(For previous posts in this series, see here.)
(For previous posts in this series, see here.)
Lewis Powell’s confidential 1971 memo to the US Chamber of Commerce laid out the framework that was largely followed by the business community in the subsequent decades. In it he admits quite frankly that the media and academia are already owned or controlled by big business interests and expresses puzzlement as to why they are not using that power more overtly to serve their own interests.
(For previous posts in this series, see here.)
Three factors discussed so far in the creation of the propaganda machine are the rise of 24/7 cable news networks, nationwide talk radio enabled by satellite communications and toll-free numbers, and the relaxation of media ownership rules that resulted in the concentration of ownership.
The manufactured outrage over Barack Obama’s former pastor Jeremiah Wright’s comments shows the extent to which capitalist Christianity has taken over in America. In this version, Christianity is presented as some kind of self-help program, a lifestyle choice, that is designed to make you feel good about yourself. In this approach, you just have to say some slogan about accepting Jesus as your personal lord and savior, and bingo! you have automatically become a Good Person, guaranteed a place in heaven. This version of Christianity does not deal exclusively with heaven, though. It is also believed that god wants you to be rich and prosperous, so one has it nice both here and in the hereafter. Being poor or sick or otherwise troubled is seen as a sign that you are somehow unworthy or have failed god in some way.
The clergy who endorse this capitalist Christianity ignore the prophetic tradition of preachers, going all the way back to the Old Testament. The true meaning of ‘prophet’ in the Bible is not someone who primarily foretells the future, as is popularly thought, but someone who reveals the truth. Preachers in this tradition saw their role as to shine a harsh light on injustice and on their own people’s evil actions, and demand that they repent and change their behavior or god would punish them severely. Read any of those Old Testament prophets’ thundering denunciations of Israel and you will see that Wright’s damning of America after listing all its crimes fall squarely within that tradition. Take the prophet Amos, for example:
This is what the LORD says:
“For three sins of Israel,
even for four, I will not turn back my wrath.
They sell the righteous for silver,
and the needy for a pair of sandals.
They trample on the heads of the poor
as upon the dust of the ground
and deny justice to the oppressed.
. . .
Now then, I will crush you
as a cart crushes when loaded with grain.” (Amos 2:6,7,13)
This kind of message (that oppressing the poor and otherwise swerving from the path of justice is guaranteed to bring down god’s wrath) is rarely heard today in the megachurches of the dominant classes, the world of comfortable capitalist Christianity. Such a message is aimed squarely at those with a smug sense of their own virtue and would make people uncomfortable. The people hearing it may not come back and give generously to the church or may find a new church that preaches a more soothing message. That would be bad because in capitalist Christianity, increasing your market share of well-to-do believers is everything.
But this prophetic message finds great resonance in the churches of oppressed people throughout the world because they know exactly what it means to be exploited like the people championed by Amos. They wait for the day when god will punish those who have oppressed them. Liberation theology finds a warmer reception in the developing world than in the developed.
The boundaries of this great divide between the churches of capitalist Christianity and prophetic Christianity largely overlaps with the boundaries between white and black churches and this is why white people are surprised when the curtain that separates the two is occasionally raised.
Chris Britt, editorial cartoonist of the Springfield Journal Register captures the acute disconnect between the way that white people and black people view the racial situation in America.
As Obama said in his speech:
For the men and women of Reverend Wright’s generation, the memories of humiliation and doubt and fear have not gone away; nor has the anger and the bitterness of those years. That anger may not get expressed in public, in front of white co-workers or white friends. But it does find voice in the barbershop or around the kitchen table.
People who as a group have not experienced a long history of cruel oppression may not fully appreciate the depth of anger and bitterness that echoes down generation after generation as personal stories of atrocities are passed on, getting slightly more diffuse each time but never quite going away. I know this from my own experience, even though I do not think that I am normally an angry or bitter person. Even though the British left Sri Lanka before I was born, there are times when I feel anger and bitterness against the British for the deep divisions they deliberately created in their colonies that have later resulted in ethnic wars. I would find it laughable if anyone said to me that the British possessed an Essential Goodness and that their colonial occupation was benign. There are also times when I feel deep anger and resentment against my country of birth Sri Lanka for the way that the Tamil minority has been treated, and still continues to be treated by the majority community.
