| Capitalism and Socialism
By Antonio C. Abaya Written on Sept. 24, 2008 For the Standard Today, September 25 issue This is not the end of capitalism. It is not even the end of American capitalism. For the benefit of those who do not understand what they read but are quick to fire off supercilious rebuttals to nothing, let me restate what I wrote the other day, namely that American capitalism has imploded and has to be redefined in the coming weeks and months. Make that 'years.' American capitalism, especially as zealously protected by the Republican Party, is anchored on the hitherto unshakeable belief in what is reverentially referred to by its priests and acolytes as "The Market." Meaning, that the Free Market, the Unseen Hand of Adam Smith, is the best, and even the only, arbiter of economic decisions in the allocation of resources. Hence, according to this secular religion, the best government is the one that interferes the least in the workings of The Market. But that has now been stood on its head. The lame-duck Republican administration of George W. Bush is pushing for a $700 billion bail-out, to be financed by American taxpayers over the next few generations, ostensibly to buy the bad debts of homeowners who can no longer afford to pay the monthlies, but effectively to save the banking and finance corporations � and their scandalously overpaid executives � from drowning in their own vomit. There seems to be bi-partisan agreement that something drastic has to be done, but the Democrats and the independents are concerned that there seems to be no provision in the proposed bill for an oversight committee to make sure that Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke (and their successors) perform their functions more diligently than the Wall Street regulators have done theirs. With this heavy intrusion of government into The Market, I wrote the other day that "American capitalism, with or without Jewish speculators, will never be the same." But American capitalism is not dead. It just needs a blood transfusion and, possibly, a heart transplant and a lobotomy... One Republican fuddy-duddy senator complained on CNN that "this is socialism and un-American." Someone should tell the pompous ignoramus that the minimum wage law is socialism, unemployment insurance is socialism, universal health care (admittedly still unknown in the US) is socialism, socialized housing is socialism, subsidized education is socialism, sick and vacation leaves are socialism, maternity leaves are socialism, even trade unions are socialism. American capitalism is not and never was the model for the rest of the world. Western European capitalism, which unapologetically accepts heavy government presence in the economy and generous social benefits for stakeholders, is substantially different from American capitalism. So is Anglo-Saxon capitalism under ruling Labour parties, especially in the matter of health care. So are the highly paternalistic Japanese and German capitalism. So are Chinese and Vietnamese capitalism under monopoly of political power for the ruling Communist parties, So is Middle Eastern capitalism, totally dependent on one abundant commodity that is theirs purely by geological accident.. So is Russian capitalism, heavily dominated by cronies and gangsters close to the Kremlin center of gravity. So is Philippine and Latin American capitalism, with one foot still stuck in feudalism.. To each his own. Chacun a son gout. Americans should disabuse themselves of the conceit � often articulated by George W. Bush in his limited vocabulary, - that everyone else, aside from the Filipinos, wants to be like them. The socialism that was directly inspired by Karl Marx and his followers was a reaction to the abuses and excesses of capitalism in the 19th century, when appalling social and economic conditions underlined the fact that social legislation had not yet caught up with the dislocations brought about by the Industrial Revolution. When Marx and Friedrich Engels published The Communist Manifesto in 1848, they were convinced that "the specter of Communism" which they saw hovering over Europe was about to descend soon. In 1869, they organized a series of meetings, beginning in London, which became known as the First International Conference of the socialist movement, attended by socialists of different stripes from all over the world. In 1889, another series of meetings, including one in Philadelphia, became known as the Second International Conference of the socialist movement, but attended only by reformist socialists who believed that they could operate in capitalist societies and reform capitalism from within. The Third International Conference � also known as the Communist International or Comintern - was held in Moscow in 1919 and was attended only by revolutionary socialists who believed that capitalism cannot be reformed and must be overthrown by bloody revolution, according to the allegedly scientific historical laws of dialectical materialism. Needless to say, revolutionary socialism became the operating ideology of the Soviet Union and, later, the People's Republic of China (also known as Maoist China).It became the inspirational model for revolutionary socialist movements in the rest of Europe, Asia, Latin America and Africa. Not so well known to Americans (and, by extension, to Americanized Filipinos) is the reformist socialist movement derived from the Second International Conference, which provided the ideological foundations for the social democratic and socialist parties in Western Europe, the Labour parties in the Anglo-Saxon countries and, to a much lesser extent, the Democratic Party in the US. (Which is the reason why