Subject : ON THE POLITICS OF POVERTY AND THE POVERTY OF POLITICS.


22 October 2006
Grenoble, France

Dear Colleagues and Friends of CEIMSA,
In the 1960s the French term "fumiste" was used to designate someone who used rhetoric devoid of meaning, simply for purposes of obfuscation, mystification, and/or domination. "Hot air" the Americans call the flood of rhetoric required to silence the other, and African Americans referred to the same tactic as  "blowing smoke in your face". The mass media contributed long ago to the genesis of a wide distribution of verbal skills, which in turn gave birth to new games -like for example "the dirty dozens"- political games which are played in one form or another at every level of society. Rudyard Kipling's "silent, sullen masses" have disappeared forever, and legitimate demands for new negotiations keep reappearing on the table, to redress old grievances and to facilitate new strategies. The former imperialist powers, along with Israel, must come into the 21st Century.

Anthropologists have described strategies of warfare invented by primitive tribes (and presumably also by our ancestors long ago) whereby the entire village would line up facing the members of their enemy village, who were lined up in a similar formation. By previous agreement, each of the two chiefs would select one of his own tribal members and kill him right there, in front of everyone. The war was over when one of the chiefs lost his nerve and refused to kill another member of his own tribe whose value to the tribe was equal to the one killed in his enemy's tribe. This ritual competition in tribal suicide institutionalized individual collaboration with self-destruction as a method of gaining political advantage for the group. As "barbaric" as it may appear to be, this system actually served to preserve lives by avoiding a more general violence that might have led to the mass destruction of entire tribes involved in hostilities.

Just as William Jefferson Clinton (known by everyone in the world as "Bill") and Marie Jana Korbelová (later known as Madeline Albright) are responsible for many, many more deaths in Iraq than are George W. Bush and Condoleezza Rice, so tribal leaders, for hundres-of-thousands of years, have been constrained by the system in which they found themselves. Without understanding the context of violence, we can understand nothing about the nature of war, and consequently it is no wonder that we find ourselves powerless to end it, much less to prevent it.


Our research center continues to receive much information about the highly visible culture of violence today in America and abroad. We encourage readers to visit the international news broadcast, Democracy Now! for the most radical reports on current events in the U.S. and abroad, which include a remarkable interview last Friday, 20 October, with American Pacifist leader, Staughton Lynd.

Below, please find 6 items which we wish to share with readers concerned with nascent formations of democratic structures within the United States and with new forms of resistance to institutionalized violence, big and small. . . .


Item A. is an article sent to us by Professor Richard Wolf on poverty and labor exploitation in the United States.
Item B., from Professor James Cohn, is a forecast for the coming carnival of electoral politics in the United States.
Item C. is a message from Graduate Student Frédéric Méni about the recording of the campus radio interview at the University of Grenoble with Professor Francis Feeley speaking on "La guerre en Irak" in February 2003.
Item D. is an article by Professor Gabriel Kolko, on capitalist fantasies and the real destruction of the global market place by their relentless search for private profits.
Item E. is a reminder by Professor Michael Klare of the historic capriciousness of "declining empires" and their lessons from mass destruction.
Finally, item F. is a recent article from the Guardian UK on the "desperate search" for an EXIT STRATEGY from Iraq.

And, as usual, we share with you the current newsletter sent to us by author William Blum: http://members.aol.com/bblum6/aer38.htm.



Sincerely,
Francis McCollum Feeley
Professor of American Studies
Dircector of Research
Université Stendhal Grenoble 3
http://www.ceimsa.org/


_________________
A.
from Richard Wolff :
18 Octoberr 2006
http://69.16.243.137/~rethinki/conferences/2006/

Dear Francis FEELEY,
This recent piece from our website (www.globalmacroscope.com) may be of interest to you and your communicants.
Rick Wolff
 
 
The minimum wage is extraordinarily low in the US. Some 15 million persons now toil for $5.15 per hour or $206 per forty-hour week before tax and other deductions. Congress set that minimum in September, 1997, and has frozen it there despite a 26 per cent rise in the cost of living since then. As an economist this makes clear the following difficult truth; either it was much too high then, or it is much to low now! One of these statements must be true. Given the paucity of basics this wage can purchase, it is safe to conclude that the low now thesis is more likely than the high then explanation. 
 
There are important political lessons to be learned from the frozen minimal wage. Minimum wages in Britain, France and throughout the industrial world are much higher than in the US and are scheduled to increase. Workers in those countries relate differently to politics. The British and French minimum wages reflect their workers’ political consciousness, militancy, and mobilization. Our lower wages reflect greater reliance on debt, belief in greater future possibility, general political apathy and lack of participation.
 
