The warning signs of trouble ahead

If we look at the situation globally, we see two trends, one good and one bad. The good one is that the gap in average incomes between people in the developed world and the developing world is closing. But while inequalities between nations (as measured by statistics on averages) is decreasing, inequalities within nations are worsening, as income and wealth disparities get larger. As a result, we now have two worlds emerging that, unlike the old divisions of rich and poor nations, now consist of rich and poor groupings that transcend nations. As Chrystia Freeland says in an article in the January/February 2011 issue of The Atlantic titled The Rise of the New Global Elite of the new oligarchy:

Perhaps most noteworthy, they are becoming a transglobal community of peers who have more in common with one another than with their countrymen back home. Whether they maintain primary residences in New York or Hong Kong, Moscow or Mumbai, today’s super-rich are increasingly a nation unto themselves.

No good can come from this trend of a rapidly widening gap between a tiny rich coterie and the ever-increasing numbers of the poor. It is too uncomfortably reminiscent of the pre-revolutionary France and is destined to self-destruct.

Within the US, the collapse of the US empire will not be because of any external threat. Its military is too powerful to be overcome. It will collapse from within for economic reasons, as it becomes bloated, bankrupt, arrogant, over-extended, and hubristic, thinking that its military might alone is sufficient to ensure its continued dominance over other countries. As with past empires, people will not realize until the very moment of collapse how bad things are, and then look back and marvel as to how they could have missed all the screaming warning signs.

The structural warning signs are already there: rapidly rising inequalities in income and wealth, declining services and quality of life, lower standards of living for the many, endemic large budget deficits, a national debt that is approaching the size of the GDP, and a political class that has become so subservient to the oligarchy that it will not address the problems head on but blusters over trivialities.

A serious warning sign is when other nations become wary of the US dollar serving as the reserve currency. That feature has enabled the US Federal Reserve to print money (euphemistically called ‘quantitative easing’) to paper over its chronic deficits and try and boost the US economy by putting more money in circulation, even though this has a negative impact on the economies of the rest of the world because it essentially devalues the dollar and thus cheapens the value of their dollar reserves. This practice has allowed the US to live well beyond its means for many years now.

But there are limits to how long this can go on. Other countries are starting to seek alternatives to the dollar. Paul Craig Roberts says that here have been rumblings already on this front and that “Russia and China have concluded an agreement to abandon the use of the US dollar in their bilateral trade and to use their own currencies in its place”. Troubles with the euro have kept the threat of that currency becoming the reserve temporarily at bay. Meanwhile, China, India, and France are calling for a new international monetary system in which the dollar is no longer the sole reserve currency.

A symbolic warning sign that things are bad is the increasing frequency of grandiose rhetoric making claims to national greatness. Witness this recent effusion from Rich Lowry in the National Review: “Our greatness is simply a fact. Only the churlish or malevolent can deny it, or even get irked at its assertion.” It is a truism that the truly great in any field never have to boast about it because they simply take it for granted. It is only those who are insecure who do so.

Barack Obama campaigned on a platform of hope and promises of change and a new direction that we now know he had no intention of fulfilling. He used hope as a lure to delude people the same way that religions use hope of a wonderful afterlife to get them to accept terrible conditions here and now. We need to kill that sense of hope. This sounds terrible but it is only when we lose our illusions about the current state of affairs in the US that we can begin to create a better society. It is only when we see the reality, that the US does not have two parties with different visions but is a one party oligarchic state that is pursuing policies that benefit a few but are causing the nation as a whole to tumble into disaster, that we can set about creating the kind of movement that will unite the base of both parties, including even the tea partiers, and can see clearly what the real problems are and what needs to be done.

Next: Who makes up the oligarchy and what needs to be done?

The modern transnational oligarchy

When it comes to politics, my preference is to think long-term and to use short-term trends simply as indicators of what the long-term future is going to be like. So I have little patience with much of news ‘analysis’ that is primarily tactical, following the fortunes of individual elections and individual candidates, unless I think those races signify some major trend.

Given my gloom about the current direction that the US is taking, it may surprise some readers that I am by nature an optimist and I can often find silver linings in the darkest clouds. But in the case of the US, the only silver linings that I see are in the long term. In the short term, I fear that things are going to become very bad.

The reasons for my gloomy outlook are because of the systemic causes of the problems that currently beset the US. As long as there is no mass recognition of the deep causes of problems, we are doomed to pursue ineffective policies. The US is at present mired in two publicly acknowledged wars in Iraq and Afghanistan, two secret wars in Pakistan and Yemen, and two potential wars in Iran and Somalia. These are all part of a futile ‘war on terror’ that it can never win by force of arms but which is a huge drain on the treasury. Couple this with an oligarchy that seems to have lost all sense of restraint and seems hell-bent on looting the public treasury for its own short-term benefit with little or no concern for the long-term consequences for the nation as a whole, and you have a prescription for major trouble ahead.

