by Robert Parry
Once Barack Obama emerged as a viable candidate for President – given the nation's grim history of violence toward African-American political figures – the worries began about Obama’s safety, and they have not gone away.
Now, with the McCain-Palin campaign’s recent decision to go intensely negative on Obama, those risks appear to be growing, putting added pressure on the Secret Service detail assigned to protect Obama.
In particular, Sarah Palin’s reckless talk about Obama “palling around with terrorists” has helped validate the anti-Obama hate that has long obsessed the American Right. She also accused Obama of insulting American troops in Afghanistan, a twisting of Obama’s words that was then reprised in a McCain-Palin attack ad.
Though avoiding some of Palin’s most incendiary rhetoric, John McCain has played this dangerous game, too, asking ominously “who is the real Barack Obama?” – suggesting that there are dark secrets in Obama’s past that would make him a threat to the nation.
Warm-up speakers at Republican rallies have insisted on emphasizing Obama’s middle name “Hussein” as another epithet.
Not surprisingly, McCain-Palin supporters have responded to this “red meat” by shouting words like “treason,” “communist,” “kill him.” At a Palin event in Florida, some excited backers yelled ugly taunts at an African-American working in a TV crew.
For her part, Palin appears oblivious to the dangerous political storm that she is stirring up. Caught up in her new celebrity – and lost in her own ambition – she acts as if there are no consequences for putting ugly words together and spewing them into the fervid world of the angry American Right.
Many observers are more surprised about McCain, who vowed at the end of the GOP convention to become a President who would end “partisan rancor” – although his convention was filled with partisan rancor targeting Obama.
Now, facing slumping poll numbers, McCain has jettisoned what’s left of his promise to run a respectful campaign as well as his prized slogan “Country First,” in exchange for a new goal of winning at all costs.
Like Palin, McCain seems not to care that he is feeding the anger of white racists and the paranoia of xenophobes who have long recycled false allegations about Obama’s religion and his loyalty to the United States.
The Real McCain?
This “new” McCain has startled many of his old fans in the U.S. press corps who bought into his image as a bipartisan reformer who was victimized by George W. Bush’s dirty tactics in 2000. Some now shake their heads about an aging politician letting his ambition – or fear of defeat – overwhelm his larger sense of decency.
But other assessments hold that McCain is simply reverting to the real McCain, the spoiled son of one four-star admiral and the grandson of another, the brat who earned the nickname “McNasty” and who exploited his family influence to rise in military rank despite a poor record as a student and a pilot.
A new account of McCain’s life by Tim Dickinson published in Rolling Stone describes not only McCain’s playboy youth – his gambling, womanizing and tendency to crash planes – but debunks a central element of his personal narrative, that his ordeal as a Vietnam War POW transformed him into a person who puts “country first.”
The article opens with an anecdote from 1974 when former POW McCain encounters another ex-POW, Air Force Lt. Col. John Dramesi, at the prestigious National War College, where McCain had pulled strings to get in.
Dramesi, who unlike McCain had refused to make an anti-American “confession” for the North Vietnamese, describes his plans to seek an assignment in the Middle East because he fears it will become a future danger zone for U.S. interests.
McCain is dismissive of Dramesi’s plans, saying he was off to Rio de Janeiro.
"What the hell are you going to Rio for?" Dramesi asked.
McCain, who was then a married father of three, responded, "I got a better chance of getting laid."
Indeed, if one looks at McCain’s life through a single prism of self-interest, all the twists and turns of his career – including his ventures into reform, bipartisanship and even his coziness with the mainstream press – make sense.
As Dickinson observes in his biographical article, “the real John McCain … has been hiding in plain sight. It is the story of a man who has consistently put his own advancement above all else, a man willing to say and do anything to achieve his ultimate ambition: to become commander in chief, ascending to the one position that would finally enable him to outrank his four-star father and grandfather.”
In this view, McCain is like his erstwhile Republican rival, George W. Bush, a screw-up scion of a dynastic family who learned how to come across as an “everyman” and who became adept at playing the political game. McCain, like Bush, also wanted to outdo his more accomplished father.
Country Last
So, it shouldn’t be too surprising that McCain – finding himself in a political hole – would do whatever it takes to climb out, even if that means smearing an opponent, further polarizing the country and inciting some extremists with violent tendencies.
This evidence of the “real McCain” should have been long apparent, certainly since he recruited to run his campaign many of the Bush veterans who threw mud at Al Gore, John Kerry and McCain himself – the likes of Karl Rove protégés Steve Schmidt to the top job and Tucker Eskew, who smeared McCain in the 2000 South Carolina primary.
Then, when McCain needed to solidify his Republican base and inject some excitement into his campaign, the 72-year-old cancer survivor selected Sarah Palin, a first-term governor of Alaska with virtually no foreign policy experience, as his running mate.
For a while, the Palin pick worked politically giving McCain a boost at his convention and in the polls. However, increasingly, American voters look at Palin as eminently unqualified to be a heartbeat away from the presidency.
But McCain is undaunted. Despite concerns among medical experts that his melanoma could recur, he continues to defend his vice-presidential choice, now unleashing her as the lead attack dog against Obama.
McCain’s ambition, which burns as brightly as Palin’s, seems to have few limits. Nor does his disdain for his Democratic rival, Barack Obama, whom McCain sneeringly referred to in Tuesday’s debate as “that one.”
But the most worrisome question in these last four weeks of the campaign is whether McCain and Palin will continue with dangerous rhetoric that might encourage some unstable character to take matters into his own hands.
If something like that does happen – or even if McCain-Palin somehow manage to turn their ugly messaging into a tainted victory – the ultimate loser will be the United States, which will be left even more deeply divided than it is today.
Instead of putting “Country First,” the ugly tactics of McCain and Palin are putting “Country Last.”
ABOUT AUTHOR
Robert Parry broke many of the Iran-Contra stories in the 1980s for the Associated Press and Newsweek. His latest book, Secrecy & Privilege: Rise of the Bush Dynasty from Watergate to Iraq, can be ordered at secrecyandprivilege.com. It's also available at Amazon.com, as is his 1999 book, Lost History: Contras, Cocaine, the Press & 'Project Truth.'
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Friday, October 10, 2008
Thursday, October 9, 2008
The Surge That Failed
Afghanistan Under the Bombs
by Anand Gopal
A bit past midnight on a balmy night in late August, Hedayatullah awoke to a deafening blast. He stumbled out of bed and heard angry voices drawing closer. Suddenly, his bedroom doors banged open and dozens of silhouetted figures burst in, some shouting in a strange language.
The intruders blindfolded Hedayatullah and, screaming with fury, forced him to the ground. An Afghan voice told him not to move or speak, or he would be killed. He listened for sounds from the next room, where his brother Noorullah slept with his family. He could hear his nephew, eight months old, crying hysterically. Then came the sound of an automatic rifle, after which his nephew fell silent.
The rest of the family -- 18 people in all, including aunts, uncles, and cousins -- was herded outside into the darkness. The Afghan voice explained to Hedayatullah's terrified mother, "We are the Afghan National Army, here to accompany the American military. The Americans have killed one of your sons and his two children. They also shot his wife and they're taking her to the hospital."
"Why?" Hedayatullah's mother stammered.
"There is no why," the soldier replied. When she heard this, she started screaming, slamming her fists into her chest in anguish. The Afghan soldiers left her and loaded Hedayatullah and his cousin into the back of a military van, after which they drove off with an American convoy into the black of night.
The next day, the Afghan forces released Hedayatullah and his cousin, calling the whole raid a mistake. However, Noorullah's wife, months pregnant, never came home: She died on the way to the hospital.
Surging in Afghanistan
When, decades from now, historians compile the record of this Afghan war, they will date the Afghan version of the surge -- the now trendy injection of large numbers of troops to resuscitate a flagging war effort -- to sometime in early 2007. Then, a growing insurgency was causing visible problems for U.S. and NATO forces in certain pockets in the southern parts of the country, long a Taliban stronghold. In response, military planners dramatically beefed up the international presence, raising the number of troops over the following 18 months by 20,000, a 45% jump.
During this period, however, the violence also jumped -- by 50%. This shouldn't be surprising. More troops meant more targets for Taliban fighters and suicide bombers. In response, the international forces retaliated with massive aerial bombing campaigns and large-scale house raids. The number of civilians killed in the process skyrocketed. In the fifteen months of this surge, more civilians have been killed than in the previous four years combined.
During the same period, the country descended into a state of utter dereliction -- no jobs, very little reconstruction, and ever less security. In turn, the rising civilian death toll and the decaying economy proved a profitable recipe for the Taliban, who recruited significant numbers of new fighters. They also won the sympathy of Afghans who saw them as the lesser of two evils. Once confined to the deep Afghan south, today the insurgents operate openly right at the doorstep of Kabul, the capital.
This last surge, little noted by the media, failed miserably, but Washington is now planning another one, even as Afghanistan slips away. More boots on the ground, though, will do little to address the real causes of this country's unfolding tragedy.
Revenge and the Taliban
One day, as Zubair was walking home, he noticed that the carpet factory near his house in the southern province of Ghazni was silent. That's strange, he thought, because he could usually hear the din of spinning looms as he approached. As he rounded the corner, he saw a crowd of people, villagers and factory workers, gathered around his destroyed house. An American bomb had flattened it into a pancake of cement blocks and pulverized bricks. He ran toward the scene. It was only when he shoved his way through the crowd and up to the wreckage that he actually saw it -- his mother's severed head lying amid mangled furniture.
He didn't scream. Instead, the sight induced a sort of catatonia; he picked up the head, cradled it in his arms, and started walking aimlessly. He carried on like this for days, until tribal elders pried the head from his hands and convinced him to deal with his loss more constructively. He decided he would get revenge by becoming a suicide bomber and inflicting a loss on some American family as painful as the one he had just suffered.
When one decides to become a suicide bomber, it is pretty easy to find the Taliban. In Zubair's case he just asked a relative to direct him to the nearest Talib; every village in the country's south and east has at least a few. He found them and he trained -- yes, suicide bombing requires training -- for some time and then he was fitted with the latest model suicide vest. One morning, he made his way, as directed, towards an office building where Americans advisors were training their Afghan counterparts, but before he could detonate his vest, a pair of sharp-eyed intelligence officers spotted him and wrestled him to the ground. Zubair now spends his days in an Afghan prison.
A poll of 42 Taliban fighters by the Canadian Globe and Mail newspaper earlier this year revealed that 12 had seen family members killed in air strikes, and six joined the insurgency after such attacks. Far more who don't join offer their support.
Under the Bombs
In the muddied outskirts of Kabul, an impromptu neighborhood has been sprouting, full of civilians fleeing the regular Allied aerial bombardments in the Afghan countryside. Sherafadeen Sadozay, a poor farmer from the south, spoke for many there when he told me that he had once had no opinion of the United States. Then, one day, a payload from an American sortie split his house in two, eviscerating his wife and three children. Now, he says, he'd rather have the Taliban back in power than nervously eye the skies every day.
Even when the bombs don't fall, it's quite dangerous to be an Afghan. Journalist Jawed Ahmad was on assignment for Canadian Television in the southern city of Kandahar when American troops stopped him. In his possession, they found contact numbers to the cell phones of various Taliban fighters -- something every good journalist in the country has -- and threw him into prison, not to be heard from for almost a year. During interrogation, Ahmad says that American jailors kicked him, smashed his head into a table, and at one point prevented him from sleeping for nine days. They kept him standing on a snowy runway for six hours without shoes. Twice he fainted and twice the soldiers forced him to stand up again. After 11 months of detention, military authorities gave him a letter stating that he was not a threat to the U.S. and released him.
Starving in Kabul
If you're walking his street, there isn't a single day when you won't see Zayainullah. For as long as he can remember, the 11 year-old has perched on the sidewalk at one of Kabul's busiest intersections. Zayainullah has only one arm; the Taliban blew the other one away when he was a child. He uses this arm to beg for handouts, quietly in the mornings, more desperately as the day goes on. Both his parents are dead so he lives with his aunt, a widow. Given the mores of modern-day Afghanistan, she can't work because a woman needs a man's sanction to leave the house. So she puts young Zayainullah on the street as her sole breadwinner. If he comes home empty-handed she beats him, sometimes until he can no longer move.
He sits there, shirtless, with a heaving, rounded belly -- distended from severe malnutrition -- as scores of other beggars and pedestrians stream by him. No one really notices him though, because poverty has become endemic in this country.
Afghanistan is now one of the poorest countries on the planet. It takes its place among desperate, destitute nations like Burkina Faso and Somalia whenever any international organization bothers to measure. The official unemployment rate, last calculated in 2005, was 40% percent. According to recent estimates, it may today reach as high as 80% in some parts of the country.
Approximately 45% of the population is now unable to purchase enough food to guarantee bare minimum health levels, according to the Brookings Institution. This winter, Afghan officials claim that hunger may kill up to 80% of the population in some northern provinces caught in a vicious drought. Reports are emerging of parents selling their children simply to make ends meet. In one district of the southern province of Ghazni last spring things got so bad that villagers started eating grass. Locals say that after a harsh winter and almost no food, they had no choice.
Kabul itself lies in tatters. Roads have gone unpaved since 2001. Massive craters from decades of war blot the capital city. Poor Afghans live in crumbling warrens with no electricity and often without safe drinking water. Kabul, a city designed for about 800,000 people, now holds more than four million, mostly squeezed into informal settlements and squatters' shacks.
Washington spends about $100 million a day on this war -- close to $36 billion a year -- but only five cents of every dollar actually goes towards aid. From this paltry sum, the Agency Coordinating Body for Afghan Relief found that "a staggering 40 percent has returned to donor countries in corporate profits and salaries." The economy is so underdeveloped that opium production accounts for more than half of the country's gross domestic product.
What little money does go for reconstruction is handed over to U.S. multinationals who then subcontract out to Afghan partners and cut corners every step of the way. As a result, the U.N. ranks the country as the fifth least-developed in the world -- a one-position drop from 2004.
The government and coalition forces may not bring jobs to Afghanistan, but the Taliban does. The insurgents pay for fighters -- in some cases, up to $200 a month, a windfall in a country where 42% of the population earns less than $14 a month. When a textile factory in Kandahar laid off 2,000 workers in September, most of them joined the Taliban. And that district in Ghazni where locals were reduced to eating grass? It is now a Taliban stronghold.
Biking in Kabul
A spate of suicide bombings and high-profile attacks in recent years have turned Kabul into a sort of garrison state, with roadblocks and checkpoints clogging many of the city's main arteries. The traffic is, at times, unbearable, so I bought a new motorbike, an Iranian import that can adroitly weave through traffic. I was puttering along one day recently when a police commander stopped me.
"That's a nice bike," he said.
"Thank you," I replied.
"Is it new?"
"Yes."
"I'd like to have it. Get off."
I stared at him in disbelief, not quite grasping at first that he was deadly serious. Then I began threatening him, saying I'd call a certain influential friend if he laid a finger on the bike. That finally hit home and he stepped back, waving me on.
Journalists may have influential friends, but ordinary Afghans are usually not so lucky. Locals tend to fear the neighborhood police as much as the many criminals who prowl Kabul's streets. The notoriously corrupt police force is just one face of a government that much of the population has come to loathe.
Police are known to rob passengers at checkpoints. Many of the country's leading members of parliament and cabinet officials sport long, bloody records of human rights abuses. Rapists and serious criminals regularly bribe their way out of prison. Warlords and militia commanders run wild in the north, regularly raping young girls and snatching the land of villagers with impunity. Earlier this year newspapers revealed that President Hamid Karzai pardoned a pair of such militiamen accused of bayonet-raping a young woman.
What Karzai does hardly matters, though. After all, his government barely functions. Most of the country is carved up into fiefdoms run by small-time commanders. A U.S. intelligence report in the spring of 2008 estimated that the central government then controlled just 30% of the country, and many say even that is now an optimistic assessment.
Drive a few miles outside Kabul and the roads are controlled by bandits, off-duty cops, or anyone else with a gun and an eye for a quick buck. The Karzai government's popularity has plummeted to such levels that, believe it or not, many Afghans in Kabul wax nostalgic for the days of Dr. Mohammad Najibullah, the country's last Communist dictator. "That government was cruel and indifferent, but at least they gave us something," an Afghan friend typically told me. The Karzai government provides almost no social services, expending all its efforts just trying to keep itself together.
Shadow Government
Power abhors a vacuum, and so, in those areas where central government rule has crumbled, the Islamic Emirate of Afghanistan -- the Taliban government -- is rising in its place. In Wardak, a province bordering Kabul Province, the Taliban has a stable foothold, complete with a shadow government of mayors and police chiefs. In Logar, another of Kabul's neighboring provinces, some "government-controlled" areas consist of the home of the district head, the NATO installation down the road -- and nothing else.
With the rise of the Taliban in these areas comes their notorious brand of justice. Shadow courts now dispense Taliban-style draconian judgments and punishments in many districts and ever more locals are turning to them to settle disputes, either out of fear or because they are far more efficient than the corrupt government courts. The Taliban recently chopped off the ears of a schoolteacher in Zabul province for working for the government. They gunned down a popular drummer in Ghazni simply for playing music in public. Even the infamous public executions are back. The Taliban recently invited journalists to watch the execution of a pair of women on prostitution charges.
The Taliban are as uninterested in social services and human rights as the Karzai government or the international forces, but they know how to turn a world of poverty, insecurity, and death from laser-guided missiles to their advantage. This is how the Islamic Emirate spreads, like so many weeds at first, poking out of areas where the government has failed. As the central government spins towards irrelevancy, the whole south and east of Afghanistan is becoming a thicket of Taliban before our very eyes.
A War to be Lost
One night the Taliban raided a police check post near my Kabul home, killing three policemen. The following morning, when a police contingent arrived on the scene to investigate, a bomb that the rebels had cleverly hidden at the site exploded and killed two more of them. I arrived shortly afterwards to find pieces of charred flesh littering the ground and a mangled, burnt out police van sitting overturned on a pile of rubble.
The raid didn't make much news at the time, but it was actually the deepest the insurgents had penetrated the capital since they were overthrown seven years ago. They have dispatched many individual suicide bombers into the capital and rocketed it as well from time to time, but never had they marched in as an attacking force on foot. When I told an Afghan colleague that I couldn't believe the Taliban were coming into Kabul this way, he responded: "Coming? They've been here. They were just waiting for the government and the U.S. to fail."
Failure is a notion now preoccupying the Western leadership of this war, which is why they are scrambling for yet another "surge" solution.
Of course, the Taliban won't be capturing Kabul anytime soon; the international forces are much too powerful to topple militarily. But the Americans can't defeat the Taliban either; the guerrillas are too deeply rooted in a country scarred by no jobs, no security, and no hope. The result is a war of attrition, with the Americans planning to pour yet more fuel on the flames by throwing in more soldiers next year.
This is a war to be won by constructing roads, creating jobs, cleaning up the government, and giving Afghans something they've had preciously little of in the last 30 years: hope. However, hope is fading fast here, and that's a fact Washington can ill afford to ignore; for once the Afghans lose all hope, the Americans will have lost this war.