The battles over the minimum wage, there and here, have always been political. Employees (not all but most) want higher minimum wages and employers (not all but most) don’t. Unlike what happened in Britain (under mostly a Labor government) and France (under mostly a conservative government), in the US across the last decade, employers won, while labor lost. The losses partly reflected the broad political shifts to the right in the US (yet Britain experienced that too) and partly emerged from effective business lobbying. However, at least as important was the failed political strategy of US labor and its allies. They focused far too much on producing and publicizing “proofs” that the benefits of a higher minimum wage outweighed costs. American Labor apparently could not grasp that arguments claiming to know (to have “measured”) the benefits and costs of higher or lower minimum wages are illusions no matter which side makes them; they are self-satisfied hot air pretending to be “scientific truth.” Not only, as we shall show, can cost-benefit analyses not deliver on the promises their performers make, they never have, and the public is by now very skeptical of them.

Low minimum wages no doubt impose costs on society including recipients’ and families’ (1) increased probability of physical and mental deterioration (2) low investments in education and training, (3) damages from living in unclean or unsafe neighborhoods, (4) damages from dependence on public transportation, public emergency room healthcare, and public welfare, unemployment, and family support services, (6) costs from poor job benefits  (pensions, medical leave allowances, medical insurance, etc.), and so on. Many of the above problems associated with poverty burden federal, state and local agencies and budgets. Raising the minimum wage would likely include reductions in the above listed costs plus enhanced consumption, self-esteem, and community standing for15 million Americans. Not surprisingly, labor advocates identify the costs of a higher minimum wage in their selective way, count them differently, and so reach the self-congratulatory conclusion that its costs are decisively outweighed by its benefits.
Business advocates basically reverse the argument. The costs and benefits they selectively identify and how they count them “proves” that the costs of raising the minimum wage outweigh its benefits. Opponents of minimum wage hikes argue, for example, that employers will fire workers rather than pay higher minimum wages, and that the resulting unemployment will increase social costs. Enterprise and its representatives also suggest that raising the minimum wage will contribute to inflation and thus trigger inflation’s many negatives. The lead argument these days revolves around affordable labor as a bulwark against loss of jobs to offshore locations that beckon with much lower wage rates. Some firms do support lifting minimum wages; notably Wal-Mart recently voiced support for an increase. This is the exception rather than the rule.
 
Predictably, the cost-benefit calculations of the two sides clash. Does this really matter much? Are the resources used to make and disseminate such calculations effective in the political battle over the minimum wage? Was it the best possible strategy for labor or business and their allies to focus on such calculations? Does the more successful business lobby count on the scientific vigor of its cost benefit analysis? No. All any cost-benefit study ever did was select and count some of them. And differently motivated cost-benefit studies identify and count costs and benefits differently.
 
Anything shown to be a consequence of raising the minimum wage is easily shown to be a consequence as well of other factors. For example, when better health follows a rise in the minimum wage, the latter cannot be assumed to be the sole cause. Many other factors – known and unknown, present and past – also play their roles. It is no more feasible to identify and measure all the consequences of a changed minimum wage than it is feasible to identify and measure all the factors that combine to produce any of those consequences. Claims to have made such comprehensive identifications and measurements do not deserve to be taken seriously, no matter who offers them nor how assuredly they are advertised.
 
Such claims are taken ever less seriously in the political battles over the minimum wage. True, each side performs its partisan calculations of differently selected costs and benefits to reach their opposite conclusions. Each side appeals to public opinion and to Congress which sets the minimum wage. But what decides the success of opposing appeals is not either side’s calculations and proofs. Those are, after all, complex and not comparable; they vary depending on many assumptions made differently by each calculator. Each side finds and exposes flaws in the other’s argument; each side repairs such flaws. The endless changes and intricacies quickly spin beyond public or politician interest.
 
What does matter in US politics is which side commits the greater resources to persuade, promote, and dazzle its audiences and to demonize its opponent. It’s not either side’s calculations or “proofs” but rather the preponderance of public relations that wins the political battles. Because business committed more resources for the last ten years, it froze the minimum wage.
 
Ironically, cost calculations only acquire some limited importance after the battle is won. Then the victorious side provides their version to their political friends gratis as a convenient public cover. Sooner or later those politicians will explain that they voted not for this against the other side but rather “for what is best for everyone, which is, after all, their democratic duty.”


____________
B.
from Jim Cohn :
Subject: Re: Democrats under the spell of Ollie North?
19 October 2006

Francis,
This is a troubling piece by Greg Grandin, and I don't throw it with any satisfaction in the face of my "please, anybody-but-these-Republican-crazies" friends. But it truly made me think. It was sent by a friend in Quito and I couldn't track down the full reference, but the author is a certified serious historian of US foreign policy, at NYU I think. He writes pretty well too.
--jim


Prefaced by a comment by Elisabeth Hamilton :
(Hamilton at <dovehouse@noos.fr>)

I agree with this writer that the democrats, for their timidity, are poised to snatch defeat out of the jaws of victory, but I am unconvinced that challenging militarism is the way back to credibility.