American rednecks, including senators, have a knee-jerk aversion to the word 'socialism.') In the Philippines, revolutionary socialists organized the Partido Komunista ng Pilipinas (PKP) in the 1940s. The late Renato Constantino Sr.. and Francisco Nemenzo became members of its politburo in the 1950s. But the PKP folded its revolutionary tent in the 1970s and made peace with dictator Ferdinand Marcos.. Following the schism between the Soviet Union and the People's Republic of China in the early 1960s over ideological grounds � the Soviets insisted on revolution through the urban industrial proletariat, while Mao Zedong chose revolution through a politicized peasantry � Jose Ma. Sison formed the Communist Party of the Philippines (CPP) with a Maoist orientation. This is the socialism that is supported by the likes of Satur Ocampo, Teddy Casino, Liza Masa, the late Crispin Beltran and their allies in Philippine media�as well as the last Communists left in Europe: Joma Sison and the aging NDF cumbancheros in Utrecht, Holland. In 1964, I was invited by Joma's people to become a charter member of Sison's Kabataang Makabayan, which invitation I accepted, even though I knew that it was a Communist front organization. Of the 30 or so original members, I was the only one from an "elite" school (Ateneo); everyone else was from either UP or Lyceum. But I never joined the CPP. . Even as early as the 1960s, I was aware of the distinctions between Soviet and Maoist socialism on the one hand, and Western European socialism on the other. Knowing as I did of the success of the latter, especially Scandinavian socialism, I could not accept the notion that the Soviet Union or Maoist China � with their built-in intolerance and absolutism - represented the best that human beings are capable of. In 1989, millions of ordinary people in Eastern Europe literally walked out on their Communist governments. In 1991, the Soviet Union collapsed from the accumulated weight of its own failures. In the period from 1979 to the 1990s, China transformed itself into a capitalist economy, albeit with the Communist Party still in total political control. In a way, I predicted this in my 1985 booklet A Funny Thing Happened on the Way to Communism. History has vindicated my choice. ***** Reactions to [email protected]. Other articles in acabaya.blogspot.com. Tony on YouTube in www.tapatt.org. To subscribe, send a blank email with the subject heading Subscribe. To unsubscribe, send a blank email with the subject heading Unsubscribe. . OOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOO Reactions to "Capitalism and Socialism" 'Calling out the culprits who caused the crisis' 'An economic Cassandra who predicted it' HI! You just wrote a beautiful treatise/essay on all those "isms" I used to play around as a UP student in the '70s. Your essay is like "manna from heaven". I have been a confused figure since I graduated from UP. My life's experience has put in nowhere land, although my love for my country and for my countrymen have never mellowed. I went to school in an Ivy League School, chose a career turn and I am now a preschool teacher and an owner of an elementary school supporting the progressive education of John Dewey. At 58, all I want now is to produce children who can become life-long learners and succeed in whatever endeavor in life they want to pursue, all under the umbrella of American democracy. If I were an American citizen, I believe I would be a Republican. On my spare time, I also take the time to share whatever I can to as many poor I can afford to help. One of the reasons, I also keep my school, because I am able to give employment to a few people who I thought deserve to be helped. Whatever I do now is all I can do to help my country and a few of my countrymen. I like to believe God has been most kind to me. I want to share my blessings to as many Filipinos as I can in the best way I can. Be that as it may, I find your views quite illuminating and something to ponder on. With prayers, Corabel Diel, (by email), Sept. 25, 2008 wwwwwwwwwwwwwwwwwwwwwwwwwwwwwww Good article as usual, Tony. By the time you get this, the $700B bailout may already be legislated and hopefully improved with provisions for oversight, cap on top management compensation, transparency, etc. In my opinion, the models of Capitalism and Socialism as we used to define them are no longer applicable in today's society. The same is true with the models of Democracy. I like the paradigm which is aligned with Meritocracy, sort of a compromise between Democracy and the classic Socialism of old. Even the Republican Party where I am registered for over 20 years seem to be leaning towards more liberalism. Of course there are still some who are hard core conservatives just as you still have hard core Democrats who are liberal to its fullest extent and left-wing. Bert Peronilla, (by email), Sept. 25, 2008 An avid reader from New Jersey wwwwwwwwwwwwwwwwwwwwwwwwwwwwwwww Dear Tony: Many pundits have made a rather compelling case regarding the United States now going through what historian Arnold Toynbee dubbed "a time of troubles." The U.S. is bogged down in Iraq after over five years of effort in what has been called George W. Bush's "war against terror," and where the U.S. has squandered some $1 trillion of taxpayer money in direct and indirect costs, where a bit over 4,100 U.S. troops have been killed and around 30,000 more injured, where countless Iraqi civilians have been killed or injured, and another two million Iraqi civilians have fled and have sought refuge in neighboring countries. The US-led NATO "war against terror" in Afghanistan, which has dragged on for the last 7 years appears to be going