Copyright 2008 Anand Gopal
Anand Gopal writes frequently about Afghanistan, Pakistan, and the "War on Terror." He is a correspondent for the Christian Science Monitor, based in Afghanistan. For more of his information and dispatches from the region, visit anandgopal.com.
by Anand Gopal
A bit past midnight on a balmy night in late August, Hedayatullah awoke to a deafening blast. He stumbled out of bed and heard angry voices drawing closer. Suddenly, his bedroom doors banged open and dozens of silhouetted figures burst in, some shouting in a strange language.
The intruders blindfolded Hedayatullah and, screaming with fury, forced him to the ground. An Afghan voice told him not to move or speak, or he would be killed. He listened for sounds from the next room, where his brother Noorullah slept with his family. He could hear his nephew, eight months old, crying hysterically. Then came the sound of an automatic rifle, after which his nephew fell silent.
The rest of the family -- 18 people in all, including aunts, uncles, and cousins -- was herded outside into the darkness. The Afghan voice explained to Hedayatullah's terrified mother, "We are the Afghan National Army, here to accompany the American military. The Americans have killed one of your sons and his two children. They also shot his wife and they're taking her to the hospital."
"Why?" Hedayatullah's mother stammered.
"There is no why," the soldier replied. When she heard this, she started screaming, slamming her fists into her chest in anguish. The Afghan soldiers left her and loaded Hedayatullah and his cousin into the back of a military van, after which they drove off with an American convoy into the black of night.
The next day, the Afghan forces released Hedayatullah and his cousin, calling the whole raid a mistake. However, Noorullah's wife, months pregnant, never came home: She died on the way to the hospital.
Surging in Afghanistan
When, decades from now, historians compile the record of this Afghan war, they will date the Afghan version of the surge -- the now trendy injection of large numbers of troops to resuscitate a flagging war effort -- to sometime in early 2007. Then, a growing insurgency was causing visible problems for U.S. and NATO forces in certain pockets in the southern parts of the country, long a Taliban stronghold. In response, military planners dramatically beefed up the international presence, raising the number of troops over the following 18 months by 20,000, a 45% jump.
During this period, however, the violence also jumped -- by 50%. This shouldn't be surprising. More troops meant more targets for Taliban fighters and suicide bombers. In response, the international forces retaliated with massive aerial bombing campaigns and large-scale house raids. The number of civilians killed in the process skyrocketed. In the fifteen months of this surge, more civilians have been killed than in the previous four years combined.
During the same period, the country descended into a state of utter dereliction -- no jobs, very little reconstruction, and ever less security. In turn, the rising civilian death toll and the decaying economy proved a profitable recipe for the Taliban, who recruited significant numbers of new fighters. They also won the sympathy of Afghans who saw them as the lesser of two evils. Once confined to the deep Afghan south, today the insurgents operate openly right at the doorstep of Kabul, the capital.
This last surge, little noted by the media, failed miserably, but Washington is now planning another one, even as Afghanistan slips away. More boots on the ground, though, will do little to address the real causes of this country's unfolding tragedy.
Revenge and the Taliban
One day, as Zubair was walking home, he noticed that the carpet factory near his house in the southern province of Ghazni was silent. That's strange, he thought, because he could usually hear the din of spinning looms as he approached. As he rounded the corner, he saw a crowd of people, villagers and factory workers, gathered around his destroyed house. An American bomb had flattened it into a pancake of cement blocks and pulverized bricks. He ran toward the scene. It was only when he shoved his way through the crowd and up to the wreckage that he actually saw it -- his mother's severed head lying amid mangled furniture.
He didn't scream. Instead, the sight induced a sort of catatonia; he picked up the head, cradled it in his arms, and started walking aimlessly. He carried on like this for days, until tribal elders pried the head from his hands and convinced him to deal with his loss more constructively. He decided he would get revenge by becoming a suicide bomber and inflicting a loss on some American family as painful as the one he had just suffered.
When one decides to become a suicide bomber, it is pretty easy to find the Taliban. In Zubair's case he just asked a relative to direct him to the nearest Talib; every village in the country's south and east has at least a few. He found them and he trained -- yes, suicide bombing requires training -- for some time and then he was fitted with the latest model suicide vest. One morning, he made his way, as directed, towards an office building where Americans advisors were training their Afghan counterparts, but before he could detonate his vest, a pair of sharp-eyed intelligence officers spotted him and wrestled him to the ground. Zubair now spends his days in an Afghan prison.
A poll of 42 Taliban fighters by the Canadian Globe and Mail newspaper earlier this year revealed that 12 had seen family members killed in air strikes, and six joined the insurgency after such attacks. Far more who don't join offer their support.
Under the Bombs
In the muddied outskirts of Kabul, an impromptu neighborhood has been sprouting, full of civilians fleeing the regular Allied aerial bombardments in the Afghan countryside. Sherafadeen Sadozay, a poor farmer from the south, spoke for many there when he told me that he had once had no opinion of the United States. Then, one day, a payload from an American sortie split his house in two, eviscerating his wife and three children. Now, he says, he'd rather have the Taliban back in power than nervously eye the skies every day.
Even when the bombs don't fall, it's quite dangerous to be an Afghan. Journalist Jawed Ahmad was on assignment for Canadian Television in the southern city of Kandahar when American troops stopped him. In his possession, they found contact numbers to the cell phones of various Taliban fighters -- something every good journalist in the country has -- and threw him into prison, not to be heard from for almost a year. During interrogation, Ahmad says that American jailors kicked him, smashed his head into a table, and at one point prevented him from sleeping for nine days. They kept him standing on a snowy runway for six hours without shoes. Twice he fainted and twice the soldiers forced him to stand up again. After 11 months of detention, military authorities gave him a letter stating that he was not a threat to the U.S. and released him.
Starving in Kabul
If you're walking his street, there isn't a single day when you won't see Zayainullah. For as long as he can remember, the 11 year-old has perched on the sidewalk at one of Kabul's busiest intersections. Zayainullah has only one arm; the Taliban blew the other one away when he was a child. He uses this arm to beg for handouts, quietly in the mornings, more desperately as the day goes on. Both his parents are dead so he lives with his aunt, a widow. Given the mores of modern-day Afghanistan, she can't work because a woman needs a man's sanction to leave the house. So she puts young Zayainullah on the street as her sole breadwinner. If he comes home empty-handed she beats him, sometimes until he can no longer move.
He sits there, shirtless, with a heaving, rounded belly -- distended from severe malnutrition -- as scores of other beggars and pedestrians stream by him. No one really notices him though, because poverty has become endemic in this country.
Afghanistan is now one of the poorest countries on the planet. It takes its place among desperate, destitute nations like Burkina Faso and Somalia whenever any international organization bothers to measure. The official unemployment rate, last calculated in 2005, was 40% percent. According to recent estimates, it may today reach as high as 80% in some parts of the country.
Approximately 45% of the population is now unable to purchase enough food to guarantee bare minimum health levels, according to the Brookings Institution. This winter, Afghan officials claim that hunger may kill up to 80% of the population in some northern provinces caught in a vicious drought. Reports are emerging of parents selling their children simply to make ends meet. In one district of the southern province of Ghazni last spring things got so bad that villagers started eating grass. Locals say that after a harsh winter and almost no food, they had no choice.
Kabul itself lies in tatters. Roads have gone unpaved since 2001. Massive craters from decades of war blot the capital city. Poor Afghans live in crumbling warrens with no electricity and often without safe drinking water. Kabul, a city designed for about 800,000 people, now holds more than four million, mostly squeezed into informal settlements and squatters' shacks.
Washington spends about $100 million a day on this war -- close to $36 billion a year -- but only five cents of every dollar actually goes towards aid. From this paltry sum, the Agency Coordinating Body for Afghan Relief found that "a staggering 40 percent has returned to donor countries in corporate profits and salaries." The economy is so underdeveloped that opium production accounts for more than half of the country's gross domestic product.
What little money does go for reconstruction is handed over to U.S. multinationals who then subcontract out to Afghan partners and cut corners every step of the way. As a result, the U.N. ranks the country as the fifth least-developed in the world -- a one-position drop from 2004.
The government and coalition forces may not bring jobs to Afghanistan, but the Taliban does. The insurgents pay for fighters -- in some cases, up to $200 a month, a windfall in a country where 42% of the population earns less than $14 a month. When a textile factory in Kandahar laid off 2,000 workers in September, most of them joined the Taliban. And that district in Ghazni where locals were reduced to eating grass? It is now a Taliban stronghold.
Biking in Kabul
A spate of suicide bombings and high-profile attacks in recent years have turned Kabul into a sort of garrison state, with roadblocks and checkpoints clogging many of the city's main arteries. The traffic is, at times, unbearable, so I bought a new motorbike, an Iranian import that can adroitly weave through traffic. I was puttering along one day recently when a police commander stopped me.
"That's a nice bike," he said.
"Thank you," I replied.
"Is it new?"
"Yes."
"I'd like to have it. Get off."
I stared at him in disbelief, not quite grasping at first that he was deadly serious. Then I began threatening him, saying I'd call a certain influential friend if he laid a finger on the bike. That finally hit home and he stepped back, waving me on.
Journalists may have influential friends, but ordinary Afghans are usually not so lucky. Locals tend to fear the neighborhood police as much as the many criminals who prowl Kabul's streets. The notoriously corrupt police force is just one face of a government that much of the population has come to loathe.
Police are known to rob passengers at checkpoints. Many of the country's leading members of parliament and cabinet officials sport long, bloody records of human rights abuses. Rapists and serious criminals regularly bribe their way out of prison. Warlords and militia commanders run wild in the north, regularly raping young girls and snatching the land of villagers with impunity. Earlier this year newspapers revealed that President Hamid Karzai pardoned a pair of such militiamen accused of bayonet-raping a young woman.
What Karzai does hardly matters, though. After all, his government barely functions. Most of the country is carved up into fiefdoms run by small-time commanders. A U.S. intelligence report in the spring of 2008 estimated that the central government then controlled just 30% of the country, and many say even that is now an optimistic assessment.
Drive a few miles outside Kabul and the roads are controlled by bandits, off-duty cops, or anyone else with a gun and an eye for a quick buck. The Karzai government's popularity has plummeted to such levels that, believe it or not, many Afghans in Kabul wax nostalgic for the days of Dr. Mohammad Najibullah, the country's last Communist dictator. "That government was cruel and indifferent, but at least they gave us something," an Afghan friend typically told me. The Karzai government provides almost no social services, expending all its efforts just trying to keep itself together.
Shadow Government
Power abhors a vacuum, and so, in those areas where central government rule has crumbled, the Islamic Emirate of Afghanistan -- the Taliban government -- is rising in its place. In Wardak, a province bordering Kabul Province, the Taliban has a stable foothold, complete with a shadow government of mayors and police chiefs. In Logar, another of Kabul's neighboring provinces, some "government-controlled" areas consist of the home of the district head, the NATO installation down the road -- and nothing else.
With the rise of the Taliban in these areas comes their notorious brand of justice. Shadow courts now dispense Taliban-style draconian judgments and punishments in many districts and ever more locals are turning to them to settle disputes, either out of fear or because they are far more efficient than the corrupt government courts. The Taliban recently chopped off the ears of a schoolteacher in Zabul province for working for the government. They gunned down a popular drummer in Ghazni simply for playing music in public. Even the infamous public executions are back. The Taliban recently invited journalists to watch the execution of a pair of women on prostitution charges.
The Taliban are as uninterested in social services and human rights as the Karzai government or the international forces, but they know how to turn a world of poverty, insecurity, and death from laser-guided missiles to their advantage. This is how the Islamic Emirate spreads, like so many weeds at first, poking out of areas where the government has failed. As the central government spins towards irrelevancy, the whole south and east of Afghanistan is becoming a thicket of Taliban before our very eyes.
A War to be Lost
One night the Taliban raided a police check post near my Kabul home, killing three policemen. The following morning, when a police contingent arrived on the scene to investigate, a bomb that the rebels had cleverly hidden at the site exploded and killed two more of them. I arrived shortly afterwards to find pieces of charred flesh littering the ground and a mangled, burnt out police van sitting overturned on a pile of rubble.
The raid didn't make much news at the time, but it was actually the deepest the insurgents had penetrated the capital since they were overthrown seven years ago. They have dispatched many individual suicide bombers into the capital and rocketed it as well from time to time, but never had they marched in as an attacking force on foot. When I told an Afghan colleague that I couldn't believe the Taliban were coming into Kabul this way, he responded: "Coming? They've been here. They were just waiting for the government and the U.S. to fail."
Failure is a notion now preoccupying the Western leadership of this war, which is why they are scrambling for yet another "surge" solution.
Of course, the Taliban won't be capturing Kabul anytime soon; the international forces are much too powerful to topple militarily. But the Americans can't defeat the Taliban either; the guerrillas are too deeply rooted in a country scarred by no jobs, no security, and no hope. The result is a war of attrition, with the Americans planning to pour yet more fuel on the flames by throwing in more soldiers next year.
This is a war to be won by constructing roads, creating jobs, cleaning up the government, and giving Afghans something they've had preciously little of in the last 30 years: hope. However, hope is fading fast here, and that's a fact Washington can ill afford to ignore; for once the Afghans lose all hope, the Americans will have lost this war.
Copyright 2008 Anand Gopal
Anand Gopal writes frequently about Afghanistan, Pakistan, and the "War on Terror." He is a correspondent for the Christian Science Monitor, based in Afghanistan. For more of his information and dispatches from the region, visit anandgopal.com.
The Debate in Nashville
By ALEXANDER COCKBURN
The presidential campaign plummeted into imbecilic tedium last night in Nashville as Barack Obama and John McCain faced off in the second debate. The encounter took place against the vivid backdrop of economic catastrophe, the obvious failure of the $700 billion bailout to turn the tide, Tuesday's market averages hurtling into the abyss, a paralyzing credit freeze, the prospect of savage deflation and prolonged world depression.
Scant intimations of these disasters penetrated the walls of the Belmont University auditorium, where the Gallup polling organization had mustered a crowd of "independents", people canny enough to claim to Gallup's emissaries that they hadn’t yet made up their minds. The affair was billed as a "Town Hall Meeting", meaning only that the candidates were permitted to pace about, or walk up to their carefully selected, ethnically and sexually balanced interlocutors in the crowd and praise them for the acuity of their questions.
It was as though the inhabitants of Sodom and Gomorrah, even though apprised that fire and brimstone had already consumed substantial portions of their cities, with prospective destruction of the remnant, spent a vainglorious 90 minutes vying with each other in proclaiming the fundamental soundness of their economy and the greatness of their civilization.
McCain said he had a plan. He would require his Treasury Secretary to bail out beleaguered homeowners. Obama said he'd do the same. It's a sensible idea. A few days earlier both men had voted on a bankers' bailout that explicitly does not rescue homeowners but exposes the defaulters to foreclosures superintended by the Treasury. The testy and self-important moderator, Tom Brokaw, could have swiftly asked them about this but he didn't.
McCain said he'd consider a spending freeze. Obama could have asked him whether this would include a freeze on the war in Iraq, which has so far cost nearly a trillion dollars. He did finally circle around to this matter, but way too late and much too feebly. In a week when only the government stands between Americans and ruin, one would have thought McCain's Reaganesque attacks on government could have drawn telling barbs from Obama. The auditorium had plenty of veterans who, like McCain, have access to hospitals run by the Veterans' Administration. Obama declined the opportunity.
As a debater Obama is pitifully slow on his feet. This is not a time when any Republican candidate wants to be reminded that a cause dear to President Bush's heart was Social Security "reform", shorthand for handing over peoples' pensions, now held in government accounts, to Wall Street. Yet when McCain agreed with Brokaw that America's Social Security system needs "reform", Obama promptly accepted the faulty premise that the Social Security system is in crisis. Why didn't he point out that had privatization been enacted, millions would have already seen the monthly checks standing between them and utter destitution go down the tubes, destroyed by the sharks at now bankrupt institutions like Lehman Bros?
Obama is too timid even to invoke the greatest hero in the Democrats' pantheon, Franklin Roosevelt. If ever there was a moment to quote FDR, to pledge a new, New Deal it is surely now.
The discussion of foreign affairs was even worse, with the added burden of being mostly repetitions of the first debate in Oxford, Mississippi. McCain invoked the uniqueness of America and its mission to bring freedom and light to the rest of the planet. Obama solemnly agreed. Neither man saw fit to address the fact that America is only able to shoulder these imperial burdens because China has been prepared to finance the war in Iraq. The difficult word "China" passed no one's lips. Nor did the issue of an immense and unsustainable Pentagon budget intrude, nor the thousand or so US military bases overseas.
Both men once again bravely declared they would not allow another Holocaust to happen. Both pledged constancy to Israel. Both men said that an Iran with nuclear weapons was unacceptable. Brokaw could have asked them for their reactions to outgoing Israeli prime minister Olmert's stunning disclosure in an interview with the Hebrew-language newspaper Yediot Aharonot that he thinks Israel is on a totally misguided course, should " actually withdraw from almost all the territories, if not from all the territories", agree to the division of Jerusalem and give Syria back the Golan Heights.
Brokaw didn't, though he did raise the recent British assessments from Kabul saying the West's war is lost. This elicited scant reaction from Obama who continued to pledge higher US troops levels in Afghanistan plus forays into Pakistan, whatever the opinion of Pakistan's government might be. Will anyone ask the Democratic candidate how he feels about stoking up a replication of the Iraq disaster, with a possible war between nuclear Pakistan and nuclear India as lagniappe? The dawn of an Obama administration is now scheduled, on the candidate's pledges, to see escalation of a doomed and pointless war in Afghanistan and perhaps also the assassination of Karzai, now square in Uncle Sam's sights as a failure and probably scheduled for assassination. There's the heritage of JFK and Vietnam for you. It's back to 1963.
Asked if Russia was evil, just like the Soviet Union in Ronald Reagan's eyes, Obama said yes, McCain "maybe". Trade? Latin America? Africa? Europe? Nothing from either man, though they both agreed that they would flout the UN at will.
Of the two performances, Obama's was the more appalling since he is meant to be the candidate of change and new ideas. He has no detectable commitment to change and no new ideas. Neither does McCain. Yet the post-debate panelists mostly claimed the Town Hall Meeting an absorbing affair, rich in content. We have one more debate, in which McCain will have another chance to reduce Obama's commanding lead, something he failed to do last night, even though it now seems Sarah Palin did slow McCain's slump with her performance last week. McCain and Palin are trying to get traction by slurring Obama for association with Bill Ayers, a leader of the the bomb-throwing antiwar Weathermen in the 60s. Obama was eight when they threw the bombs. It doesn't seem a productive line of attack for McCain and Palin, particularly when many Americans wouldn't mind blowing up Wall St themselves.
Alexander Cockburn can be reached at alexandercockburn@asis.com
The presidential campaign plummeted into imbecilic tedium last night in Nashville as Barack Obama and John McCain faced off in the second debate. The encounter took place against the vivid backdrop of economic catastrophe, the obvious failure of the $700 billion bailout to turn the tide, Tuesday's market averages hurtling into the abyss, a paralyzing credit freeze, the prospect of savage deflation and prolonged world depression.
Scant intimations of these disasters penetrated the walls of the Belmont University auditorium, where the Gallup polling organization had mustered a crowd of "independents", people canny enough to claim to Gallup's emissaries that they hadn’t yet made up their minds. The affair was billed as a "Town Hall Meeting", meaning only that the candidates were permitted to pace about, or walk up to their carefully selected, ethnically and sexually balanced interlocutors in the crowd and praise them for the acuity of their questions.