I think that in general, human beings are suckers for shows of strength, military parades and so on. This struck me again most recently when France sent peacekeeping troops to Lebanon. For years the French media had been criticizing America’s militarism (as such) and unilateralism in foreign policy, and then, in the description of the French hardware and muscly guys being sent over seas there was this barely disguised pride, a kind of thrill in the voices of radio announcers that was NOT calculated (they often calculate a weepy tone for “sad” news). I don’t think they were thrilled by the legality of the mission or by its peacekeeping aspect, but simply by the outlay of brawn.


 

It’s true the French mission was pretty uncontested, that they were certainly going as internationally approved  “good guys”, and that this may have allowed the vibrato in the newscasters’ voices to come out, but it’s also true that what the media emphasized was the difficulty of the task and thus the bravery of it (nothing to do with its legitimacy), accompanied by descriptions and shots of hardware. On another level, one might say France was sending “keepers of the faith” to the Holy Land, though the nature of the faith in question has changed since the Crusades and that this may also have nothing or little to do with the thrill and the pride.

Perhaps I am wrong. Perhaps challenging militarism can be a viable political strategy in general and one that might work for American Democrats at the beginning of our new century. After all, popular opposition has forestalled or curtailed many a war effort, but I think this has more to do with not wanting to fight another war (France, post WWI), with having previously sustained too many losses, with mounting death tolls (Vietnam) or with distrust of government in general (we won’t fight THEIR war), rather than with anti-militarism as a value in and of itself.

Recently linguists Lakoff and Pinker faced off in the pages of The New Republic and readers, almost all of whom recognized Pinker’s unfairness and verbal brutality nonetheless gave him their laurels because they found him ‘more fun”. Swagger and bravado have a charm, Oliver North’s charm. Perhaps the name of the game for democrats is not challenging militarism as such, but of establishing a David and Goliath kind of scenario in which the big guy is perceived as the bully. People love to see a bully get his just desserts.
Elizabeth


A Republican Party on the ropes, bloodied by a mid-second-term scandal; a resurrected Democratic opposition, sure it can capitalize on public outrage to prove that it is still, in the American heart of hearts, the majority party.

But before House Democrats start divvying up committee assignments and convening special investigations, they should consider that they've been here before, and things didn't turn out exactly the way they hoped.

It was twenty years ago this November 3rd -- exactly one day after the Democrats regained control of the Senate after six years in the minority -- that the Lebanese magazine Ash-Shiraa reported on the Reagan administration's secret, high-tech missile sale to Ayatollah Khomeini's Iran, which violated an arms embargo against that country and contradicted President Ronald Reagan's personal pledge never to deal with governments that sponsored terrorism.

Democrats couldn't believe their luck. After years of banging their heads on Reagan's popularity and failing to derail his legislative agenda, they had
not only taken back the Senate, but follow-up investigations soon uncovered a scandal of epic proportions, arguably the most consequential in American history, one that seemed sure to disgrace every single constituency that had fueled the upstart conservative movement. The Reagan Revolution, it appeared, had finally been thrown into reverse.

The New York Times reported that the National Security Council was running an extensive "foreign policy initiative largely in private hands," made up of rogue intelligence agents, mercenaries, neoconservative intellectuals, Arab sheiks, drug runners, anticommunist businessmen, even the Moonies. Profits from the missile sale to Iran, brokered by a National Security Council staffer named Oliver North, went to the Nicaraguan Contras, breaking yet another law, this one banning military aid to the anti-Sandinista guerrillas.

The ultimate goal of this shadow government, said a congressional investigation, was to create a "worldwide private covert operation organization" whose "income-generating capacity came almost entirely from its access to U.S. government resources and connections" -- either from trading arms to Iran or from contributions requested by administration officials. Joseph Coors and H. Ross Perot kicked in, as did the Sultan of Brunei, whose $10,000,000 gift, solicited by Assistant Secretary of State Elliot Abrams, went missing after it was deposited into the wrong Swiss bank account.

The Democrats, now the majority in both congressional chambers, gleefully convened multiple inquiries into the scandal. From May to August 1987,  viewers tuned in to congressional hearings on the affair. They got a rare glimpse into the cabalistic world of spooks, bagmen, and mercenaries, with
their code words, encryption machines, offshore holding companies, unregistered fleets of boats and planes, and furtive cash transfers. Fawn Hall, Oliver North's secret shredder, told of smuggling evidence out of the Old Executive Office Building in her boots, and lectured Representative Thomas Foley that "sometimes you have to go above the written law."

