William Greider writes: Financial-market wise guys, who had been seized with fear, are suddenly
drunk with hope. They are rallying explosively because they think they
have successfully stampeded Washington into accepting the Wall Street
Journal solution to the crisis: dump it all on the taxpayers. That
is the meaning of the massive bailout Treasury Secretary Henry Paulson
has shopped around Congress. It would relieve the major banks and
investment firms of their mountainous rotten assets and make the public
swallow their losses–many hundreds of billions, maybe much more. What’s
not to like if you are a financial titan threatened with extinction?

If Wall Street gets away with this, it will represent an historic
swindle of the American public–all sugar for the villains, lasting pain
and damage for the victims. My advice to Washington politicians: Stop,
take a deep breath and examine what you are being told to do by
so-called “responsible opinion.” If this deal succeeds, I predict it
will become a transforming event in American politics–exposing the deep
deformities in our democracy and launching a tidal wave of righteous
anger and popular rebellion. As I have been saying for several months,
this crisis has the potential to bring down one or both political
parties, take your choice.

Christopher Whalen of Institutional Risk Analytics, a brave conservative
critic, put it plainly: “The joyous reception from Congressional
Democrats to Paulson’s latest massive bailout proposal smells an awful
lot like yet another corporatist lovefest between Washington’s one-party
government and the Sell Side investment banks.”

A kindred critic, Josh Rosner of Graham Fisher in New York, defined the
sponsors of this stampede to action: “Let us be clear, it is not citizen
groups, private investors, equity investors or institutional investors
broadly who are calling for this government purchase fund. It is almost
exclusively being lobbied for by precisely those institutions that
believed they were ’smarter than the rest of us,’ institutions who need
to get those assets off their balance sheet at an inflated value lest
they be at risk of large losses or worse.”

Let me be clear. The scandal is not that government is acting. The
scandal is that government is not acting forcefully enough–using its
ultimate emergency powers to take full control of the financial system
and impose order on banks, firms and markets. Stop the music, so to
speak, instead of allowing individual financiers and traders to take
opportunistic moves to save themselves at the expense of the system. The
step-by-step rescues that the Federal Reserve and Treasury have executed
to date have failed utterly to reverse the flight of investors and banks
worldwide from lending or buying in doubtful times. There is no obvious
reason to assume this bailout proposal will change their minds, though
it will certainly feel good to the financial houses that get to dump
their bad paper on the government.

A serious intervention in which Washington takes charge would, first,
require a new central authority to supervise the financial institutions
and compel them to support the government’s actions to stabilize the
system. Government can apply killer leverage to the financial
players: accept our objectives and follow our instructions or you are
left on your own–cut off from government lending spigots and ineligible
for any direct assistance. If they decline to cooperate, the money guys
are stuck with their own mess. If they resist the government’s orders to
keep lending to the real economy of producers and consumers, banks and
brokers will be effectively isolated, therefore doomed.

Only with these conditions, and some others, should the federal
government be willing to take ownership–temporarily–of the rotten
financial assets that are dragging down funds, banks and brokerages. (09/20/08)
more…

Joseph S. Nye Jr. writes: Like it or not, we need Tom Friedman.

The peripatetic
columnist has made himself a major interpreter of the confusing world
we inhabit. He travels to the farthest reaches, interviews everyone
from peasants to chief executives and expresses big ideas in clear and
memorable prose. While pettifogging academics (a select few of whom he
favors) complain that his catchy phrases and anecdotes sometimes
obscure deeper analysis, by and large Friedman gets the big issues
right.

Almost a decade ago, in The Lexus and the Olive Tree, he celebrated the arrival of “globalization.” Three years ago, in The World is Flat,
he warned that borders, oceans and distance no longer protect us from
the information revolution that is leveling the global economic playing
field and relocating our jobs. Now he updates and expands this
diagnosis by showing how population growth, climate change and the
expansion of the world’s middle class are producing a planet that is
“hot, flat, and crowded.” Unchecked, these trends will produce
dangerous instability; but Friedman remains guardedly optimistic that
we can stave off this nightmare, particularly if the United States
changes its wasteful energy habits. In this important book, Friedman
says we can survive, even prosper, by going green.