Even conservative Francis Fukuyama writes that we now have a plutocracy in the US.

We mean not just rule by the rich, but rule by and for the rich. We mean, in other words, a state of affairs in which the rich influence government in such a way as to protect and expand their own wealth and influence, often at the expense of others. As the introductory essay to this issue shows, this influence may be exercised in four basic ways: lobbying to shift regulatory costs and other burdens away from corporations and onto the public at large; lobbying to affect the tax code so that the wealthy pay less; lobbying to allow the fullest possible use of corporate money in political campaigns; and, above all, lobbying to enable lobbying to go on with the fewest restrictions. Of these, the second has perhaps the deepest historical legacy.

Countries are almost always run by a ruling class largely for the benefit of that ruling class, so what Fukuyama is saying is not new. What is new is that larger segments of even the conservative intelligentsia are coming around to that realization that even within such a system, what creates some semblance of national unity and prevents deep social unrest is the idea of noblesse oblige, the sense among the ruling class that they have at least some obligation to serve the needs of society as a whole in addition to enriching themselves. At the very least this was a form of self-interest, to create a positive image of themselves to avoid things becoming so bad as to create a revolutionary situation. As a result of this sensibility, one saw investment in public works and amenities (roads, rail, parks, libraries, schools, etc.) and the rise of the welfare state within capitalism. In days gone by one even saw members of the ruling class actually volunteer to fight in their country’s wars, an idea that would seem quaint to the members of the current oligarchy.

Those days are gone. The concept of noblesse oblige is completely foreign to the present oligarchy in the US. They would find laughable the idea of any personal sacrifice for the common good or that the well being of the nation requires at least some checks on their own wealth accumulation. We are now past the stage of the ordinary capitalism that unleashed enormous productive capacities and growth and have entered an era of rapacious and predatory capitalism, where unchecked greed reigns supreme, and where the wealthy are beginning to compete amongst each other to see how much and how quickly they can enrich themselves at the expense of the public good.

Felix Salmon points to an article by Chrystia Freeland in the January/February 2011 issue of The Atlantic titled The Rise of the New Global Elite on how the present oligarchy is quite different from the oligarchies of the past and views the middle classes with contempt. They see themselves as having succeeded purely on their merit and entirely deserving of their huge wealth and see no obligation to society as a whole.

What is more relevant to our times, though, is that the rich of today are also different from the rich of yesterday. Our light-speed, globally connected economy has led to the rise of a new super-elite that consists, to a notable degree, of first- and second-generation wealth. Its members are hardworking, highly educated, jet-setting meritocrats who feel they are the deserving winners of a tough, worldwide economic competition—and many of them, as a result, have an ambivalent attitude toward those of us who didn’t succeed so spectacularly.

The idea that the poor are poor through their own fault and are thus ‘undeserving’ of any consideration and quite expendable is a very old idea. What is changing is that the line of demarcation has shifted upwards quite suddenly so that the group that constitutes the lower middle class and even the middle class, once considered the bedrock workers on which the economy was built, now find themselves also being considered expendable because their jobs can easily be outsourced to other countries or replaced by machines or by squeezing other workers to do more. This is why we can now have a ‘jobless recovery’, whereby the stock market and profits are soaring while unemployment remains high.

F. Scott Fitzgerald wrote in a short story The Rich Boy (1926), “Let me tell you about the very rich. They are different from you and me”, a theme he had elaborated on in his novel The Great Gatsby that was published in the same year. What we see is that the very rich now are not just different from you and me, they are even different from the rich of the past. And not in a good way.

Next: Warning signs of trouble ahead.

The Republican Party’s con game

Last Friday, I said that the problem with the Democratic Party’s base is that they are too willing to accept at face value the statements of their party leaders and too quick to be satisfied with crumbs thrown their way in the form of victories on social or symbolic issues.

What is going on with the Republicans is more interesting than what is going on with the Democrats because the Republican base has become more feisty and less trusting of their own leadership and are showing signs of developing a healthy cynicism. The tea party rebellion was the result of the Republican Party faithful waking up to the fact that their own leadership was also manipulating them to advance an agenda that was not in their own interests. For a long time, the Republican Party leadership has managed to fool their followers in the same way that the Democrats do but their followers seem to have wised up earlier.