Foreign enemies were not the only targets set in North's crosshairs, as later investigations described what was in effect a covert operation run on domestic soil, with the White House mobilizing conservative grassroots organizations to plant disinformation in the press and harass legislators and reporters who opposed or criticized President Reagan's Contra policy.

Reagan's poll numbers plummeted and talk of impeachment was rampant. Democratics thought they had found in Iran-Contra a sequel to Watergate, another tutorial about the imperial presidency that would enable them to consolidate the power Congress had assumed over foreign policy in the 1970s.

But just a year after the hearings, Iran-Contra was a dead issue. When Congress released its final report on the matter in November 1988, Reagan
breezily dismissed it. "They labored," he said, "and brought forth a mouse." Vice President George H.W. Bush was elected president that month, despite being implicated in the scandal.

Ollie's Song
How could the Democrats have failed to inflict serious damage on an administration that had sold sophisticated weaponry to a sworn enemy of the
United States? How could they have botched the job of transforming a conspiracy of self-righteous renegades, many of whom not only admitted their crimes but unrepentantly declared themselves to be above the law, into a defense of constitutional checks and balances in the realm of foreign affairs?

One reason is that the congressional hearings they called backfired on them. In the early months of those hearings, Congress methodically gathered damning testimony and documentary evidence of what many believed amounted to treason by high-level administration officials, if not the President himself.

But then in marched Oliver North -- the crisp Marine, with his hard-rock jaw and chest full of medals. Ronald Reagan may have once been an actor, but it was North's dramatic chops that rescued his presidency.

For six days, the Marine fended off the questions of politicians and their lawyers. His answers were contradictory and self-serving, but his
performance was virtuoso. Many viewers viscerally connected with the loyalty and courage so artfully on display. "If the commander in chief tells this lieutenant colonel to go stand in the corner and stand on his head," North said, "I will do so." Never mind that, as Senator Daniel Inouye, a maimed WWII veteran, pointed out, the U.S. Military Code stipulates that only legal orders are to be followed. Ollie-mania swept the heartland and Hollywood. Even liberal TV producer Norman Lear admitted he couldn't "take [his] eyes off" the colonel.

North's luster may not have rubbed off on Reagan, but his standoff with Congress allowed the president's defenders to take control of the storyline,
reducing the scandal's cacophony to the simple chords of patriotism and anticommunism. Conservative activist Richard Viguerie compared the hearings to a song: "Liberals are listening to the words, but the guy in the street hears the music. The music is about men and women who are prepared to die for their country."

At the heart of the Democrats disaster was their unwillingness ever to question North's militarism or Reagan's support for the Contras, whose
human-rights atrocities were well-documented. Rather than attacking Reagan's restoration of anticommunism as the guiding principle of U.S. policy, they focused on procedure -- such as the White House's failure to oversee the National Security Council -- or on proving that top officials had prior
knowledge of the crimes.

Much as Hillary Clinton and John Kerry today focus on this administration's "incompetence" and "mishandling" of the Iraq War, Democrats twenty years ago were scathing in their descriptions of an administration steeped in "confusion, secrecy and deception" as well as of the White House's
"pervasive dishonesty" and "disarray." But as today, so then, these criticisms seemed like mere cavils when the security of the United States --
of the "Free World" -- was at stake.

In 1988, when Democratic presidential candidate Michael Dukakis, in his first debate with Vice President Bush, brought up the scandal, Bush responded that he would take "all the blame" for Iran-Contra if he got "half the credit for all the good things that have happened in world peace since Ronald Reagan and I took over." Dukakis quietly took the deal, never again raising the issue. So, when Ollie North jibed that Libya's Muammar Qaddafi endorsed Dukakis, there was little left for the Massachusetts governor to do but don a helmet, jump in a tank, and look famously foolish. Along with political timidity, there was another factor that led to the Democratic collapse on Iran-Contra -- careerism. Far more so than today, Washington was then a clubby, small, inbred world. One of the reasons why the anger over George H.W. Bush's Christmas Eve 1992 pardon of six indicted Iran-Contra figures was so short-lived is that the move was quietly blessed by ranking Congressional Democrats, including Wisconsin Representative Les Aspin, who huffed and puffed but let the matter die. Aspin, who had supported aid to the Contras, was later tapped by Bill Clinton to be Secretary of Defense, easily winning confirmation with significant Republican support.

Careerism naturally leads to back-room deals. There were rumors that Democratic House Majority Leader Tip O'Neill, who unlike Aspin was an outspoken critic of Contra funding, toned down his opposition as a quid pro quo to secure federal funds for Boston's Big Dig construction project -- another disaster from the 1980s that we are still living with.

