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"...public opinion deserves to be respected as well as despised" G.W.F. Hegel, 'Philosophy of Right'

just reviving financial markets? « Previous | |Next »
September 29, 2008

Leaders in the United States Congress last night approved an unprecedented $US700 billion ($840 billion) plan to revive credit markets. In the UK Bradford and Bingley is the latest high street bank to fall victim to the financial contagion as unemployment is rising and consumers are tightening their belts. On Friday the Rudd Government made $4biilion available ( a support package) for no- bank financial institutions providing household mortgages.

PetttyWallStreet.jpg

So things aren't alright in Australia. The bank mortgage lenders are unable to get funds to provide new mortgages, and of those that can have to charge much higher interest rates. As mortgage rates rose ihousands of homeowners now struggle to find affordable finance.

The US plan does not reduce across the board the debt burden of the distressed household sector. Does that mean that without such a component the debt overhang of the household sector will continue to depress consumption spending and will exacerbate the current economic recession?

Will purchasing toxic/illiquid assets of the financial system be an effective and efficient way to recapitalize the banking system? It would appear that the plan does not address the need to recapitalize those financial institutions that are badly undercapitalized. It looks to be a bailout of reckless bankers, lenders and investors. Bailing out wealthy bankers when the millions of families losing their homes get little direct help is not going to play well in Main Street America, which has seen factory after factory close and jobs move overseas. What has happened to fairness in the US?

John Gray says that the era of American global leadership, reaching back to the Second World War, is over in The Guardian. His argument is that America will be even more starkly dependent on the world's new rising powers. and it is unclear that the governments of countries that buy large quantities of American bonds---China, the Gulf States and Russia---will be ready to continue supporting the dollar's role as the world's reserve currency? Gray says:

The fate of empires is very often sealed by the interaction of war and debt. That was true of the British Empire, whose finances deteriorated from the First World War onwards, and of the Soviet Union. Defeat in Afghanistan and the economic burden of trying to respond to Reagan's technically flawed but politically extremely effective Star Wars programme were vital factors in triggering the Soviet collapse. Despite its insistent exceptionalism, America is no different. The Iraq War and the credit bubble have fatally undermined America's economic primacy. The US will continue to be the world's largest economy for a while longer, but it will be the new rising powers that, once the crisis is over, buy up what remains intact in the wreckage of America's financial system.

He says that America's political leaders appear unable to grasp the fact that American global leadership is fast ebbing away.

Update: 30 September
The House of Representatives voted to reject a $700 billion rescue of the financial industry in defiance of President Bush and Congressional leaders of both parties who had said the bailout was needed to prevent a widespread financial collapse.The vote against the measure was 228 to 205, with 133 Republicans turning against President Bush to join 95 Democrats in opposition. The bill was backed by 140 Democrats and 65 Republicans.

So House Republicans voted roughly two-to-one against the bail-out, while the Democrats split three-to-two in favour. This was a Republican bill and 2/3rds of the Democrats voted for the bill.

| Posted by Gary Sauer-Thompson at 7:53 AM | | Comments (10)
Comments

Comments

So trust matter for capitalism. London's money markets froze because of a trust collapse; banks simply don't believe each other when they say their businesses are sound and will not default on their obligations.

Gary,
Michael Tomasky in the Guardian says that the financial crisis is bringing the Main Street Wall Street alliance to an end. The Republican coalition since at least Reagan has been a alliance of Wall Street and Main Street.

Main Street" means, in short, the right-wing populist aspects of the current GOP--guns, God and gays, abortion, rallying the decent common folk against the coastal elites, etc. "Wall Street" means, literally, Wall Street -- more specifically, the pro-corporatist policies that the party puts in place once voted into office by the people on Main Street: the tax cuts for the wealthy, the stern opposition to almost all regulation and oversight of the private sector, the denial of a human role in climate change (because to acknowledge would imply the need to do something about it, and that means regulations and oversight), a host of policies like that.

