran a Ponzi scheme out of his brokerage firm, as strictly fraudulent as the original one invented by Charles Ponzi, that Italian vegetable peddler, smuggler and, after he got out of an American jail, minor fascist official in Mussolini's Italy.
Ponzi, however, was a small-timer. He gulled ordinary folks out of their five- and ten-dollar bills. Madoff's $50 billion game was something else again. It was completely dependent on his ties to the most august circles of our financial establishment, to major hedge funds and funds of funds, to top-drawer consulting firms, to blue-ribbon nonprofits and to a global aristocracy of the super-rich. True enough, people of middling means, as well as public and union pension funds, got taken too. At the end of the day, however, Madoff's scheme, unlike Ponzi's, was premised on a pervasive insiderism which had everything to do with the way our financial system has been run for the past quarter-century.
Once Madoff was exposed, everybody questioned the credulousness of those who invested with him: why didn't they grow suspicious of such consistently high rates of return? But the equally reasonable question was: why should they have? Not only did you practically need an embossed invitation before you could entrust your loot to Madoff, but the whole financial sector had been enjoying extraordinary returns for a very long time (admittedly, with occasional major hiccups like the dot-com bust of 1999-2000, which somehow seemed to fade quickly from memory).
Keep in mind as well that these lucrative dealings were based on speculative investments in securities so far removed from anything tangible or comprehensible that they seemed to be floating in thin air. The whole system was a Ponzi-like scheme which, like the Energizer Bunny, just kept on going and going and going... until, of course, it didn't.
Locked Into the Bailout State
After 1929, when the old order went down in flames, when it commanded no more credibility and legitimacy than a confidence game, there was an urgent cry to regulate both the malefactors and their rogue system. Indeed, new financial regulation was at the top of, and made up a hefty part of, Roosevelt's New Deal agenda during its first year. That included the Bank Holiday, the creation of the Federal Deposit Insurance Corporation, the passing of the Glass-Steagall Act, which separated commercial from investment banking (their prior cohabitation had been a prime incubator of financial hanky-panky during the Jazz Age of the previous decade), and the first Securities Act to monitor the stock exchange.
One might have anticipated an even more robust response today, given the damage done not only to our domestic economy but to the global one upon which any American economic recovery will rely to a very considerable degree. At the moment, however, financial regulation or re-regulation--given the last thirty years of Washington's fiercely deregulatory policies--seems to have a surprisingly low profile in the new administration's stated plans. Capping bonuses, pay scales and stock options for the financial upper crust is all well and good and should happen promptly, but serious regulation and reform of the financial system must strike much deeper than that.
Instead, the new administration is evidently locked into the bailout state invented by its predecessors, the latest version of which, the creation of a government "bad bank" (whether called that or not) to buy up toxic securities from the private sector, commands increasing attention. A "bad bank" seems a strikingly lose-lose proposition: either we, the taxpaying public, buy or guarantee these securities at something approaching their grossly inflated, largely fictitious value, in which case we will be supporting this second gilded age's financial malfeasance for who knows how long; or the government's "bad bank" buys these shoddy assets at something close to their real value, in which case major banks will remain in lockdown mode, if they survive at all. Worse yet, the administration's latest "bad bank" plan does not even compel rescued institutions to begin lending to anybody, which presumably is the whole point of this new financial welfare system.
Why this timidity and narrowness of vision, which seems less like reform than capitulation? Perhaps it comes, in part, from the extraordinary economic and political throw-weight of the FIRE (finance, insurance, and real estate) sector of our national economy. It has, after all, grown geometrically for decades and is now a vital part of the economy in a way that would have been inconceivable back when the United States was a real industrial powerhouse.
Naturally, FIRE's political influence expanded accordingly, as politicians doing its bidding dismantled the regulatory apparatus installed by the New Deal. Even today, even in ruins, many in that world no doubt hope to keep things more or less that way; and unfortunately, spokesmen for that view--or at least people who used to champion that approach during the Clinton years, including Larry Summers and Robert Rubin (who "earned" more than a $115 million dollars at Citigroup from 1999 to 2008), occupy enormously influential positions in, or as informal advisors to, the new Obama administration.
Still, popular anger and ridicule of the sort our New Deal era ancestors once let loose are growing more and more common, which explains, of course, the newly discovered voice of righteous anger of some of our leading politicians who are feeling the heat. Certain observers have dismissed popular resistance to the bailout state as nothing more than right-wing, Republican-inspired hostility to government intervention of any sort. No doubt that may account for some of it, but much of the anger is indeed righteous, reasonable, and coming from ordinary Americans who simply have had enough.
Progressive-minded people in and outside of government must find a way to make re-regulation urgent business, and to do so outside the imprisoning, politically self-defeating confines of the bailout state. Just weeks ago, the notion of nationalizing the banks seemed irretrievably un-American. Now, it is part of the conversation, even if, for the moment, Obama's savants have ruled it out.
The old order is dying. Let's bury it. The future beckons.
About Steve Fraser
Steve Fraser is a visiting professor at New York University, co-founder of the American Empire Project, and the author, most recently, of Wall Street: America's Dream Palace. more...
* Copyright © 2008 The Nation