Unleashing the Imperial Presidency
But if the Democrats failed to gain political traction with the scandal, or wring a parable out of it, others did far better. Dick Cheney today points to Iran-Contra not as a cautionary tale against unchecked executive power but as a blueprint for how to obtain it.

It turns out that it was Dick Cheney's current chief of staff David Addington -- the man the press calls "Cheney's Cheney" for his defense of unchecked presidential power in matters of foreign policy -- who, as a counsel to the Republicans serving on the congressional Iran Contra committee, wrote the controversial 1988 "Minority Report" on the scandal.

At the time, the report, which condemned not the National Security Council for its secret dealings but Congress for its "legislative hostage taking,"
was considered out of the mainstream. Today, it reads like a run-of-the-mill Justice Department memo outlining the legal basis for any of the Bush
Administration's wartime power grabs. It was this report that Cheney referenced when asked last December about his role in strengthening the executive branch. The report, he said, was "very good in laying out a robust view of the President's prerogatives" to wage war and defend national security.

Cheney and Addington are not the only veterans of the scandal to have found a home in the current White House. Other Iran-Contra notables who have resurfaced in recent years include Elliot Abrams, John Bolton, Otto Reich, John Negroponte, John Poindexter, neoconservative Michael Ledeen, and even Manucher Ghorbanifar, the Iranian arms dealer who brokered one of the first missile sales to the Khomeini regime.

This recycling of Iran-Contra personnel to fight the War on Terror points to the most important reason it has been so difficult to transform the scandal into a parable: Iran-Contra wasn't just a crime and a cover-up -- as Watergate was -- or a misdemeanor like Monica-Gate. It was rather the first battle in the neoconservative campaign against Congress and in defense of the imperial presidency.

Iran-Contra field-tested many of the tactics used by the Bush administration to build support for the invasion of Iraq by manipulating intelligence,
spinning public opinion, and riding roughshod over experts in the CIA and the State Department who counseled restraint. While the original Iran-Contra battle might be termed a draw -- the eleven convicted conspirators won on appeal or were pardoned by George H.W. Bush -- the backlash has become the establishment.

That 80s Show
Today, with that establishment shackled to the most ruinous war in recent U.S. history, the Republicans, taking a page out of Oliver North's songbook, decided that the best defense was to go on the offensive, to turn the upcoming midterm vote into a debate on Iraq and national security. Up until the eve of the recent Foley IM-sex scandal, the strategy seemed like it just might be working once again. The Democrats were losing momentum in the run-up to next month's elections, unanimously consenting to a distended military budget, and watching silently as Republicans, with significant Democratic support, revoked habeas corpus and gave the President the right to torture at will.

Foley-gate, along with a cascade of other scandals, controversies, and bad war news, may indeed now give the Democrats the House, and perhaps even the Senate. But already there are reports that, if they do take over Congress, their agenda will have a remarkably 1986-ish look to it: hearings and calls for more congressional "oversight" of foreign policy that leave uncontested the crusading premises driving the President's extremist foreign policy.

If the Democratic Party wants to halt, or even reverse, its long decline and avoid yet again snatching defeat from the jaws of victory, it will need to do more than investigate the six-year reign of corruption, incompetence, and arrogance presided over by Cheney and company. Progressive politicians who protest the war in Iraq will have to do more than criticize the way it has been fought or demand to have more of a say in how it is waged. They must challenge the militarism that justified the invasion and that has made war the option of first resort for too many of our foreign-policy makers. Otherwise, no matter how many tanks they drive or veterans they nominate -- or congressional seats they pick up -- the Democrats will always be dancing to Ollie's tune.

______________
Greg Grandin is the author of the other book endorsed by Hugo Chávez on his recent New York visit: Empire's Workshop: Latin America, the United States, and the Rise of the New Imperialism (Metropolitan).



_____________
C.
from Frédéric Méni :
19 October 2006
Subject: Il était une fois la politique - "La guerre en Irak" (13/02/2003)

Dear Professor Feeley,
Your interview in February 2003 on the Grenoble campus radio program, "Il était une fois la politique " coverning the war in Iraq is now available on the Internet. Despite the defective microphones set too close to the speakers, the quality of sound is not too bad. You can find it at the below address.
Fred

_______________
D.
from Gabriel Kolko :
16 Octobre 2006


[Last month a major US hedge fund, Amaranth Advisors, lost more than half its assets in a week, speculating on natural gas prices. The company proved correct the chief worry of such major financial institutions as the World Bank and the International Monetary Fund: that financial reality is now out of control.]

