The Great American fraud

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The Great American fraud

Postby meteorite » Sun Aug 14, 2011 3:41 pm

The current market collapse, downgrading of the United States credit rating, and weak recovery from the economic tailspin of the last three years have generated a perverse, right-wing trend in particularly American politics, but that is oozing over the border into Canada as well.

A number of analysts an commentators are beginning to pick up on this movement and its background, with a representative sample making their way into the pages of the Toronto Star. Here is what a couple of them have had to say:

Apocalyptic crisis budgeting

August 12, 2011

Edmund Pries

The headlines have been apocalyptic and relentless. Unless the U.S. cuts trillions in social spending, it will go bankrupt. Unless Canada cuts billions in federal spending, our economy will go bust. Unless Toronto cuts more than $700 million in program spending, the city will collapse. We live in an age of apocalyptic crisis budgeting. Unless the most drastic social spending cuts are implemented, the world as we know it will sink into the quicksand of debt, never to reappear again. How could this happen?

During the Reagan era, a friend and former colleague, a professor of American history, was invited to the deliberations of a Washington think-tank that provided policy direction for the Republican Party. As they discussed growing the debt and increasing the deficit, he was flabbergasted: “Are you not the party of balanced budgets and debt elimination?” The reply was unequivocal, “Our goal is to grow the deficit as much as possible in order to create political space to eliminate government-funded programming. Until then, we want high deficits while lobbying for a balanced budget — and promoting social program cuts as the only solution.”

To create this useful deficit, tax cuts to wealthy individuals and corporate sectors would be dramatically increased, especially to the banking, energy and military segments. In short, one would implement a transfer of the state’s revenue supply obligations from the wealthiest to the poor and middle classes in order to permit an even greater transfer of wealth from the middle classes to the rich thereafter.

The only trick was to convince the poor and middle classes to “buy in” via a mixture of patriotism and structural necessity so that they would vote in favour of cutting the very programs that benefitted them.

Canadians have had front row seats to observe this structural engineering over the past two decades. After years of sky-high deficits, Bill Clinton’s Democrats balanced the budget and produced a surplus. Then George W. Bush granted tax relief for the wealthiest and went to war in Afghanistan and Iraq to create the largest deficit in American history. As Bush exited from office and Obama entered, trillions of dollars were transferred by the government (funded mostly by middle-class Americans) to the banks. As a thank you, the banks foreclosed on the homes of more people than at any other time in history. The recent debt ceiling settlement follows the pattern as additional social spending cuts are implemented without cancelling Bush’s tax cuts to the very rich.

Like Clinton in the U.S., the federal Liberals left office with a budgetary surplus. The Conservatives created the largest deficit in Canadian history and, unbelievably, ran an election campaign on financial management savvy! Of course, they created the deficit in part by implementing tax cuts and engaging in discretionary spending designed to produce the deficit which, we are told, now needs to be eliminated by cutting programs.

The same approach has now come to Toronto and is being mimicked by Rob Ford. He, too, was left a surplus by his predecessor. Nevertheless, the agenda marches on. First, create the crisis by reducing the revenue base through tax cuts and then take the budget knife to Toronto’s city-wide programs. Instead of articulating a vision for building a great city, it is simply a slash and burn approach to a manufactured crisis.

Some have pretended that the budgetary crisis is real and not manufactured. Let us be clear: our relative wealth is greater than at any time in our history. Our collective ability to build a strong, caring and inclusive society in which everyone can participate has never been greater. This also holds true for the community of nations: we have the capacity to build a just global society.

Our preparedness to do so, however, seems utterly lacking, for an extreme individualism has taken over the mindset of many. We believe, falsely, that we are best served by hoarding as many resources as possible and letting others fend for themselves. The opposite is true. We are best served when we build a society together where all, including each reader of this article, can benefit through the building of community-wide programs.

In many 16th century European cities, each citizen was required to swear an annual citizenship oath to the city (or community) in which they resided. In it citizens affirmed, among other things, their commitment to “support the well-being of their neighbour” and “promote the common good.” Toronto’s early history as a community, like Canada’s as a country, speaks of similar goals and aspirations.