It is easy for the members of the community that caused the injustices to say that we should let bygones be bygones, but those emotional scars run deep and cannot be removed by mere words. This anger is normally kept under control but given the right triggers, can bubble to the surface.
When Wright listed the harmful actions that the US has taken against other people, especially in the Middle East, and said that the attacks of 9/11 were the consequence of such acts, he was merely articulating the ‘blowback’ political analysis of people like Chalmers Johnson, an analysis which is widely accepted by serious policy analysts as the correct motivation for the attacks of 9/11, except that Wright was framing that political analysis in the context of religious punishment for sins. (See Justin Raimondo for a good analysis of the political content of Wright’s sermons.)
When Jerry Falwell and Pat Robertson said that the events of 9/11 were god’s punishment for America’s tolerance of homosexuality and abortion, they were making a similar point to Wright, but with a different target. The significant difference is that Falwell and Robertson were laying the blame at powerless individuals (like gays and those receiving and providing abortions) as causes of that crime and hence got off lightly. Wright, unlike Falwell and Robertson, was challenging the very myth of America’s Essential Goodness and aiming his criticisms straight at the actions of the military-business-political-media complex that rules America. That is why he has been vilified in ways that Falwell and Robertson were not.
Wright is not the first black preacher to say such things and will not be the last. When Wright said right after the events of 9/11, “We bombed Hiroshima, we bombed Nagasaki and we nuked far more than the thousands in New York and the Pentagon, and we never batted an eye. We have supported state terrorism against the Palestinians and the black South Africans, and now we are indignant. Because the stuff we have done overseas has now been brought back into our own front yard. America’s chickens are coming home to roost”, and when he also said “We bombed Cambodia, Iraq, and Nicaragua, killing women and children while trying to get public opinion turned against Castro and Ghadhafi . . . We put [Nelson] Mandela in prison and supported apartheid the whole 27 years he was there”, he was following up on similar analyses made by Martin Luther King, Jr. (another preacher in the prophetic tradition) in the context of the Vietnam war, suggesting that god would rain down punishment on America for its political sins.
King said in a sermon in 1968:
God didn’t call America to do what she’s doing in the world now. God didn’t call America to engage in a senseless, unjust war as the war in Vietnam. And we are criminals in that war. We’ve committed more war crimes almost than any nation in the world, and I’m going to continue to say it. And we won’t stop it because of our pride and our arrogance as a nation.
But God has a way of even putting nations in their place. The God that I worship has a way of saying, “Don’t play with me.” He has a way of saying, as the God of the Old Testament used to say to the Hebrews, “Don’t play with me, Israel. Don’t play with me, Babylon. Be still and know that I’m God. And if you don’t stop your reckless course, I’ll rise up and break the backbone of your power.” And that can happen to America.
King was murdered just two months after delivering that sermon.
Of course, where preachers like Wright and King and Falwell and Robertson, followers of capitalist Christianity and prophetic Christianity alike, all make a mistake is in thinking that they all know what god wants and what god does, even if they are each saying things that contradict the others.
God is not going to solve the problem of deep racial divisions in America, Sri Lanka, Rwanda, or anywhere else in the world, because god does not exist. That is our responsibility.
Obama’s speech provides a small window of opportunity to start that process. We have to open that window wider and walk through it.
POST SCRIPT: The little girl is all grown up
Some readers may have seen the ‘telephone at 3:00 am’ ad that Hillary Clinton made that suggested that Obama did not have the experience to handle crises. It turns out that the images of sleeping children used in that ad were from stock footage filmed eight years ago.
Ironically, one the children in that ad is now eighteen and is campaigning for Obama. She has made a new ad that you can see below:
One of the things that would amuse me if it did not have such serious consequences is that white people in America are always shocked, just shocked, when they get even a glimpse of the anger and resentment that exists among many black people about they way they have been treated and still continue to be treated in this country.