It was as though the inhabitants of Sodom and Gomorrah, even though apprised that fire and brimstone had already consumed substantial portions of their cities, with prospective destruction of the remnant, spent a vainglorious 90 minutes vying with each other in proclaiming the fundamental soundness of their economy and the greatness of their civilization.
McCain said he had a plan. He would require his Treasury Secretary to bail out beleaguered homeowners. Obama said he'd do the same. It's a sensible idea. A few days earlier both men had voted on a bankers' bailout that explicitly does not rescue homeowners but exposes the defaulters to foreclosures superintended by the Treasury. The testy and self-important moderator, Tom Brokaw, could have swiftly asked them about this but he didn't.
McCain said he'd consider a spending freeze. Obama could have asked him whether this would include a freeze on the war in Iraq, which has so far cost nearly a trillion dollars. He did finally circle around to this matter, but way too late and much too feebly. In a week when only the government stands between Americans and ruin, one would have thought McCain's Reaganesque attacks on government could have drawn telling barbs from Obama. The auditorium had plenty of veterans who, like McCain, have access to hospitals run by the Veterans' Administration. Obama declined the opportunity.
As a debater Obama is pitifully slow on his feet. This is not a time when any Republican candidate wants to be reminded that a cause dear to President Bush's heart was Social Security "reform", shorthand for handing over peoples' pensions, now held in government accounts, to Wall Street. Yet when McCain agreed with Brokaw that America's Social Security system needs "reform", Obama promptly accepted the faulty premise that the Social Security system is in crisis. Why didn't he point out that had privatization been enacted, millions would have already seen the monthly checks standing between them and utter destitution go down the tubes, destroyed by the sharks at now bankrupt institutions like Lehman Bros?
Obama is too timid even to invoke the greatest hero in the Democrats' pantheon, Franklin Roosevelt. If ever there was a moment to quote FDR, to pledge a new, New Deal it is surely now.
The discussion of foreign affairs was even worse, with the added burden of being mostly repetitions of the first debate in Oxford, Mississippi. McCain invoked the uniqueness of America and its mission to bring freedom and light to the rest of the planet. Obama solemnly agreed. Neither man saw fit to address the fact that America is only able to shoulder these imperial burdens because China has been prepared to finance the war in Iraq. The difficult word "China" passed no one's lips. Nor did the issue of an immense and unsustainable Pentagon budget intrude, nor the thousand or so US military bases overseas.
Both men once again bravely declared they would not allow another Holocaust to happen. Both pledged constancy to Israel. Both men said that an Iran with nuclear weapons was unacceptable. Brokaw could have asked them for their reactions to outgoing Israeli prime minister Olmert's stunning disclosure in an interview with the Hebrew-language newspaper Yediot Aharonot that he thinks Israel is on a totally misguided course, should " actually withdraw from almost all the territories, if not from all the territories", agree to the division of Jerusalem and give Syria back the Golan Heights.
Brokaw didn't, though he did raise the recent British assessments from Kabul saying the West's war is lost. This elicited scant reaction from Obama who continued to pledge higher US troops levels in Afghanistan plus forays into Pakistan, whatever the opinion of Pakistan's government might be. Will anyone ask the Democratic candidate how he feels about stoking up a replication of the Iraq disaster, with a possible war between nuclear Pakistan and nuclear India as lagniappe? The dawn of an Obama administration is now scheduled, on the candidate's pledges, to see escalation of a doomed and pointless war in Afghanistan and perhaps also the assassination of Karzai, now square in Uncle Sam's sights as a failure and probably scheduled for assassination. There's the heritage of JFK and Vietnam for you. It's back to 1963.
Asked if Russia was evil, just like the Soviet Union in Ronald Reagan's eyes, Obama said yes, McCain "maybe". Trade? Latin America? Africa? Europe? Nothing from either man, though they both agreed that they would flout the UN at will.
Of the two performances, Obama's was the more appalling since he is meant to be the candidate of change and new ideas. He has no detectable commitment to change and no new ideas. Neither does McCain. Yet the post-debate panelists mostly claimed the Town Hall Meeting an absorbing affair, rich in content. We have one more debate, in which McCain will have another chance to reduce Obama's commanding lead, something he failed to do last night, even though it now seems Sarah Palin did slow McCain's slump with her performance last week. McCain and Palin are trying to get traction by slurring Obama for association with Bill Ayers, a leader of the the bomb-throwing antiwar Weathermen in the 60s. Obama was eight when they threw the bombs. It doesn't seem a productive line of attack for McCain and Palin, particularly when many Americans wouldn't mind blowing up Wall St themselves.
Alexander Cockburn can be reached at alexandercockburn@asis.com
Wednesday, October 8, 2008
Leahy Concerned About NorthCom’s New Army Unit
by Matthew Rothschild
Senator Patrick Leahy is concerned about the Pentagon's decision to designate an Army unit to Northern Command.
On October 1, the Pentagon, for the first time ever, dedicated an Army force specifically to NorthCom, which is in charge of securing not some foreign region but the United States of America.
The unit it assigned is the 3rd Infantry, First Brigade Combat Team, which has spent three of the last five years in Iraq. It was one of the first units to get to Baghdad, and it was active in retaking and patrolling Fallujah. One of its specialties is counterinsurgency.
This marks a change for NorthCom, which was established on October 1, 2002. Its website still says it "has few permanently assigned forces," and that "the command is assigned forces whenever necessary to execute missions, as ordered by the President and the Secretary of Defense."
Leahy "asked for a briefing from his staff" on this development and "wants to monitor the situation," an aide to Leahy said.
Leahy was instrumental in getting Congress to repeal the "Insurrection Act Rider" in the 2006 defense appropriations bill. That rider had given the President sweeping power to use military troops in ways contrary to the Insurrection Act and Posse Comitatus Act. The rider authorized the President to have troops patrol our streets in response to disasters, epidemics, and any "condition" he might cite.
Leahy said last December that this rider "made it easier for the President to take over the Guard and to declare martial law." In a Senate statement on April 24, 2007, he cautioned against inserting the military "into domestic situations." As he put it: "One of the distinguishing characteristics of the United States is that we do not use the military to patrol our communities and neighborhoods." A few months before that, he warned that we must ensure that "the military is not used in a way that offends and endangers some of our most cherished values and liberties."
The repeal of the rider was signed by Bush on January 28, though Amy Goodman reports that "Bush attached a signing statement that he did not feel bound by the repeal."
The roles the 1st Brigade Combat Team will take on at NorthCom are a bit unclear.
"They may be called upon to help with civil unrest and crowd control," said the Army Times when it first reported on it. These duties would be in addition to dealing with "potentially horrific scenarios such as massive poisoning and chaos in response to a chemical, biological, radiological, nuclear or high-yield explosive, or CBRNE, attack."
Soldiers in the unit "also will learn how to use ‘the first ever nonlethal package that the Army has field,' 1st BCT commander Col. Roger Cloutier said, referring to crowd and traffic control equipment and nonlethal weapons designed to subdue unruly or dangerous individuals without killing them," the article noted.
Cloutier even bragged to the Army Times: "I was the first guy in the brigade to get Tasered."
The Army Times has since issued a correction, stating that the "non-lethal crowd control package" is "intended for use on deployments to the war zone, not in the U.S."
NorthCom's own press release of September 30 says, "This response force will not be called upon to help with law enforcement, civil disturbance, or crowd control."
The unit will have its regular weapons, however. It will store other weapons in "containers," and will have access to tanks, as Amy Goodman has reported and the Pentagon has confirmed.
The Army is taking a strong interest in this deployment.
Army Chief of Staff Gen. George Casey personally observed the combat team's training exercise, entitled "Vibrant Response," which was held at Fort Stewart, Georgia, last month. According to NorthCom's public affairs department, Gen. Casey "pointed out that being part of the new force requires a shift in thinking for soldiers who are accustomed to taking charge."
One soldier in the exercise said he learned that the troops should "preposition containers and equipment."
NorthCom's website, in a section on frequently asked questions about Joint Task Forces-Civil Support, cites "DoD Directive 3025.1" as laying out the criteria for how the Pentagon will respond in domestic situations.
That directive talks about "military support in dealing with the actual or anticipated consequences of civil emergencies." Those civil emergencies could be "arising during peace, war, or transition to war."
While it states that such support "does not include military support to local law enforcement," there is a provision in the directive for the military to take over functions of the civilian government.
Military personnel "shall not perform any function of civil government unless absolutely necessary on a temporary basis under conditions of Immediate Response. Any commander who is directed, or undertakes, to perform such functions shall facilitate the reestablishment of civil responsibility at the earliest possible time," the document states.
Under this "Immediate Response" exception, local military commanders can even act without prior approval from their superiors. "Imminently serious conditions resulting from any civil emergency or attack may require immediate action by military commanders, or by responsible officials of other DoD agencies, to save lives, prevent human suffering, or mitigate great property damage," it says. "When such conditions exist and time does not permit prior approval from higher headquarters, local military commanders and responsible officials of other DoD Components are authorized by this Directive, subject to any supplemental direction that may be provide by their DoD Component, to take necessary action to respond to requests of civil authorities."
The Pentagon's decision to dedicate the First Brigade Combat Team to NorthCom has raised alarms, especially in the context of the current economic crisis. In Bush's National Security Presidential Directive 51, he lays out his authority in the event of a catastrophic emergency. In such an emergency, "the President shall lead the activities of the Federal Government for ensuring constitutional government" and will coordinate with state, local, and tribal governments, along with private sector owners of infrastructure.
NSPD 51 defines a catastrophic emergency as "any incident, regardless of location, that results in extraordinary levels of mass casualties, damage, or disruption severely affecting the U.S. population, infrastructure, environment, economy, or government function."
Notice the use of the word "or" above. In our current circumstances, it might be more relevant to read the definition this way: "any incident . . . that results in extraordinary levels of . . . disruption severely affecting the U.S. . . . economy."
President Bush could declare a catastrophic emergency today. And he'd have the 3rd Infantry, First Brigade Combat Team, well trained from its years patrolling Iraq, at his disposal here at home.
Copyright 2008 The Progressive Magazine
Note from The Progressive's editor: Matthew Rothschild was on Democracy Now! on October 7 debating Army Col. Michael Boatner, USNORTHCOM future operations division chief.
Senator Patrick Leahy is concerned about the Pentagon's decision to designate an Army unit to Northern Command.
On October 1, the Pentagon, for the first time ever, dedicated an Army force specifically to NorthCom, which is in charge of securing not some foreign region but the United States of America.
The unit it assigned is the 3rd Infantry, First Brigade Combat Team, which has spent three of the last five years in Iraq. It was one of the first units to get to Baghdad, and it was active in retaking and patrolling Fallujah. One of its specialties is counterinsurgency.
This marks a change for NorthCom, which was established on October 1, 2002. Its website still says it "has few permanently assigned forces," and that "the command is assigned forces whenever necessary to execute missions, as ordered by the President and the Secretary of Defense."
Leahy "asked for a briefing from his staff" on this development and "wants to monitor the situation," an aide to Leahy said.
Leahy was instrumental in getting Congress to repeal the "Insurrection Act Rider" in the 2006 defense appropriations bill. That rider had given the President sweeping power to use military troops in ways contrary to the Insurrection Act and Posse Comitatus Act. The rider authorized the President to have troops patrol our streets in response to disasters, epidemics, and any "condition" he might cite.
Leahy said last December that this rider "made it easier for the President to take over the Guard and to declare martial law." In a Senate statement on April 24, 2007, he cautioned against inserting the military "into domestic situations." As he put it: "One of the distinguishing characteristics of the United States is that we do not use the military to patrol our communities and neighborhoods." A few months before that, he warned that we must ensure that "the military is not used in a way that offends and endangers some of our most cherished values and liberties."
The repeal of the rider was signed by Bush on January 28, though Amy Goodman reports that "Bush attached a signing statement that he did not feel bound by the repeal."
The roles the 1st Brigade Combat Team will take on at NorthCom are a bit unclear.
"They may be called upon to help with civil unrest and crowd control," said the Army Times when it first reported on it. These duties would be in addition to dealing with "potentially horrific scenarios such as massive poisoning and chaos in response to a chemical, biological, radiological, nuclear or high-yield explosive, or CBRNE, attack."
Soldiers in the unit "also will learn how to use ‘the first ever nonlethal package that the Army has field,' 1st BCT commander Col. Roger Cloutier said, referring to crowd and traffic control equipment and nonlethal weapons designed to subdue unruly or dangerous individuals without killing them," the article noted.
Cloutier even bragged to the Army Times: "I was the first guy in the brigade to get Tasered."
The Army Times has since issued a correction, stating that the "non-lethal crowd control package" is "intended for use on deployments to the war zone, not in the U.S."
NorthCom's own press release of September 30 says, "This response force will not be called upon to help with law enforcement, civil disturbance, or crowd control."
The unit will have its regular weapons, however. It will store other weapons in "containers," and will have access to tanks, as Amy Goodman has reported and the Pentagon has confirmed.
The Army is taking a strong interest in this deployment.
Army Chief of Staff Gen. George Casey personally observed the combat team's training exercise, entitled "Vibrant Response," which was held at Fort Stewart, Georgia, last month. According to NorthCom's public affairs department, Gen. Casey "pointed out that being part of the new force requires a shift in thinking for soldiers who are accustomed to taking charge."
One soldier in the exercise said he learned that the troops should "preposition containers and equipment."
NorthCom's website, in a section on frequently asked questions about Joint Task Forces-Civil Support, cites "DoD Directive 3025.1" as laying out the criteria for how the Pentagon will respond in domestic situations.
That directive talks about "military support in dealing with the actual or anticipated consequences of civil emergencies." Those civil emergencies could be "arising during peace, war, or transition to war."
While it states that such support "does not include military support to local law enforcement," there is a provision in the directive for the military to take over functions of the civilian government.
Military personnel "shall not perform any function of civil government unless absolutely necessary on a temporary basis under conditions of Immediate Response. Any commander who is directed, or undertakes, to perform such functions shall facilitate the reestablishment of civil responsibility at the earliest possible time," the document states.
Under this "Immediate Response" exception, local military commanders can even act without prior approval from their superiors. "Imminently serious conditions resulting from any civil emergency or attack may require immediate action by military commanders, or by responsible officials of other DoD agencies, to save lives, prevent human suffering, or mitigate great property damage," it says. "When such conditions exist and time does not permit prior approval from higher headquarters, local military commanders and responsible officials of other DoD Components are authorized by this Directive, subject to any supplemental direction that may be provide by their DoD Component, to take necessary action to respond to requests of civil authorities."
The Pentagon's decision to dedicate the First Brigade Combat Team to NorthCom has raised alarms, especially in the context of the current economic crisis. In Bush's National Security Presidential Directive 51, he lays out his authority in the event of a catastrophic emergency. In such an emergency, "the President shall lead the activities of the Federal Government for ensuring constitutional government" and will coordinate with state, local, and tribal governments, along with private sector owners of infrastructure.
NSPD 51 defines a catastrophic emergency as "any incident, regardless of location, that results in extraordinary levels of mass casualties, damage, or disruption severely affecting the U.S. population, infrastructure, environment, economy, or government function."
Notice the use of the word "or" above. In our current circumstances, it might be more relevant to read the definition this way: "any incident . . . that results in extraordinary levels of . . . disruption severely affecting the U.S. . . . economy."
President Bush could declare a catastrophic emergency today. And he'd have the 3rd Infantry, First Brigade Combat Team, well trained from its years patrolling Iraq, at his disposal here at home.
Copyright 2008 The Progressive Magazine
Note from The Progressive's editor: Matthew Rothschild was on Democracy Now! on October 7 debating Army Col. Michael Boatner, USNORTHCOM future operations division chief.
Tuesday, October 7, 2008
Secrets of Iraq's Death Chamber
Prisoners are being summarily executed in the government's high-security detention centre in Baghdad.
by Robert Fisk
Like all wars, the dark, untold stories of the Iraqi conflict drain from its shattered landscape like the filthy waters of the Tigris. And still the revelations come.
The Independent has learnt that secret executions are being carried out in the prisons run by Nouri al-Maliki's "democratic" government.
The hangings are carried out regularly - from a wooden gallows in a small, cramped cell - in Saddam Hussein's old intelligence headquarters at Kazimiyah. There is no public record of these killings in what is now called Baghdad's "high-security detention facility" but most of the victims - there have been hundreds since America introduced "democracy" to Iraq - are said to be insurgents, given the same summary justice they mete out to their own captives.
The secrets of Iraq's death chambers lie mostly hidden from foreign eyes but a few brave Western souls have come forward to tell of this prison horror. The accounts provide only a glimpse into the Iraqi story, at times tantalisingly cut short, at others gloomily predictable. Those who tell it are as depressed as they are filled with hopelessness.
"Most of the executions are of supposed insurgents of one kind or another," a Westerner who has seen the execution chamber at Kazimiyah told me. "But hanging isn't easy." As always, the devil is in the detail.
"There's a cell with a bar below the ceiling with a rope over it and a bench on which the victim stands with his hands tied," a former British official, told me last week. "I've been in the cell, though it was always empty. But not long before I visited, they'd taken this guy there to hang him. They made him stand on the bench, put the rope round his neck and pushed him off. But he jumped on to the floor. He could stand up. So they shortened the length of the rope and got him back on the bench and pushed him off again. It didn't work."
There's nothing new in savage executions in the Middle East - in the Lebanese city of Sidon 10 years ago, a policeman had to hang on to the legs of a condemned man to throttle him after he failed to die on the noose - but in Baghdad, cruel death seems a speciality.
"They started digging into the floor beneath the bench so that the guy would drop far enough to snap his neck," the official said. "They dug up the tiles and the cement underneath. But that didn't work. He could still stand up when they pushed him off the bench. So they just took him to a corner of the cell and shot him in the head."
The condemned prisoners in Kazimiyah, a Shia district of Baghdad, are said to include rapists and murderers as well as insurgents. One prisoner, a Chechen, managed to escape from the jail with another man after a gun was smuggled to them. They shot two guards dead. The authorities had to call in the Americans to help them recapture the two. The Americans killed one and shot the Chechen in the leg. He refused medical assistance so his wound went gangrenous. In the end, the Iraqis had to operate and took all the bones out of his leg. By the time he met one Western visitor to the prison, "he was walking around on crutches with his boneless right leg slung over his shoulder".
In many cases, it seems, the Iraqis neither keep nor release any record of the true names of their captives or of the hanged prisoners. For years the Americans - in charge of the notorious Abu Ghraib prison outside Baghdad - did not know the identity of their prisoners. Here, for example, is new testimony given to The Independent by a former Western official to the Anglo-US Iraq Survey Group, which searched for the infamous but mythical weapons of mass destruction: "We would go to the interrogation rooms at Abu Ghraib and ask for a particular prisoner. After about 40 minutes, the Americans brought in this hooded guy, shuffling along, shackled hands and feet.