The alliance worked in terms of a populist politics, since the attack on "elites" were the vehicle for Wall Street policies. Tomasky says;
Get the little people to vote you in. Give them a small tax cut and lots of symbolic stuff that has no actual price tage. Give the store to the big people. That's the Main Street-Wall Street alliance. This bailout proposal puts them at each other's throats far more directly than I can ever remember in my adult lifetime.

Tomasky references this article by Mark Schmitt in American Prospect.

Peter,
In Palin’s American Exception in The New York Times Roger Cohen writes:

Behind Palinism lies anger. It’s been growing as America’s relative decline has become more manifest in falling incomes, imploding markets, massive debt and rising new centers of wealth and power from Shanghai to Dubai.The damn-the-world, God-chose-us rage of that America has sharpened as U.S. exceptionalism has become harder to square with the 21st-century world’s interconnectedness.

The angry exceptionalism that is Palinism has its roots in the view that the United States is a nation unlike any other with a special mission to build the “city upon a hill” that will serve as liberty’s beacon for mankind

Taken together, the financial mess and the Middle East mess seem to have undermined whatever legitimacy the US had. As well, being the cultural production centre of the globe works to their advantage profit-wise, but it also means the rest of us get to see every bit of nastiness the US can possibly reveal about itself - from Tarantino to Palinism.

Imagine if Colin Powell was speaking at the UN today trying to convince everybody to go to war. Would the US even dare to try such a thing now?

Lyn
And the credibility of the Republicans--- The House Republicans propose to try to solve the financial crisis by eliminating capital gains taxes? Factss such as troubled financial institutions, by definition, not having capital gains to tax, doesn't seem to bother them.

Lyn,
It now looks as if the Wall Street meltdown is a huge economic and financial event that also signal a historic shift in global politics – a moment that both marks and accelerates the decline of American power.

Nan,

There's a fair bit of discussion about whether this marks the end of neoliberalism, but not as much about a decline in American power. As if they're somehow separable.

Thinking about the historical context of Wall St, the US and the rest of the world in the Great Depression, this is a whole other animal.

Peter,
I'd argue that it's about way more than the Republicans. I haven't noticed the Democrats proposing that the American way of life, or American exceptionalism, are due for a re-think.

The Bush presidency has certainly sped up the process, but I imagine that in longer term hindsight, historians will be describing a much longer and more complicated slide.

Lyn,
there is an interesting discussion between Naomi Klein and Amy Goodman on neo-liberalism here on Democracy Now. Klein argues that the
the thesis of my book, what I mean by the “shock doctrine,” is that it is in times of crisis, it is in times when people are panicked, when we’ve seen again and again the right push through radical pro-corporate policies, what they call “free market reforms,” precisely because it is in a crisis where the space for debate rapidly closes, and you can invoke this state of emergency to say we have no choice.

And I think we’re seeing a very dramatic example of this tactic right now with this really extortionist kind of tactics playing out in Washington. You know, “Sign this blank check, or we’re all going down, or Main Street is going down, or taxpayers—you know, the sky will fall in on them.” I’m also arguing that this is only stage one of the shock doctrine.
If the Republicans take power, it will be in the midst of an economic emergency. They’ll invoke that emergency to push through very, very radical changes--- they want right-wing, pro-corporate economic changes, attached to a bailout.

Klein says that the crisis that is being deepened right now through these bailouts will be invoked for even more radical deregulation, privatization, tax cuts and so on.


Nan,
It's an interesting thesis. Reading blog comments from Americans around the traps today, I've been reminded of last year's election when there was rising expectation that Howard would manufacture some emergency, produce another Tampa. People are expecting Wall St to be closed, the election to be cancelled, all sorts of wild stuff.

Assuming the thesis is right, it appears that it only works for so long before people start recognising it for what it is.

Also, I'd argue that deploying shock tactics in a domestic situation is one thing. In a global situation it's another. In a global economy, there must be a tipping point where international investors see the US as too high a risk. Not that I know anything about global economics, but it seems to me that if the current situation was used to exacerbate the underlying cause, smart people everywhere would start opting out.

Thought anon's comment about their cranky contrarianism exceptional.