The reason for this perpetual state of surprise is that many white people tend to unquestioningly accept a powerful myth: that America is the one country in the world possessed of an Essential Goodness, bestowed by god. They believe that not only do Americans as individuals possess this quality (that they mysteriously acquire simply by being born within its geographical boundaries), but that the nation as a whole, this political entity, collectively possesses this same quality. The possession of this Essential Goodness is believed to make America morally superior to every other country.
Of course we committed genocide against the Native Americans, we institutionalized and perpetuated a long and brutal slavery, along with lynchings and murders, we have killed millions and millions of people in many small countries under the pretence of defending and spreading democracy, but it is held that all that is in the past and anyway were done by a few misguided individuals a long time ago and is not a reflection on the people as a whole. Despite all that history, the myth persists that we are and always have been, Essentially Good, and that anyone who challenges that myth in any way is spreading a vicious and hateful lie that is borderline treasonous. People who adhere to that myth cannot seem to wrap their minds around the idea that other ethnic groups, with a history of being oppressed, might not find it so compelling.
This powerful myth serves as the basis of a sense of self-identity that is thought to be uplifting but is actually dangerous because it can lead to arrogance, blindness, hubris, and an unwillingness to learn from the harsh lessons of history. A paper in Psychological Review showed that individuals, groups, and even nations that think highly of themselves without any real basis for doing so, resort to violence when they do not receive the inflated respect they feel they are entitled to. High self-esteem that is unsupported by actual achievements or abilities turns out to be harmful. (Roy F. Baumeister, Laura Smart, Joseph M. Boden, Relation of Threatened Egotism to Violence and Aggression: The Dark Side of High Self-Esteem, Psychological Review, 1996, vol. 103, No. 1, 5-33.)
America’s politicians pander to this powerful and corrosive myth since it conveniently enables them to always get the benefit of the doubt of the public when they do something obviously wrong. Since America is Essentially Good, people think that there must be a benevolent reason for any action taken by its government and are eager to seize on any excuse to believe in its good intent. The public acceptance of the weak, almost non-existent, and obviously fraudulent case made for the invasion of Iraq is a case in point.
The brutal fact that history reveals, and which so many of us seem unwilling to accept, is that no people are special, no people are possessed of an Essential Goodness. Not the Germans who were passive in the face of the murder of Jews during World War II, not the Americans who were passive during the murder an estimated half million Vietnamese, not the Ethiopians who were passive during the destruction of Eritrea, not the Hutus who were passive during the murder of the Tutsis, with the list being continued almost indefinitely.
The hardest lesson for us to accept is that we are just like other people.
The commonly heard opening phrase “Only in America can . . .” is a symptom of this belief in American exceptionalism. That preamble is usually followed by a boast that can almost always easily shown to be false, but the truth is immaterial to the speaker of such sentiments. He is appealing to the myth about our Essential Goodness and thus cannot be challenged. Even Barack Obama appealed to this myth in his otherwise exemplary speech on race. He did this to distinguish himself from his former pastor Jeremiah Wright because Wright had committed the one unforgivable sin in American political discourse, a sin even worse than blasphemy, even worse than denying the Holy Spirit, which the Bible tells us is the only unforgivable sin. By listing all the crimes that he felt America had committed and then saying “Not God bless America, God damn America”, Wright had denied the Essential Goodness of America, denied that god had a special place in his heart for America and would always take its side.
For these words, he has been vilified by those who were looking for a reason, any reason, to fan racist flames and discredit Obama as a candidate. I think that a commenter at Talking Points Memo said it best
What drives me crazy is how this could have been avoided so easily if Wright was the slightest bit media-savvy. Had he merely controlled his tongue and limited himself to advocating an attack on Iran to encourage massive worldwide Muslim attacks leading to a fulfillment of the biblical prophecy of end-times and bringing about Armageddon and the summary slaughter of every Jew, Muslim, Catholic, and non-believer on the planet while rapturing him and his flock up to heaven, then followed it up by denouncing Catholics as cult members and blaming Hurricane Katrina on gay people, this story wouldn’t be metastasizing like this. One five minute milquetoast repudiation by Obama and it would all be behind him.