badly. There the Taliban, Osama bin-Laden and his al-Qaeda, jihadists, Muslim fundamentalists and Afghan militias under Pashtun and other tribal warlords are now in effective control of large areas of Afghanistan. European troops under NATO command have made it abundantly clear that they are not exceedingly eager to be assigned to high-risk areas. Commander-in-Chief George W. Bush, Secretary of State Condoleezza Rice and Secretary of Defense Robert M. Gates, Jr. have repeatedly pleaded with European members of NATO to please send more troop to Afghanistan--but their pleas have pretty much fallen on deaf ears. It is becoming increasingly painfully clear that the European participation in Afghanistan does not go far beyond tokenism. Thus the U.S. continues to shoulder a disproportionately large share of the war against terror in Afghanistan. Just recently, Mr. Bush let on that he would send an additional force of some 7,000 U.S. marines to Afghanistan, in the hope that things could be turned around. But military experts are agreed that an additional 7,000 U.S. troops are but a drop in the bucket; in their considered opinion, a reinforcement of at least 50,000 troops may just be the number needed to tip the balance of power in Afghanistan. On the domestic front, the United States is now confronted by a historic mortgage and financial crisis. Secretary of the Treasury Henry Paulson has just submitted to the Congress a "rescue" Plan requiring the allocation of $700 billion (that's a "b") of taxpayer money. The Congress is now in the process of examining the Plan in a clear effort to determine if it is the solution to the present mortgage and financial crisis and, moreover, to make certain that through needed changes and amendments, it will provide for needed safeguards against abuse and corruption. Mr. Bush has just urged the Congress to act quickly on the rescue Plan if dire consequences, domestic and international, are to be avoided. There are other serious domestic problems which the United States needs to confront effectively, decisively and quickly. Some experts have warned that if these problems are left unresolved, Pax Americana may suffer a blow from which it has no chance to recover. I am not in any way minimizing the magnitude and the seriousness of these problems which are putting the United States to its severest test since the Great Depression of the early Thirties. But the United States not only successfully passed that severe test--thanks mainly to World War II and a wise President who advised his fellow Americans that "The only thing to fear is fear itself"--but after the War attained a measure of growth and prosperity unparalleled in history, eventually leading to the United States taking on the mantle of the wealthiest and the greatest military power on our planet. Judging by its resilience and ability to surmount challenges which could easily prove the demise of other nations, I am confident that in time the United States will be able successfully to put the twin mortgage and financial crises behind it, as well as find good and effective solutions to the other serious geopolitical and domestic problems that now bedevil it. In sum, I say that fears expressed by some that Pax Americana is in its death throes are premature. Mariano Patalinjug, (by email), Yonkers, NY, Sept. 26, 2008 wwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwww Thanks, Tony, Can you tell me where I can get a copy of your booklet "A Funny Thing Happened on the way to Communism"? At EREWHON, I dare guess? Regards, Joe Mac, [email protected], New York City, Sept 26, 2008 (Erehwon went out of business in 1988, and 'Funny Thing' has been out of print for decades. But I have a few dozen copies left. If you send me your street address, I'll be glad to send you one. ACA) wwwwwwwwwwwwwwwwwwwwwwwwwwwwwwww Dear Mr. Abaya, I think it is good to understand the lessons of the Second International Conference of the socialist movements since it aims to work within the capitalist framework and depart from the costly effects of violent revolution. I attended a Forum on new globalization theory and on new socialism at the Department of Sociology in UP-Diliman last year with William Robinson from the University of California, Santa Barbara and an expert in Latin American Social Movements. Robinson mentioned on his two-week lecture series that the new socialist movements in the world are led by Brazil on one hand with the World Social Forum framework (who believe that socialist cannot destroy the enemy by engaging it directly but through initiatives of reforms within the capitalist system and its excessess similar to the voices of the second international and the Venezuelan-Bolivian alliance where civil society supported a head of state and serve as a power base of the State while Capitalist with their conservative constituency continue to exist while engaging those in power in parliamentary contest). This two trends in the Socialist community is in contrast with the Third International especially with the Maoist movements worldwide that is I think partly if not being led by Joma Sison as an international idealogue, other stalinist tendencies and the more complex combinitions of marxist revisonist groups including the Trotsky'ites Fourth International. The Philippine left is divided among this Leftist inspiration and still in seeking popular audience among the mainstream public who is now dominated by a more historically disinterested young voters and students. The Keynesian economics is a good thing to look at as well as the the Bretton Woods where that system of monetary management established the rules for commercial and financial relations among the world's