Has Deregulation Sired Fascism?
By Paul Craig Roberts
24/09/08 "ICH" -- - -- Remember the good old days when the
economic threat was mere recession? The Federal Reserve would
encourage the economy with low interest rates until the economy
overheated. Prices would rise, and unions would strike for
higher benefits. Then the Fed would put on the brakes by raising
interest rates. Money supply growth would fall. Inventories
would grow, and layoffs would result. When the economy cooled
down, the cycle would start over.
The nice thing about 20th century recessions was that the jobs
returned when the Federal Reserve lowered interest rates and
consumer demand increased. In the 21st century, the jobs that
have been moved offshore do not come back. More than three
million U.S. manufacturing jobs have been lost while Bush was in
the White House. Those jobs represent consumer income and career
opportunities that America will never see again.
In the 21st century the US economy has produced net new jobs
only in low paid domestic services, such as waitresses,
bartenders, hospital orderlies, and retail clerks. The kind of
jobs that provided ladders of upward mobility into the middle
class are being exported abroad or filled by foreigners brought
in on work visas. Today when you purchase an American name
brand, you are supporting economic growth and consumer incomes
in China and Indonesia, not in Detroit and Cincinnati.
In the 20th century, economic growth resulted from improved
technologies, new investment, and increases in labor
productivity, which raised consumers’ incomes and purchasing
power. In contrast, in the 21st century, economic growth has
resulted from debt expansion.
Most Americans have experienced little, if any, income growth in
the 21st century. Instead, consumers have kept the economy going
by maxing out their credit cards and refinancing their mortgages
in order to consume the equity in their homes.
The income gains of the 21st century have gone to corporate
chief executives, shareholders of offshoring corporations, and
By replacing $20 an hour U.S. labor with $1 an hour Chinese
labor, the profits of U.S. offshoring corporations have boomed,
thus driving up share prices and “performance” bonuses for
corporate CEOs. With Bush/Cheney, the Republicans have
resurrected their policy of favoring the rich over the poor.
John McCain captured today’s high income class with his quip
that you are middle class if you have an annual income less than
Financial companies have made enormous profits by securitizing
income flows from unknown risks and selling asset backed
securities to pension funds and investors at home and abroad.
Today recession is only a small part of the threat that we face.
Financial deregulation, Alan Greenspan’s low interest rates, and
the belief that the market was the best regulator of risks, have
created a highly leveraged pyramid of risk without adequate
capital or collateral to back the risk. Consequently, a wide
variety of financial institutions are threatened with
insolvency, threatening a collapse comparable to the bank
failures that shrank the supply of money and credit and produced
the Great Depression.
Washington has been slow to recognize the current problem. A
millstone around the neck of every financial institution is the
mark-to-market rule, an ill-advised “reform” from a previous
crisis that was blamed on fraudulent accounting that over-valued
assets on the books. As a result, today institutions have to
value their assets at current market value.
In the current crisis the rule has turned out to be a curse.
Asset backed securities, such as collateralized mortgage
obligations, faced their first market pricing in panicked
circumstances. The owner of a bond backed by 1,000 mortgages
doesn’t know how many of the mortgages are good and how many are
bad. The uncertainty erodes the value of the bond.
If significant amounts of such untested securities are on the
balance sheet, insolvency rears its ugly head. The bonds get
dumped in order to realize some part of their value. Merrill
Lynch sold its asset backed securities for twenty cents on the
dollar, although it is
unlikely that 80 percent of the instruments were worthless.
The mark to market rule, together with the suspect values of the
asset backed securities and collateral debt obligations and
swaps, allowed short sellers to make fortunes by driving down
the share prices of the investment banks, thus worsening the
crisis. With their capitalization shrinking, the investment
banks could no longer borrow. The authorities took their time in
halting short-selling, and short-selling is set to resume on
October 3 or thereabout.
If the mark to market rule had been suspended and short-selling
prohibited, the crisis would have been mitigated. Instead, the
crisis intensified, provoking the US Treasury to propose to take
responsibility for $700 billion more in troubled financial
instruments in addition to the Fannie Mae, Freddie Mac, and AIG
bailouts. Treasury guarantees are also apparently being extended
to money market funds.
All of this makes sense at a certain level. But what if the $700
billion doesn’t stem the tide and another $700 billion is
needed? At what point does the Treasury’s assumption of
liabilities erode its own credit standing?
This crisis comes at the worst possible time. Gratuitous wars
and military spending in pursuit of US world hegemony have
inflated the federal budget deficit, which recession is further
enlarging. Massive trade deficits, magnified by the offshoring
of goods and services, cannot be eliminated by US export
These large deficits are financed by foreigners, and foreign
unease has resulted in a decline in the US dollar’s value
compared to other tradable currencies, precious metals, and oil.
The US Treasury does not have $700 billion on hand with which to
buy the troubled assets from the troubled institutions. The
Treasury will have to borrow the $700 billion from abroad.
The dependency of Treasury Secretary Paulson’s bailout scheme on
foreign willingness to absorb more Treasury paper in order that
the Treasury has the money to bail out the troubled institutions
is heavy proof that the US is in a financially dependent
position that is inconsistent with that of America’s
The US is not a superpower. The US is a financially dependent
country that foreign lenders can close down at will.
Washington still hasn’t learned this. American hubris can lead
the administration and Congress into a bailout solution that the
rest of the world, which has to finance it, might not accept.
Currently, the fight between the administration and Congress
over the bailout is whether the bailout will include the
Democrats’ poor constituencies as well as the Republicans’ rich
ones. The Republicans, for the most part, and their media shills
are doing their best to exclude the ordinary American from the
A less appreciated feature of Paulson’s bailout plan is his
demand for freedom from accountability. Congress balked at
Paulson’s demand that the executive branch’s conduct of the
bailout be non-reviewable by Congress or the courts: “Decisions
by the Secretary pursuant to the authority of this Act are
non-reviewable and committed to agency discretion.” However,
Congress substituted for its own authority a “board” that
possibly will consist of the bailed out parties, by which I mean
Republican and Democratic constituencies. The control over the
financial system that the bailout would give to the executive
branch would mean, in effect, state capitalism or fascism.
If we add state capitalism to the Bush administration’s success
in eroding both the US Constitution and the power of Congress,
we may be witnessing the final death of accountable
The US might also be on the verge of a decision by foreign
lenders to cease financing a country that claims to be a
hegemonic power with the right and the virtue to impose its will
on the rest of the world. The US is able to be at war in Iraq
and Afghanistan and is able to pick fights with Iran, Pakistan
and Russia, because the Chinese, the Japanese and the sovereign
wealth funds of the oil kingdoms finance America’s wars and
military budgets. Aside from nuclear weapons, which are also in
the hands of other countries, the US has no assets of its own
with which to pursue its control over the world.
The US cannot be a hegemonic power without foreign financing.
All indications are that the rest of the world is tiring of US
If the US Treasury’s assumption of bailout responsibilities
becomes excessive, the US dollar will lose its reserve currency
role. The minute that occurs, foreign financing of America’s
twin deficits will cease, as will the bailout. The US government
would have to turn to the printing of paper money as did Weimar
For now this pending problem is hidden from view, because in
times of panic, the tradition is to flee into “safety,” that is,
into US Treasury debt obligations. The safety of Treasuries will
be revealed by the extent of the bailout.
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:
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