Some financial crisis links (9.29.2008)

America on the road to dictatorship?

Joseph Stiglitz writes in the Nation that

To a skeptic, Paulson's [bailout] proposal looks like another of those shell games that Wall Street has honed to a fine art. Wall Street has always made money by slicing, dicing and recombining risk. This "cure" is another one of these rearrangements: somehow, by stripping out the bad assets from the banks and paying fair market value for them, the value of the banks will soar.

There is, however, an alternative explanation for Wall Street's celebration: the banks realized that they were about to get a free ride at taxpayers' expense. No private firm was willing to buy these toxic mortgages at what the seller thought was a reasonable price; they finally had found a sucker who would take them off their hands — called the American taxpayer.

Daniel Gros and Stefano Miccosi of the Financial Times observe: "…the largest European banks have become not only too big to fail, but also too big to be saved." From this point they conclude:

With banks that have outgrown their home turf, national treasuries and regulators in Europe are living on borrowed time: they cannot simply develop "road maps" (the only result of various Ecofin discussions of regulatory reform by finance ministers), but must contemplate a worst-case scenario.

To Gros and Miccosi's point, Wolfgang Münchau, also writing in the Financial Times, adds:

Banks once considered as too big to fail have become too big to save. Unlike the German government, the US administration is in a position to save its largest bank, but is not big enough to save its entire financial system.

And:

Without a contraction in the financial sector, the US administration risks a debt explosion, and a sudden withdrawal of foreign financial investors. This is the other big catastrophe looming large in the background. We are facing two big tail risks from different ends. Failing to rescue the banking system could lead to a depression. But so could a rescue if it produced macroeconomic instability [emphasis added].

Yves Smith of Naked Capitalism, the lead source for the comments above, then observes:

But in the course of his discussion, Munchau makes the observation that none have dared face up to: the financial system is too big for governments to rescue. We've given the weaker form of that argument: the US, or even the US plus all the world's central banks, cannot keep a massive, multi-market asset bubble from deflating. But not only can the current financial system be saved, it shouldn't be saved. The debt binge means it is at an unsupportable, bloated scale. It needs to be scaled down to a more viable size, and only that level should get government support [emphasis added].

As reported by the Financial Times, Peer Steinbrück, the German Finance Minister, told the German Parliament that

"The US will lose its status as the superpower of the world financial system. This world will become multipolar" with the emergence of stronger, better capitalised centres in Asia and Europe…. "The world will never be the same again."

And:

"When we look back 10 years from now, we will see 2008 as a fundamental rupture. I am not saying the dollar will lose its reserve currency status, but it will become relative."

John Gray also does not mince words in his assessment of America's predicament. He points out that

Our gaze might be on the markets melting down, but the upheaval we are experiencing is more than a financial crisis, however large. Here is a historic geopolitical shift, in which the balance of power in the world is being altered irrevocably. The era of American global leadership, reaching back to the Second World War, is over.

You can see it in the way America's dominion has slipped away in its own backyard, with Venezuelan President Hugo Chávez taunting and ridiculing the superpower with impunity. Yet the setback of America's standing at the global level is even more striking. With the nationalisation of crucial parts of the financial system, the American free-market creed has self-destructed while countries that retained overall control of markets have been vindicated. In a change as far-reaching in its implications as the fall of the Soviet Union, an entire model of government and the economy has collapsed [emphasis added].

Unfortunately, for those of us who must live with the consequences of the plan, which is to say, of the political response to the financial crisis, the "creed" in question is likely to survive in some form. In America, Market fundamentalist talk has long coexisted with the remnants of the New Deal State. Economic conservatives made their peace with the New Deal order during Reagan's time. We know, then, that such talk does not need a solid basis in reality to be effective as an ideology. Consequently there is no compelling reason to believe that Americans will completely jettison market fundamentalism because America's finance capitalists have taken a few blows. One possibility has the crisis affirming market fundamentalism because it would serve to legitimize state repression of dissent.

The Chilean option — liberal dictatorship, military or otherwise — stands before America as one 'attractive method' to conserve market fundamentalism as an ideology and a practice.

Floyd Norris of the New York Times reports that the Secretary of the Treasury will gain significant powers because of the bailout legislation.