major industrial states. The Bretton Woods system was the first example of a fully negotiated monetary order intended to govern monetary relations among independent nation-states. Mahathir also proposed a regional Monetary fund where the region particulalrly the ASEAN will make a mechanism that protect itself against world wide economic fallout. I believe that government are instituted for the common good and the general public especially those who are in need. On the other side, I also believe in free but genuine competition and to the Protestant ethics of hard work but work and workers themselves as Ninoy Aquino must share the fruit of their own labor from the fruits of the Capitalist. Government must still provide the welfare system on certain degree while justice must prevail to punish the unpunishable. It is sad that no politician cites this kind of discussion in the halls of the Senate except with a few column such as yours. What the public can hear and watch are the issues of how a particular public official steal, cheat and deceive the publict trust. I hope that our very own business people and some elements from the concern and enlightened class of our society can sit down and realized an economic program where popular audience can support so the RP can at least fight a good fight in the face of this US economic meltdown. For they are in the position to shape this things. I share your opinion that Capitalism is being re-shape and we must welcome this opportunity to re-think our own collective experience and the very fabric of our way life. Albert Banico, (by email), Manila, Sept. 26, 2008 wwwwwwwwwwwwwwwwwwwwwwwwwwwwwwww Dear ACA, Below is a link on what happened to Chrysler in the 70' in which the US government sent a bailout program for the moribund corporation. http://www.wsws.org/articles/2008/sep2008/chry-s26.shtml The article comes from the World socialist web. Regards AL Jose Leonidas, (by email), Sept. 26, 2008 wwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwww Dear Tony, This may sound simplistic. Capitalism, as in democracy, requires high ethical standards of governance and citizenship, as well as consistency and excellence in the application of those standards. When the wrong bunch get their hands on the levers of power and misapply them for their selfish and greedy ends, the system is undermined and eventually unravels. The unfortunate country then goes either ballistic to stop the nonsense or on denial mode pretending that all's well except for some exceptions. In my view, the Scandinavian countries exemplify best the synthesis of capitalism and socialism and what it has done for their societies from the standpoint of governance and citizenship because of their maturity as a race. How they managed to mature and sustain their way of life should be studied carefully and imbibed after adjusting for cultural differences. All the best, Raffy Alunan, (by email), Sept. 26, 2008 wwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwww Tony hi, Please allow me to write in Taglish so I could express myself better. I'm so glad that the country is blessed not only with good singers but with so many talented writers as well as best-exemplified by you. Thank you for keeping us abreast with the latest happenings in the Free Market world of commerce. I know for a fact that some, if not all, of the European countries government subsidized their exports (which I thought is unfair if not unethical); so I would like to know if our exporters are getting a sort of assistance from the government to make the price of their goods to be competitive in the world market? The question was raised as membership in the so called free global trade (tama ba?) was decided by the government and not by the private entities concerned. Sorry if my query was irrelevant with the subject matter. Curious lang naman. As to the raging question whether the US government was correct in bailing out and taking control, as well, of AIG, etc. Well, theoritacally. in the world of the capitalists: it was not. But in the real world it was not only correct but it was the only option left to prevent the collapse of the world of economy and its aftermath. I have to admit that I'm a history-challenged individual ;nonetheless, I would venture a guess that most wars were waged purely for economic reasons like, Iraq invasion of Kuwait or say, UN/US invasion of Iraq (?). Guess lang. Excuse me. Arcy F. Sibal, (by email), Sta. Maria, Bulacan, Sept 27, 2008 wwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwww Tony, That "funny thing happened on the way to Communism" was when the concept of laize-faire disappeared and the government abandoned the role as the NIGHT WATCHMAN for competing capitalist corporation and between LABOUR and LABOUR, hence, the American brand of capitalism as economic system is what we still practiced in the Philippines. Jose Sison Luzadas, (by email), Toronto, Canada, Sept. 27, 2008 wwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwww Dear Tony, Good article. Thank you. Finally, a superpower melts. I hope this slows down its involvement in wars beyond its own shores. Or, we pray this doesn't get help from ideas to help increase more wars to boost sales of weapons and bullets. Lifestyles for their citizenry will have to change. Skilled labor will have to be taken by their own nationals as jobs will be harder to land, and the US will lessen their dependence on labor imports from Asia or its Hispanic neighbors. In due time we will also feel the effects, no matter how our government denies that it will. Not that I am cynical or without faith in our leaders but simple common sense economics lead some of us to believe that other countries