But what does Wright do instead? He spews this vile “God damn America” bile. What a psycho.
In the next post, I will look at the prophetic tradition in which Wright’s sermon is embedded.
Next: Capitalist Christianity versus prophetic Christianity
POST SCRIPT: Hilarious story
I wrote before that the intelligent design creationists were going to release a documentary called Expelled: No Intelligence Allowed where they continue their whining about how these mean scientists are saying nasty things about their nice theory.
Biologist and blogger P.Z. Myers, who has been a fierce critic of intelligent design creationism and was interviewed for the film, has an absolutely hilarious story about what happened to him when he went to see a prescreening of the film. I don’t want to spoil it for you. Just read his post.
UPDATE: After the screening, Richard Dawkins and P. Z. Myers share a good laugh at what happened.
As readers of this blog know, I have not been an enthusiastic supporter of Barack Obama, voting for him in the Ohio primary as the default choice since the alternative of Hillary Clinton is much worse in comparison, and John McCain is truly awful.
But I was really impressed by the speech he gave last Tuesday on race, triggered by the ridiculous flap over some words spoken by the former pastor of his church. If you haven’t seen the speech, you can join the three million people who have viewed it on YouTube or read the full transcript.
The speech was quite extraordinary both for the things he did not say and do as well as for the things he said and did. It was a long speech, lasting about forty minutes, but it was not a stem-winder with resounding phrases. There were no jokes, no innuendo, no digs at political opponents. While there was applause from the audience on a few occasions, there were no built-in, cued-up, applause lines, like one sees in campaign speeches or the awful State of the Union addresses. In fact, Obama seemed to prefer no applause at all and seemed to want to just get on with it. There were no rhetorical flourishes, no crescendos, no dramatic modulations, not even very many memorable phrases.
In his understated and low-key speech, Obama used just one rhetorical device, the pause, and he used it extremely well in a way that reminded me of Harold Pinter’s memorable 2005 Nobel Prize acceptance speech which I have discussed earlier.
Obama quietly delivered a powerful message about the state of race relations in the US and how the way it is currently conducted poisons everything and everyone it touches and of the need to change that situation.
For once we had a major political figure talk like an adult about the serious issue of race. Even more impressive, he seemed to be assuming that the audience also consisted of adults. What made the event so extraordinary, and at the same time reflects so poorly on the state of our political discourse, was that such events are so rare.
He spoke about one issue that I have repeatedly emphasized, how race and other issues are almost always deliberately discussed in inflammatory ways, so that they become distractions from vital issues, and he issued a challenge to the media and to us to change that. He did not take a Pollyannaish view of race or try to disavow the people or history that are integral to dealing with it. Instead he correctly said that we need to know and understand that history if we are ever to overcome it.
The fact is that the comments that have been made and the issues that have surfaced over the last few weeks reflect the complexities of race in this country that we’ve never really worked through – a part of our union that we have yet to perfect. And if we walk away now, if we simply retreat into our respective corners, we will never be able to come together and solve challenges like health care, or education, or the need to find good jobs for every American.
Understanding this reality requires a reminder of how we arrived at this point. As William Faulkner once wrote, “The past isn’t dead and buried. In fact, it isn’t even past.” We do not need to recite here the history of racial injustice in this country. But we do need to remind ourselves that so many of the disparities that exist in the African-American community today can be directly traced to inequalities passed on from an earlier generation that suffered under the brutal legacy of slavery and Jim Crow.
But what was most important in the speech was the indictment of the media about how they cover race and politics and the challenge that he issued to them and us to talk like adults about race, a topic that is at once so ephemeral (after all, the concept of race has no biological standing) and yet so important.
This is where we are right now. It’s a racial stalemate we’ve been stuck in for years. Contrary to the claims of some of my critics, black and white, I have never been so naïve as to believe that we can get beyond our racial divisions in a single election cycle, or with a single candidacy – particularly a candidacy as imperfect as my own.
. . .