The slow but steady decline of the white middle class, the mass base of the Republican Party, who are losing jobs and seeing their lifestyle lowered, has been causing simmering discontent for some time. There seems to be an almost palpable feeling that the country is in a state of decline and when that happens people tend to want to assign blame. The tea party members have a vague sense that the outsourcing of jobs and the financial shenanigans of Wall Street are the cause of their plight, as can be seen from their hostility to the bailouts and their ‘buy American’ form of patriotism. But because of their ignorance and naivete about politics and how things actually work, they have been suckered into thinking that the reason that things are this way is due to ‘big government’ and that cutting taxes for everyone will shrink the government and thus somehow miraculously get them out of their plight.

The tea partiers that demand less government do not realize that their anger is being used to target those agencies of government that keep rampant corporate greed in check and that the more those agencies are constrained and eliminated, the more we will be at the mercy of big business interests. The goal of big business is to eliminate or undermine all those government agencies whose purpose serve as watchdogs for the public but which put a crimp on their unfettered search for ever-increasing for profits. Those agencies like the IRS, SEC, OSHA, FDA, BLM, and EPA are meant to balance the needs of the corporate sector with the welfare of individual citizens who lack the money and other resources to fight on their own.

While the base of the Democratic Party tends to make excuses for their leadership’s fecklessness, the base of the Republican Party at least has the gumption to take to the streets and make their leadership sit up and take notice. It is true that the tea party is largely white, well-to-do, older, and has in its ranks racists, xenophobes, homophobes, and outright nutcases. Its ranks contain people who are so out of touch with reality that they seriously think that Obama is a Kenyan and/or Muslim and/or Communist who has a secret agenda to destroy the country by imposing a socialist dictatorship mixed in with Sharia law or that the health care reform package that the Democrats passed is a government takeover of the system.

The tea party is also shackled by anti-intellectual pride and complacent ignorance that has enabled obvious grifters like Sarah Palin and Glenn Beck to turn their anger away from the true causes of their decline (which is the oligarchy seeking an ever-increasing share of wealth) into resentment against minorities and the poor and foreigners, coupled with hot-button social issues like abortion and gays, all wrapped into a single anti-government and anti-tax package.

The Republican leadership clearly is aware of this unrest and is nervous. So far, the they have managed to ride that tiger but its position is precarious. While they were able to win significant legislative victories in 2010 by pandering to their base and making unrealistic promises, we see them now warily wondering how to appease their followers to distract them from the fact that those promises cannot and will not be kept. They made a big issue out of the budget deficit and the national debt and promised to bring both down, when in reality their obligations to the oligarchy will increase both. They are walking a knife-edge and they know it. In order to disguise their inevitable sell-out, we can expect to see another major effort to gin up major controversies on social issues in order to distract their followers.

Whether the Republican Party base will wise up as to what is really going on and realize that the groups they are currently being made to hate and attack as the cause of the nation’s problems (minorities, unions, the unemployed, the poor) are in the same boat as them and shift their focus to attacking the oligarchy or whether they will continue to be sidetracked by false issues and thus eventually wither away into sputtering incoherence remains to be seen.

The Democratic Party’s con game

My social circle tends to be people who call themselves liberal and vote Democratic. Whenever we discuss politics, I am always struck by how their sources of information are restricted to the mainstream media and how much they reflect the thinking of the commentators in them. Their idea of a ‘liberal’ is someone like Thomas Friedman and someone on the ‘far left’ is Keith Olberman. They will proudly say that they subscribe to the New York Times and will express contempt for Fox News and its stable of propagandists. These are taken as signs of their impeccable liberal credentials,
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American oligarchy-8: An update

I wrote a long series recently on the oligarchy in America, and since then came across some good articles that I thought others might enjoy.

Matt Taibbi reflects on the flip side of a society that tolerates an oligarchy, which is the peasant mentality that prevents people from seeing who their real enemies are and whose anger can be easily misdirected.

Actual rich people can’t ever be the target. It’s a classic peasant mentality: going into fits of groveling and bowing whenever the master’s carriage rides by, then fuming against the Turks in Crimea or the Jews in the Pale or whoever after spending fifteen hard hours in the fields.

Meanwhile Glenn Greenwald further elaborates on how the oligarchy operates.

[Michael] Paese went from Chairman [Barney] Frank’s office to be the top lobbyist at Goldman, and shortly before that, Goldman dispatched Paese’s predecessor, close Tom Daschle associate Mark Patterson, to be Chief of Staff to Treasury Secretary Tim Geithner, himself a protege of former Goldman CEO Robert Rubin and a virtually wholly owned subsidiary of the banking industry. That’s all part of what Desmond Lachman — American Enterprise Institute fellow, former chief emerging market strategist at Salomon Smith Barney and top IMF official (no socialist he) — recently described as “Goldman Sachs’s seeming lock on high-level U.S. Treasury jobs.”