Have we really lost our sense of the common good? Or is each person now on his or her own? There is no apocalyptic budgetary crisis other than of our own making. The crisis is in our orientation.

Edmund Pries teaches in the department of global studies at Wilfrid Laurier University. The University is located in Waterloo, Ontario and is an expansion of the former Waterloo Lutheran University.

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Some have a very different take on both the causes and cures appropriate to the current economic turmoil:


Recession Redux: Time for an Economic Overhaul

August 14, 2011

Stephen Bede Scharper

“Make a billion, lose a billion.”

This was the wry comment of a boyhood friend, a Wall Street hedge fund manager, shortly after the 2008 financial collapse. I thought he was joking.

Yet after learning that the top 25 hedge fund managers in the U.S. last year enjoyed an average take home pay of $880 million (U.S.), I realized it was no joke. (And their 15 per cent tax rate loophole continues.)

As markets bounce like superballs in light of the United States’ loss of its triple-A credit rating in the eyes of Standard and Poor’s, and speculation grows that France, the second-largest economy in the Euro-zone, may suffer a similar credit rating downgrade as their banks deal with the financial firestorms of Greece, Ireland, Portugal, Italy and Spain, fears of a second global financial meltdown have whipsawed the financial world.

To quote former Yankees catcher Yogi Berra, it seems like “déjà vu all over again” in the global economic scene.

Yet this current financial debacle is happening after trillions of dollars of government bailouts were handed to banks and corporations.

But a funny thing happened on the way to a massive corporate welfare moment. Instead of reinvesting in jobs, manufacturing, and new enterprises in the nations that saved their pork bellies from the financial frying pan, many of the largest and most profitable U.S. corporations are sitting atop nearly $2 trillion in cash, refusing to invest in the economic life of the people who threw them a lifeline.

As the Globe and Mail’s Greg Keenan reports, General Motors, a recipient of $5.8 billion (U.S.) in U.S. and Canadian government bailouts, while recently adding 2,000 jobs to North America, is most interested in preserving its “fortress balance sheets.” This means that, while it plans to increase vehicle production capacity by 45 per cent over the next four years, those jobs and new plants will be located, not in Oshawa or Detroit, but in Brazil, Russia, India and China. As for a rationale, GM noted that Canada and the United States are “high-cost manufacturing countries.”

Since the ascendancy of Margaret Thatcher in Britain and the election of Ronald Reagan in 1980, we have been subjected to the “surround-sound” theme music of a new global economy. We were immersed in the worldview that free-trade in North America and Europe would spur economic growth, decrease unemployment, lower the price of goods and services, and lead to a prosperous future for all.

The overarching idea was if you simply removed the fetters of big government, gave tax breaks to the wealthiest sectors of society, and allowed market forces to gallop freely across the land, we would become “competitive in the global marketplace.” The ensuing economic activity would “raise all boats.” Tragically, such measures have served chiefly to “raise all yachts,” as the growing gap between rich and poor in North America and Europe demonstrates.

As McGill economist Thomas Naylor notes in his new book, Crass Struggle: Greed, Glitz, and Gluttony in a Wanna-Have World, governments have increasingly become “a creature of the corporate sector.”

“The social contract,” Naylor argues, “is being rewritten.” It’s now a compact between “government and corporate barons.”

Economics, after all, is a social science, not a form of alchemy. As celebrated environmentalist David Suzuki observes in the recent, compelling documentary, Force of Nature, we often refer to “the market” as some arcane, mysterious behemoth, which has to be appeased and stimulated by financial “wizards” who use the pecuniary equivalents of the reading of tea leaves, incense burning and virgin sacrifice to assuage its mercurial moods.

As a social construction, our economy can and must be radically altered. It is clear that the neo-liberal paradigm, with its tax breaks and financial bailouts for the most affluent, is failing not only our societies, but our ecosystems as well. As the chaos of climate change reveals, from rising sea levels, coral reef depletion, massive droughts, and the creation of millions of climate refugees, our current economic system does not simply need fine-tuning, it needs a serious and sustained overhaul.