For we have a choice in this country. We can accept a politics that breeds division, and conflict, and cynicism. We can tackle race only as spectacle – as we did in the OJ trial – or in the wake of tragedy, as we did in the aftermath of Katrina – or as fodder for the nightly news. We can play Reverend Wright’s sermons on every channel, every day and talk about them from now until the election, and make the only question in this campaign whether or not the American people think that I somehow believe or sympathize with his most offensive words. We can pounce on some gaffe by a Hillary supporter as evidence that she’s playing the race card, or we can speculate on whether white men will all flock to John McCain in the general election regardless of his policies.
We can do that.
But if we do, I can tell you that in the next election, we’ll be talking about some other distraction. And then another one. And then another one. And nothing will change.
That is one option. Or, at this moment, in this election, we can come together and say, “Not this time.”
We have to look to comedian Jon Stewart who, between the jokes, gives one of the most adult media reactions to the speech.
The reactions to Obama’s speech are interesting. Those who would never have voted for him anyway have been nitpicking it to death but in the process come off looking petty. But he put in a tricky position those who pride themselves on being at least somewhat enlightened. If they continue to harp on Wright’s words, they will be acknowledging that they really don’t want the kind of discussion Obama is calling for but simply want to continue to use race as a divisive tool. Even Fox News’s Chris Wallace was so embarrassed by his colleagues on his own network over their relentless focus on precisely the kind discussion that Obama deplored that he publicly took them to task for it. It seemed like even he had had enough.
We can only hope that this speech will change the way that race is discussed in America.
In the next post, I will say more about the context in which Obama’s speech came to be delivered.
POST SCRIPT: The God Delusion Debate
Case’s Campus Freethought Alliance (CFA), in partnership with the Case InterVarsity Christian Fellowship, will present a screening of The God Delusion Debate beginning at 7 p.m. on Tuesday, March 25 in Strosacker Auditorium. The program features biologist Richard Dawkins, who needs no introduction, debating points from his book The God Delusion with John Lennox, a mathematician, philosopher of science, and a Christian.
You can see just the opening to the debate here. In the interests of time, this 20-minute introduction explaining the debate set up and having the debaters give brief biographies of themselves will not be shown at the event.
At 8:30, immediately, following the screening, there will be refreshments and then a panel discussion.
(For previous posts in this series, see here.)
The third tier pundits are a byproduct of five significant developments in media ownership and control.
The first is the rise of 24/7 cable news networks that has created a voracious demand for people to fill all that airtime. There is just not enough real news to report, and creating good investigative reports on important topics costs money which eats into profits. There is a limit to how much time one can spend on celebrity gossip. Even coverage of Britney Spears can get stale. The supply of attractive young women who go missing, another source of endless cable news media fascination, is also limited. As a result, the cable news networks depend heavily on talk shows since having people give opinions costs little money. But the people who have studied issues in depth and have informed opinions based on deep knowledge tend to be academics but they have jobs that require them to teach and do research and thus are not readily available at a moment’s notice to come and talk about the day’s events, assuming they even wanted to. This leaves a niche for a large number of professional pundits whose job is to be at the media’s beck and call. The third tier pundits fill that niche.
Yesterday, March 19, 2008 saw the fifth anniversary of the tragic invasion of Iraq by the US, a deliberate act of aggression against a country that had posed no threat whatsoever to it, an action that is going to have serious negative consequences for US power an influence in the world, both militarily and economically. Historians looking back might see that as a watershed event, a peak in the power hubris of a country. Apart from the appalling death and destruction that has been wreaked on the people of Iraq, with hundreds of thousands of Iraqis dead and injured and vast numbers of internal and external refugees, the invasion of Iraq has also brought to the surface the decline of US economic power.
Presidential elections involve two distinct phases. In the first phase, the Villagers drive out of the race anyone who might even remotely threaten the power and privileges of the pro-business/pro-war single party oligarchy that runs the country. Once that is achieved, then the Villagers create major controversies over personal and social issues, so that the electorate gets really fired up and angry and think that important issues are at stake, and not notice that the game is already over. (See here and here for who the Villagers are and the role they play.)