will likewise be affected and these will slow down their demand for our labor force . Thank you, Tony, for your article. I guess more and more we are told to depend on our own boundaries for work in the future, and this must remind government to map out industrial development to open much more jobs so that our people need not have to leave families to earn elsewhere. Meanwhile, so far so good though.. Victor Manalac, (by email), Sept. 28, 2008 wwwwwwwwwwwwwwwwwwwwwwwwwwwwwwww Dear Tony - My congratulations on your recent articles which provide great background and comments re the financial crisis in the US and beyond. They give key information on the problem and compare favorably with what I read in the International Herald Tribune and The Economist. In fact I have forwarded them to several friends in the US, India and here in the Philippines. Ken Wright, (by email), Ayala Alabang, Sept.. 29, 2008 wwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwww Just plain English, but no one in Washington wants to hear about it. They are betting the man on the street is too stupid to know any better. Lynn Abad-Santos, (by email), Washington, DC, Sept. 26, 2008 Calling Out the Culprits Who Caused the Crisis By Eric D. Hovde Sunday, September 21, 2008; B01 Looking for someone to blame for the shambles in U.S. financial markets? As someone who owns both an investment bank and commercial banks, and also runs a hedge fund, I have sat front and center and watched as this mess unfolded. And in my view, there's no need to look beyond Wall Street -- and the halls of power in Washington. The former has created the nightmare by chasing obscene profits, and the latter have allowed it to spread by not practicing the oversight that is the federal government's responsibility. I find it hard to stomach the fact that investment banks that caused this financial crisis immediately ran to the government asking for assistance, which Bear Stearns received and Lehman Brothers, thankfully, did not. This is one of many eerie parallels that the current meltdown bears to the Great Depression, when Washington and the taxpayers had to step up and take unprecedented action to stabilize the financial markets and the economy. Unfortunately, the government today has already put enormous taxpayer resources at risk -- bailing out investment firm Bear Stearns, mortgage giants Fannie Mae and Freddie Mac and insurer AIG, and proposing to buy risky assets from the banking system -- to stop the economy from plummeting into another depression. But these events only underscore the toxic relationship between Washington and Wall Street that has brought us to this point. To understand the role of that relationship in our current troubles, let's go back to 1999. That was when the hype about the Internet reached its pinnacle. Technology spending by the government and corporations was booming as both sought to address economic and security fears surrounding the so-called Y2K problem, a potential massive computer shutdown at the start of the year 2000. In the run-up to the millennium, the Federal Reserve, led by then-Chairman Alan Greenspan, began to pump money into the capital markets to deal with any financial problems that might arise from a Y2K meltdown. In the end, 2000 arrived to nothing but a wonderful celebration. But the monetary stimulus, coupled with the aforementioned hype, created an unfortunate bubble in Internet, technology and telecommunications stocks. At the center of this bubble were the large Wall Street investment banks, which understood the profit potential in promoting the technology boom to overeager clients looking for the investment of a lifetime. From mid-1999 to mid-2000, Wall Street firms took approximately 500 companies public, raising a total of nearly $77 billion for these companies through initial public offerings, or IPOs. For every IPO, the investment banks themselves earned an underwriting fee of 6 percent, returning them an enormous profit. But apparently that was not enough for Wall Street. As the middlemen between the insatiable investor demand for anything technology-related and young tech entrepreneurs needing to raise capital, the investment banks demanded the opportunity to invest in these companies before the public offerings, when the companies's stocks were valued at a fraction of what they would bring post-IPO. It wasn't uncommon for Wall Street firms to invest tens of millions of dollars in "anything.com" before taking it public, charge a multimillion-dollar fee for the public offering and then watch their investment multiply within a matter of months. Main Street investors, meanwhile, did not realize that the investment banks had essentially thrown away their underwriting guidelines, which had been in place since the Depression, to take companies public. Among these guidelines were rules requiring that a company be in business for more than five years, be profitable for two or three consecutive years and have certain levels of revenue and profitability. The business models of many of the companies that went public simply weren't viable. Once the Internet bubble burst and the dust settled, America's corporate landscape was littered with bankruptcies and mass layoffs, and investor losses have been estimated at more than $1 trillion. In an effort to offset the economic strain from these losses, the Fed once again rapidly increased the money supply and slashed short-term interest rates to 1 percent -- a level that hadn't been seen in more than 45 years. This enormous monetary stimulus (along with significant federal spending) energized the overall economy, but it also led to the greatest housing boom -- and possible bust -- this country has