27 octobre 2008 1 27 /10 /octobre /2008 03:57

Online Journal
Oct 21, 2008, 10:23

How the masters
of the universe
outsmarted themselves,
but don’t count
them out yet

By Chronis Polychroniou
Online Journal Contributing WriterBy


Ralph Nader Wall Streer Protest Oct 16th
Photo: Joëlle Pénochet

Even though it probably has deeper and more structural causes associated with it, perhaps due to over-accumulation, to use an old-fashioned Marxist economic term, the September-October 2008 global financial crisis will go down in history as a combined event of scandalous corporate greed and callousness and government irresponsibility.

As for the historic bailout plans in the US and Europe, they should long be remembered not as policies that brought back state intervention, as various shallow journalistic analyses are hinting at when interpreting government rescues to save global capitalism, but rather as shameless, undisguised top-down class warfare.

In contrast to basic economics textbooks and prevailing ideology, capitalism has always thrived on the basis of strong state support, including the type of government interventions that shift market-driven domestic expansion overseas and the distribution of wealth from bottom to top. Under neoliberalism, the state functions as the exclusive domain of the super-rich and powerful as it has been clearly converted into an appendix of big business and multinationals. In this context, the bailout plans -- socializing losses for the disastrous actions of greedy individuals and companies -- is the elite’s only natural response to the inherent flaws built into the fabric of an economic system that makes a virtue of unfettered economic behavior and praises greed and unlimited wealth while displaying at the same time contempt for the poor, disdain for justice, and carelessness for the future of the planet.

The September-October global financial crisis did not come out of the blue. Since the US moved sharply to financial liberalization in the late 1970s, with much of the world following obediently immediately thereafter, a great many financial crises have erupted, predictably and predicted, and the latest one, with profitability depending on speculative coups, was a time bomb just waiting to explode. Both insiders, like Berkshire Hathaway’s billionaire chairman Warren Buffett, and academic experts (Paul Krugman, David Felix, Dean Baker, to name just the few that come to mind) had long understood that the system had reached its limits and were warning of a possible meltdown.

Indeed, since 2001, the year of Bush’s ascension to power, the American economy has faced a multitude of severe problems: a recession, the bursting of the dot-com and the housing bubbles, and major corporate scandals. Add to that the immense pressures imposed by the global war on terror and the Iraq war and a crystal ball is hardly needed to forecast gloomy days ahead for the economy.

Writing in the New York Times on October 14, 2003, Paul Krugman, this year’s Nobel Prize Laureate in Economics, was quite prophetic about the current financial debacle: “Lehman Brothers has a mathematical model known as Damocles that it calls ‘an early warning system to identify the likelihood of countries entering into financial crises.’ Developing nations are looking pretty safe these days. But applying the same model to some advanced countries ‘would set Damocles’ alarm bells ringing.” Lehman’s press release adds, “Most conspicuous of these threats is the United States.”

The real question then is why were so many smart people in Wall Street and the banking sector, including the current Chairman of the US Federal Reserve System, Ben Bernanke, and his predecessor, Alan Greenspan, doing nothing all along to avoid the crisis except praising the virtues of free market capitalism?

One response would be that they simply misjudged the crisis or even failed to see it coming. Sure, and the extensive risk-analysis algorithms that the Wall Street barons relied on were being used instead to assess long-term gains and losses from gambling money on the race tracks in Belmont and Saratoga where the super rich undoubtedly spend part of their long weekends.

A more likely scenario is that the masters of the universe (a term originally used by Tom Wolfe in his novel The Bonfire of Vanities to describe the titans of Wall Street), having free reign to pursue profits irrespective of the risks involved, outsmarted themselves by creating more and more complex financial networks both in order to continue squeezing out more profits and to postpone the eventuality of a coming crisis and ended up believing that the new world of finance is like the expanding universe. In a word, it won’t collapse because it had been expanding since the moment of its creation.

Henry Paulson, current US Secretary of the Treasury and a former chief executive officer of Goldman Sach’s, was one of the masters of the universe prior to his ascension to the Treasury. As the International Herald Tribune reported in May 31, 2006, in a story titled “A ‘Salesman’ for the Treasury,” Henry Paulson, “was one of the first Wall Street leaders to recognize how drastically investment banks could enhance their profitability by betting with their own capital instead of acting as mere intermediaries.” Paulson “stubbornly assert[ed] Goldman’s right to invest in, advise on and finance deals, regardless of potential conflicts.”

When Paulson proposed his $700 billion bailout of the financial industry, he knew exactly what had gone wrong. In his career at Goldman Sachs, it is estimated that he may have built a wealth worth $700 million. His $700 billion bailout scheme, which originally came to a scant 3 pages long for what is widely regarded as the greatest financial crisis since the Great Depression, was but a knee-jerk reaction, a token of appreciation, to a sector of the economy that had been so generous to him and his ilk. To be sure, most economists agreed that the original version of the American bailout was at once both highly incomplete and extremely vague to make financial markets stabilize. Even the amount of the bailout plan defied economic logic. Why $700 billion and not $500 billion or $1 trillion? The Treasury people still don’t have the slightest idea how to respond to this question.

Gordon Brown’s plan to rescue the European financial system is seemingly less tolerant of greedy financial practices because it is not distorted by the ideological fanaticism about free markets prevailing at the other side of the Atlantic. However, lest we forget that Britain is the junior partner of the Empire, the extent to which his plan will lead to a new global financial order remains to be seen.

What is probably more certain is that the global financial crisis under way will not disappear into thin air because of the various bailout schemes already introduced. Both the American and European economies will suffer in coming years as nothing is being done to address the problems of rising unemployment, the sharp increase in consumption debt and the decline in overall consumption and what Noam Chomsky has referred in a private correspondence to me “the monster in the closet that is soon to burst out: the health system catastrophe.” Both the US and EU economies may also soon find themselves under the grip of inflation or deflation, pending on where the money supply and credit pendulum swings. But none of this should be surprising. As the bailout plans made obvious even to sceptics about the real mindset of Western governments, the interests of the “fat cats” is what they first and foremost cater to during both good and bad times.

The United States, with its distinct economic culture, is certainly the one player that might have a greater difficulty in adjusting to the current crisis. A number of serious economic assessments predict quite a long slump for the American economy, especially since it is quite clear that Wall Street’s problems have spilled over onto Main Street. In addition, many states are already experiencing a fiscal crisis of their own and are looking to the federal government for a bailout.

America’s economic woes could get even worse in the event that the current global financial crisis continues unabated and the dollar fails to stabilize. In the event that investors lose confidence in the dollar as the world’s currency, a combined financial crisis with a currency crisis will make the economic environment in the US look a lot like that of Argentina’s during the period between 1999-2002.

In the meantime, the masters of the universe have retreated to their luxury beach homes, but don’t count them out. With or without a new global capitalist financial order, they may return sooner than anyone thinks. It’s in the nature of the system.

Chronis Polychroniou is an author and journalist who writes frequently on current global, political, economic and social affairs.

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