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Angry America and the Bailout

The Nation

Obtuse hardly does justice to the social stupidity of our late, unlamented financial overlords. John Thain of Merrill Lynch and Richard Fuld of Lehman Brothers, along with an astonishing number of their fraternity brothers, continue to behave like so many intoxicated toreadors waving their capes at an enraged bull, oblivious even when gored.
Their greed and self-indulgence in the face of an economic cataclysm for which they bear heavy responsibility is, unsurprisingly, inciting anger and contempt, as daily news headlines indicate. It is undermining the last shreds of their once exalted social status--and, in that regard, they are evidently fated to relive the experience of their predecessors, those Wall Street "lords of creation" who came crashing to Earth during the last Great Depression.
Ever since the bailout state went into hyperdrive, popular anger has been simmering. In fact, even before the meltdown gained real traction, a sign at a mass protest outside the New York Stock Exchange advised those inside: "Jump, You Fuckers."
You can already buy "I Hate Investment Banking" T-shirts on line. All the Caesar-sized salaries and the Caligula-like madness as the economy crashes and burns, all the bonuses, dividends, princely consulting fees for learning how to milk the Treasury, not to speak of those new corporate jets, as well as the government funds poured down the black hole of mega-mergers, moneys that might otherwise have spared citizens from foreclosure--all of this is making ordinary Americans apoplectic.
Nothing, however, may be more galling than the rationale regularly offered for so much of this self-indulgence. Asked about why he had given out $4 billion in bonuses to his Merrill Lynch staff in a quarter in which the company had lost a staggering $15 billion dollars, ex-CEO John Thain, typically, responded: "If you don't pay your best people, you will destroy your franchise. Those best people can get jobs other places, they will leave."
Apparently it never occurs to those who utter such perverse statements about rewarding the "best people," or "the best men," that we'd all have been better off, and saved some serious money, if they had hired the worst men. After all, based on the recent record, who could possibly have done more damage than the "best" Merrill Lynch, Wachovia, WaMu, Citigroup, AIG, Bank of America and so many other top financial crews had to offer?
The "Best Men" Fall
Now even the new powers in Washington are venting. Vice President Biden has suggested that our onetime masters of the universe be thrown "in the brig"; Missouri Senator Claire McKaskill has denounced them as "idiots...that are kicking sand in the face of the American taxpayer," and even the new president, a man of exquisite tact with an instinct for turning the other cheek, labeled Wall Street's titans as reckless, irresponsible and shameful.
To those who remember the history, all this bears a painfully familiar ring. Soon enough, that history tells us, Congressional investigators will start hauling such people into the public dock and the real fireworks will begin. It happened once before--a vital chapter in the ongoing story of how an old regime dies and a new one is born.
After the Great Crash of 1929, those at the commanding heights of the economy who had enriched themselves and deluded others into believing that, under their leadership, the United States had achieved "a permanent plateau of prosperity"--sound familiar?--were subject to a whirlwind of anger, public shaming and withering ridicule. Like the John Thains of today, Jack Morgan, Charles Mitchell, Richard Whitney, Albert Wiggins and others who headed the country's chief investment and commercial banks, trusts, insurance companies and the New York Stock Exchange never knew what hit them. They, too, had been steeped in the comforting bathwaters of self-delusion for so long that they believed, like Thain and his compadres, that they were indeed the "best," the wisest, the most entitled, and the most impregnable men in America. Even amid the ruins of the world they had made, they were incapable of recognizing that their day was done.
Under the merciless glare of Congressional hearings, above all the Senate's Pecora Committee (named after its bulldog chief counsel Ferdinand Pecora), it was revealed that Jack Morgan and his partners in the House of Morgan hadn't paid income taxes for years; that "Sunshine" Charlie Mitchell, head of National City Bank (the country's largest), had been short-selling his own bank's stock and transferring assets into his wife's name to escape taxes; that other financiers just like him, who had been hero-worshiped for a decade or more as financial messiahs, had regularly engaged in insider-trading schemes that made them wealthy and fleeced legions of unknowing investors.