ever encountered. From 2002 to 2006, housing values appreciated at an astounding rate of 16 percent per year. It became impossible for the typical American family to buy an average-priced house using a conventional 30-year fixed-rate mortgage. Wall Street found another perfect opportunity to propel and take advantage of another forming bubble. The result was the explosion of toxic new mortgage products that enticed homebuyers into supporting escalating housing prices while eliminating the need for the traditional 20 percent down payment. Whether it was interest-only loans, low- or no-doc "liar loans," or piggyback home-equity loans, the mortgage and banking industries found a way to place almost anyone with -- or even without -- a credit score into a home. Wall Street played its part by packaging those mortgages into complex financial products and selling them to other investors, many of whom had no idea of what they were buying or the associated risks. Once again, the investment banks raked in billions of dollars in fees, giving them incentive to keep lowering underwriting standards, allowing mortgage companies to originate and sell even the most unscrupulous home loans, which Wall Street then dumped onto the investment community. Wall Street never once questioned the ethics of these activities; it too was focused on the enormous rewards that allowed its firms to pay out an unfathomable $62 billion in bonuses in 2006 alone. Without Wall Street, the housing bubble would have ended shortly after the Fed started to raise interest rates in 2004, because no lenders would have originated these toxic mortgages if they had to keep the loans on their own balance sheets. The price of all this greed? Sadly, because of the actions of the investment banks, the mortgage industry and the rating agencies, the investment community has now incurred an estimated $1 trillion and more in losses. Even more troubling, housing prices have dropped 20 percent from their July 2006 highs, with the very real likelihood that housing could contract another 15 to 20 percent -- essentially wiping out more than $4 trillion in housing values. This would be the biggest hit since the Depression to Americans' most important asset. What is even more remarkable is that at the same time, firms such as Goldman Sachs and Lehman not only made billions of dollars packaging and selling these toxic loans, they also wagered with their own capital that the values of these investments would decline, further raising their profits. If any other industries engaged in such knowingly unscrupulous activities, there would be an immediate federal investigation. Why is Washington so complicit in this intricate and lucrative affair? First, the Fed laid the groundwork for both these asset bubbles by lowering interest rates to historic lows. In an attempt to protect his legacy after the Internet-bubble collapse, Greenspan provided unprecedented stimulus to re-inflate the economy and maintain his popularity with Wall Street. (Remember the "Greenspan put"?) But in doing so, he spawned the largest debt and asset bubble in U.S. history. At the same time, federal regulatory agencies such as the SEC stood idly by as Wall Street took advantage of the investment public during both the Internet and the housing bubbles. The SEC took almost no action against Wall Street after the dot-com implosion. And in the midst of the housing bubble, in 2006, only the Office of the Comptroller of the Currency pushed for any level of regulation to address subprime lending. One has to wonder why Treasury secretaries under Presidents Clinton and Bush -- Robert Rubin and Hank Paulson, respectively -- took no action to curb these abuses. It certainly was not because they did not understand Wall Street's practices -- both are former chief executives of Goldman Sachs. And why has Congress been so silent? The Wall Street investment banking firms, their executives, their families and their political action committees contribute more to U.S. Senate and House campaigns than any other industry in America. By sprinkling some of its massive gains into the pockets of our elected officials, Wall Street bought itself protection from any tough government enforcement. This is no doubt the same reason why so many members of Congress were consistently blocking attempts to reform and downsize Fannie Mae and Freddie Mac, which are essentially giant, undercapitalized hedge funds. These two entities have been huge money machines for Democrats in both the House and the Senate, many of whom recently had the gall to ask why these companies hadn't been reformed in the past. Nor should several Republican congressmen and Senators who likewise contributed to watering down legislation aimed at reforming these institutions be let off the hook. Wall Street's actions are now profoundly hurting American families, communities and the entire U.S. financial system. People are being thrown out of their homes. Once seemingly indestructible financial entities are succumbing to the crisis they have created and have jeopardized the stability of the global financial system. Isn't it ironic that the same firms that preached free-market capitalism are now the ones begging for a taxpayer bailout? Many investment professionals operating in my world believe, as do I, that we are facing the greatest financial crisis since 1929. Fortunately, today we have safety nets, such as federal deposit insurance, that were non-existent during the Great Depression. Yet there has not been a time since the 1920s when Wall Street has enjoyed as much influence over Washington as it has for the last 12 years. Let's hope that this influence fades rapidly -- and that this financial