Of course,
rousing a full-bellied nation, groggy from decades of energy
overconsumption, is no small task. As the current election debate
reminds us, the United States has proven inept at developing a serious
energy strategy. Our approach, says one expert quoted by Friedman, is
“the sum of all lobbies”; we have energy politics rather than energy
policy. In the aftermath of 9/11, George W. Bush
ignored calls by Friedman and others for a “USA Patriot Tax” of $1 per
gallon on gasoline. Instead, the president offered tax cuts and urged
us to shop. Rather than stimulating the economy to move toward
fuel-efficient vehicles and renewable energy, we became more dependent
on China to finance our deficit and Saudi Arabia to fill our gas tanks.
Americans wound up paying even more for gas in 2008, but we enabled OPEC
to be the tax collector instead of using the revenues ourselves.
Friedman calls this a “No Mullah Left Behind” policy and quotes former CIA director Jim Woolsey: “We are funding the rope for the hanging of ourselves.”

Friedman
believes we need to become “green hawks,” turning conservation and
cleaner energy into a winning strategy in many different arenas,
including the military. (”Nothing,” he writes, “will make you a
believer in distributed solar power faster than having responsibility
for trucking fuel across Iraq.”) We should stop defining our current
era as “post-Cold War,” he says, and see it as an “Energy-Climate Era”marked by five major problems: growing demand for scarcer supplies,
massive transfer of wealth to petrodictators, disruptive climate
change, poor have-nots falling behind, and an accelerating loss of
bio-diversity. A green strategy is not simply about generating electric
power, it is a new way of generating national power. (09/20/08)
more…

William Greider writes: For the first time in this unfolding financial crisis, I felt personally
scared by the news. Not about my money, but about the potential for
catastrophe. The Federal Reserve’s
lightning rescue of AIG has the smell of systemic fear. The house of
global finance is on fire and everyone is running for the exits, no sure
way to turn them around. What’s next? The question itself is ominous,
because there are no good answers.

Government is much better equipped this time with various safeguards to
defend the system against an implosion–including Fed Chairman Ben
Bernanke’s personal willingness to act swiftly with unorthodox measures.
But the case of AIG suggests the present unwinding has a malignant
dynamic to it that might even overwhelm the authorities’ capacity to put
out fires. That’s scary. I hope I’m wrong.

The US central bank and other nations acted with speed, and good that
they did–an emergency loan of $85 billion to prop up the failing
insurance giant, plus another $75 billion in liquidity pumped into the
banking system to calm nervous bankers worldwide who abruptly stopped
lending. The international rate for overnight lending among banks has
doubled, an expression of fear that describes the potential danger of a
sudden freeze in lending, more or less everywhere. That would deliver a
deep shock to real economic activity, not just in the United States but
worldwide. This feels ominously parallel to the financial chaos that
followed the crash of 1929 and led to global economic collapse.

The reason the Fed was compelled to save an American insurance company
in order to save the global financial system goes to the source of the
rot–the “new financial architecture” developed during the last
generation. These innovations allowed banking and finance to expand
their leverage explosively, borrowing and lending far beyond the
traditional limits defined as prudent risk-taking. One gimmick that
supposedly made this okay was the creation of esoteric insurance
derivatives–the so-called “credit default swaps” that supposedly
protected investors and firms against losses in mortgage securities and
other debt paper.

Critics repeatedly warned that these derivatives were a time
bomb–trillions of dollars in risk insurance that would be exposed as
meaningless if financial markets ever experienced a sharp fall in asset
values. Politicians and regulators from both parties brushed aside the
critics and led cheers for Wall Street’s fancy new ways of guaranteeing
risk.

AIG sold those guarantees in huge volume. It assumed potential
liabilities far beyond the firm’s capacity to make good on the deals if
something went terribly wrong. The problem is global because AIG–an
imperious promoter of globalized finance–sold this rotten paper all
around the world to big investors and leading banks. If AIG is suddenly
insolvent, the pain and loss are spread instantly to thousands of
balance sheets in Asia and Europe–banks and corporations that must
suddenly write down their own assets. That’s why the Fed could not wait
to find out what would happen if AIG was allowed to fail. (09/20/08)
more…