"They sat him on a chair in front of us and took off his hood. He had a big beard. We asked where he received his education. He repeatedly said 'Mosul'. Then he said he'd left school at 14 - remember, this guy is supposed to be a missile scientist. We said: 'We know you've got a PhD and went to the Sorbonne - we'd like you to help us with information about Saddam's missile project'. But I said to myself : 'This guy doesn't know anything 'bout fucking missiles.' Then it turned out he had a different name from the man we'd asked for, he'd been picked up on the road by the Americans four months earlier, he didn't know why. So we said to the Americans: 'Wrong gentleman!' So they put the shackles on him and took him back to his cell and after 20 or 30 minutes, they'd bring someone else. We'd ask him where he went to school and he told us he had never been to school.
"Wrong person again. It was a complete farce. The incompetence of the US military was astounding, criminal. Eventually, of course, they found the right guy and brought him in and took his hood off. He was breathing heavily, overweight, pudgy, disoriented, a little bit scared."
On this occasion, the Americans had found the right man. The British and American investigators asked the guards to remove the man's shackles, which they did - but then they tied one of the man's legs to the floor. Yes, he had a PhD.
Again, the official's testimony: "We went through his history, what he'd worked on - he was obviously just a minor functionary in one of Saddam's missile programmes. Iraqi scientists didn't have the knowledge how to make nuclear missiles nor did they have the financial support necessary. It just remained in the dreams of Saddam."
The scientist-prisoner in Abu Ghraib miserably told his captors that he'd been arrested by the Americans after they'd knocked on his front door in Baghdad and found two Kalashnikov rifles a woman's hijab, verses from the Koran and, obviously of interest to his captors, "physics and missile textbooks on his bookshelves." But this supposedly valuable prisoner was never charged or previously interviewed even though he admitted he was a rocket scientist.
"I don't know what happened to him," the former official told me. "I tried to tell the UK and the US military that we've arrested this man but that he's got a wife, children, a family. I said that by locking up this one innocent person, you've got 50 men radicalised overnight. No, I don't know what happened to him."
For many of the investigators working for the Anglo-American authorities in Baghdad, the trial for the crime for which the Iraqi dictator was himself subsequently hanged was a fearful experience that ultimately ended in disgust. Through captured documents, they could see the dark, inner workings of Saddam's secret police. The idea of the Saddam trial was less to bring members of the former regime to justice than to show Iraqis how justice and the rule of law should operate.
"It was exhilarating to see Saddam being cross-examined," one of the court investigators said. "The low point was when he was executed. What drove me on was seeing how Saddam dealt with his victims - I was looking at a microcosm of all the deaths that had taken place in Iraq. But when he was executed, it was done in such a savage way."
Saddam Hussein was hanged in the same "secure" unit at Kazimiyah where Mr al-Maliki's people, in an echo of Saddamite Baathist terror, now hang their victims.
Iraq The death penalty
*The death penalty in Iraq was suspended after Saddam Hussein was deposed in 2003. It was reinstated by the interim government in August 2004.
*The United Nations, the European Union and international human rights organisations all spoke out against the reintroduction.
*At the time, the government claimed the death penalty was a necessary measure until the country had stabilised. Amnesty International claims that "the extent of violence in Iraq has increased rather than diminished, clearly indicating that the death penalty has not proved to be an effective deterrent."
*Saddam, left, his half-brother Barzan al-Tikriti and Iraq's former chief judge Awad Hamed al-Bandar were hanged at the end of 2006 for their part in the killings of 148 people in the mainly Shia town of Dujail in 1982. Illicit videos of all three executions later became public. Saddam's body could be seen on a hospital trolley, his head twisted at 90 degrees. Barzan - Iraq's former intelligence chief -was decapitated by the noose. Officials said it was an accident.
*According to Amnesty, there were at least 33 executions reported in Iraq last year. About 200 people were estimated to have been sentenced to death.
©independent.co.uk
--Robert Fisk
by Robert Fisk
Like all wars, the dark, untold stories of the Iraqi conflict drain from its shattered landscape like the filthy waters of the Tigris. And still the revelations come.
The Independent has learnt that secret executions are being carried out in the prisons run by Nouri al-Maliki's "democratic" government.
The hangings are carried out regularly - from a wooden gallows in a small, cramped cell - in Saddam Hussein's old intelligence headquarters at Kazimiyah. There is no public record of these killings in what is now called Baghdad's "high-security detention facility" but most of the victims - there have been hundreds since America introduced "democracy" to Iraq - are said to be insurgents, given the same summary justice they mete out to their own captives.
The secrets of Iraq's death chambers lie mostly hidden from foreign eyes but a few brave Western souls have come forward to tell of this prison horror. The accounts provide only a glimpse into the Iraqi story, at times tantalisingly cut short, at others gloomily predictable. Those who tell it are as depressed as they are filled with hopelessness.
"Most of the executions are of supposed insurgents of one kind or another," a Westerner who has seen the execution chamber at Kazimiyah told me. "But hanging isn't easy." As always, the devil is in the detail.
"There's a cell with a bar below the ceiling with a rope over it and a bench on which the victim stands with his hands tied," a former British official, told me last week. "I've been in the cell, though it was always empty. But not long before I visited, they'd taken this guy there to hang him. They made him stand on the bench, put the rope round his neck and pushed him off. But he jumped on to the floor. He could stand up. So they shortened the length of the rope and got him back on the bench and pushed him off again. It didn't work."
There's nothing new in savage executions in the Middle East - in the Lebanese city of Sidon 10 years ago, a policeman had to hang on to the legs of a condemned man to throttle him after he failed to die on the noose - but in Baghdad, cruel death seems a speciality.
"They started digging into the floor beneath the bench so that the guy would drop far enough to snap his neck," the official said. "They dug up the tiles and the cement underneath. But that didn't work. He could still stand up when they pushed him off the bench. So they just took him to a corner of the cell and shot him in the head."
The condemned prisoners in Kazimiyah, a Shia district of Baghdad, are said to include rapists and murderers as well as insurgents. One prisoner, a Chechen, managed to escape from the jail with another man after a gun was smuggled to them. They shot two guards dead. The authorities had to call in the Americans to help them recapture the two. The Americans killed one and shot the Chechen in the leg. He refused medical assistance so his wound went gangrenous. In the end, the Iraqis had to operate and took all the bones out of his leg. By the time he met one Western visitor to the prison, "he was walking around on crutches with his boneless right leg slung over his shoulder".
In many cases, it seems, the Iraqis neither keep nor release any record of the true names of their captives or of the hanged prisoners. For years the Americans - in charge of the notorious Abu Ghraib prison outside Baghdad - did not know the identity of their prisoners. Here, for example, is new testimony given to The Independent by a former Western official to the Anglo-US Iraq Survey Group, which searched for the infamous but mythical weapons of mass destruction: "We would go to the interrogation rooms at Abu Ghraib and ask for a particular prisoner. After about 40 minutes, the Americans brought in this hooded guy, shuffling along, shackled hands and feet.
"They sat him on a chair in front of us and took off his hood. He had a big beard. We asked where he received his education. He repeatedly said 'Mosul'. Then he said he'd left school at 14 - remember, this guy is supposed to be a missile scientist. We said: 'We know you've got a PhD and went to the Sorbonne - we'd like you to help us with information about Saddam's missile project'. But I said to myself : 'This guy doesn't know anything 'bout fucking missiles.' Then it turned out he had a different name from the man we'd asked for, he'd been picked up on the road by the Americans four months earlier, he didn't know why. So we said to the Americans: 'Wrong gentleman!' So they put the shackles on him and took him back to his cell and after 20 or 30 minutes, they'd bring someone else. We'd ask him where he went to school and he told us he had never been to school.
"Wrong person again. It was a complete farce. The incompetence of the US military was astounding, criminal. Eventually, of course, they found the right guy and brought him in and took his hood off. He was breathing heavily, overweight, pudgy, disoriented, a little bit scared."
On this occasion, the Americans had found the right man. The British and American investigators asked the guards to remove the man's shackles, which they did - but then they tied one of the man's legs to the floor. Yes, he had a PhD.
Again, the official's testimony: "We went through his history, what he'd worked on - he was obviously just a minor functionary in one of Saddam's missile programmes. Iraqi scientists didn't have the knowledge how to make nuclear missiles nor did they have the financial support necessary. It just remained in the dreams of Saddam."
The scientist-prisoner in Abu Ghraib miserably told his captors that he'd been arrested by the Americans after they'd knocked on his front door in Baghdad and found two Kalashnikov rifles a woman's hijab, verses from the Koran and, obviously of interest to his captors, "physics and missile textbooks on his bookshelves." But this supposedly valuable prisoner was never charged or previously interviewed even though he admitted he was a rocket scientist.
"I don't know what happened to him," the former official told me. "I tried to tell the UK and the US military that we've arrested this man but that he's got a wife, children, a family. I said that by locking up this one innocent person, you've got 50 men radicalised overnight. No, I don't know what happened to him."
For many of the investigators working for the Anglo-American authorities in Baghdad, the trial for the crime for which the Iraqi dictator was himself subsequently hanged was a fearful experience that ultimately ended in disgust. Through captured documents, they could see the dark, inner workings of Saddam's secret police. The idea of the Saddam trial was less to bring members of the former regime to justice than to show Iraqis how justice and the rule of law should operate.
"It was exhilarating to see Saddam being cross-examined," one of the court investigators said. "The low point was when he was executed. What drove me on was seeing how Saddam dealt with his victims - I was looking at a microcosm of all the deaths that had taken place in Iraq. But when he was executed, it was done in such a savage way."
Saddam Hussein was hanged in the same "secure" unit at Kazimiyah where Mr al-Maliki's people, in an echo of Saddamite Baathist terror, now hang their victims.
Iraq The death penalty
*The death penalty in Iraq was suspended after Saddam Hussein was deposed in 2003. It was reinstated by the interim government in August 2004.
*The United Nations, the European Union and international human rights organisations all spoke out against the reintroduction.
*At the time, the government claimed the death penalty was a necessary measure until the country had stabilised. Amnesty International claims that "the extent of violence in Iraq has increased rather than diminished, clearly indicating that the death penalty has not proved to be an effective deterrent."
*Saddam, left, his half-brother Barzan al-Tikriti and Iraq's former chief judge Awad Hamed al-Bandar were hanged at the end of 2006 for their part in the killings of 148 people in the mainly Shia town of Dujail in 1982. Illicit videos of all three executions later became public. Saddam's body could be seen on a hospital trolley, his head twisted at 90 degrees. Barzan - Iraq's former intelligence chief -was decapitated by the noose. Officials said it was an accident.
*According to Amnesty, there were at least 33 executions reported in Iraq last year. About 200 people were estimated to have been sentenced to death.
©independent.co.uk
--Robert Fisk
THE END OF ARROGANCE
By SPIEGEL Staff
The banking crisis is upending American dominance of the financial markets and world politics. The industrialized countries are sliding into recession, the era of turbo-capitalism is coming to an end and US military might is ebbing. Still, this is no time to gloat.
There are days when all it takes is a single speech to illustrate the decline of a world power. A face can speak volumes, as can the speaker's tone of voice, the speech itself or the audience's reaction. Kings and queens have clung to the past before and humiliated themselves in public, but this time it was merely a United States president.
Or what is left of him.
George W. Bush has grown old, erratic and rosy in the eight years of his presidency. Little remains of his combativeness or his enthusiasm for physical fitness. On this sunny Tuesday morning in New York, even his hair seemed messy and unkempt, his blue suit a little baggy around the shoulders, as Bush stepped onto the stage, for the eighth time, at the United Nations General Assembly.
He talked about terrorism and terrorist regimes, and about governments that allegedly support terror. He failed to notice that the delegates sitting in front of and below him were shaking their heads, smiling and whispering, or if he did notice, he was no longer capable of reacting. The US president gave a speech similar to the ones he gave in 2004 and 2007, mentioning the word "terror" 32 times in 22 minutes. At the 63rd General Assembly of the United Nations, George W. Bush was the only one still talking about terror and not about the topic that currently has the rest of the world's attention.
"Absurd, absurd, absurd," said one German diplomat. A French woman called him "yesterday's man" over coffee on the East River. There is another way to put it, too: Bush was a laughing stock in the gray corridors of the UN.
The American president has always had enemies in these hallways and offices at the UN building on First Avenue in Manhattan. The Iranians and Syrians despise the eternal American-Israeli coalition, while many others are tired of Bush's Americans telling the world about the blessings of deregulated markets and establishing rules "that only apply to others," says the diplomat from Berlin.
But the ridicule was a new thing. It marked the end of respect.
"Well," Brazilian President Luiz Inacio "Lula" da Silva began, standing outside the General Assembly Hall. Then he looked out the window and said: "He decided to talk about terrorism, but the issue that has the world concerned is the economic crisis." Cristina Fernández de Kirchner, the president of Argentina, said that the schoolmasters from Washington had dubbed the 1994 Mexican crisis the "tequila effect" and Brazil's 1999 crisis the "Caipirinha effect."
Are we now experiencing the "whiskey effect?" But President Kirchner was gracious and, with a smile, called it the "jazz effect."
Is it only President George W. Bush, the lame duck president, whom the rest of the world is no longer taking seriously, or are the remaining 191 UN member states already setting their sights on the United States, the giant brought to its knees? UN Secretary General Ban Ki Moon referred to a "new reality" and "new centers of power and leadership in Asia, Latin America and across the newly developed world." Are they surprised, in these new centers, at the fall of America, of the system of the Western-style market economy?
Even America's closest allies are distancing themselves -- first and foremost the German chancellor. When push came to shove in the past, Angela Merkel had always come down on the side of the United States. As a candidate for the Chancellery for the conservative Christian Democrats, she helped Bush in the Iraq war, and as chancellor she supported tougher sanctions on Iran and campaigned in Europe for an embargo against Cuba. "The partnership with the United States," the chancellor insisted again and again, "has a very special meaning for us Germans."
There was no mention of loyalty and friendship last Monday. Merkel stood in the glass-roofed entrance hall of one of the German parliament's office buildings in Berlin and prepared her audience of roughly 1,000 businesspeople from all across Germany for the foreseeable consequences of the financial crisis. It was a speech filled with concealed accusations and dark warnings.
Merkel talked about a "distribution of risk at everyone's expense" and the consequences for the "economic situation in the coming months and possibly even years." Most of all, she made it clear who she considers the true culprit behind the current plight. "The German government pointed out the problems early on," said the chancellor, whose proposals to impose tighter international market controls failed repeatedly because of US opposition. "Some things can be done at the national level," she said, "but most things have to be handled internationally."
Merkel had never publicly criticized the United States this harshly and unapologetically. In this regard, she enjoys the wholehearted support of her coalition government partner, the center-left Social Democrats (SPD). In a speech before Germany's parliament, the Bundestag, Finance Minister Peer Steinbrück of the SPD spoke of the end of the United States as a "superpower of the global financial system."
The banking crisis in the United States has shaken many things in recent days, not just the chancellor's affection for America and the respect the rest of the world once had for the US as an economic and political superpower. Since the US investment bank Lehman Brothers plummeted into bankruptcy two weeks ago, the financial crisis has developed a destructive force of almost unimaginable strength. The proud US investment banks with globally recognized names like Merrill Lynch and Goldman Sachs have all gone bankrupt, been bought up or restructured. The American real estate market has essentially been nationalized. And the country's biggest savings and loan, Washington Mutual, has failed and been sold at a loss.
In light of the almost daily reports of losses in the financial sector, it seemed almost secondary to note that the disaster had also turned into one of the biggest criminal investigations in American history. The Federal Bureau of Investigation (FBI) is already investigating 26 large financial corporations as well as 1,400 smaller companies and private citizens for possible fraud.
Economists now characterize what began two years ago with falling prices in the American real estate market as the biggest economic disaster since the world economic crisis of the 1930s. No one knows whether and how the meltdown of global financial markets, which would have grave consequences for the world economy, can still be prevented.
And now, of all times, the world is faced with a preeminent power that no longer seems capable of leading and a US president who is not even able to unite his divided country in an hour of need.
For weeks, Bush ignored the crisis, insisting on the strength of the market and telling Americans: "Everything will be fine."
In a televised address to the nation last Wednesday, Bush gave his oath of disclosure. He warned Americans that they could face a "long and painful recession" and that "millions of Americans could lose their jobs" unless swift action is taken.
But nothing happened swiftly, at least not at first. The crisis is happening while the United States is in a political vacuum. Bush lacks the power needed for decisive leadership, and his potential successors, John McCain and Barack Obama, seem more concerned about making a strong impression on voters.
Ironically, it is in the country of unfettered capitalism that the government now plans to intervene in the economy on a scale not seen since the Great Depression, and, with hundreds of billions of dollars, attempt to save the financial sector from failure -- out of fear of something even worse: an economic collapse with declining prices and widespread unemployment.
This is no longer the muscular and arrogant United States the world knows, the superpower that sets the rules for everyone else and that considers its way of thinking and doing business to be the only road to success.
A new America is on display, a country that no longer trusts its old values and its elites even less: the politicians, who failed to see the problems on the horizon, and the economic leaders, who tried to sell a fictitious world of prosperity to Americans.
Also on display is the end of arrogance. The Americans are now paying the price for their pride.
Gone are the days when the US could go into debt with abandon, without considering who would end up footing the bill. And gone are the days when it could impose its economic rules of engagement on the rest of the world, rules that emphasized profit above all else -- without ever considering that such returns cannot be achieved by doing business in a respectable way.
With its rule of three of cheap money, free markets and double-digit profit margins, American turbo-capitalism has set economic standards worldwide for the past quarter century. Now it is proving to be nothing but a giant snowball system, upsetting the US's global political status as it comes crashing down. Every bank that US Treasury Secretary Henry Paulson is currently forced to bail out with American government funds damages America's reputation around the world.
Of course, it is not solely the result of undesirable economic developments that the United States is in the process of forfeiting its unique position in the world and that the world is moving toward what Fareed Zakaria, editor of Newsweek International, calls a "post-American age." Washington has also lost much of its political ability to impose its will on other countries.
Bush's Failed Leadership
The failed leadership of President Bush, whose departure most of his counterparts from other countries are now looking forward to more and more openly, is not solely to blame. Nor are his two risky wars: the one in Iraq, which he launched frivolously in the vain hope of converting the entire region to the American way of life, and the other in Afghanistan, in which Bush now risks the world's most powerful defense alliance, NATO, suffering its first defeat.
But it's hard to forget how this president's mentors celebrated the power to shape world affairs the United States acquired in the wake of the collapse of the Soviet Union and the end of the East-West conflict. There was talk of a "unipolar moment," of "America's moment," even of an "end of history," now that all other countries apparently had no other choice but to become smaller versions of America: liberal, democratic and buoyed by an unshakeable confidence in the free market economy.
The Bush administration wanted to cement forever this unique moment in history, in which the United States was undoubtedly the strongest power on earth. It wanted to use it to clean house in chronic crisis zones around the world, especially the Middle East. Far from relying on the classic, cumbersome and often unsuccessful tools of multilateral diplomacy, the Bush warriors were always quick to threaten military intervention -- just as quick as they were to make good on this threat.
The strategists of this immoderately self-confident administration formulated these principles in the "Bush doctrine" and claimed, for themselves and their actions, the right to "preemptive" military intervention -- with little concern for the rules of alliances or international organizations.