Meanwhile, the above-linked Huffington Post article which reported on [Senator Dick] Durbin’s comments [that "The banks -- hard to believe in a time when we're facing a banking crisis that many of the banks created -- are still the most powerful lobby on Capitol Hill. And they frankly own the place."] also notes Sen. Evan Bayh’s previously-reported central role on behalf of the bankers in blocking legislation, hated by the banking industry, to allow bankruptcy judges to alter the terms of mortgages so that families can stay in their homes.

And that’s not all. As the Wall Street Journal reports (via Washington Monthly):

The Federal Reserve Bank of New York shaped Washington’s response to the financial crisis late last year, which buoyed Goldman Sachs Group Inc. and other Wall Street firms. Goldman received speedy approval to become a bank holding company in September and a $10 billion capital injection soon after.

During that time, the New York Fed’s chairman, Stephen Friedman, sat on Goldman’s board and had a large holding in Goldman stock, which because of Goldman’s new status as a bank holding company was a violation of Federal Reserve policy.

The New York Fed asked for a waiver, which, after about 2 1/2 months, the Fed granted. While it was weighing the request, Mr. Friedman bought 37,300 more Goldman shares in December. They’ve since risen $1.7 million in value. (…)

Mr. Friedman, who once ran Goldman, says none of these events involved any conflicts. He says his job as chairman of the New York Fed isn’t a policy-making one, that he didn’t consider his purchases of more Goldman shares to conflict with Fed policy, and bought shares because they were very cheap.

Conflict of interest means nothing to the members of the oligarchy because they really think they own the country and the rules that apply to you and me are irrelevant to them. You know you are living in an oligarchy when the very rich get into fits of aggrieved rage when even the tiniest of their privileges are taken away. Here are some reactions from Wall Street executives, as reported in a fascinating article in New York magazine.

“No offense to Middle America, but if someone went to Columbia or Wharton, [even if] their company is a fumbling, mismanaged bank, why should they all of a sudden be paid the same as the guy down the block who delivers restaurant supplies for Sysco out of a huge, shiny truck?” e-mails an irate Citigroup executive to a colleague.

“I’m not giving to charity this year!” one hedge-fund analyst shouts into the phone, when I ask about Obama’s planned tax increases. “When people ask me for money, I tell them, ‘If you want me to give you money, send a letter to my senator asking for my taxes to be lowered.’ I feel so much less generous right now.”

You should read the whole article. The petulant sense of entitlement, their immense sense of self-importance, and their contempt for everyone else, is astounding. They really do live in a different world from you and me.

POST SCRIPT: The Onion on Trekkies reaction to new Star Trek film

Trekkies Bash New Star Trek Film As ‘Fun, Watchable’

American oligarchy-7: What needs to be done

(For previous posts in this series, see here.)

So where does Barack Obama fit into this picture? We saw him strike various populist themes during the campaign. But it should be clear from the people he has surrounded himself with on economic policy that he too is completely subservient to Wall Street interests. In fact, populist and supposedly liberal Democratic politicians like Bill Clinton and Barack Obama are far more useful to Wall Street in many ways, because they hide their subservience to Wall Street better. Liberal watchdogs tend to let down their guard and thus allow these politicians to give away the store in ways that Republicans, with their naked greed, would find hard to get away with.
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American oligarchy-6: The victories of the oligarchy

(For previous posts in this series, see here.)
In his article in the May 2009 issue of The Atlantic magazine titled The Quiet Coup, Former chief economist of the IMF Simon Johnson lists the fruits of the collusion between both political parties and Wall Street interests.

From this confluence of campaign finance, personal connections, and ideology there flowed, in just the past decade, a river of deregulatory policies that is, in hindsight, astonishing:

  • insistence on free movement of capital across borders;
  • the repeal of Depression-era regulations separating commercial and investment banking;
  • a congressional ban on the regulation of credit-default swaps;
  • major increases in the amount of leverage allowed to investment banks;
  • a light (dare I say invisible?) hand at the Securities and Exchange Commission in its regulatory enforcement;
  • an international agreement to allow banks to measure their own riskiness;
  • and an intentional failure to update regulations so as to keep up with the tremendous pace of financial innovation.