We are now comfortably in that second phase of the process. There is little to choose from between Obama and Clinton in terms of policy differences and so we have this ridiculous amount of attention being paid to statements made by their supporters and other trivialities. When the Democratic nominee is finally determined, we will then see the same kind of intense attention on trivial issues between the two party nominees.
As I said in a 2006 post on election year politics:
As a result, the overture to familiar strains of election year sloganeering are being heard, following a similar pattern. In the months leading to November, one can expect to hear a lot about the following: gay marriage, abortion, immigrants, flag burning, English-only rhetoric, UN bashing, estate tax repeal, and assisted suicide.
All these issues (except for immigration and the estate tax) share the characteristic that they are largely symbolic and directly affect only a tiny minority of people. They have little relevance to the actual lives of most people, but they do aim straight at the emotional core of the base and provide many opportunities to push people’s buttons and make them angry. And expect to hear lots of talk about god and religion, perhaps involving those old faithfuls such as displaying the ten commandments in public places or the pledge of allegiance or prayer in schools and similar church-state separation issues.
However, I would not be surprised if a completely unexpected, but equally trivial, new issue emerges suddenly, since the ones I have listed are, like, so-o-o-o 2004, and the extremist base loves fresh raw meat.
That has happened. Look at the kinds of media coverage that the race now gets. The big issues that the country faces are the wars in Iraq and Afghanistan and the threat of a US attack on Iran; the hundreds of thousands of dead and injured in Iraq and the massive number of displaced people and refugees; the large and continuing budget and trade deficits; the rapid decline in the value of the dollar against other major currencies; the threat of an imminent recession; the crisis facing many homeowners due to the subprime debacle; the shakiness of the US banking system because of that same issue; and the spiraling cost of health care and the lack of coverage for over forty million people, a large fraction of whom are children.
These are all signs that the US has gotten itself into a tailspin. Paul Craig Roberts spells out the magnitude of the problems that have been created. All these issues affect each and every one of us, either directly or indirectly, and have major long-term consequences. Whoever becomes president in November will inherit a financial and military mess that will require very tough and unpopular decisions.
And yet, how much coverage do we have of the candidates’ views on these topics and what their priorities and plans are for dealing with them? Take for example the unprecedented actions by the Federal Reserve to bail out the big investment banks that made lots of money but now are in serious trouble. What are the candidates’ views on this situation? What would they do as president? Do they approve of this kind of government intervention in the financial sector?
We are clearly not going to get any kind of adult talk on this issue from the current president. Last Friday, when the Bear Stearns news was rocking global financial markets, Bush talked to a group of economists at the Economic Club of New York who, along with people around the world, were presumably anxious to hear what the government’s response would be. According to a reporter present, what they heard would have given them the impression of a president who was either in fantasyland, oblivious to what is going on around him or completely out of his depth.
[Y]ou had to wonder what the international financial community makes of a country whose president could show up to talk economics in the middle of a liquidity crisis and kind of flop around the stage as if he was emcee at the Iowa Republican Pig Roast.
We’re really past expecting anything much, but in times of crisis you would like to at least believe your leader has the capacity to pretend he’s in control.
. . .
Our credit markets are foundering, and all we’ve got is a guy who looks like he’s ready to kick back and start the weekend.
. . .
[T]his economic crisis has been going on for months, and all the president could come up with sounded as if it had been composed for a Rotary Club and then delivered by a guy who had never read it before.
He then spoke about his Big Plan: sending checks of $600 to everyone! Oh yes, that should definitely turn things around. Oh, and he’s also totally against congressional earmarks now, though he was fine with them while the Republicans controlled Congress. That was pretty much it. One wonders if there are any adults in this administration.
Here is Jon Stewart on the economic mess and Bush’s speech:
Meanwhile, on Friday itself Wall Street investors started a steady drumbeat demanding that the Fed cut interest rates once again at its regular meeting on Tuesday, by another huge amount, perhaps even as high as one percentage point. The Fed duly obliged cutting rates by a quarter point on Sunday, itself a highly unusual action, and then followed with a further cut of ¾ point on Tuesday. The stock markets duly soared upwards again.