 G LOBAL financial structure is far less transparent now than it has ever been. A few decades ago daily payments for foreign exchange transactions were roughly equivalent to the capital stock of a major United States bank; today they exceed the combined capital of the top 100 US banks. Financial adventurers constantly create new products that defy nation states and international banks. This May the International Monetary Fund's (IMF) managing director, Rodrigo de Rato, deplored these new risks, which the weakness of the US dollar and the US's mounting trade deficits have greatly magnified.

His fears reflect the fact that the IMF has been in both structural and intellectual crisis. Structurally, its outstanding credit and loans have declined sharply since 2003, from over $70bn to a little over $20bn, leaving it with far less leverage over the economic policies of developing nations, and a smaller income than its expensive operations require. The IMF admits it has been "quantitatively marginalised" (1). Many of its problems are due to the doubling since 2003 of world prices for all the commodities (oil, copper, silver, zinc, nickel, etc) which are traditionally exported by developing nations. So developing nations have been able to bring forward repayment of their debts, further reducing IMF resources.

Higher prices for raw materials are likely to continue because rapid economic growth in China, India and elsewhere has created burgeoning demand that did not exist before, when the balance of trade systematic- ally favoured rich nations. The US has seen its net foreign asset position fall, whereas Japan, emerging Asia and oil-exporting nations have become far more powerful over the past decade and have become creditors to the US. As US deficits mount, with imports far greater than exports, the value of the dollar has declined, falling by 28% against the euro between 2001 and 2005.

The IMF and World Bank were also severely chastened by the 1997-2000 financial meltdowns in East Asia, Russia and elsewhere. Many of their leaders lost faith in the anarchic premises, inherited from classical laissez-faire economic thought, which had guided their policy advice until then. Intellectually both institutions are now far more defensive and concede that the premises that led to their creation in 1944 are hardly relevant to the way the real world now operates. Our "knowledge of economic growth is extremely incomplete," many in the IMF now admit, and it now needs "more humility". The IMF concedes that the international economy has been transformed dramatically since then and, as Stephen Roach of bankers Morgan Stanley has warned, the world "has done little to prepare itself for what could well be the next crisis" (2).

The nature of the global financial system has changed radically in ways that have nothing to do with virtuous national economic policies that follow IMF advice. The investment managers of private equity funds and major banks have displaced national banks and international bodies such as the IMF. In many investment banks, buccaneering traders have taken over from more cautious and traditional bankers
and owners. Buying and selling shares, bonds and derivatives now generate higher profits, and taking far greater risks is now the rule among what was once a fairly conservative branch of finance.


Profits, real or not.
Such traders are rewarded on the basis of profits, fictitious or real, and routinely bet with house money. Low interest rates, and banks eager to lend money to hedge funds and firms that arrange mergers and acquisitions, have given such traders and others in the US, Japan and elsewhere, a mandate to play financial games, including making dubious mergers that would once have been deemed foolhardy. In some cases, leveraged recapitalisations allow the traders to pay themselves enormous fees and dividends immediately, by adding to a company's debt burden. What happens later is someone else's problem.

Since the beginning of 2006 investment banks have vastly expanded their loans to leveraged buy-outs, pushing commercial banks out of a market they once dominated. To win a greater share of the market, they are making riskier deals and increasing the likelihood of defaults among highly leveraged firms -- "living dangerously" as the head of Standard & Poor's bank loan ratings section put it. "Observers are predicting a sharp increase in defaults among highly leveraged companies," the Financial Times noted in July (3).

But there are fewer legal clauses to protect investors, so lenders are less likely than ever to compel mismanaged firms to default. Hedge funds, aware that their bets are more and more risky, are making it much more difficult to withdraw the money with which they play. Traders have "reintermediated" themselves between traditional borrowers (national and individual) and markets, further deregulating the world financial structure and making it far more susceptible to crises. They seek to generate high investment returns and take mounting risks to do so.

This March the IMF released Garry J Schinasi's well-documented book Safeguarding Financial Stability (4), giving it unusual prominence. The book is alarming, and reveals and documents the IMF's deep anxieties in disturbing detail. Deregulation and liberalisation, which the IMF and proponents of the Washington consensus (5) have advocated for decades, have become a nightmare: they have created "tremendous private and social benefits" (6) but also hold "the potential for fragility, instability, systemic risk, and adverse economic consequences".

Schinasi concludes that the irrational development of global finance, combined with deregulation and liberalisation, has "created scope for financial innovation and enhanced the mobility of risks". Schinasi and the IMF advocate a radical new framework to monitor and prevent the problems that are now enabled to emerge, but any success "may have as much to do with good luck" as with policy design and market surveillance. Leaving the future to luck is not at all what economics originally promised.

Even more alarming is a study, also publicised by the IMF and produced at the same time by establishment specialists, analysing the problems that deregulation of the world financial structure has created. The authors believe that deregulation has caused "national financial systems [to] become increasingly vulnerable to increased systemic risk and to a growing number of financial crises" (7). The IMF shares the growing consensus among conservative banking experts that the world financial structure has now become far more precarious.