Just examine that list for a moment. Did you hear about any of those important actions while they were being carried out? Were there front page news reports and commentary on them? Loud arguments? Highly publicized congressional hearings? Fierce partisan debates? When all that was going on, was there any attempt at informing the public of the potential consequences of these wide-ranging decisions? Of course not. The chances are that during those times our attention was focused on Monica Lewinsky, Terri Schiavo, gay marriage, Chandra Levy, Valerie Plame, and the like. This is why observing politics has to be like watching a magician. If you look at what your attention is being drawn to, you are missing what is actually happening. The real action takes place in obscure committee hearings, at the regulatory bodies, in private meetings between members of government and the heads of the financial firms, over lunch and dinner and on golf courses.

Did you notice how in the fall of 2008, as we lurched daily from crisis to crisis as one big firm after another like Merrill Lynch and Lehman Brothers fell, we were presented by the Treasury and Federal Reserve officials with ‘solutions’ to the problems that had been worked out seemingly overnight involving the taxpayer-subsidized purchase of one major institution by another that involved hundreds of billions of taxpayer dollars? The only way that consensus could be reached so quickly and smoothly on such major actions was if there had always been collusion between the government and the financial firms involved and they saw their interests as one and the same.

Simon Johnson continues:

Throughout the crisis, the government has taken extreme care not to upset the interests of the financial institutions, or to question the basic outlines of the system that got us here. In September 2008, Henry Paulson asked Congress for $700 billion to buy toxic assets from banks, with no strings attached and no judicial review of his purchase decisions. Many observers suspected that the purpose was to overpay for those assets and thereby take the problem off the banks’ hands—indeed, that is the only way that buying toxic assets would have helped anything. Perhaps because there was no way to make such a blatant subsidy politically acceptable, that plan was shelved.

Instead, the money was used to recapitalize banks, buying shares in them on terms that were grossly favorable to the banks themselves. As the crisis has deepened and financial institutions have needed more help, the government has gotten more and more creative in figuring out ways to provide banks with subsidies that are too complex for the general public to understand.

This latest plan—which is likely to provide cheap loans to hedge funds and others so that they can buy distressed bank assets at relatively high prices—has been heavily influenced by the financial sector, and Treasury has made no secret of that.

Johnson says that the same remedies that the IMF routinely gives to developing countries in similar financial crisis should also apply to the US. But they are not, because the American oligarchy is immune to the pressure that the IMF can put on oligarchies in other countries. The American oligarchy is not responsible to anyone.

As the IMF understands (and as the U.S. government itself has insisted to multiple emerging-market countries in the past), the most direct way to do this is nationalization… Nationalization would not imply permanent state ownership. The IMF’s advice would be, essentially: scale up the standard Federal Deposit Insurance Corporation process.

This may seem like strong medicine. But in fact, while necessary, it is insufficient.

Then Johnson gets to the crux of the problem and what must be done. When reading it, remember that Johnson is a centrist technocrat, not some ideologue, and his understanding comes from dealing with many countries that have gone through financial crises.

The second problem the U.S. faces—the power of the oligarchy—is just as important as the immediate crisis of lending. And the advice from the IMF on this front would again be simple: break the oligarchy. (my italics)

But the IMF is not going to give this advice to the US because the US oligarchy, through the US government, pretty much dictates IMF policies.

The only way that the oligarchy will be broken is if the public demands it.

Next: Barack Obama’s role

POST SCRIPT: God as CEO

When you look at god’s actions as revealed in the Bible, you realize that he is not very good at strategic long-range planning, preferring to go for cheap and popular gimmicks. But not to worry! His apologists know how to explain away all the absurdities and contradictions.

(Thanks to Machines Like Us.)

American oligarchy-5: How Wall Street builds its power

(For previous posts in this series, see here.)

In the previous posts, we saw how people with connections to big Wall Street firms like Goldman Sachs are everywhere in government, especially in key economic policy-making positions, so that whichever party wins, their interests are protected and advanced.

In his article in the May 2009 issue of The Atlantic magazine titled The Quiet Coup, Simon Johnson explains how firms like Goldman Sachs have carefully cultivated their power structure.

[T]he American financial industry gained political power by amassing a kind of cultural capital—a belief system. Once, perhaps, what was good for General Motors was good for the country. Over the past decade, the attitude took hold that what was good for Wall Street was good for the country. The banking-and-securities industry has become one of the top contributors to political campaigns, but at the peak of its influence, it did not have to buy favors the way, for example, the tobacco companies or military contractors might have to. Instead, it benefited from the fact that Washington insiders already believed that large financial institutions and free-flowing capital markets were crucial to America’s position in the world.