The Pecora Committee was not the only scourge of the old financial elite. Franklin Delano Roosevelt, as publicly mild-mannered as and perhaps even more amiable and charming than President Obama, began excoriating them from the moment of his first inaugural address. He condemned them in no uncertain terms for misusing "other people's money" and for their reckless speculations; he blamed them for the sorry state of the country; he promised to chase these "unscrupulous money changers" from their "high seats in the temples of American civilization."
Jack Morgan, called to testify by yet another set of Congressional investigators, had a circus midget plopped in his lap to the delight of a swarm of photo-journalists who memorialized the moment for millions. It was an emblematic photo, a visual metaphor for a once proud, powerful elite, its gravitas gone, reduced to impotence, ridiculed for its incompetence and no longer capable of intimidating a soul.
What happened to Jack Morgan or later Richard Whitney--a crowd of 6,000 turned out at New York's Grand Central Station in 1938 to watch the handcuffed former president of the New York Stock Exchange be escorted onto a train for Sing Sing, having been convicted of embezzlement--was the political and social equivalent of a great depression. It represented, that is, a catastrophic deflation of the legitimacy of the ancien régime. It was part of what made possible the advent of something entirely new.
Speculators and Con Men
Under normal circumstances, most Americans have been perfectly willing to draw a relatively sharp distinction between the misguided speculator and the confidence man's outright felonious behavior. One is a legitimate banker gone astray, the other an outlaw.
Under the extraordinary circumstances of terminal systemic breakdown, that distinction grows ever hazier. That was certainly true in the early years of the first Great Depression, when a damaging question arose: just exactly what was the difference between the behavior of Charles Mitchell, Jack Morgan and Richard Whitney, lions of that era's Establishment, and outliers like "Sell-em" Ben Smith; Ivar Kreuger, "the match king"; Jesse Livermore, "the man with the evil eye"; William Crappo Durant, maestro of investment pool stock-kiting; or the onetime Broadway ticket agent and stock manipulator Michael Meehan--men long barred from the walnut-paneled inner sanctums of white-shoe Wall Street?
Admittedly, their daredevil escapades had often left them on the wrong side of the law and they would end their days in jail, as suicides or in penury and disgrace. Nonetheless, as is true today, many Americans then came to accept that between the speculating banker and the confidence man lay a distinction without a meaningful difference. After all, by the early 1930s, the whole American financial system seemed like nothing but a confidence game deserving of the deepest ignominy.
In that sense, Bernie Madoff, a former chairman of the NASDAQ stock exchange, already seems like a synecdoche for a whole way of life. Technically speaking, he ran a Ponzi scheme out of his brokerage firm, as strictly fraudulent as the original one invented by Charles Ponzi, that Italian vegetable peddler, smuggler and, after he got out of an American jail, minor fascist official in Mussolini's Italy.
Ponzi, however, was a small-timer. He gulled ordinary folks out of their five- and ten-dollar bills. Madoff's $50 billion game was something else again. It was completely dependent on his ties to the most august circles of our financial establishment, to major hedge funds and funds of funds, to top-drawer consulting firms, to blue-ribbon nonprofits and to a global aristocracy of the super-rich. True enough, people of middling means, as well as public and union pension funds, got taken too. At the end of the day, however, Madoff's scheme, unlike Ponzi's, was premised on a pervasive insiderism which had everything to do with the way our financial system has been run for the past quarter-century.
Once Madoff was exposed, everybody questioned the credulousness of those who invested with him: why didn't they grow suspicious of such consistently high rates of return? But the equally reasonable question was: why should they have? Not only did you practically need an embossed invitation before you could entrust your loot to Madoff, but the whole financial sector had been enjoying extraordinary returns for a very long time (admittedly, with occasional major hiccups like the dot-com bust of 1999-2000, which somehow seemed to fade quickly from memory).
Keep in mind as well that these lucrative dealings were based on speculative investments in securities so far removed from anything tangible or comprehensible that they seemed to be floating in thin air. The whole system was a Ponzi-like scheme which, like the Energizer Bunny, just kept on going and going and going... until, of course, it didn't.