The superpower even claimed privileges over its allies, even offending some of its best friends during Bush's first term. Bush withdrew the American signature from a treaty to establish the International Criminal Court, he refused to ratify the Kyoto Protocol to combat climate change and he withdrew from an agreement with the Russians to limit the number of missile defense systems.
Washington sought to divide the world into good and evil -- and did so as it saw fit.
Now, in the wake of the crash on Wall Street, the debate in the UN reveals that the long-humiliated have lost their fear of the giant in world politics. Even a political dwarf like Bolivian President Evo Morales is now talking big. "There is an uprising against an economic model, a capitalistic system that is the worst enemy of humanity," Morales told the UN General Assembly.
The financial crisis has uncovered the world power's true weakness. The more the highly indebted United States has to spend to stabilize its own economic system, the more trouble it has performing its self-imposed duties as the world's policeman.
The new US president will only have been in office for a short time when a document titled "Global Trends 2025" appears on his desk. The report is being prepared by analysts at the National Intelligence Council. Its chairman, Thomas Fingar, has already released a preview, and reading it will not exactly be enjoyable for proud American. "Although the United States will remain the most important power, American dominance will be sharply reduced," says Fingar.
According to the preview of the report, the erosion of American supremacy will "accelerate in the areas of politics and economics, and possibly culture."
The century that just began is unlikely to be declared the American century again. Instead, "Asia will shape the fate of the world, with or without the United States," says Parag Khanna, a young Indian-American political scientist whose book "The Second World: Empires and Influence in the New Global Order" has attracted a great deal of attention in the United States.
There is much to be said for Khanna's assertion. Beijing is already funding a large share of the gigantic American trade deficit, while at the same time selling many consumer goods to the United States. In other words, it benefits from the US's weakness in two ways. And politically speaking, the newly self-confident Chinese will no longer allow themselves to be domineered by the West. Reacting to worldwide criticism of political oppression in Tibet, the Chinese encouraged their nationalist youth to assault Western institutions and refused to allow themselves to be lectured on human rights.
Republican Senator Chuck Hagel has acknowledged that the "world's largest debtor nation" cannot simultaneously shape the course of the world. The challenges America faces have multiplied, especially in recent times.
After the collapse of the Soviet Union and a decade of weakness, resource-rich Russia now expects to be treated as an equal to its former Cold War rival. The invasion of Georgia by Russian troops showed NATO where Moscow sees the limits of expansion of the Western military alliance. Indeed, some time ago, Russian bombers resumed patrolling the borders of the Western defense alliance.
Iran has also been unimpressed by Washington's approach to force it to terminate its uranium-enrichment process by threatening to use military force. The expansion of the nuclear facility at Natanz is progressing at a brisk pace, as expected, and Iranian President Mahmoud Ahmadinejad now considers his adversary, Bush, to be finished. "The American empire in the world is reaching the end of its road," he said in his speech to the UN General Assembly, "and its next rulers must limit their interference to their own borders."
Even before the financial crisis, there was lively debate in the United States over whether the world's largest economy could become overtaxed in the long run as a result of its international obligations and the global deployment of its armed forces. The war in Iraq costs the country $3 billion a week. And it is already clear that Bush's successor will find his powers in the White House further limited by the enormous mountain of debt he inherits.
And then there are the costs of the financial crisis -- and the recession that will inevitably follow.
Most Americans are opposed to Treasury Secretary Paulson's plan to buy the banks' bad loans for $700 billion (€483 billion). A rare coalition of the left and right reject this one-time bailout package as "un-American" and as a completely excessive act of government intervention that, in fact, rewards those responsible for the debacle: the key players in New York's financial industry.
The government and large parts of the establishment disagree. They fear that if the program fails, it could drag the American financial markets and then the global economy into the abyss.
With only five weeks to go before the presidential election, the emergency Wall Street bailout has turned into a high-stakes political drama. Last Tuesday's hearing before the US Senate, which lasted several hours and included Paulson, Federal Reserve Chairman Ben Bernanke and the chairman of the Securities and Exchange Commission (SEC), Christopher Cox, was reminiscent of a show trial, with the government and the Federal Reserve playing the role of prosecutor.
The administration struck back the next day, when Bush gave his dramatic televised address to the nation. But then the Republican Party base revolted. For many Republicans, the idea of giving away $700 billion in tax money to Wall Street banks is tantamount to the introduction of socialism on American soil.
They believe that Bush and Paulson are betraying the ideals of their party, and their fears were confirmed elsewhere on Thursday. The mood did not improve when, without further ado, the government seized one of the country's largest savings & loan institutions and sold it to JP Morgan Chase.
Many experts are also skeptical. Allan Meltzer, an advisor to former President Ronald Reagan, is critical of what he calls "intimidation tactics" designed to serve "private, not public interests."
"We are applying cold compresses to the fever patient instead of fighting the actual infection," says Christopher Mayer of Columbia University in New York. According to Mayer, the billions would be better spent reducing mortgage interest. This would reduce the number of foreclosures and attract buyers back to the market.
But as divided as Washington is, doing nothing would still be the worst alternative.
"There is no other option now than to move the plan forward," says Ed Yardeni, the former chief investment strategist at Deutsche Bank, who now heads his own research firm outside New York. "The US treasury secretary and chairman of the Federal Reserve predicted a financial Armageddon," says Yardeni. "Unless action is taken now, it'll get really ugly on the markets."
At the end of last week, investors' loss of confidence worldwide led to the credit markets becoming essentially frozen once again. This could cause the flow of money in the broader economic environment to run dry, as happened once before in the world economic crisis. This explains why Paulson, Bush and Bernanke are so nervous.
The bailout plan they unveiled at the end of last week was arrogant and incomplete. The Democrats, in particular, fought for some key changes. They want to give Congress more control over the treasury secretary and the ability to monitor his spending on an ongoing basis. Instead of approving $700 billion in one fell swoop, the Democrats want the funds to be disbursed in portions. Banks wishing to take advantage of the government bailout would also have to impose limits on executive compensation.
Finally, the Democrats want taxpayers to get something in return for their sacrifice: The government would buy the financial institutions' toxic mortgage securities at a preferred price. In return, it would receive bank shares that it could later sell, if and when prices recovered.
Overall, the hope was that this would reestablish relatively normal market conditions. Banks would be able to unload their junk securities for a clear price, their balance sheets would no longer be adversely affected by virtually worthless mortgage-backed securities, and transparency and confidence would be restored.
Wall Street's Central Values: Avarice and Greed
It is an optimistic scenario, but with no guarantee of success. Still, what's the alternative? "Maybe we can let Wall Street implode," writes Princeton economist Paul Krugman in the New York Times, "and Main Street would escape largely unscathed." But, he continues, "that's not a chance we want to take."
The effects of the financial crisis are already serious, both for the American taxpayer, who will end up footing the bill no matter what, and for the relationship between the government and the economy. An era of American economic policy is coming to a close. Ironically, and surprisingly to many, the last few months of the Bush administration will mark the end of the so-called "Reagan revolution."
Since the early 1980s, the United States has radically emphasized deregulation, which has meant lowering taxes, eliminating regulations and generally leaving the markets to their own devices. Ronald Reagan began his presidency in 1981 with this program, and it was following by a prolonged economic upturn.
It was driven in part by an aggressive policy of cheap money, for which a second icon of the American boom was responsible: former Fed Chairman Alan Greenspan. During the 18 years of his tenure, whenever there was trouble brewing in the stock market and financial markets, Greenspan would drown the crises in a flood of fresh money. Whether it was the 1997 market crash in the Asian tiger countries, the selloff of Russian government bonds a year later, the collapse of the LTCM hedge fund or, finally, the bursting of the New Economy bubble at the beginning of the new millennium, Greenspan's rescue operations could be counted on to return growth to the world's markets. But there was one thing Greenspan overlooked: By repeatedly printing money, he also laid the foundation for the next financial bubble, and its destructive energy grew from one intervention to the next.
Over the last 15 years, Greenspan was opposed to oversight and control over those companies that used the ready cash made available by his policies to introduce a wave of so-called financial innovations. As long as he was in office, he blocked all attempts to impose government collateral requirements on the credit, stock and financial markets. In Greenspan's view, it would only hamper "necessary flexibility."
His policies were borne out by the successes of two decades. Fed by cheap money and freed of most regulations, the American financial industry experienced an unprecedented boom. The industry's excessive growth was reflected in exorbitant salaries and ostentatious skyscrapers but also in the withdrawal of a large share of American value creation.
In 2007, at the beginning of the crisis, the American financial and lending sector was responsible for 14 percent of economic performance, while collecting 33 percent of all corporate profits.
The financial boom also set the turbo-charger in motion that would lend a new face to worldwide capital from then on. Avarice and greed have always been the central values on Wall Street, but now they had become a benchmark for the real global economy. The American banking industry paid for globalization and the Internet revolution, the Asian upswing and the boom in the commodities markets. "We need a 25-percent return," or else his bank would not be "competitive internationally," Deutsche Bank CEO Josef Ackermann said, thereby establishing a benchmark that would soon apply not just to banks but also to automobile makers, machine builders and steel companies.
But, as is often the case with recipes for success, at some point the healthy dose is exceeded and soon the risks and side effects begin to accumulate. The result: The supposed medicine instead becomes a pathogen instead.
In the United States, this process began after the collapse of the New Economy. Once again, Greenspan flooded the economy with money and, yet again, Wall Street started looking for a new market for its growth machine. This time it discovered the American homeowner, convincing him to take out mortgages at favorable terms, even when there was practically no collateral.
The total value of all outstanding mortgage loans in the United States -- $11 trillion (€7.6 trillion) -- is almost as large as the country's gross domestic product. At the same time, with the help of Wall Street's financial engineers, the Americans managed to sell a portion of the risk to other parts of the world, reasoning that if the risk was out of sight it would be out of mind.
But the fact that risks do not disappear when they are distributed around the world became clear at the beginning of last year. Interest rates rose across the board and house prices came down, triggering a chain reaction with collateral damage that was bringing down ever-growing segments of the financial sector from one week to the next. Today, 18 million single-family homes and condominiums in the United States are empty. More and more Americans can no longer afford the high interest rates they are being charged. Many consumers have even been forced to bid farewell to their beloved credit cards because the banks are no longer willing to extend credit to them.
To make matters worse, because a large share of the mortgage loans are now distributed all over the world, the crisis is spreading halfway around the globe like an infectious disease. In recent years, many of the industrialized countries deregulated their financial markets based on the American model. This has led to a relatively unimpeded flow of capital around the world today.
The financial assets that economies hold abroad have grown more than sevenfold in the past three decades. By late 2007, the market volume for derivatives, which are used to bet on interest rate, stock and credit risks worldwide, had reached a previously unthinkable level of $596 trillion (€411 trillion).
At the same time, the number of players has multiplied. The banks stopped being the only ones in control of the industry some time ago. Nowadays, hedge funds bet on falling stock prices and mortgage rates, private equity companies buy up failed banks and bad loans, and wealthy pension funds keep the fund managers afloat.
The "greater complexity of linkages within and between the financial systems" now has one man worried, a man whose profession ought to provide him with a better idea of what's going on: Jean-Claude Trichet, president of the European Central Bank. In a recent speech at New York University, Europe's highest-ranking central banker complained about the "obscurity of and interactions among many financial instruments," often combined with a "high level of borrowing."
The inventors of these complex securities hoped that they could be used to distribute risk more broadly around the globe. But instead of making financial transactions more secure, they achieved the opposite effect, increasing the risks. Today the notion of using "many shoulders for support," the constant mantra of the gurus of financial alchemy, has proved to be one of the catalysts of the crash.
American economist Raghuram Rajan, whom ECB President Trichet is frequently quoting these days, had a premonition of the current disaster three years ago. The total integration of the markets "exposes the system to large systemic shocks," Rajan wrote then in a study. Although the economy had survived many crises before, like the bursting of the Internet bubble, "this should not lead us to be too optimistic." "Can we be confident that the shocks were large enough and in the right places to fully test the system?" Rajan asked. "A shock to equity markets, though large," he continued, "may have less effect than a shock to credit markets."
There was certainly no shortage of warnings, and there were many voices of caution. As long ago as 1936, John Maynard Keynes recognized the risk that "speculation may win the upper hand" in the markets. Its influence in New York, the British economist wrote, was "enormous," and the situation would become serious "when the capital development of a country becomes the by-product of the activities of a casino."
Irrational Exuberance
US economist Robert Shiller, who predicted the bursting of the dot-com bubble at the turn of the century, was one of the first to notice that the value of houses and condominiums in the United States was rising at a suspiciously fast rate. In Shiller's view, this was another case of irrational exuberance. In December 2004, Stephen Roach, the former chief economist at investment bank Morgan Stanley, cautioned against the "grimmest of all financial bubbles."
New York economist Nouriel Roubini presented the most accurate scenario of a crash, from the bursting of the real estate bubble to the domino-like demise of major banks. Roubini, known as a notorious alarmist, now predicts a prolonged recession in the United States that will drag down the entire global economy with it. "The US consumer has consumed himself to death," says Roubini.
Paul Samuelson, the doyen of the world's economists, predicted this bitter outcome three years ago. "America's position is under pressure because we have become a society that hardly saves," Samuelson, 90 at the time, said in an interview with SPIEGEL. "We don't think of others or of tomorrow."
And now the global conflagration is a reality, triggered by cleverly packaged US subprime mortgages sold around the world, even to bankers in the provincial eastern German state of Saxony. So-called credit derivatives, which banks and investment funds used to hedge against the failure of commercial loans, could soon add new fuel to the fire. In the wake of the subprime crisis, could credit derivatives be the next bad thing? Is the world facing a wave of bankruptcies that could soon bring the financial world crashing down through the mechanism of credit derivatives?
US market guru Warren Buffett calls derivatives " weapons of mass destruction." They are the creations of inventive financial alchemists, concoctions that blend classic forms of investment, like stocks, bonds and commodities.
In fact, within this discipline, derivatives used to hedge against credit risk are among the most dangerous gambles and, as one would expect within the global financial casino, they have experienced dizzying growth. In the last five years, the volume of credit derivatives has grown thirtyfold to about $55 trillion (€38 trillion), or about 20 times the gross national product of Germany.
The world is encased in a tightly woven network of reciprocal payment obligations. "The core problem is that it is no longer possible to know where the risks have ultimately landed," warns Thomas Heidorn, a professor at Frankfurt's Institute for Law and Finance. This is because traders pass on credit risks an infinite number of times, which explains the dizzying market volume. Where the risks end up is anyone's guess.
Nevertheless, only a handful of firms set the tone in this high-stakes game of bingo in which trillions are on the line. According to a survey by Fitch Ratings, an international credit rating agency, about four-fifths of all credit derivatives bought and sold worldwide in 2004 was on the books of only 15 banks and major dealers. Lehman Brothers was one of the Top 10 players in the business, and its bankruptcy has torn giant holes in the fragile network of credit insurance. "Not saving Lehman was a huge mistake," says a banking executive in Frankfurt, who notes that the shock waves will be extremely difficult to control.
Germany, where banks have had to write off about €40 billion ($58 billion), has managed to come away relatively unscathed until now. Experts believe that that number will be increased by significantly more than €10 billion ($14.5 billion).
German banks are now concerned that they will be at a competitive disadvantage if their US competitors are permitted to unload their bad debt with the government in the future, thereby improving their credit ratings. The Germans are demanding equal treatment. Last Thursday, leading representatives of the industry informed Finance Minister Steinbrück of their wishes -- and were rebuffed.
The financial storm has even been felt in the most unexpected of places, such as the offices of German town halls. At the turn of the millennium, hard-up German cities like Bochum, Recklinghausen and Wuppertal, used complex agreements, to sell large shares of the municipal family silver to US investors -- and then turned around to re-lease it. In many cases these so-called Cross-Border Leases (CBL) -- in which entire sewage systems or municipal transport operations were sold off -- were insured by the US insurance giant AIG, which was recently nationalized to avoid bankruptcy.
Naturally, the small print of the CBL agreements contains an explosive clause. It stipulates that if the guarantor loses its top-rated AAA credit rating, additional collateral must be provided. Despite government intervention, AIG was downgraded. Under their CBL agreements, the affected city councils have only a few weeks to come up with a solution.
By contrast, their counterparts in the cities of Münster, Troisdorf, Munich and Frankfurt can only wait and hope. They invested portions of their tax revenues with the Frankfurt subsidiary of now-bankrupt Lehman Brothers. By offering generous terms and citing a deposit insurance fund, the Americans managed to drum up urgently needed liquidity in Germany shortly before their bankruptcy.
The funds that German cities coughed up to help the Wall Street gamblers survive are not likely to be repaid anytime soon. BaFin, Germany's Federal Financial Supervisory Authority, has imposed a moratorium on the German subsidiary, freezing all transactions until further notice.
On August 15, when the US investment bank was already on shaky ground, Helga Bickeböller, a member of Münster's city council, transferred €15 million ($22 million) to Frankfurt in two tranches. "The offer was 0.004 percent higher than the next-best offer," Bickeböller says in justifying the transaction.
The credit crunch is tearing holes in the balance sheets of municipalities, companies and private households across the world. Banks hardly lend each other money anymore, consumer confidence is evaporating, and investors are questioning whether new sales will help them recoup money already spent on new equipment. In Germany, Arcandor -- a major holding company in the mail order, retail and tourism industries that reported €21 billion in 2007 sales -- threatens to become the first victim of tighter credit terms.
As the bad news accumulates -- in recent days, especially in the United States -- the mood around the world is growing increasingly dire. In August, sales of new homes in the United States dropped to their lowest level in 17 years. In comparison to last year, which was already a bad year, new home sales have dropped by more than 34 percent. At the same time, more and more US citizens have applied for unemployment benefits. And the manufacturing industry is reporting significant declines in order volume.
"The United States cannot avoid an 18-month-long, severe recession and a deep-seated financial crisis," warns Roubini, the New York economist. He would consider it a success if the country manages not to plunge into years of stagnation, as Japan did in the 1990s.
The consequences of the economic downturn in the United States are being felt around the world, especially in Germany, which is currently the world's leading exporter. Hans-Werner Sinn, president of the Munich-based Ifo Institute for Economic Research, calls it an "extremely worrisome situation." According to an analysis by the German Economics Ministry, the economy is exposed to "external shocks" and a "noticeably worsened external economic environment." The report even mentions the dreaded word "recession," although it adds that that recession is "not a foregone conclusion."
This is all the more vexing for the German government because it was the one that warned against the current malaise some time ago. During the G-8 economic summit in Heiligendamm more than a year ago, for example, Chancellor Angela Merkel tried to convince her state guests of the need for tighter controls on the financial markets. But President Bush and then British Prime Minister Tony Blair gave the chancellor the cold shoulder.
'One Can See that We Are on a more Solid Base'
For far too long, the Americans and the British made fun of the Germans for their risk-averse, savings-oriented mentality, says Bernd Pfaffenbach, Merkel's chief negotiator on foreign trade issues. But now the relative conservatism that Germans have shown in financial matters is paying off. "One can see that we are on a more solid base," says Pfaffenbach, who refers to the crisis as a "purifying storm."
Pfaffenbach isn't the only one to see the problem in this light. The American bank crash has prompted economists and politicians worldwide to prepare for the end of an era of turbo-capitalism driven by the financial markets.