Cutting interest rates by large amounts might please Wall Street investors, at least in the short run, but it has consequences for the long term. Doing so while European rates stay high results in the dollar, already at record lows, sinking even further. This will raise the price of oil and other imports, increasing the rate of inflation and aggravating the trade deficit. All this makes foreign investors even more wary of dollar-based investments, which may make it harder to sell them US treasury bonds to finance the deficits.
The investments made by investment banks like Bear Stearns are highly leveraged, meaning that they buy securities with just a small amount as down payment and finance the rest, just like the way we buy houses with a small down payment and finance the rest with a mortgage. The difference is that when buying a house (in normal times) the down payment is usually 10 to 20% and the value of the collateral (the house) is worth more than the loan, so that if the borrower can’t repay the loan, the lender can still recover the money by selling that asset.
In the case of Bear Stearns, it is estimated that the size of its purchases outnumbered its actual assets by a ratio of 28-to 1, meaning that it bought securities for 28 times the value of the actual cash it put into the purchase. The balance was borrowed. Usually these banks sell these highly leveraged securities long before the loan is due to be repaid and thus are able to repay the debt. But in this case, nobody wants to buy their securities. When the bills came due, the banks could not sell and thus had no money, which is why the bank had a liquidity crisis. When the Fed came to the rescue by guaranteeing these securities, it was essentially saying that they would pay up if the value of the securities did not rise again and creditors came for their money.
Hanging over everyone is the uncertainty. How many other big banks are holding on to how much mortgage backed securities? How much did they leverage? How far is the Federal Reserve willing to go in using taxpayer money to prop up these banks?
On Monday the biggest commercial bank in Cleveland, National City Bank, lost 43% of its value in one day, fueled by suspicions that it was holding a large amount of now worthless mortgage-backed securities. Before 1999, commercial banks were restricted by the Glass-Steagall Act from taking the kinds of risks that investment banks take, because the government insured the deposits of those banks and did not want to underwrite excessive risk taking. That act was passed in 1933 in the wake of the Great Depression because banks had been making highly speculative investments and thus caused the crash. But in 1999 Congress and Bill Clinton removed that barrier and now the rot that has infected the investment banks has spread into the commercial banking sector also.
As the days go by, watch for more volatility, fueled by rumors.
POST SCRIPT: The God Delusion Index
Answer this series of questions and calculate the extent of your own God Delusion.
Last Tuesday, the Federal Reserve Board said that it would guarantee up to $300 billion worth of the highly devalued assets held by those banks that had been speculating in the subprime real estate market, thus enabling those banks to borrow money because of the federal guarantee. Nobody else would accept the subprime mortgage portfolios as collateral for loans. So in effect the taxpayers were being put on the hook if the loans could not be repaid. The stock market that day reacted with glee, skyrocketing upwards. (I explained what was going on here.)
That party ended on Friday. The big investment bank Bear Stearns said that it could not meet its obligations and requested a loan from another big investment bank JPMorgan Chase. The latter, unlike the general public, was aware of the nature of the assets held by Bear Stearns and said nothing doing, unless the Federal Reserve was willing to guarantee that loan too. The Fed, always eager to please the big financial interests on Wall Street, readily agreed and in a single day the whole transaction was approved. This is pretty amazing speed when you consider that $30 billion of taxpayer money was involved.
But the news of Bear Stearns’ troubles, which came just two days after a cheery message of confidence by its head just two days earlier that everything was just fine and dandy, sent jitters down the spine of investors who wondered how bad the situation really was and what dark secrets existed in the vaults of other big financial institutions.
They found out on Sunday when it was announced that JPMorgan Chase was actually buying Bear Stearns for the astoundingly low price of $2 per share, with the Fed once again guaranteeing the transaction. Just last year that stock had been trading at $172 per share. In just one year, the bank had lost almost 99% of its value, a collapse of Enron-sized proportions, but this time affecting one of the oldest and largest investment banks in the country. The total cost to JPMorgan Chase to buy this former financial powerhouse was only $236 million. Given that the Bear Stearns’ fancy headquarters building alone was estimated to be worth about a billion dollars, this fire sale price indicates that Bear Stearns was in even more terrible shape than previously thought.