crisis doesn't end the same way as the one of nearly 80 years ago. Eric D. Hovde is chief executive of Washington-based Hovde Capital and Hovde Acquisitions. wwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwww (Forwarded to Tapatt by Bobby Tordesillas) An economic Cassandra whose predictions are coming true By Stephen Mihm, The New York Times Saturday, August 16, 2008 On Sept. 7, 2006, Nouriel Roubini, an economics professor at New York University, stood before an audience of economists at the International Monetary Fund and announced that a crisis was brewing. In the coming months and years, he warned, the United States was likely to face a once-in-a-lifetime housing bust, an oil shock, sharply declining consumer confidence and, ultimately, a deep recession. He laid out a bleak sequence of events: homeowners defaulting on mortgages, trillions of dollars of mortgage-backed securities unraveling worldwide and the global financial system shuddering to a halt. These developments, he said, could cripple or destroy hedge funds, investment banks and other major financial institutions like Fannie Mae and Freddie Mac. As Roubini stepped down from the lectern after his talk, the moderator of the event said, 'I think perhaps we will need a stiff drink after that.' People laughed - and not without reason. At the time, unemployment and inflation remained low, and the economy, while weak, was still growing, despite rising oil prices and a softening housing market. But Roubini was soon vindicated. In the year that followed, subprime lenders began entering bankruptcy, hedge funds began going under and the stock market plunged. There was declining employment, a deteriorating dollar, ever-increasing evidence of a huge housing bust and a growing air of panic in financial markets as the credit crisis deepened. By late summer, the Federal Reserve was rushing to the rescue, making the first of many unorthodox interventions in the economy, including cutting the lending rate by half a percentage point and buying up tens of billions of dollars in mortgage-backed securities. Over the past year, whenever optimists have declared the worst of the U.S. economic crisis over, Roubini has countered with steadfast pessimism. In February, when the conventional wisdom held that the venerable investment firms of Wall Street would weather the crisis, Roubini warned that one or more of them would go 'belly up' - and six weeks later, Bear Stearns collapsed. After the Fed's further extraordinary actions in the spring - including making lines of credit available to selected investment banks and brokerage houses - many economists made note of the ensuing economic rally and proclaimed the credit crisis over and a recession averted. Roubini stuck to his script of 'nightmare' events: waves of corporate bankruptcies, collapses in markets like commercial real estate and municipal bonds and, most alarming, the possible bankruptcy of a large regional or national bank that would lead to a panic by depositors. Not all of these developments have come to pass, but last month's demise of the California bank IndyMac - one of the largest such failures in U.S. history - drew only more attention to Roubini's seeming prescience. As a result, Roubini, a respected but formerly obscure academic, has become a major figure in the public debate about the economy: the seer who saw it coming. He has been summoned to speak before Congress, the Council on Foreign Relations and the World Economic Forum at Davos, Switzerland. He is now a sought-after adviser, spending much of his time shuttling between meetings with central bank governors and finance ministers in Europe and Asia. The mainstream economic establishment appears to be moving closer, however fitfully, to his way of seeing things. 'I have in the last few months become more pessimistic than the consensus,' Lawrence Summers, a former Treasury secretary, told me this year. 'Certainly, Nouriel's writings have been a contributor to that.' On a cold and dreary day last winter, I met Roubini over lunch in New York City. 'I'm not a pessimist by nature,' he insisted. I found the assertion hard to credit. With a dour manner and an aura of gloom about him, Roubini gives the impression of being permanently pained, as if the burden of what he knows is almost too much for him to bear. Roubini, who is 50, has been an outsider his entire life. He was born in Istanbul, the child of Iranian Jews, and his family moved to Tehran when he was 2, then to Tel Aviv and finally to Italy. He moved to the United States to pursue his doctorate in international economics at Harvard. After completing his doctoral degree in 1988, Roubini joined the economics department at Yale, where he first met and began sharing ideas with Robert Shiller, the economist now known for his prescient warnings about the 1990s technology bubble. The 1990s were an eventful time for an international economist like Roubini. Throughout the decade, one emerging economy after another was struck by crisis, beginning with Mexico's in 1994. Panics swept Asia, including Thailand, Indonesia and South Korea, in 1997 and 1998. The economies of Brazil and Russia imploded in 1998. Argentina's followed in 2000. Roubini began studying these countries and soon identified what he saw as their common weaknesses. On the eve of the crises that befell them, he noticed, most had huge current-account deficits (meaning, basically, that they spent far more than they made), and they typically financed these deficits by borrowing from abroad in ways that exposed them to the national equivalent of bank runs. Most of these countries also had poorly regulated banking systems plagued by excessive borrowing and reckless