The financial industry -- especially in the United States -- will shrink considerably, while the significance of the real economy will increase. Once again, the government will have to base its supervisory function on the old banker's principle: security first.
This is especially true when it comes to monetary policy. For years, central bankers "paid attention almost exclusively to developments in consumer prices," complains Thomas Meyer, chief European economist at Deutsche Bank. If consumer prices were going up by 2 percent or 3 percent, the risk of inflation was thought to have been averted.
The fact that the prices of stocks, bonds and real estate were often rising at double-digit rates was usually ignored until the financial bubbles burst with a loud bang. Some economists recommend that central bankers should also consider asset inflation when reaching future decisions.
At the same time, Europe's finance ministers are calling for tighter supervision of the credit and securities markets, as a group of experts from the G-8 countries recently recommended. Their plan calls for requiring banks to maintain larger capital reserves for specific risks. In addition, they have recommended that hidden financial risks that banks have assumed be made more transparent and that better guidelines be developed for the valuation of financial instruments.
Most of all, the G-8 council of experts stresses the need to reform the risk classification of securities. The major international rating agencies, such Moody's and Standard & Poor's, have deeply embarrassed themselves in the current crisis. In many cases, they gave their highest ratings to what were really junk securities. The G-8 experts have proposed that these institutions be made subject to a code of conduct.
At the same time, the experts also warn against intervening too much in the financial markets. As was illustrated by Germany's public sector Landesbanken, hard hit by the subprime crisis, as well as state-owned lender KfW -- which transfered €350 million to Lehman Brothers the day it filed for bankruptcy protection -- the government is usually not up to the task of owning and operating banks. Simply banning certain financial market operations also makes little sense, they believe, as such prohibitions are often easily circumvented.
If the G-8 experts prevail, there will be major consequences. For now, it would spell the end of ever-rising returns with constantly changing securities. At the same time, the market position of Anglo-Saxon banks would be significantly restricted, which would benefit the up-and-coming financial institutions of the emerging Asian and Eastern European economies.
A new chapter in economic history has begun, one in which the United States will no longer play its former dominant role. A process of redistributing money and power around the world -- away from America and toward the resource-rich countries and rising industrialized nations in Asia -- has been underway for years. The financial crisis will only accelerate the process.
The wealthy state-owned funds of China, Singapore, Dubai and Kuwait control assets of almost $4 trillion (€2.76 trillion), and they are now in a position to buy their way onto Wall Street in a big way.
But they have remained reserved until now, partly as a result of poor experiences in the past. The China Investment Corp., for example, invested in the initial public offering of the Blackstone Group, a private equity firm, and invested $5 billion (€3.45 billion) in Morgan Stanley. In both cases, it lost a lot of money.
But time is on the side of the Chinese. American stocks are becoming cheaper and cheaper. And the longer the crisis lasts, the weaker American objections to buyers from the Far East will become. In fact, it is quite possible that they will soon be celebrated as saviors.
The Chinese are interested in keeping the situation in the United States from spinning out of control. In a telephone conversation last Monday, Chinese President Hu Jintao told President Bush that he hoped that the measures to stabilize US financial markets would "achieve quick results and improve the economic and financial situation."
Bush had called his Chinese counterpart to inform him about his government's bailout program. Once again, the conversation symbolized just how great the mutual dependence between the two countries has become.
No Time to Gloat
Both in Asia and the United States, expressing schadenfreude over the decline of the United States as a superpower is out of place. The risk is too great that if America goes into a tailspin, it will drag the rest of the world down with it.
Despite the anger felt toward Bush, there is little enthusiasm in Europe's capitals for the political consequences. The financial crisis will reinvigorate America's tendency toward isolationism, which never quite disappeared.
The triumphalism of the Bush years could easily be followed by the "I'll-sit-this-one-out" years of an Obama administration committed to a strict policy of belt-tightening. If that happens, both old and new Europe will have to demonstrate whether the European Union can rightfully claim to be on an equal footing with the United States.
In the past, the US government's solo efforts provided the Europeans with an all-too-comfortable excuse for simply doing nothing. But that excuse is no longer valid.
BEAT BALZLI, KLAUS BRINKBÄUMER, FRANK HORNIG, HANS HOYNG, ARMIN MAHLER, ALEXANDER NEUBACHER, WOLFGANG REUTER, CHRISTOPH PAULY, MICHAEL SAUGA
The banking crisis is upending American dominance of the financial markets and world politics. The industrialized countries are sliding into recession, the era of turbo-capitalism is coming to an end and US military might is ebbing. Still, this is no time to gloat.
There are days when all it takes is a single speech to illustrate the decline of a world power. A face can speak volumes, as can the speaker's tone of voice, the speech itself or the audience's reaction. Kings and queens have clung to the past before and humiliated themselves in public, but this time it was merely a United States president.
Or what is left of him.
George W. Bush has grown old, erratic and rosy in the eight years of his presidency. Little remains of his combativeness or his enthusiasm for physical fitness. On this sunny Tuesday morning in New York, even his hair seemed messy and unkempt, his blue suit a little baggy around the shoulders, as Bush stepped onto the stage, for the eighth time, at the United Nations General Assembly.
He talked about terrorism and terrorist regimes, and about governments that allegedly support terror. He failed to notice that the delegates sitting in front of and below him were shaking their heads, smiling and whispering, or if he did notice, he was no longer capable of reacting. The US president gave a speech similar to the ones he gave in 2004 and 2007, mentioning the word "terror" 32 times in 22 minutes. At the 63rd General Assembly of the United Nations, George W. Bush was the only one still talking about terror and not about the topic that currently has the rest of the world's attention.
"Absurd, absurd, absurd," said one German diplomat. A French woman called him "yesterday's man" over coffee on the East River. There is another way to put it, too: Bush was a laughing stock in the gray corridors of the UN.
The American president has always had enemies in these hallways and offices at the UN building on First Avenue in Manhattan. The Iranians and Syrians despise the eternal American-Israeli coalition, while many others are tired of Bush's Americans telling the world about the blessings of deregulated markets and establishing rules "that only apply to others," says the diplomat from Berlin.
But the ridicule was a new thing. It marked the end of respect.
"Well," Brazilian President Luiz Inacio "Lula" da Silva began, standing outside the General Assembly Hall. Then he looked out the window and said: "He decided to talk about terrorism, but the issue that has the world concerned is the economic crisis." Cristina Fernández de Kirchner, the president of Argentina, said that the schoolmasters from Washington had dubbed the 1994 Mexican crisis the "tequila effect" and Brazil's 1999 crisis the "Caipirinha effect."
Are we now experiencing the "whiskey effect?" But President Kirchner was gracious and, with a smile, called it the "jazz effect."
Is it only President George W. Bush, the lame duck president, whom the rest of the world is no longer taking seriously, or are the remaining 191 UN member states already setting their sights on the United States, the giant brought to its knees? UN Secretary General Ban Ki Moon referred to a "new reality" and "new centers of power and leadership in Asia, Latin America and across the newly developed world." Are they surprised, in these new centers, at the fall of America, of the system of the Western-style market economy?
Even America's closest allies are distancing themselves -- first and foremost the German chancellor. When push came to shove in the past, Angela Merkel had always come down on the side of the United States. As a candidate for the Chancellery for the conservative Christian Democrats, she helped Bush in the Iraq war, and as chancellor she supported tougher sanctions on Iran and campaigned in Europe for an embargo against Cuba. "The partnership with the United States," the chancellor insisted again and again, "has a very special meaning for us Germans."
There was no mention of loyalty and friendship last Monday. Merkel stood in the glass-roofed entrance hall of one of the German parliament's office buildings in Berlin and prepared her audience of roughly 1,000 businesspeople from all across Germany for the foreseeable consequences of the financial crisis. It was a speech filled with concealed accusations and dark warnings.
Merkel talked about a "distribution of risk at everyone's expense" and the consequences for the "economic situation in the coming months and possibly even years." Most of all, she made it clear who she considers the true culprit behind the current plight. "The German government pointed out the problems early on," said the chancellor, whose proposals to impose tighter international market controls failed repeatedly because of US opposition. "Some things can be done at the national level," she said, "but most things have to be handled internationally."
Merkel had never publicly criticized the United States this harshly and unapologetically. In this regard, she enjoys the wholehearted support of her coalition government partner, the center-left Social Democrats (SPD). In a speech before Germany's parliament, the Bundestag, Finance Minister Peer Steinbrück of the SPD spoke of the end of the United States as a "superpower of the global financial system."
The banking crisis in the United States has shaken many things in recent days, not just the chancellor's affection for America and the respect the rest of the world once had for the US as an economic and political superpower. Since the US investment bank Lehman Brothers plummeted into bankruptcy two weeks ago, the financial crisis has developed a destructive force of almost unimaginable strength. The proud US investment banks with globally recognized names like Merrill Lynch and Goldman Sachs have all gone bankrupt, been bought up or restructured. The American real estate market has essentially been nationalized. And the country's biggest savings and loan, Washington Mutual, has failed and been sold at a loss.
In light of the almost daily reports of losses in the financial sector, it seemed almost secondary to note that the disaster had also turned into one of the biggest criminal investigations in American history. The Federal Bureau of Investigation (FBI) is already investigating 26 large financial corporations as well as 1,400 smaller companies and private citizens for possible fraud.
Economists now characterize what began two years ago with falling prices in the American real estate market as the biggest economic disaster since the world economic crisis of the 1930s. No one knows whether and how the meltdown of global financial markets, which would have grave consequences for the world economy, can still be prevented.
And now, of all times, the world is faced with a preeminent power that no longer seems capable of leading and a US president who is not even able to unite his divided country in an hour of need.
For weeks, Bush ignored the crisis, insisting on the strength of the market and telling Americans: "Everything will be fine."
In a televised address to the nation last Wednesday, Bush gave his oath of disclosure. He warned Americans that they could face a "long and painful recession" and that "millions of Americans could lose their jobs" unless swift action is taken.
But nothing happened swiftly, at least not at first. The crisis is happening while the United States is in a political vacuum. Bush lacks the power needed for decisive leadership, and his potential successors, John McCain and Barack Obama, seem more concerned about making a strong impression on voters.
Ironically, it is in the country of unfettered capitalism that the government now plans to intervene in the economy on a scale not seen since the Great Depression, and, with hundreds of billions of dollars, attempt to save the financial sector from failure -- out of fear of something even worse: an economic collapse with declining prices and widespread unemployment.
This is no longer the muscular and arrogant United States the world knows, the superpower that sets the rules for everyone else and that considers its way of thinking and doing business to be the only road to success.
A new America is on display, a country that no longer trusts its old values and its elites even less: the politicians, who failed to see the problems on the horizon, and the economic leaders, who tried to sell a fictitious world of prosperity to Americans.
Also on display is the end of arrogance. The Americans are now paying the price for their pride.
Gone are the days when the US could go into debt with abandon, without considering who would end up footing the bill. And gone are the days when it could impose its economic rules of engagement on the rest of the world, rules that emphasized profit above all else -- without ever considering that such returns cannot be achieved by doing business in a respectable way.
With its rule of three of cheap money, free markets and double-digit profit margins, American turbo-capitalism has set economic standards worldwide for the past quarter century. Now it is proving to be nothing but a giant snowball system, upsetting the US's global political status as it comes crashing down. Every bank that US Treasury Secretary Henry Paulson is currently forced to bail out with American government funds damages America's reputation around the world.
Of course, it is not solely the result of undesirable economic developments that the United States is in the process of forfeiting its unique position in the world and that the world is moving toward what Fareed Zakaria, editor of Newsweek International, calls a "post-American age." Washington has also lost much of its political ability to impose its will on other countries.
Bush's Failed Leadership
The failed leadership of President Bush, whose departure most of his counterparts from other countries are now looking forward to more and more openly, is not solely to blame. Nor are his two risky wars: the one in Iraq, which he launched frivolously in the vain hope of converting the entire region to the American way of life, and the other in Afghanistan, in which Bush now risks the world's most powerful defense alliance, NATO, suffering its first defeat.
But it's hard to forget how this president's mentors celebrated the power to shape world affairs the United States acquired in the wake of the collapse of the Soviet Union and the end of the East-West conflict. There was talk of a "unipolar moment," of "America's moment," even of an "end of history," now that all other countries apparently had no other choice but to become smaller versions of America: liberal, democratic and buoyed by an unshakeable confidence in the free market economy.
The Bush administration wanted to cement forever this unique moment in history, in which the United States was undoubtedly the strongest power on earth. It wanted to use it to clean house in chronic crisis zones around the world, especially the Middle East. Far from relying on the classic, cumbersome and often unsuccessful tools of multilateral diplomacy, the Bush warriors were always quick to threaten military intervention -- just as quick as they were to make good on this threat.
The strategists of this immoderately self-confident administration formulated these principles in the "Bush doctrine" and claimed, for themselves and their actions, the right to "preemptive" military intervention -- with little concern for the rules of alliances or international organizations.
The superpower even claimed privileges over its allies, even offending some of its best friends during Bush's first term. Bush withdrew the American signature from a treaty to establish the International Criminal Court, he refused to ratify the Kyoto Protocol to combat climate change and he withdrew from an agreement with the Russians to limit the number of missile defense systems.
Washington sought to divide the world into good and evil -- and did so as it saw fit.
Now, in the wake of the crash on Wall Street, the debate in the UN reveals that the long-humiliated have lost their fear of the giant in world politics. Even a political dwarf like Bolivian President Evo Morales is now talking big. "There is an uprising against an economic model, a capitalistic system that is the worst enemy of humanity," Morales told the UN General Assembly.
The financial crisis has uncovered the world power's true weakness. The more the highly indebted United States has to spend to stabilize its own economic system, the more trouble it has performing its self-imposed duties as the world's policeman.
The new US president will only have been in office for a short time when a document titled "Global Trends 2025" appears on his desk. The report is being prepared by analysts at the National Intelligence Council. Its chairman, Thomas Fingar, has already released a preview, and reading it will not exactly be enjoyable for proud American. "Although the United States will remain the most important power, American dominance will be sharply reduced," says Fingar.
According to the preview of the report, the erosion of American supremacy will "accelerate in the areas of politics and economics, and possibly culture."
The century that just began is unlikely to be declared the American century again. Instead, "Asia will shape the fate of the world, with or without the United States," says Parag Khanna, a young Indian-American political scientist whose book "The Second World: Empires and Influence in the New Global Order" has attracted a great deal of attention in the United States.
There is much to be said for Khanna's assertion. Beijing is already funding a large share of the gigantic American trade deficit, while at the same time selling many consumer goods to the United States. In other words, it benefits from the US's weakness in two ways. And politically speaking, the newly self-confident Chinese will no longer allow themselves to be domineered by the West. Reacting to worldwide criticism of political oppression in Tibet, the Chinese encouraged their nationalist youth to assault Western institutions and refused to allow themselves to be lectured on human rights.
Republican Senator Chuck Hagel has acknowledged that the "world's largest debtor nation" cannot simultaneously shape the course of the world. The challenges America faces have multiplied, especially in recent times.
After the collapse of the Soviet Union and a decade of weakness, resource-rich Russia now expects to be treated as an equal to its former Cold War rival. The invasion of Georgia by Russian troops showed NATO where Moscow sees the limits of expansion of the Western military alliance. Indeed, some time ago, Russian bombers resumed patrolling the borders of the Western defense alliance.
Iran has also been unimpressed by Washington's approach to force it to terminate its uranium-enrichment process by threatening to use military force. The expansion of the nuclear facility at Natanz is progressing at a brisk pace, as expected, and Iranian President Mahmoud Ahmadinejad now considers his adversary, Bush, to be finished. "The American empire in the world is reaching the end of its road," he said in his speech to the UN General Assembly, "and its next rulers must limit their interference to their own borders."
Even before the financial crisis, there was lively debate in the United States over whether the world's largest economy could become overtaxed in the long run as a result of its international obligations and the global deployment of its armed forces. The war in Iraq costs the country $3 billion a week. And it is already clear that Bush's successor will find his powers in the White House further limited by the enormous mountain of debt he inherits.
And then there are the costs of the financial crisis -- and the recession that will inevitably follow.
Most Americans are opposed to Treasury Secretary Paulson's plan to buy the banks' bad loans for $700 billion (€483 billion). A rare coalition of the left and right reject this one-time bailout package as "un-American" and as a completely excessive act of government intervention that, in fact, rewards those responsible for the debacle: the key players in New York's financial industry.
The government and large parts of the establishment disagree. They fear that if the program fails, it could drag the American financial markets and then the global economy into the abyss.
With only five weeks to go before the presidential election, the emergency Wall Street bailout has turned into a high-stakes political drama. Last Tuesday's hearing before the US Senate, which lasted several hours and included Paulson, Federal Reserve Chairman Ben Bernanke and the chairman of the Securities and Exchange Commission (SEC), Christopher Cox, was reminiscent of a show trial, with the government and the Federal Reserve playing the role of prosecutor.
The administration struck back the next day, when Bush gave his dramatic televised address to the nation. But then the Republican Party base revolted. For many Republicans, the idea of giving away $700 billion in tax money to Wall Street banks is tantamount to the introduction of socialism on American soil.
They believe that Bush and Paulson are betraying the ideals of their party, and their fears were confirmed elsewhere on Thursday. The mood did not improve when, without further ado, the government seized one of the country's largest savings & loan institutions and sold it to JP Morgan Chase.
Many experts are also skeptical. Allan Meltzer, an advisor to former President Ronald Reagan, is critical of what he calls "intimidation tactics" designed to serve "private, not public interests."
"We are applying cold compresses to the fever patient instead of fighting the actual infection," says Christopher Mayer of Columbia University in New York. According to Mayer, the billions would be better spent reducing mortgage interest. This would reduce the number of foreclosures and attract buyers back to the market.
But as divided as Washington is, doing nothing would still be the worst alternative.
"There is no other option now than to move the plan forward," says Ed Yardeni, the former chief investment strategist at Deutsche Bank, who now heads his own research firm outside New York. "The US treasury secretary and chairman of the Federal Reserve predicted a financial Armageddon," says Yardeni. "Unless action is taken now, it'll get really ugly on the markets."
At the end of last week, investors' loss of confidence worldwide led to the credit markets becoming essentially frozen once again. This could cause the flow of money in the broader economic environment to run dry, as happened once before in the world economic crisis. This explains why Paulson, Bush and Bernanke are so nervous.
The bailout plan they unveiled at the end of last week was arrogant and incomplete. The Democrats, in particular, fought for some key changes. They want to give Congress more control over the treasury secretary and the ability to monitor his spending on an ongoing basis. Instead of approving $700 billion in one fell swoop, the Democrats want the funds to be disbursed in portions. Banks wishing to take advantage of the government bailout would also have to impose limits on executive compensation.
Finally, the Democrats want taxpayers to get something in return for their sacrifice: The government would buy the financial institutions' toxic mortgage securities at a preferred price. In return, it would receive bank shares that it could later sell, if and when prices recovered.
Overall, the hope was that this would reestablish relatively normal market conditions. Banks would be able to unload their junk securities for a clear price, their balance sheets would no longer be adversely affected by virtually worthless mortgage-backed securities, and transparency and confidence would be restored.