As the financial meltdown of Argentina in 1998 proved, countries that do not succumb to IMF and banker pressures can play on divisions within the IMF membership to avoid many, though not all, foreign demands. About $140bn in sovereign bonds to private creditors and the IMF were at stake in Argentina, terminating in 2001 with the largest national default in history. Banks in the 1990s had been eager to lend Argentina money and they ultimately paid for their eagerness.


When prices soared.
Since then, however, commodity prices have soared. The growth rate of developing nations in 2004 and 2005 was more than double that of high-income nations. As early as 2003 developing countries were already the source of 37% of the foreign direct investment in other developing nations. China accounts for much of this growth, which means that the IMF and rich bankers of New York, Tokyo and London have far less leverage than before. After the financial crises in the developing world in the late 1990s, bankers resolved that they would be more cautious in the future, yet their current exposure to emerging market stocks and bonds is as great as ever because of far higher yields in Zambia or the Philippines, and excess cash. "The love affair is back on," said a bank trader (8).

Growing complexity in the world economy and the endless negotiations of the World Trade Organisation have failed to overcome the subsidies and protectionism that have thwarted a global free trade agreement and an end to the threat of trade wars. The potential for greater instability and danger for the rich now exists in the entire world economy.

The emerging global financial problem is proving inextricably tangled, with a fast-rising US fiscal and trade deficit. Since George Bush took presidential office in the US in 2001 he has added more than $3 trillion to federal borrowing limits, which are now almost $9 trillion. As long as there is a continued devaluation of the US dollar, banks and financiers will seek to guard their money and risky financial adventures will appear worthwhile. This is the context, but Washington had advocated greater financial deregulation long before the dollar weakened.

There are now at least 10,000 hedge funds, of which 8,000 are registered in the Cayman Islands. However, the 400 funds with $1bn or more under management do 80% of the business. They cannot be regulated. They have over $1.5 trillion in assets and the daily global derivatives turnover is almost $6 trillion (equal to half US gross domestic product). With the economic climate euphoric over the past five years, most funds have won, although some have lost. In the year ending this August, nearly 1,900 were created and 575 were liquidated. Standard & Poor would like to rank their credit-worthiness, but has yet to do so: bigger funds claim to use computer models to make trades, and three of the 10 biggest claim they make purely quantitative decisions.

One of the most serious post-1945 financial threats to the global economy, the failure of the Long-Term Capital Management (LTCM) hedge fund in 1998, involved a firm renowned for its mathematical trading techniques devised by two Nobel prize laureates, Myron Scholes and Robert Merton (9). The combined efforts of Washington and Wall Street prevented a disaster with LTCM, but the hedge funds
are now much too big to be saved easily.

In effect, hedge funds, which are extremely competitive, gamble and take great chances; they are attracted to credit derivatives (10) and many similar devices invented with the promise of making money. The credit derivative market was almost nonexistent in 2001, grew slowly until 2004 and then went into the stratosphere, reaching $26 trillion this June. Many other financial instruments are now being invented, and markets for credit derivative futures, credit default swaps (11) and binary options are in the offing.

What are credit derivatives? The Financial Times's chief capital markets writer, Gillian Tett, tried to find out, but failed. The legend goes that around a decade ago some bankers from JP Morgan were in Boca Raton, Florida, drinking and throwing each other into the swimming pool when they came up with the notion of a new financial instrument that was too complex to be copied easily (since financial ideas cannot be copyrighted) and sure to make them money.

Tett was critical of the potential of credit derivatives for causing a chain reaction of losses which could engulf the hedge funds that have jumped into this market. Bankers have become "ultra-creative in their efforts to slice, dice and redistribute risk, at this time of easy liquidity," she concluded. The Financial Times has in recent months run a series on financial wizardry which has been frankly skeptical of the means and ends of these innovations (12).

One of the gurus of finance, Avinash Persaud, concluded that low interest rates have led investors to use borrowed money to play the markets, and "a painful deleveraging is as inevitable as night follows day . . . the only question is its timing." There is no way that hedge funds, which have become intricate in their arrangements to seek safety, can avoid a reckoning and they will be "forced to sell their most liquid investments". "I will not bet on that happy outcome," Gillian Tett concluded in her survey of belated attempts to redeem the hedge funds from their own follies (13).

Warren Buffett, Forbes-listed as the second richest person in the world, has called credit derivatives "financial weapons of mass destruction". Nominally they are insurance against defaults, but they encourage greater gambles and credit expansion, which are moral hazards. Enron (14) used them extensively; they were a secret of Enron's success and also of its eventual bankruptcy with $100bn losses. They are not monitored in any real sense, and experts have called them "maddeningly opaque". Many innovative financial products, according to a finance director, only "exist in cyberspace", often as tax dodges for the ultra-rich (15).