One channel of influence was, of course, the flow of individuals between Wall Street and Washington. Robert Rubin, once the co-chairman of Goldman Sachs, served in Washington as Treasury secretary under Clinton, and later became chairman of Citigroup’s executive committee. Henry Paulson, CEO of Goldman Sachs during the long boom, became Treasury secretary under George W.Bush. John Snow, Paulson’s predecessor, left to become chairman of Cerberus Capital Management, a large private-equity firm that also counts Dan Quayle among its executives. Alan Greenspan, after leaving the Federal Reserve, became a consultant to Pimco, perhaps the biggest player in international bond markets.

These personal connections were multiplied many times over at the lower levels of the past three presidential administrations, strengthening the ties between Washington and Wall Street. It has become something of a tradition for Goldman Sachs employees to go into public service after they leave the firm. The flow of Goldman alumni—including Jon Corzine, now the governor of New Jersey, along with Rubin and Paulson—not only placed people with Wall Street’s worldview in the halls of power; it also helped create an image of Goldman (inside the Beltway, at least) as an institution that was itself almost a form of public service.

Recall that once in a while, a maverick like Brooksley Born gets into a position such as head of the Commodity Futures Trading Commission, where she could be a thorn in the side of the oligarchy. I described how the oligarchy was able to marginalize her and neutralize her efforts and force her to leave. To make sure that that does not happen again, they then put their own people in that slot. As Glenn Greenwald points out:

More amazingly still, the CFTC, headed back then by Born, is now headed by Obama appointee Gary Gensler, a former Goldman Sachs executive (naturally) who was as instrumental as anyone in blocking any regulations of those derivative markets (and then enriched himself by feeding on those unregulated markets).

Just think about how this works. People like Rubin, Summers and Gensler shuffle back and forth from the public to the private sector and back again, repeatedly switching places with their GOP counterparts in this endless public/private sector looting. When in government, they ensure that the laws and regulations are written to redound directly to the benefit of a handful of Wall St. firms, literally abolishing all safeguards and allowing them to pillage and steal. Then, when out of government, they return to those very firms and collect millions upon millions of dollars, profits made possible by the laws and regulations they implemented when in government. Then, when their party returns to power, they return back to government, where they continue to use their influence to ensure that the oligarchical circle that rewards them so massively is protected and advanced. This corruption is so tawdry and transparent — and it has fueled and continues to fuel a fraud so enormous and destructive as to be unprecedented in both size and audacity — that it is mystifying that it is not provoking more mass public rage.

And of course Obama nominee Gensler was confirmed in his post without a single dissenting vote in the Senate Agriculture Committee, a perfect example of bipartisan subservience to Goldman Sachs and Wall Street.

POST SCRIPT: Stephen Colbert’s anti-gay marriage ad

A group called the National Organization for Marriage has put out an ad opposing gay marriage. Stephen Colbert thinks that ad doesn’t go far enough and ups the ante.

The Colbert Report Mon – Thurs 11:30pm / 10:30c
The Colbert Coalition’s Anti-Gay Marriage Ad
colbertnation.com
Colbert Report Full Episodes Political Humor NASA Name Contest

American oligarchy-4: How oligarchies work

(For previous posts in this series, see here.)

Simon Johnson is a professor at MIT’s Sloan School of Management. He used to be the chief economist at the International Monetary Fund and in that role had to deal with many countries in financial crisis and had plenty of experience with oligarchies. He is hardly an ideologue. In fact, he calls himself a ‘centrist technocrat’, which is the kind of person that these international financial institutions usually have in their technical divisions. But yet he has no hesitation in identifying the current financial crisis in the US as caused by the same kind of oligarchies that he encountered in his dealings with developing countries in crisis. In a must-read article titled The Quiet Coup that appeared in the May 2009 issue of The Atlantic magazine, he describes how oligarchies work and how they end up ruining the economies of countries.

The problem is that because these oligarchies exert such enormous influence and power over their governments, they feel that normal market forces and business constraints that restrain lesser players do not apply to them. Hence they take much greater risks and when disaster strikes, as it inevitably will, they then turn to their friends and clients in the government to bail them out. This is exactly what has happened in the US.

Johnson says that when a crisis hits, countries come to the IMF for assistance. While the proximate causes of each country’s crisis differs, the ultimate causes all have a depressingly similar pattern that could be traced to the existence of an oligarchy. He says that while the economic solutions to each crisis are not hard to figure out, the biggest obstacle to recovery is almost invariably the politics of countries in crisis.

Typically, these countries are in a desperate economic situation for one simple reason—the powerful elites within them overreached in good times and took too many risks. Emerging-market governments and their private-sector allies commonly form a tight-knit—and, most of the time, genteel—oligarchy, running the country rather like a profit-seeking company in which they are the controlling shareholders.