Wall Street's Central Values: Avarice and Greed
It is an optimistic scenario, but with no guarantee of success. Still, what's the alternative? "Maybe we can let Wall Street implode," writes Princeton economist Paul Krugman in the New York Times, "and Main Street would escape largely unscathed." But, he continues, "that's not a chance we want to take."
The effects of the financial crisis are already serious, both for the American taxpayer, who will end up footing the bill no matter what, and for the relationship between the government and the economy. An era of American economic policy is coming to a close. Ironically, and surprisingly to many, the last few months of the Bush administration will mark the end of the so-called "Reagan revolution."
Since the early 1980s, the United States has radically emphasized deregulation, which has meant lowering taxes, eliminating regulations and generally leaving the markets to their own devices. Ronald Reagan began his presidency in 1981 with this program, and it was following by a prolonged economic upturn.
It was driven in part by an aggressive policy of cheap money, for which a second icon of the American boom was responsible: former Fed Chairman Alan Greenspan. During the 18 years of his tenure, whenever there was trouble brewing in the stock market and financial markets, Greenspan would drown the crises in a flood of fresh money. Whether it was the 1997 market crash in the Asian tiger countries, the selloff of Russian government bonds a year later, the collapse of the LTCM hedge fund or, finally, the bursting of the New Economy bubble at the beginning of the new millennium, Greenspan's rescue operations could be counted on to return growth to the world's markets. But there was one thing Greenspan overlooked: By repeatedly printing money, he also laid the foundation for the next financial bubble, and its destructive energy grew from one intervention to the next.
Over the last 15 years, Greenspan was opposed to oversight and control over those companies that used the ready cash made available by his policies to introduce a wave of so-called financial innovations. As long as he was in office, he blocked all attempts to impose government collateral requirements on the credit, stock and financial markets. In Greenspan's view, it would only hamper "necessary flexibility."
His policies were borne out by the successes of two decades. Fed by cheap money and freed of most regulations, the American financial industry experienced an unprecedented boom. The industry's excessive growth was reflected in exorbitant salaries and ostentatious skyscrapers but also in the withdrawal of a large share of American value creation.
In 2007, at the beginning of the crisis, the American financial and lending sector was responsible for 14 percent of economic performance, while collecting 33 percent of all corporate profits.
The financial boom also set the turbo-charger in motion that would lend a new face to worldwide capital from then on. Avarice and greed have always been the central values on Wall Street, but now they had become a benchmark for the real global economy. The American banking industry paid for globalization and the Internet revolution, the Asian upswing and the boom in the commodities markets. "We need a 25-percent return," or else his bank would not be "competitive internationally," Deutsche Bank CEO Josef Ackermann said, thereby establishing a benchmark that would soon apply not just to banks but also to automobile makers, machine builders and steel companies.
But, as is often the case with recipes for success, at some point the healthy dose is exceeded and soon the risks and side effects begin to accumulate. The result: The supposed medicine instead becomes a pathogen instead.
In the United States, this process began after the collapse of the New Economy. Once again, Greenspan flooded the economy with money and, yet again, Wall Street started looking for a new market for its growth machine. This time it discovered the American homeowner, convincing him to take out mortgages at favorable terms, even when there was practically no collateral.
The total value of all outstanding mortgage loans in the United States -- $11 trillion (€7.6 trillion) -- is almost as large as the country's gross domestic product. At the same time, with the help of Wall Street's financial engineers, the Americans managed to sell a portion of the risk to other parts of the world, reasoning that if the risk was out of sight it would be out of mind.
But the fact that risks do not disappear when they are distributed around the world became clear at the beginning of last year. Interest rates rose across the board and house prices came down, triggering a chain reaction with collateral damage that was bringing down ever-growing segments of the financial sector from one week to the next. Today, 18 million single-family homes and condominiums in the United States are empty. More and more Americans can no longer afford the high interest rates they are being charged. Many consumers have even been forced to bid farewell to their beloved credit cards because the banks are no longer willing to extend credit to them.
To make matters worse, because a large share of the mortgage loans are now distributed all over the world, the crisis is spreading halfway around the globe like an infectious disease. In recent years, many of the industrialized countries deregulated their financial markets based on the American model. This has led to a relatively unimpeded flow of capital around the world today.
The financial assets that economies hold abroad have grown more than sevenfold in the past three decades. By late 2007, the market volume for derivatives, which are used to bet on interest rate, stock and credit risks worldwide, had reached a previously unthinkable level of $596 trillion (€411 trillion).
At the same time, the number of players has multiplied. The banks stopped being the only ones in control of the industry some time ago. Nowadays, hedge funds bet on falling stock prices and mortgage rates, private equity companies buy up failed banks and bad loans, and wealthy pension funds keep the fund managers afloat.
The "greater complexity of linkages within and between the financial systems" now has one man worried, a man whose profession ought to provide him with a better idea of what's going on: Jean-Claude Trichet, president of the European Central Bank. In a recent speech at New York University, Europe's highest-ranking central banker complained about the "obscurity of and interactions among many financial instruments," often combined with a "high level of borrowing."
The inventors of these complex securities hoped that they could be used to distribute risk more broadly around the globe. But instead of making financial transactions more secure, they achieved the opposite effect, increasing the risks. Today the notion of using "many shoulders for support," the constant mantra of the gurus of financial alchemy, has proved to be one of the catalysts of the crash.
American economist Raghuram Rajan, whom ECB President Trichet is frequently quoting these days, had a premonition of the current disaster three years ago. The total integration of the markets "exposes the system to large systemic shocks," Rajan wrote then in a study. Although the economy had survived many crises before, like the bursting of the Internet bubble, "this should not lead us to be too optimistic." "Can we be confident that the shocks were large enough and in the right places to fully test the system?" Rajan asked. "A shock to equity markets, though large," he continued, "may have less effect than a shock to credit markets."
There was certainly no shortage of warnings, and there were many voices of caution. As long ago as 1936, John Maynard Keynes recognized the risk that "speculation may win the upper hand" in the markets. Its influence in New York, the British economist wrote, was "enormous," and the situation would become serious "when the capital development of a country becomes the by-product of the activities of a casino."
Irrational Exuberance
US economist Robert Shiller, who predicted the bursting of the dot-com bubble at the turn of the century, was one of the first to notice that the value of houses and condominiums in the United States was rising at a suspiciously fast rate. In Shiller's view, this was another case of irrational exuberance. In December 2004, Stephen Roach, the former chief economist at investment bank Morgan Stanley, cautioned against the "grimmest of all financial bubbles."
New York economist Nouriel Roubini presented the most accurate scenario of a crash, from the bursting of the real estate bubble to the domino-like demise of major banks. Roubini, known as a notorious alarmist, now predicts a prolonged recession in the United States that will drag down the entire global economy with it. "The US consumer has consumed himself to death," says Roubini.
Paul Samuelson, the doyen of the world's economists, predicted this bitter outcome three years ago. "America's position is under pressure because we have become a society that hardly saves," Samuelson, 90 at the time, said in an interview with SPIEGEL. "We don't think of others or of tomorrow."
And now the global conflagration is a reality, triggered by cleverly packaged US subprime mortgages sold around the world, even to bankers in the provincial eastern German state of Saxony. So-called credit derivatives, which banks and investment funds used to hedge against the failure of commercial loans, could soon add new fuel to the fire. In the wake of the subprime crisis, could credit derivatives be the next bad thing? Is the world facing a wave of bankruptcies that could soon bring the financial world crashing down through the mechanism of credit derivatives?
US market guru Warren Buffett calls derivatives " weapons of mass destruction." They are the creations of inventive financial alchemists, concoctions that blend classic forms of investment, like stocks, bonds and commodities.
In fact, within this discipline, derivatives used to hedge against credit risk are among the most dangerous gambles and, as one would expect within the global financial casino, they have experienced dizzying growth. In the last five years, the volume of credit derivatives has grown thirtyfold to about $55 trillion (€38 trillion), or about 20 times the gross national product of Germany.
The world is encased in a tightly woven network of reciprocal payment obligations. "The core problem is that it is no longer possible to know where the risks have ultimately landed," warns Thomas Heidorn, a professor at Frankfurt's Institute for Law and Finance. This is because traders pass on credit risks an infinite number of times, which explains the dizzying market volume. Where the risks end up is anyone's guess.
Nevertheless, only a handful of firms set the tone in this high-stakes game of bingo in which trillions are on the line. According to a survey by Fitch Ratings, an international credit rating agency, about four-fifths of all credit derivatives bought and sold worldwide in 2004 was on the books of only 15 banks and major dealers. Lehman Brothers was one of the Top 10 players in the business, and its bankruptcy has torn giant holes in the fragile network of credit insurance. "Not saving Lehman was a huge mistake," says a banking executive in Frankfurt, who notes that the shock waves will be extremely difficult to control.
Germany, where banks have had to write off about €40 billion ($58 billion), has managed to come away relatively unscathed until now. Experts believe that that number will be increased by significantly more than €10 billion ($14.5 billion).
German banks are now concerned that they will be at a competitive disadvantage if their US competitors are permitted to unload their bad debt with the government in the future, thereby improving their credit ratings. The Germans are demanding equal treatment. Last Thursday, leading representatives of the industry informed Finance Minister Steinbrück of their wishes -- and were rebuffed.
The financial storm has even been felt in the most unexpected of places, such as the offices of German town halls. At the turn of the millennium, hard-up German cities like Bochum, Recklinghausen and Wuppertal, used complex agreements, to sell large shares of the municipal family silver to US investors -- and then turned around to re-lease it. In many cases these so-called Cross-Border Leases (CBL) -- in which entire sewage systems or municipal transport operations were sold off -- were insured by the US insurance giant AIG, which was recently nationalized to avoid bankruptcy.
Naturally, the small print of the CBL agreements contains an explosive clause. It stipulates that if the guarantor loses its top-rated AAA credit rating, additional collateral must be provided. Despite government intervention, AIG was downgraded. Under their CBL agreements, the affected city councils have only a few weeks to come up with a solution.
By contrast, their counterparts in the cities of Münster, Troisdorf, Munich and Frankfurt can only wait and hope. They invested portions of their tax revenues with the Frankfurt subsidiary of now-bankrupt Lehman Brothers. By offering generous terms and citing a deposit insurance fund, the Americans managed to drum up urgently needed liquidity in Germany shortly before their bankruptcy.
The funds that German cities coughed up to help the Wall Street gamblers survive are not likely to be repaid anytime soon. BaFin, Germany's Federal Financial Supervisory Authority, has imposed a moratorium on the German subsidiary, freezing all transactions until further notice.
On August 15, when the US investment bank was already on shaky ground, Helga Bickeböller, a member of Münster's city council, transferred €15 million ($22 million) to Frankfurt in two tranches. "The offer was 0.004 percent higher than the next-best offer," Bickeböller says in justifying the transaction.
The credit crunch is tearing holes in the balance sheets of municipalities, companies and private households across the world. Banks hardly lend each other money anymore, consumer confidence is evaporating, and investors are questioning whether new sales will help them recoup money already spent on new equipment. In Germany, Arcandor -- a major holding company in the mail order, retail and tourism industries that reported €21 billion in 2007 sales -- threatens to become the first victim of tighter credit terms.
As the bad news accumulates -- in recent days, especially in the United States -- the mood around the world is growing increasingly dire. In August, sales of new homes in the United States dropped to their lowest level in 17 years. In comparison to last year, which was already a bad year, new home sales have dropped by more than 34 percent. At the same time, more and more US citizens have applied for unemployment benefits. And the manufacturing industry is reporting significant declines in order volume.
"The United States cannot avoid an 18-month-long, severe recession and a deep-seated financial crisis," warns Roubini, the New York economist. He would consider it a success if the country manages not to plunge into years of stagnation, as Japan did in the 1990s.
The consequences of the economic downturn in the United States are being felt around the world, especially in Germany, which is currently the world's leading exporter. Hans-Werner Sinn, president of the Munich-based Ifo Institute for Economic Research, calls it an "extremely worrisome situation." According to an analysis by the German Economics Ministry, the economy is exposed to "external shocks" and a "noticeably worsened external economic environment." The report even mentions the dreaded word "recession," although it adds that that recession is "not a foregone conclusion."
This is all the more vexing for the German government because it was the one that warned against the current malaise some time ago. During the G-8 economic summit in Heiligendamm more than a year ago, for example, Chancellor Angela Merkel tried to convince her state guests of the need for tighter controls on the financial markets. But President Bush and then British Prime Minister Tony Blair gave the chancellor the cold shoulder.
'One Can See that We Are on a more Solid Base'
For far too long, the Americans and the British made fun of the Germans for their risk-averse, savings-oriented mentality, says Bernd Pfaffenbach, Merkel's chief negotiator on foreign trade issues. But now the relative conservatism that Germans have shown in financial matters is paying off. "One can see that we are on a more solid base," says Pfaffenbach, who refers to the crisis as a "purifying storm."
Pfaffenbach isn't the only one to see the problem in this light. The American bank crash has prompted economists and politicians worldwide to prepare for the end of an era of turbo-capitalism driven by the financial markets.
The financial industry -- especially in the United States -- will shrink considerably, while the significance of the real economy will increase. Once again, the government will have to base its supervisory function on the old banker's principle: security first.
This is especially true when it comes to monetary policy. For years, central bankers "paid attention almost exclusively to developments in consumer prices," complains Thomas Meyer, chief European economist at Deutsche Bank. If consumer prices were going up by 2 percent or 3 percent, the risk of inflation was thought to have been averted.
The fact that the prices of stocks, bonds and real estate were often rising at double-digit rates was usually ignored until the financial bubbles burst with a loud bang. Some economists recommend that central bankers should also consider asset inflation when reaching future decisions.
At the same time, Europe's finance ministers are calling for tighter supervision of the credit and securities markets, as a group of experts from the G-8 countries recently recommended. Their plan calls for requiring banks to maintain larger capital reserves for specific risks. In addition, they have recommended that hidden financial risks that banks have assumed be made more transparent and that better guidelines be developed for the valuation of financial instruments.
Most of all, the G-8 council of experts stresses the need to reform the risk classification of securities. The major international rating agencies, such Moody's and Standard & Poor's, have deeply embarrassed themselves in the current crisis. In many cases, they gave their highest ratings to what were really junk securities. The G-8 experts have proposed that these institutions be made subject to a code of conduct.
At the same time, the experts also warn against intervening too much in the financial markets. As was illustrated by Germany's public sector Landesbanken, hard hit by the subprime crisis, as well as state-owned lender KfW -- which transfered €350 million to Lehman Brothers the day it filed for bankruptcy protection -- the government is usually not up to the task of owning and operating banks. Simply banning certain financial market operations also makes little sense, they believe, as such prohibitions are often easily circumvented.
If the G-8 experts prevail, there will be major consequences. For now, it would spell the end of ever-rising returns with constantly changing securities. At the same time, the market position of Anglo-Saxon banks would be significantly restricted, which would benefit the up-and-coming financial institutions of the emerging Asian and Eastern European economies.
A new chapter in economic history has begun, one in which the United States will no longer play its former dominant role. A process of redistributing money and power around the world -- away from America and toward the resource-rich countries and rising industrialized nations in Asia -- has been underway for years. The financial crisis will only accelerate the process.
The wealthy state-owned funds of China, Singapore, Dubai and Kuwait control assets of almost $4 trillion (€2.76 trillion), and they are now in a position to buy their way onto Wall Street in a big way.
But they have remained reserved until now, partly as a result of poor experiences in the past. The China Investment Corp., for example, invested in the initial public offering of the Blackstone Group, a private equity firm, and invested $5 billion (€3.45 billion) in Morgan Stanley. In both cases, it lost a lot of money.
But time is on the side of the Chinese. American stocks are becoming cheaper and cheaper. And the longer the crisis lasts, the weaker American objections to buyers from the Far East will become. In fact, it is quite possible that they will soon be celebrated as saviors.
The Chinese are interested in keeping the situation in the United States from spinning out of control. In a telephone conversation last Monday, Chinese President Hu Jintao told President Bush that he hoped that the measures to stabilize US financial markets would "achieve quick results and improve the economic and financial situation."
Bush had called his Chinese counterpart to inform him about his government's bailout program. Once again, the conversation symbolized just how great the mutual dependence between the two countries has become.
No Time to Gloat
Both in Asia and the United States, expressing schadenfreude over the decline of the United States as a superpower is out of place. The risk is too great that if America goes into a tailspin, it will drag the rest of the world down with it.
Despite the anger felt toward Bush, there is little enthusiasm in Europe's capitals for the political consequences. The financial crisis will reinvigorate America's tendency toward isolationism, which never quite disappeared.
The triumphalism of the Bush years could easily be followed by the "I'll-sit-this-one-out" years of an Obama administration committed to a strict policy of belt-tightening. If that happens, both old and new Europe will have to demonstrate whether the European Union can rightfully claim to be on an equal footing with the United States.
In the past, the US government's solo efforts provided the Europeans with an all-too-comfortable excuse for simply doing nothing. But that excuse is no longer valid.
BEAT BALZLI, KLAUS BRINKBÄUMER, FRANK HORNIG, HANS HOYNG, ARMIN MAHLER, ALEXANDER NEUBACHER, WOLFGANG REUTER, CHRISTOPH PAULY, MICHAEL SAUGA
Please, no more liars in the White House
By Richard Hasenauer
Fargo
It is time again to elect another president. The vast majority of us can agree we will be happy to get rid of George W. Bush. Why do we dislike Bush? The one big reason I despise our president and current vice president is because they lied to us. They misled us into a war. How should this affect our decisions this Nov. 4?
Certainly we all can agree that John McCain and Sarah Palin have stretched the truth to gain some political advantage. The same is true of Barack Obama and Joe Biden. But in case you missed it, McCain was supposed to be a guest on David Letterman, and then canceled to rush back to Washington. He made a public statement to the same effect, suspending his campaign to help solve the economic crisis. His sense of urgency sounded sincere.
Did he rush back to Washington? No. He spent the rest of the afternoon and evening in New York doing other interviews, then spoke the next morning at the Clinton Global Initiative. Then he managed to make it Washington.
As far as the economic crisis is concerned, he painstakingly spent a few hours with his colleagues for some photo ops. He threatened to not debate because of the crisis, yet he had time to do an interview with NBC. My point: McCain might be a patriot, but he is a bold-faced liar. He told all Americans that this crisis was so urgent that he needed to suspend his campaign. Then it turns out he didn’t even spend more than a few hours working on the problem.
McCain is a liar. Bush and Cheney are liars. We know what happens when we have bold-faced liars in the White House.
Fargo
It is time again to elect another president. The vast majority of us can agree we will be happy to get rid of George W. Bush. Why do we dislike Bush? The one big reason I despise our president and current vice president is because they lied to us. They misled us into a war. How should this affect our decisions this Nov. 4?
Certainly we all can agree that John McCain and Sarah Palin have stretched the truth to gain some political advantage. The same is true of Barack Obama and Joe Biden. But in case you missed it, McCain was supposed to be a guest on David Letterman, and then canceled to rush back to Washington. He made a public statement to the same effect, suspending his campaign to help solve the economic crisis. His sense of urgency sounded sincere.
Did he rush back to Washington? No. He spent the rest of the afternoon and evening in New York doing other interviews, then spoke the next morning at the Clinton Global Initiative. Then he managed to make it Washington.