“Competitive in the global marketplace?” It’s time to be compassionate, socially just, and ecologically responsible in the “global village.”

It is, after all, no joking matter.

Stephen Bede Scharper, a Senior Fellow at Massey College, teaches environmental studies at the University of Toronto. His column appears monthly. His email is StephenScharper@utoronto.ca. Massey College is an elite graduate studies institution within the structure of the University of Toronto.

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While the problem seems to be a crisis, and the planned cures draconian - for the working stiff at least - there are a few dissenters who seem to feel that just maybe the challenge isn't quite as drastic as it seems - in fact at least one contrarian is quite sanguine about it all. Though how far will the facts go in suppressing a popular delusion?

Don’t panic — it isn’t 2008

August 11, 2011

Peter Morici

At times of peril, when all around are panicking, the person who stays calm can see the facts, act prudently and not merely survive but prosper. No doubt readers have heard that before, but this is a good time to remember it.

The markets are behaving like it is 2008 again, but it simply is not.

The current situation does bare some considerable resemblance in two important ways. A recession is threatened by anemic growth and a fundamental imbalance in demand between Asia and the West — caused by aggressive exchange rate misalignments a U.S. president and European leaders understand but lack the courage to confront.

And, a huge debt overhang — this time sovereign debt in Europe, not private mortgages — threatens the viability of critical financial institutions. European banks hold huge amounts of Italian, Spanish, Portuguese, Greek and other European government bonds.

With the bond market pressuring Italy and restive about France, it is easy, but wrong, to imagine that Greece is Bear Stearns, Italy is Lehman Brothers and France potentially the next AIG. It is simply not the same.

In 2008, the problem was a massive overhang of poorly understood, faulty mortgage backed securities created and insured by U.S. financial institutions with virtually no reliable collateral. This time the principle debtors are sovereigns with the capacity to tax and restructure debt — if necessary by fiat. Those governments’ problems are straightforward and understood, and enjoy the implicit guarantee of the European Central Bank.

Already, the European Central Bank is purchasing the sovereign debt of the Mediterranean states and Portugal, and it will purchase more debt as necessary to supplement fiscal reform to ensure solvency. The European Central Bank may not like it, but like the Fed, it is only as independent as its creators — the sovereigns — will permit.

As an economist, I am fully aware of the consequences for moral hazard and long-term growth of socializing bank losses. Too much harm has already been done on this side of the pond by the bailout of GM, Chrysler and the Wall Street banks, and what the European Central Bank will likely be compelled to do — buy bonds that it may never fully pay off — only compounds those harms.

In the near term, 2011 differs from 2008 in that Rome, Lisbon and other profligate governments have access to the European Central Bank printing press in a way that the above-mentioned private firms did not to the Fed’s money-making machine, at least not until it was too late.

Inflation is less of a concern — bonds function as near money — and the European Central Bank is merely swapping one form of liquidity for another on the books of the bank. Also, the iron rule that money causes inflation most applies when economies are at least near full employment — none of that is around at the moment. Austerity in the United States and Europe ensures underemployment of resources will persist.

In the West, democracy has gone too far — the majority consistently votes for politicians who promise more than societies are producing and borrow against the future in irresponsible ways. The most irresponsible among us, under the banner of disadvantage and social justice, threaten civil collapse when disappointed — the riots in England are not a new phenomenon. Remember Watts, and just try to raise tuition in France.

Social Democrats on both sides of the pond have turned social responsibility through government into absolute fiscal irresponsibility.

Now as we unwind it all — bad private mortgages and bonds governments can’t honour — the West is headed for another long period of slow growth. No longer will debt permit the West to churn paper and live high on Asia’s productivity.

The West will have to accept a diminished place in the world for not limiting the powers of its banks and politicians to do too many foolish things, at the consent (demands) of the governed.

This said, markets are behaving irrationally — global financial markets are not headed for a second meltdown. But growth is going to be slow until western leaders correct the imbalance in demand between Asia and the West, and work off all the debt. Still, 2011 is simply not 2008.

Peter Morici is a professor at the Smith School of Business, University of Maryland School, and former chief economist at the U.S. International Trade Commission.
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