Locked Into the Bailout State
After 1929, when the old order went down in flames, when it commanded no more credibility and legitimacy than a confidence game, there was an urgent cry to regulate both the malefactors and their rogue system. Indeed, new financial regulation was at the top of, and made up a hefty part of, Roosevelt's New Deal agenda during its first year. That included the Bank Holiday, the creation of the Federal Deposit Insurance Corporation, the passing of the Glass-Steagall Act, which separated commercial from investment banking (their prior cohabitation had been a prime incubator of financial hanky-panky during the Jazz Age of the previous decade), and the first Securities Act to monitor the stock exchange.
One might have anticipated an even more robust response today, given the damage done not only to our domestic economy but to the global one upon which any American economic recovery will rely to a very considerable degree. At the moment, however, financial regulation or re-regulation--given the last thirty years of Washington's fiercely deregulatory policies--seems to have a surprisingly low profile in the new administration's stated plans. Capping bonuses, pay scales and stock options for the financial upper crust is all well and good and should happen promptly, but serious regulation and reform of the financial system must strike much deeper than that.
Instead, the new administration is evidently locked into the bailout state invented by its predecessors, the latest version of which, the creation of a government "bad bank" (whether called that or not) to buy up toxic securities from the private sector, commands increasing attention. A "bad bank" seems a strikingly lose-lose proposition: either we, the taxpaying public, buy or guarantee these securities at something approaching their grossly inflated, largely fictitious value, in which case we will be supporting this second gilded age's financial malfeasance for who knows how long; or the government's "bad bank" buys these shoddy assets at something close to their real value, in which case major banks will remain in lockdown mode, if they survive at all. Worse yet, the administration's latest "bad bank" plan does not even compel rescued institutions to begin lending to anybody, which presumably is the whole point of this new financial welfare system.
Why this timidity and narrowness of vision, which seems less like reform than capitulation? Perhaps it comes, in part, from the extraordinary economic and political throw-weight of the FIRE (finance, insurance, and real estate) sector of our national economy. It has, after all, grown geometrically for decades and is now a vital part of the economy in a way that would have been inconceivable back when the United States was a real industrial powerhouse.
Naturally, FIRE's political influence expanded accordingly, as politicians doing its bidding dismantled the regulatory apparatus installed by the New Deal. Even today, even in ruins, many in that world no doubt hope to keep things more or less that way; and unfortunately, spokesmen for that view--or at least people who used to champion that approach during the Clinton years, including Larry Summers and Robert Rubin (who "earned" more than a $115 million dollars at Citigroup from 1999 to 2008), occupy enormously influential positions in, or as informal advisors to, the new Obama administration.
Still, popular anger and ridicule of the sort our New Deal era ancestors once let loose are growing more and more common, which explains, of course, the newly discovered voice of righteous anger of some of our leading politicians who are feeling the heat. Certain observers have dismissed popular resistance to the bailout state as nothing more than right-wing, Republican-inspired hostility to government intervention of any sort. No doubt that may account for some of it, but much of the anger is indeed righteous, reasonable, and coming from ordinary Americans who simply have had enough.
Progressive-minded people in and outside of government must find a way to make re-regulation urgent business, and to do so outside the imprisoning, politically self-defeating confines of the bailout state. Just weeks ago, the notion of nationalizing the banks seemed irretrievably un-American. Now, it is part of the conversation, even if, for the moment, Obama's savants have ruled it out.
The old order is dying. Let's bury it. The future beckons.
About Steve Fraser
Steve Fraser is a visiting professor at New York University, co-founder of the American Empire Project, and the author, most recently, of Wall Street: America's Dream Palace. more...
* Copyright © 2008 The Nation