As far as the economic crisis is concerned, he painstakingly spent a few hours with his colleagues for some photo ops. He threatened to not debate because of the crisis, yet he had time to do an interview with NBC. My point: McCain might be a patriot, but he is a bold-faced liar. He told all Americans that this crisis was so urgent that he needed to suspend his campaign. Then it turns out he didn’t even spend more than a few hours working on the problem.
McCain is a liar. Bush and Cheney are liars. We know what happens when we have bold-faced liars in the White House.
Monday, October 6, 2008
A Futile Bailout as Darkness Falls on America
By PAUL CRAIG ROBERTS
America has become a pretty discouraging place. Americans, for the most part, will never know what happened to them, because they no longer have a free and responsible press. They have Big Brother’s press. For example, on September 28, 2008, a New York Times editorial blamed the current financial crisis on “antiregulation disciples of the Reagan Revolution.”
What utter nonsense. Every example of deregulation that the New York Times editorial provides is located in the Clinton Administration and the George W. Bush administration. I was a member of the Reagan administration. We most certainly did not deregulate the financial system.
The repeal of the Glass-Steagall Act, which separated commercial from investment banking, was the achievement of the Democratic Clinton Administration. It happened in 1999, over a decade after Reagan left office.
It was in 2000 that derivatives and credit default swaps were excluded from regulation.
The greatest mistake was made in 2004, the year that Reagan died. That year the current Secretary of the Treasury, Henry M. Paulson Jr, was head of the investment bank Goldman Sachs. In the spring of 2004, the investment banks, led by Paulson, met with the Securities and Exchange Commission. At this meeting with the New Deal regulatory agency tasked with regulating the US financial system, Paulson convinced the SEC Commissioners to exempt the investment banks from maintaining reserves to cover losses on investments. The exemption granted by the SEC allowed the investment banks to leverage financial instruments beyond any bounds of prudence.
In place of time-proven standards of prudence, computer models engineered by hot shots determined acceptable risk. As one result Bear Stearns, for example, pushed its leverage ratio to 33 to 1. For every one dollar in equity, the investment bank had $33 of debt!
It was computer models that led to the failure of Long-Term Capital Management in 1998, the first systemic threat to the financial system. Why the SEC went along with Paulson and set aside capital requirements after the scare of Long-Term Capital Management is inexplicable.
The blame is headed toward SEC chairman Christopher Cox. This is more of Big Brother’s disinformation. Cox, like so many others, was a victim of a free market ideology, itself a reaction to over-regulation, that was boosted by academic economic opinion, rewarded with Nobel prizes, that the market “always knows best.”
The 20th century proves that the market is likely to know better than a central planning bureau. It was Soviet Communism that collapsed, not American capitalism. However, the market has to be protected from greed. It was greed, not the market, that was unleashed by deregulation during the Clinton and George W. Bush regimes.
I remember when the deregulation of the financial sector began. One of the first inroads was the legislation, written by bankers, to permit national branch banking. George Champion, former chairman of Chase Manhattan Bank, testified against it. In columns I argued that national branch banking would focus banks away from local business needs.
The deregulation of the financial sector was achieved by the Democratic Clinton Administration and by the current Secretary of the Treasury, Henry Paulson, with the acquiescence of the Securities and Exchange Commission.
The Paulson bailout saves his firm, Goldman Sachs. The Paulson bailout transfers the troubled financial instruments that the financial sector created from the books of the financial sector to the books of the taxpayers at the US Treasury.
This is all the bailout does. It rescues the guilty.
The Paulson bailout does not address the problem, which is the defaulting home mortgages.
The defaults will continue, because the economy is sinking into recession. Homeowners are losing their jobs, and homeowners are being hit with rising mortgage payments resulting from adjustable rate mortgages and escalator interest rate clauses in their mortgages that make homeowners unable to service their debt.
Shifting the troubled assets from the financial sectors’ books to the taxpayers’ books absolves the people who caused the problem from responsibility. As the economy declines and mortgage default rates rise, the US Treasury and the American taxpayers could end up with a $700 billion loss.
Initially, the House, but not the Senate, resisted the bailout of the financial institutions,whose executives had received millions of dollars in bonuses for wrecking the US financial system. However, the people’s representatives could not withstand the specter of martial law and Great Depression with which Paulson and the Bush administration threatened them. The people’s representatives succumbed as they did during the New Deal.
The impotence of Congress traces to the Great Depression. As Theodore Lowi in his classic book, The End of Liberalism, makes clear, the New Deal stripped Congress of its law-making power and gave it to the executive agencies. Prior to the New Deal, Congress wrote the laws. After the New Deal a bill is merely an authorization for executive agencies to create the law through regulations. The Paulson bailout has further diminished the legislative branch’s power.
Since Paulson’s bailout of his firm and his financial friends does nothing to lessen the default rate on mortgages, how will the bailout play out?
If the $700 billion bailout is based on an estimate of the current amount of bad mortgages, as the recession deepens and Americans lose their jobs, the default rate will rise. The $700 billion might not suffice. The Treasury will have to go hat in hand to its foreign creditors for more loans.
As the US Treasury has not got $7, much less $700 billion, it must borrow the bailout money from foreign creditors, already overloaded with US paper. At what point do America’s foreign bankers decide that the additions to US debt exceed what can be repaid?
This question was ignored by the bailout. There were no hearings. No one consulted China, America’s principal banker, or the Japanese, or the OPEC sovereign wealth funds, or Europe.
Does the world have a blank check for America’s mistakes?
This is the same world that is faced with American demands that countries support with money and lives America’s quest for world hegemony. Europeans are dying in Afghanistan for American hegemony. Do Europeans want their banks, which hold US dollars as their reserves, to fail so that Paulson can bail out his company and his friends?
The US dollar is the world’s reserve currency. It comprises the reserves of foreign central banks. Bush’s wars and economic policies are destroying the basis of the US dollar as reserve currency. The day the dollar loses its reserve currency role, the US government cannot pay its bills in its own currency. The result will be a dramatic reduction in US living standards.
Currently Treasuries are boosted by the habitual “flight to quality,” but as Treasury debt deepens, will investors still see quality? At what point do America’s foreign creditors cease to lend? That is the point at which American power ends. It might be close at hand.
The Paulson bailout is predicated on cleaning up financial institutions’ balance sheets and restoring the flow of credit. The assumption is that once lending resumes, the economy will pick up.
This assumption is problematic. The expansion of consumer debt, which kept the economy going in the 21st century, has reached its limit. There are no more credit cards to max out, and no more home equity to refinance and spend. The Paulson bailout might restore trust among financial institutions and enable them to lend to one another, but it doesn’t provide a jolt to consumer demand.
Moreover, there may be more shoes to drop. Credit card debt could be the next to threaten balance sheets of financial institutions. Apparently, credit card debt has been securitized and sold as well, and not all of the debt is good. In addition, the leasing programs of the car manufacturers have turned sour. As a result of high gasoline prices and absence of growth in take-home pay, the residual values of big trucks and SUVs are less than the leasing programs estimated them to be, thus creating more financial problems. Car manufacturers are canceling their leasing programs, and this will further cut into sales.
According to statistician John Williams [ http://www.shadowstats.com/section/commentaries ] who measures inflation, unemployment, and GDP according to the methodology used prior to the Clinton regime’s corruption of these measures, the US unemployment rate is currently at 14.7 per cent and the inflation rate is 13.2 per cent. Consequently, real US GDP growth in the 21st century has been negative.
This is not a picture of an economy that a bailout of financial institution balance sheets will revive. As the Paulson bailout does not address the mortgage problem per se, defaults and foreclosures are likely to rise, thus undermining the Treasury’s estimate that 90 per cent of the mortgages backing the troubled instruments are good.
Moreover, one consequence of the ongoing financial crisis is financial concentration. It is not inconceivable that the US will end up with four giant banks: J.P. Morgan Chase, Citicorp, Bank of America, and Wachovia Wells Fargo. If defaulting credit card debt then assaults these banks’ balance sheets, who is there to take them over? Would the Treasury be able to borrow the money for another Paulson bailout?
During the Great Depression of the 1930s, the Home Owners’ Loan Corporation refinanced one million home mortgages in order to prevent foreclosures. The refinancing apparently succeeded, and HOLC returned a profit. The problem then, as now, was not “deadbeats” who wouldn’t pay their mortgages, and the HOLC refinancing did not discourage others from paying their mortgages. Market purists who claim the only solution is for housing prices to fall to prior levels overlook that rising inventories can push prices below prior levels, thus causing more distress. They also overlook the role of interest rates. If a worsening credit crisis dries up mortgage lending and pushes mortgage interest rates higher, the rise in interest rates could offset the fall in home prices, and mortgages would remain unaffordable even in a falling housing market.
Some commentators are blaming the current mortgage problem on the pressure that the US government put on banks to lend to unqualified borrowers. However, whatever breaches of prudence there may have been only affected the earnings of individual institutions. They did not threaten the financial system. The current crisis required more than bad loans. It required securitization and its leverage. It required Fed chairman Alan Greenspan’s inappropriate low interest rates, which created a real estate boom. Rapidly rising real estate prices quickly created home equity to justify 100 percent mortgages. Wall Street analysts pushed financial companies to improve their bottom lines, which they did by extreme leveraging.
An alternative to refinancing troubled mortgages would be to attempt to separate the bad mortgages from the good ones and revalue the mortgage-backed securities accordingly. If there are no further defaults, this approach would not require massive write-offs that threaten the solvency of financial institutions. However, if defaults continue, write-downs would be an ongoing enterprise.
Clearly, all Secretary Paulson thought about was getting troubled assets off the books of financial institutions.
The same reckless leadership that gave us expensive wars based on false premises has now concocted an expensive bailout that does not address the problem, which will fester and become worse.
Paul Craig Roberts was Assistant Secretary of the Treasury in the Reagan administration. He was Associate Editor of the Wall Street Journal editorial page and Contributing Editor of National Review. He is coauthor of The Tyranny of Good Intentions.He can be reached at: PaulCraigRoberts@yahoo.com
America has become a pretty discouraging place. Americans, for the most part, will never know what happened to them, because they no longer have a free and responsible press. They have Big Brother’s press. For example, on September 28, 2008, a New York Times editorial blamed the current financial crisis on “antiregulation disciples of the Reagan Revolution.”
What utter nonsense. Every example of deregulation that the New York Times editorial provides is located in the Clinton Administration and the George W. Bush administration. I was a member of the Reagan administration. We most certainly did not deregulate the financial system.
The repeal of the Glass-Steagall Act, which separated commercial from investment banking, was the achievement of the Democratic Clinton Administration. It happened in 1999, over a decade after Reagan left office.
It was in 2000 that derivatives and credit default swaps were excluded from regulation.
The greatest mistake was made in 2004, the year that Reagan died. That year the current Secretary of the Treasury, Henry M. Paulson Jr, was head of the investment bank Goldman Sachs. In the spring of 2004, the investment banks, led by Paulson, met with the Securities and Exchange Commission. At this meeting with the New Deal regulatory agency tasked with regulating the US financial system, Paulson convinced the SEC Commissioners to exempt the investment banks from maintaining reserves to cover losses on investments. The exemption granted by the SEC allowed the investment banks to leverage financial instruments beyond any bounds of prudence.
In place of time-proven standards of prudence, computer models engineered by hot shots determined acceptable risk. As one result Bear Stearns, for example, pushed its leverage ratio to 33 to 1. For every one dollar in equity, the investment bank had $33 of debt!
It was computer models that led to the failure of Long-Term Capital Management in 1998, the first systemic threat to the financial system. Why the SEC went along with Paulson and set aside capital requirements after the scare of Long-Term Capital Management is inexplicable.
The blame is headed toward SEC chairman Christopher Cox. This is more of Big Brother’s disinformation. Cox, like so many others, was a victim of a free market ideology, itself a reaction to over-regulation, that was boosted by academic economic opinion, rewarded with Nobel prizes, that the market “always knows best.”
The 20th century proves that the market is likely to know better than a central planning bureau. It was Soviet Communism that collapsed, not American capitalism. However, the market has to be protected from greed. It was greed, not the market, that was unleashed by deregulation during the Clinton and George W. Bush regimes.
I remember when the deregulation of the financial sector began. One of the first inroads was the legislation, written by bankers, to permit national branch banking. George Champion, former chairman of Chase Manhattan Bank, testified against it. In columns I argued that national branch banking would focus banks away from local business needs.
The deregulation of the financial sector was achieved by the Democratic Clinton Administration and by the current Secretary of the Treasury, Henry Paulson, with the acquiescence of the Securities and Exchange Commission.
The Paulson bailout saves his firm, Goldman Sachs. The Paulson bailout transfers the troubled financial instruments that the financial sector created from the books of the financial sector to the books of the taxpayers at the US Treasury.
This is all the bailout does. It rescues the guilty.
The Paulson bailout does not address the problem, which is the defaulting home mortgages.
The defaults will continue, because the economy is sinking into recession. Homeowners are losing their jobs, and homeowners are being hit with rising mortgage payments resulting from adjustable rate mortgages and escalator interest rate clauses in their mortgages that make homeowners unable to service their debt.
Shifting the troubled assets from the financial sectors’ books to the taxpayers’ books absolves the people who caused the problem from responsibility. As the economy declines and mortgage default rates rise, the US Treasury and the American taxpayers could end up with a $700 billion loss.
Initially, the House, but not the Senate, resisted the bailout of the financial institutions,whose executives had received millions of dollars in bonuses for wrecking the US financial system. However, the people’s representatives could not withstand the specter of martial law and Great Depression with which Paulson and the Bush administration threatened them. The people’s representatives succumbed as they did during the New Deal.
The impotence of Congress traces to the Great Depression. As Theodore Lowi in his classic book, The End of Liberalism, makes clear, the New Deal stripped Congress of its law-making power and gave it to the executive agencies. Prior to the New Deal, Congress wrote the laws. After the New Deal a bill is merely an authorization for executive agencies to create the law through regulations. The Paulson bailout has further diminished the legislative branch’s power.
Since Paulson’s bailout of his firm and his financial friends does nothing to lessen the default rate on mortgages, how will the bailout play out?
If the $700 billion bailout is based on an estimate of the current amount of bad mortgages, as the recession deepens and Americans lose their jobs, the default rate will rise. The $700 billion might not suffice. The Treasury will have to go hat in hand to its foreign creditors for more loans.
As the US Treasury has not got $7, much less $700 billion, it must borrow the bailout money from foreign creditors, already overloaded with US paper. At what point do America’s foreign bankers decide that the additions to US debt exceed what can be repaid?
This question was ignored by the bailout. There were no hearings. No one consulted China, America’s principal banker, or the Japanese, or the OPEC sovereign wealth funds, or Europe.
Does the world have a blank check for America’s mistakes?
This is the same world that is faced with American demands that countries support with money and lives America’s quest for world hegemony. Europeans are dying in Afghanistan for American hegemony. Do Europeans want their banks, which hold US dollars as their reserves, to fail so that Paulson can bail out his company and his friends?
The US dollar is the world’s reserve currency. It comprises the reserves of foreign central banks. Bush’s wars and economic policies are destroying the basis of the US dollar as reserve currency. The day the dollar loses its reserve currency role, the US government cannot pay its bills in its own currency. The result will be a dramatic reduction in US living standards.
Currently Treasuries are boosted by the habitual “flight to quality,” but as Treasury debt deepens, will investors still see quality? At what point do America’s foreign creditors cease to lend? That is the point at which American power ends. It might be close at hand.
The Paulson bailout is predicated on cleaning up financial institutions’ balance sheets and restoring the flow of credit. The assumption is that once lending resumes, the economy will pick up.
This assumption is problematic. The expansion of consumer debt, which kept the economy going in the 21st century, has reached its limit. There are no more credit cards to max out, and no more home equity to refinance and spend. The Paulson bailout might restore trust among financial institutions and enable them to lend to one another, but it doesn’t provide a jolt to consumer demand.
Moreover, there may be more shoes to drop. Credit card debt could be the next to threaten balance sheets of financial institutions. Apparently, credit card debt has been securitized and sold as well, and not all of the debt is good. In addition, the leasing programs of the car manufacturers have turned sour. As a result of high gasoline prices and absence of growth in take-home pay, the residual values of big trucks and SUVs are less than the leasing programs estimated them to be, thus creating more financial problems. Car manufacturers are canceling their leasing programs, and this will further cut into sales.
According to statistician John Williams [ http://www.shadowstats.com/section/commentaries ] who measures inflation, unemployment, and GDP according to the methodology used prior to the Clinton regime’s corruption of these measures, the US unemployment rate is currently at 14.7 per cent and the inflation rate is 13.2 per cent. Consequently, real US GDP growth in the 21st century has been negative.
This is not a picture of an economy that a bailout of financial institution balance sheets will revive. As the Paulson bailout does not address the mortgage problem per se, defaults and foreclosures are likely to rise, thus undermining the Treasury’s estimate that 90 per cent of the mortgages backing the troubled instruments are good.
Moreover, one consequence of the ongoing financial crisis is financial concentration. It is not inconceivable that the US will end up with four giant banks: J.P. Morgan Chase, Citicorp, Bank of America, and Wachovia Wells Fargo. If defaulting credit card debt then assaults these banks’ balance sheets, who is there to take them over? Would the Treasury be able to borrow the money for another Paulson bailout?
During the Great Depression of the 1930s, the Home Owners’ Loan Corporation refinanced one million home mortgages in order to prevent foreclosures. The refinancing apparently succeeded, and HOLC returned a profit. The problem then, as now, was not “deadbeats” who wouldn’t pay their mortgages, and the HOLC refinancing did not discourage others from paying their mortgages. Market purists who claim the only solution is for housing prices to fall to prior levels overlook that rising inventories can push prices below prior levels, thus causing more distress. They also overlook the role of interest rates. If a worsening credit crisis dries up mortgage lending and pushes mortgage interest rates higher, the rise in interest rates could offset the fall in home prices, and mortgages would remain unaffordable even in a falling housing market.
Some commentators are blaming the current mortgage problem on the pressure that the US government put on banks to lend to unqualified borrowers. However, whatever breaches of prudence there may have been only affected the earnings of individual institutions. They did not threaten the financial system. The current crisis required more than bad loans. It required securitization and its leverage. It required Fed chairman Alan Greenspan’s inappropriate low interest rates, which created a real estate boom. Rapidly rising real estate prices quickly created home equity to justify 100 percent mortgages. Wall Street analysts pushed financial companies to improve their bottom lines, which they did by extreme leveraging.
An alternative to refinancing troubled mortgages would be to attempt to separate the bad mortgages from the good ones and revalue the mortgage-backed securities accordingly. If there are no further defaults, this approach would not require massive write-offs that threaten the solvency of financial institutions. However, if defaults continue, write-downs would be an ongoing enterprise.
Clearly, all Secretary Paulson thought about was getting troubled assets off the books of financial institutions.
The same reckless leadership that gave us expensive wars based on false premises has now concocted an expensive bailout that does not address the problem, which will fester and become worse.
Paul Craig Roberts was Assistant Secretary of the Treasury in the Reagan administration. He was Associate Editor of the Wall Street Journal editorial page and Contributing Editor of National Review. He is coauthor of The Tyranny of Good Intentions.He can be reached at: PaulCraigRoberts@yahoo.com
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