Squeezing the oligarchs, though, is seldom the strategy of choice among emerging-market governments. Quite the contrary: at the outset of the crisis, the oligarchs are usually among the first to get extra help from the government, such as preferential access to foreign currency, or maybe a nice tax break, or—here’s a classic Kremlin bailout technique—the assumption of private debt obligations by the government. Under duress, generosity toward old friends takes many innovative forms.

In its depth and suddenness, the U.S. economic and financial crisis is shockingly reminiscent of moments we have recently seen in emerging markets (and only in emerging markets)… But there’s a deeper and more disturbing similarity: elite business interests—financiers, in the case of the U.S.—played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive.

He says that while people can identify various proximate causes for the collapse, “these various policies—lightweight regulation, cheap money, the unwritten Chinese-American economic alliance, the promotion of homeownership—had something in common. Even though some are traditionally associated with Democrats and some with Republicans, they all benefited the financial sector. Policy changes that might have forestalled the crisis but would have limited the financial sector’s profits—such as Brooksley Born’s now-famous attempts to regulate credit-default swaps at the Commodity Futures Trading Commission, in 1998—were ignored or swept aside.”

Ultimately, it comes down to power. Who controls the government? The financial oligarchy in the US started running the country during the Reagan years and have continued to do so throughout all the administrations since. They prefer to do their work quietly behind the scenes while public attention is focused elsewhere such as on abortion or gay marriage or immigration or other hot-button social issues.

What the current crisis has done is threaten to rip the veil and expose how the government is really run and for whose benefit. When that is exposed, the people can rise up in angry protest so it becomes imperative to close the curtain again, to say that the problem is over, things are back to normal, nothing to see here, move along now. This is why they are rushing through major policies involving trillions of dollars practically overnight, so that they can claim that everything is back to normal. What they want to avoid is a close examination of what caused the crisis and what steps should be taken to prevent future ones.

Part of this strategy is to distract people with other issues. So you will see a concerted effort to exaggerate foreign policy issues or even create absurd events like the recent silly tea parties to protest the rise in the marginal tax rates for the highest income to 39.6%, although the new tax polices affects only raises the taxes of people earning over $250,000. Fortunately, the religious right or Christianist element in society seems to be in decline so the usual reliable standbys for distraction such as homosexuality, abortion, stem cells, and the like do not seem to be effective. People seem to be too worried about retaining their own job and homes to care about these other things. Even the frenetic cheerleading by Fox News (a faithful servant of the oligarchy) was unable to whip up more than lukewarm interest in the tea parties.

What Simon Johnson says is that there is a quiet power struggle going on behind the scenes between the government and the financial oligarchy to see who runs the show. In an interview on Fresh Air, Johnson says that the big financial firms like Goldman Sachs and JP Morgan Chase are already chafing at the restrictions placed on them by virtue of having received funds under the TARP (Troubled Asset Relief Program), and have publicly announced that they want to prematurely pay it back, though they are not going to pay back the billions that were secretly channeled to them via AIG.

(Incidentally, it has just been revealed that Edward Liddy, the head of AIG when it did the secret channeling of billions to Goldman Sachs, has $3 million stock in Goldman Sachs stock, received as compensation for serving on Goldman’s board before he moved to AIG in September 2008. We see that it is all a nice and cozy quid-pro-quo relationship. The phrase “conflict of interest” means nothing to these people. They see the role of the government as being to serve their personal interests and that of their companies.)

Johnson says that this is a test of power. If the government caves in and lets them get out from under TARP, it will mean that the oligarchy definitely is calling the shots. If the government can resist, then it means that people have a chance of regaining control.

I think Johnson is too sanguine to think that there is still a struggle for control between Wall Street and the government. I think that Wall Street won a long time ago and the real ‘struggle’, such as it is, is to find ways to once again hide their domination of the people elected to allegedly represent us.

POST SCRIPT: Trailer for 10 things I hate about commandments

American oligarchy-2: The fraud on the American people

(For previous posts in this series, see here.)

Obama’s nominee to be chief performance officer, Nancy Killefer, had to withdraw her nomination following the revelation that she had a mere $946.69 lien on her property in 2005 for failure to pay taxes ($298 in unemployment compensation for household help, $48.69 in interest, and $600.00 in penalties.) This was a fairly trivial issue.

Health and Human Services nominee Tom Daschle had to also withdraw over the failure to pay a much larger amount of $140,000 in taxes but there was a faintly plausible case of ambiguity there. I was glad Daschle withdrew for a different reason, because he is completely enmeshed with all kinds of lobbying interests.