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• Wall St., a Financial Epithet, Stirs Outrage (nytimes.com)
• Another Great Depression? (cbsnews.com)
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More on Protectionism

Paul Krugman Blog - NYTimes.com

First of all: my piece was NOT an endorsement of protectionism -- it was an explanation that there is an economic case for it, but also that there is a strong political economy case (which I consider dominant) against acting on that economic case. It was, in short, an attempt to be intellectually honest.
Second, Nick Rowe argues that under flexible exchange rates the economic case goes away. His argument is based on the proposition that since interest rates are fixed under a liquidity trap, capital flows are fixed, and the exchange rate will adjust to offset any change in the trade balance.

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More on Protectionism

Paul Krugman Blog - NYTimes.com

First of all: my piece was NOT an endorsement of protectionism -- it was an explanation that there is an economic case for it, but also that there is a strong political economy case (which I consider dominant) against acting on that economic case. It was, in short, an attempt to be intellectually honest.
Second, Nick Rowe argues that under flexible exchange rates the economic case goes away. His argument is based on the proposition that since interest rates are fixed under a liquidity trap, capital flows are fixed, and the exchange rate will adjust to offset any change in the trade balance.

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Russia in Outer Darkness

Image by robertodevido via Flickr

Asia Times Online

In outer space, as everyone knows, the absence of the force of gravity produces the appearance of weightlessness. Everything floats away.
The markets have decided that Russia is now without gravity; its equities are without weight, and at risk of floating away. Late last year, the RTS, the principal stock market index, starting decoupling from the price of the principal Russian export, oil, as the latter started to plummet. The emerging market investment funds, which have also moved with oil and Russia's other exportable commodities, also decoupled from commodity prices and the RTS.
Since the start of January, the RTS and the oil marker have been
in negative correlation. That means that even if the oil price goes up, Russian share prices go down. This is the equivalent of outer space.
It is no surprise, therefore, that everyone in the Russian market is gasping for an oxygen mask and a safety belt.
President Dmitry Medvedev and Prime Minister Vladimir Putin believe they are the constitutionally elected heads of government and imagine their government is the air supply and safety-belt of the state. Those officials aligned with them - Deputy Prime Minister Igor Shuvalov with Medvedev, Deputy Prime Minister Igor Sechin with Putin - like to think that, although elected by no one to nothing, they too are the safety belts, and pilots, of the state. Watch them closely - the more carefully Shuvalov brushes at his coiffure and Sechin draws his face into a scowl, the more you can be certain they think they are in charge of Russia's mass, motion, weight, air supply.
Without a banking and state audit system accountable to parliament, without a parliament accountable to the voters, and with regional governors and mayors appointed, not elected, where else can the force of gravity be located? If not with them, then all of Russia has indeed decoupled, and equity is in danger of valuelessness.
That is what these oscillating lines on the dials of the national control-panel mean:
In fact, once decoupling commences, there is no telling what the control-panel indicates for Russia's pilot enterprises - the dominant exporters and producers of value, such as Gazprom (gas and oil), Rosneft (oil), Norilsk Nickel (nickel, copper platinum group metals), Rusal (aluminum), Evraz (steel), Metalloinvest (iron ore), Polyus (gold), Uralkali (potash). That is because their public reports do not reveal the full extent of their debt; their shareholder stakes, pledges, and obligations; their margins; cashflow, and free cash; the ownership of their assets; their future.
Brokerage analysts, who try to measure these indicators, and issue buy/sell recommendations to the investment market, are now, more than ever, navigating by their own book - and shooting in the dark.
So are the principal enterprise owners and stakeholders, the so-called oligarchs. Each of them has now proposed to each of the senior government officials a plan calculated to cancel or refinance his debts with state money but leave him in just as much control as before. This is the reason the market has been confused by as many state takeover or consolidation plans as there are oligarchs with billion-dollar obligations they can't meet.
The evidence available from documents and inside sources close to the oligarchs themselves raises the following questions, and also answers them.
Why did Vladimir Potanin, controlling shareholder of Norilsk Nickel, place in a Monday morning newspaper on January 12 a scheme for merging Norilsk Nickel with steelmakers Evraz and Mechel, iron-ore miner Metalloinvest, and potash miner Uralkali, and vesting the lot in a new state company, in which Russian Technologies, the arms export-based state holding, would hold a 25% stake?