To understand what is going on here, we need to know that banks invest the money deposited in them to make money for themselves and their depositors. They do this by buying and selling securities of various types. But they are expected to keep a certain percentage of that money in cash to meet the routine demands of depositors who need to withdraw money for whatever reason. As long as not too many people want too much money at once, the banks are said to have sufficient ‘liquidity’ and the system works well. Even if the banks run out of cash, they can get short-term loans from the Fed or other banks using their securities as collateral. The interest on these loans is what is called the ‘discount rate’ and it is much less than the interest that we pay on loans. These kinds of loans are routinely done and are meant to ease any short-term liquidity problems.
But if there are suspicions that a bank is in trouble, that can lead to a stampede of depositors all demanding their money at the same time and we have a ‘run’ on the bank. If the banks cannot convert enough of their securities to cash or raise large enough loans, it can go bankrupt. This can happen even if a bank is perfectly sound. All it requires is a rumor of trouble to cause a run.
It was to prevent such problems that the FDIC system was set up. This said that whatever happened to a bank, the government would guarantee to reimburse depositors up $100,000 each. This was meant to reassure depositors so that they need not panic and withdraw their money suddenly. This is what possibly saved Countrywide Bank last year when it was discovered to have had huge losses by investing in subprime portfolios. I, for example, have an account at Countrywide but did not panic and ask for my money back when I heard the news of its troubles, precisely because of the guarantee.
In return for this government guarantee, the commercial banks have to submit to supervision by the government to make sure that they are not making too many risky investments, though we see in the case of Countrywide that the system is not foolproof.
But investment banks like Bear Stearns are not like the commercial banks ordinary people deal with. There are two kinds of investors in banks like Bear Stearns, those who buy shares in the bank and those who give the bank their money to manage. These banks are outside the FDIC system and the federal government has not previously assumed any responsibility for them or their depositors. Those banks are not like the ones where most ordinary people have accounts. These are meant for very wealthy investors for whom $100,000 is just pocket money. It is presumed that these wealthy depositors and investors are financially savvy people who are capable of evaluating for themselves the risks involved and do not need the government to protect their interests.
These investment banks can and do take much greater risks with their investments in return for much higher rates of return than we get on our checking and savings account. This is capitalism in theory, where there is supposed to be a correlation between risk and reward.
But the trouble was that Bear Stearns was one of the worst culprits causing the subprime mortgage debacle, underwriting many of the transactions and causing the inflation in values of those securities that had little relationship to the actual value of the properties. So when the party ended, they got stuck holding a lot of securities which they had paid high prices for and which were now worthless. When investors started suspecting that things were not going well and started trying to take out their money, Bear Stearns did not have the money and could not sell its securities to raise anywhere near enough money, and nobody would lend them money using those worthless securities as collateral.
Except the government. In an unprecedented move, the Federal Reserve decided that they would intervene to try and prop up, at least partially, Bear Stearns so that it did not go bankrupt by offering guarantees for loans given to it, essentially putting an artificial value on its securities. In essence, the government is using taxpayers’ money to try and protect the wealthy financial interests associated with these investment banks. It is true that the people who held shares in Bear Stearns have lost money due to declining share prices but there is little the government can do about that. But by guaranteeing the value of the mortgage collateral, it bought those investors some time
So rather than seeing capitalism in practice what we have is capitalism in theory but a perverse socialism in practice, where the risk is borne by all taxpayers but the benefits in the form of profits accrue to just a few. All those people in government and business who preach financial discipline to the poor and say that people should be held accountable for their decisions, tend to conveniently change their tune when it is themselves or their friends who are affected.
I have shown this clip by British comedians John Bird and John Fortune before but I am showing it again because they describe precisely how we got into this mess and mention by name Bear Stearns and discuss the two funds owned by them that lie at the heart of their problems.
It is unnerving that two comedians in another country in October 2007 could finger the problem that is just now rocking the financial markets in the US.
Once again, I am not an economist so people who are more knowledgeable can chime in with corrections.