So why was Timothy Geithner able to beat his far more serious problems and become confirmed for the position of Treasury Secretary? Because Obama and the Democratic leadership wanted him badly enough, and so did the Republicans. Why? Because he will continue the practice of subordinating the interests of the US to the financial oligarchy. It is not hard to see why he was favored by Wall Street and thus secured his nomination fairly easily despite his tax problems.

This New York Times article relates how Geithner fought to protect the interests of the big banks during internal debates on how to handle the financial crisis. Economist Michael Hudson explains why the big Wall Street players wanted Geithner to succeed Paulson as Treasury Secretary. “[T]he Obama-Geithner recovery plan is basically an extension of the Bush-Paulson plan – yet more giveaways to financial insiders, with a view to concentrating the U.S. banking system into a cartel of just a few large banks.”

The recent plan adopted by Geithner has the government putting up at least 85% of the money to buy these mortgage-backed assets of dubious value, with private investors putting up just 15%. If the assets rise in value, the profits are split 50-50. If the assets lose value, however, the government bears the brunt of the losses. So Wall Street gets the upside and the taxpayer gets the downside. Economist Michael Hudson calls it a scam and explains why this plan was greeted with such enthusiasm by the banking sector.

Suppose a bank is sitting on a $10 million package of collateralized debt obligations (CDOs) that was put together by, say, Countrywide out of junk mortgages. Given the high proportion of fraud (and a recent Fitch study found that every package it examined was rife with financial fraud), this package may be worth at most only $2 million as defaults loom on Alt-A “liars’ loan” mortgages and subprime mortgages where the mortgage brokers also have lied in filling out the forms for hapless borrowers or witting operators taking out mortgages at far more than properties were worth and pocketing the excess.

The bank now offers $3 million to buy back this mortgage. What the hell, the more they bid, the more they get from the government. So why not bid $5 million. (In practice, friendly banks may bid for each other’s junk CDOs.) The government – that is, the hapless FDIC – puts up 85 per cent of $5 million to buy this – namely, $4,250,000. The bank only needs to put up 15 per cent – namely, $750,000.

Here’s the rip-off as I see it. For an outlay of $750,000, the bank rids its books of a mortgage worth $2 million, for which it receives $4,250,000. It gets twice as much as the junk is worth.

The more the banks holding junk mortgages pay for this toxic waste, the more the government will pay as part of its 85 per cent. So the strategy is to overpay, overpay, and overpay. Paying 15 per cent is a small price to pay for getting the government to put in 85 per cent to take the most toxic waste off your books.

Another economist Dean Baker explains the real purpose of these plans. “Mr. Geithner wants to use taxpayer dollars to keep bankrupt banks in business. In effect, he wants to tax teachers, fire fighters, and Joe the Plumber to protect the wealth of the banks’ shareholders and to pay high salaries to their top executives.”

Others economists have voiced their concerns. In an interview with Bill Moyers, William K. Black, a professor of economics and law with the University of Missouri, alleges that a massive fraud is being perpetrated on the American taxpayer. As Raw Story summarizes:

In an explosive interview on PBS’ Bill Moyers Journal, William K. Black, a professor of economics and law with the University of Missouri, alleged that American banks and credit agencies conspired to create a system in which so-called “liars loans” could receive AAA ratings and zero oversight, amounting to a massive “fraud” at the epicenter of US finance.

But worse still, said Black, Timothy Geithner, President Barack Obama’s Secretary of the Treasury, is currently engaged in a cover-up to keep the truth of America’s financial insolvency from its citizens.

Black goes on to also describe other shenanigans.

Under Secretary Geithner and under Secretary Paulson before him… we took $5 billion dollars, for example, in U.S. taxpayer money. And sent it to a huge Swiss Bank called UBS. At the same time that that bank was defrauding the taxpayers of America. And we were bringing a criminal case against them. We eventually get them to pay a $780 million fine, but wait, we gave them $5 billion. So, the taxpayers of America paid the fine of a Swiss Bank. And why are we bailing out somebody who that is defrauding us?

The Bush administration and now the Obama administration kept secret from us what was being done with AIG. AIG was being used secretly to bail out favored banks like UBS and like Goldman Sachs. Secretary Paulson’s firm, that he had come from being CEO. It got the largest amount of money. $12.9 billion. And they didn’t want us to know that. And it was only Congressional pressure, and not Congressional pressure, by the way, on Geithner, but Congressional pressure on AIG.

Geithner is just the symbol of the oligarchy. Bill Moyers concludes, and Black agrees, “that people in power, political power, and financial power, act in concert when their own behinds are in the ringer.”

More on that in the next post.

POST SCRIPT: Our Goldman Sachs dominated oligarchy

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Clusterfu#@k to the Poor House – Goldman Sachs’ Connections
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