There can be no claim of stakeholder and management coordination, or raw material supply and production cost synergies, because Potanin didn't consult the others, or come up with an integrated value scheme. The simple driver of Potanin's plan was to create so much debt for the state to absorb, that he and the Norilsk Nickel group would be left to retain control of itself, and reduce the state shareholding in the scheme to 25%. The controlling stakeholders of the companies Potanin proposed to merge into the new state company have subsequently issued their refusals to go along. Each has his own plan.
Why did Oleg Deripaska, in a letter to Medvedev on January 20, invite the Kremlin to accept a US$45 billion valuation for Rusal, and issue $6 billion in state loans to cover part of Rusal's debt, in return for an issue of 15% non-voting shares in Rusal, and a promise to pay the state dividends - if and when aluminum prices rise enough for Rusal to declare a profit? Again, the answer is that Deripaska wants a bailout with minimum loss of control for himself.
Asked why the Norilsk Nickel consolidation plan didn't have room for Deripaska's Rusal, Norilsk Nickel's chief executive, Vladimir Strzhalkovsky, has responded that he isn't seeking a merger with Rusal because the aluminum company has too much debt. As it stands, the proposal from Potanin would pool $28 billion of debt to $60 billion in sales, according to Interros, Potanin's holding company.
Just a little memory is required to see this as a reprise of the very first state bailout, which made Potanin and the other oligarchs what they became and what they are today. In 1995-96 that was called loans-for-shares. It was the scheme by which the state treasury loaned the oligarchs money for cut-price privatization of the control stakes of the natural resource assets they incorporated as their own. Having leveraged these shareholdings in the dozen years that followed, in order to create even larger conglomerates inside Russia and parallel asset empires in safe-havens abroad, and having squirreled away billions of dollars in personal dividends, they have come back to the government with a request to play the same game all over again.
According to one oligarch, he is disappointed to find there is no government where he expects to find it, only bitter rivals at each others' throats. What he means is that it was much easier, and also cheaper, when he had to deal with president Boris Yeltsin.
A lesser known, but oligarch-sized figure, Vyacheslav Kantor, controlling shareholder of Acron, a fertilizer producer and exporter, submitted his plan to Putin and Sechin just before they appeared for an inspection of his Novgorod factory on January 25. Kantor's scheme puts himself in control of a state-financed company that would take over mining licenses Kantor has borrowed to buy and develop, but which he cannot afford any longer. He is asking for a bailout of $700 million of debt, and a credit line from a state bank of up to $2 billion for his mining undertakings. In this Acron scheme, the state equity stake in exchange would be a non-controlling one.
Other schemes that have been tabled at Sechin's office in the mineral fertilizer sector indicate the creation of a state company to consolidate existing state stakes in phosphate and potash companies, and impose a fine on Uralkali, owned by Dmitry Rybolovlev, which would oblige him to give up his stake in his company.
Alisher Usmanov, the controlling shareholder of the Metalloinvest group, said he is opposed to the mega-merger of Potanin, because it under-values his own assets, and dilutes his control. Usmanov said on January 28 that one option he prefers is a scheme of merger between Norilsk Nickel and Metalloinvest without a significant stake stake. Alternatively, to absorb his own debts, he offers a scheme incorporating Metalloinvest, Norilsk Nickel, and steelmaker and coal-miner Mechel, plus diamond-miner Alrosa. Announcing the obvious, Usmanov has said: "If the Russian government would participate in this merger and restructure the debts of the companies everybody would win from it."
A frank admission from one oligarch headquarters: "This global [state] company would be impossible to manage, it is true. But the reasoning here is that this is a measure only for the crisis period. Later, each of the companies would be able to buy back their shares from the state, and separate again."
The presumption of all these plans is that, if and when global demand recovers, commodity prices revive, export revenues grow, share prices pick up, and the international capital markets can accommodate Russian debt financing needs again, the oligarchs would borrow abroad to buy out the state - and resume the same unconstrained control of their enterprises as they enjoyed before all the trouble began. That's a big if; the when may be a long time coming.
Putin has responded ambiguously in a lengthy interview on January 25: "First, there are no final decisions here. Second, what you're speaking about was suggested by the owners of these companies. But you know that if you get two poor people together, it won't be a richer family. So it all depends on the specifics. Where there can be any positive synergy from consolidation - say, when one party has mineral resources, the second has financial possibilities, and the third has access to the markets - it will be in demand. You don't need a lot of brains to combine debts with debts, and it won't bring any results. That's why we'll keep a balanced, careful approach to this problem. Once again, the main goal here is to increase competitiveness."