lending. Corporate governance was often weak, with cronyism in abundance. Roubini's work was distinguished not only by his conclusions but also by his approach. By making extensive use of transnational comparisons and historical analogies, he was employing a subjective, nontechnical framework, the sort embraced by popular economists like Paul Krugman, columnist for The New York Times, and the Nobel laureate Joseph Stiglitz to reach a nonacademic audience. Roubini takes pains to note that he remains a rigorous scholarly economist, but his approach is not the contemporary scholarly ideal in which an economist builds a model in order to constrain his subjective impressions and abide by a discrete set of data. The book that Roubini ultimately wrote (with the economist Brad Setser) on the emerging-market crises, 'Bailouts or Bail-Ins?,' contains not a single equation in its 400-plus pages. After analyzing the markets that collapsed in the 1990s, Roubini set out to determine which country's economy would be the next to succumb to the same pressures. His surprising answer: the United States. Roubini was unnerved by what he saw in the U.S. economy, in particular its 2004 current-account deficit of $600 billion. He began writing extensively about the dangers of that deficit and then branched out, researching the various effects of the credit boom - including the biggest housing bubble in the nation's history - that began after the Federal Reserve cut rates to close to zero in 2003. Roubini became convinced that the housing bubble was going to pop. By late 2004 he had started to write about a 'nightmare hard landing scenario for the United States.' He predicted that foreign investors would stop financing the fiscal and current-account deficit and abandon the dollar, wreaking havoc on the economy. What economic developments does Roubini see on the horizon? When Jim Nussle, the White House budget director, announced last month that the United States had 'avoided a recession,' Roubini was incredulous. For months, he has been predicting that the United States will suffer through an 18-month recession that will eventually rank as the 'worst since the Great Depression.' Though he is confident that the economy will enter a technical recovery toward the end of next year, he said job losses, corporate bankruptcies and other drags on growth would continue to take a toll for years. Roubini has counseled various policy makers, including Federal Reserve governors and senior Treasury Department officials, to mount an aggressive response to the crisis. He applauded when the Fed cut interest rates to 2 percent from 5.25 percent beginning last summer. He also supported the Fed's willingness to engineer a takeover of Bear Stearns. Roubini argues that the Fed's actions averted catastrophe, though he says he believes that future bailouts should focus on mortgage owners, not investors. Accordingly, he sees the choice facing the United States as stark but simple: either the government backs up a trillion-plus dollars' worth of high-risk mortgages (in exchange for the lenders' agreement to reduce monthly mortgage payments), or the banks and other institutions holding those mortgages - or the complex securities derived from them - go under. 'You either nationalize the banks or you nationalize the mortgages,' he said. 'Otherwise, they're all toast.' For months, Roubini has been arguing that the true cost of the housing crisis will not be a mere $300 billion - the amount allowed for by the housing legislation sponsored by Representative Barney Frank, Democrat of Massachusetts, and Senator Christopher Dodd, Democrat of Connecticut - but something between a trillion and a trillion and a half dollars. But most important, in Roubini's opinion, is to realize that the problem is deeper than the housing crisis. 'Reckless people have deluded themselves that this was a subprime crisis,' he told me. 'But we have problems with credit-card debt, student-loan debt, auto loans, commercial real estate loans, home-equity loans, corporate debt and loans that financed leveraged buyouts.' All of these forms of debt, he argues, suffer from some or all of the same traits that first surfaced in the housing market: shoddy underwriting, securitization, negligence on the part of the credit-rating agencies and lax government oversight. 'We have a subprime financial system,' he said, 'not a subprime mortgage market.' Roubini argues that most of the losses from this bad debt have yet to be written off, and the toll from bad commercial real estate loans alone may help send hundreds of local banks into the arms of the Federal Deposit Insurance Corp. 'A good third of the regional banks won't make it,' he predicted. In turn, these bailouts will add hundreds of billions of dollars to an already gargantuan federal debt, and someone, somewhere, is going to have to finance that debt, along with all the other debt accumulated by consumers and corporations. 'Our biggest financiers are China, Russia and the Gulf states,' Roubini noted. 'These are rivals, not allies.' The United States, Roubini went on, will most likely muddle through the crisis but will emerge from it a different nation, with a different place in the world. 'Once you run current-account deficits, you depend on the kindness of strangers,' he said, pausing to let out a resigned sigh. 'This might be the beginning of the end of the American empire.' Stephen Mihm is an assistant professor of economic history at the University of Georgia. http://www.iht. com/articles/ 2008/08/15/ business/ wbroubini. 1.php OOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOO Reactions to [email protected]. 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