But the same day Putin also said he favored Kantor and his plan: "The owners of this enterprise [Kantor's Acron] not only keep jobs in quite difficult conditions, they also develop the social sphere. Owners of the enterprise are not poor people. If those who deal with real production also have a feeling of social responsibility, we will support such people."
Then in Davos, on January 28, Putin declared: "Excessive intervention in economic activity and blind faith in the state's omnipotence is another possible mistake. True, the state's increased role in times of crisis is a natural reaction to market regulation setbacks. Instead of streamlining market mechanisms, some are tempted to expand state economic intervention to the greatest possible extent."
"The concentration of surplus assets in the hands of the state is a negative aspect of anti-crisis measures in virtually every nation. In the 20th century, the Soviet Union made the state's role absolute. In the long run, this made the Soviet economy totally uncompetitive. This lesson cost us dearly, and I am sure nobody wants to see it repeated. Nor should we turn a blind eye to the fact that the spirit of free enterprise, including the principle of personal responsibility of businesspeople, investors and shareholders for their decisions, has been eroded in the last few months. There is no reason to believe that we can achieve better results by shifting responsibility onto the state."
As clear as this looks, its application is anything but. Hence, the dislocation between what Russians say, and what the market does.
Sechin has been quoted by Interfax as saying that the decision on the consolidation plans is up to the shareholders. If that were believable, Rybolovlev of Uralkali would be relieved that he will be deciding the future of the potash miner, not Sechin. But at Uralkali headquarters in Moscow, and in Geneva where Rybolovlev is based, it is the state shareholder, and Sechin's fiat, which are expected to decide. This is why Uralkali's share price is at a substantial discount to its peers, at home and abroad; and why its downward trajectory is disconnected from the potash commodity price.
Deputy Prime Minister Shuvalov has said: "We see that many enterprises that we work with, and their shareholders, have started to feel that the state will save them no matter what. Against this background, they have begun to think ... that the state will help them no matter, help them to refinance their foreign debts and give them special programs to buy their production. We have nothing like this in our plans. Just because the enterprise is important and has several tens of thousands of workers, we do not simply intend to give out resources and wait for them to come for more later. The shareholders and heads of these enterprises must for themselves look at their own personal responsibility."
Those oligarchs who are uncomfortable with state takeover risk, and think they can refinance from the same international banks, to which they are already mortgaged, are now trying to escape.
One of them, Igor Zyuzin, owner of Mechel, is well aware that he's on others' hit-lists. He and Alexei Mordashov, controlling shareholder of steelmaker Severstal, are reported by bank analysts and industry sources as having decided to pull back last month's applications for state bank loans. Since they don't admit to lodging their application; the state bank won't say if applications have been lodged; and no one will acknowledge whether the state bank said yes or no to Zyuzin and Mordashov, there is no way of gauging whether Zyuzin and Mordashov are today more or less desperate. The international markets are in two minds - Severstal's share price is up 10% over the past four weeks; Mechel's is down 21%.
If Putin means what he was saying in Davos, this is exactly what should be happening for the greater benefit of all. "The constant temptation of nestling close to the sources of state well-being is perfectly understandable," the prime minister told the Davos audience. "But at the same time, these sources are not inexhaustible, nor are they cure-alls."
But Putin will not return to Moscow to tell parliament which of the oligarch enterprises will be saved by state financial guarantees, budget funds, or state bank cash. Nor will state auditors and valuers be allowed to testify to parliament on the terms of the new round of loans-for-shares. These are state secrets. And the funny thing about state secrets is that in the marketplace, outside the state, they perform like heavily discounted promissory notes.
In due course, the market will get Putin's message from the enterprise shareholders. It will discount the value of what they say.
In the meantime, the market will apply the outer-space discount. That deals with the risk of not being able to anticipate anything at all. Uncertainty and fear are now making Russian assets worth less than they were during the last two national crises - in 1991, when the Soviet system collapsed; and in 1998, when the Treasury and the banking system defaulted.
John Helmer has been a Moscow-based correspondent since 1989, specializing in the coverage of Russian business.
(Copyright 2009 Asia Times Online (Holdings) Ltd. All rights reserved. Please contact us about sales, syndication and republishing.)

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