Banks do not understand the chain of exposure and who owns what: senior financial regulators and bankers now admit this. Hedge funds claim to be honest, but those who guide them are compensated for the profits they make, which means taking risks. There are thousands of hedge funds and many collect inside information. This is technically illegal but it happens anyway.


Growing danger.
There is now a consensus that all this has created growing financial dangers. We can put aside the persistence of unbalanced national budgets based on spending increases or tax cuts for the wealthy, and the world's volatile stock and commodity markets which caused hedge funds to show far lower returns in May 2006 than they have the past year. Hedge funds still make plenty of profit but they are increasingly dangerous.

It is too soon to estimate the ultimate impact of the recent and widely publicised loss by Amaranth Advisors (16) hedge fund of more than $6bn, representing over 60% of its assets, within a single week. Amaranth collaborated closely with Morgan Stanley, Goldman Sachs and other important investment houses, which explains why its losses caused such a stir.

The overall problems are structural, and include the greatly varying ratios between corporate debt loads and core earnings, which have grown substantially from four to six times over the past year because there are fewer legal clauses to protect investors from loss. They also keep companies from going bankrupt when they should. As long as interest rates have been low, leveraged loans (17) have been the solution. Because of hedge funds and other financial instruments, there is now a market for incompetent and debt-ridden firms. When the Ford Motor Company announced last month that it was losing over $7bn annually, its bonds actually shot up 20%. The rules once associated with capitalism, such as probity and profit, no longer hold.

The problems inherent in speed and complexity are diverse and can be almost surreal. Credit derivatives are precarious enough, but this May the International Swaps and Derivatives Association revealed that one in every five deals, many of them involving billions of dollars, had major errors. As the volume of trade increased, so did the errors. They doubled after 2004. More than 90% of all deals in the US were not properly recorded, but put down only on paper and often just scraps at that.

In 2004 Alan Greenspan, then chairman of the US Federal Reserve, admitted to being "frankly shocked" by this situation. Efforts to remedy the mess only began this June and are far from resolving a major and accumulated problem involving stupendous sums. More importantly, deregulation and financial innovation have led to forms of crucial data that cannot be collected and quantified, leaving both bankers and governments in the dark about reality. We may or may not live in a new era of finance, but we certainly are flying blindfolded.

On 24 April Stephen Roach, Morgan Stanley's chief economist, wrote that a major financial crisis seemed imminent and that the global institutions that could forestall it, including the IMF, the World Bank and other mechanisms of the international financial architecture, were utterly inadequate (18). Hong Kong's chief secretary deplored the hedge funds' risks and dangers in June, and at the same time the IMF's iconoclastic chief economist, Raghuram Rajan, warned that funds' compensation structures encouraged those in charge to take risks, endangering the whole financial system. Soon after Roach was even more pessimistic: "a certain sense of anarchy" dominated academic and political communities "unable to explain the way the new world is working" (19). In its place, mystery prevailed. By last month the IMF predicted that the risk of a severe slowdown in the global economy was greater than at any time since 2001, mainly because of the sharp decline in housing markets in the US and much of western Europe; it also included the decline in US labour's real income and insufficient consumer purchasing power (20). Even if the current level of prosperity endures through next year, and all these people are proved wrong, the transformation of the global financial system will sooner or later lead to dire results.
 

Reality is out of control.
Reality is out of control. The entire global financial structure is becoming uncontrollable in crucial ways that its nominal leaders never expected, and instability is its hallmark. The scope and operation of international financial markets, their "architecture", as establishment experts describe it, has evolved haphazardly and its regulation is inefficient -- indeed, almost nonexistent (21).

Financial deregulation has produced a monster, and resolving the many problems that have emerged is scarcely possible for those who deplore controls on making money. The Bank for International Settlement's (BIS) annual report, released in June, discusses these problems and the triumph of predatory economic behaviour and trends "difficult to rationalise". The sharks have outflanked more conservative bankers. "Given the complexity of the situation and the limits of our knowledge, it is extremely difficult to predict how all this might unfold" (22). The BIS does not want its fears to cause panic, and circumstances compel it to remain on the side of those who are not alarmist. But it now concedes that a big crash in the markets is a possibility, and sees "several market-specific reasons for a concern about a degree of disorder".

We are "currently not in a situation" where a meltdown is likely to occur, but "expecting the best but planning for the worst" is still prudent. The BIS admits that, for a decade, global economic trends and financial imbalances have created worsening dangers, and "understanding how we got to where we are is crucial in choosing policies to reduce current risks" (23). The BIS is very worried.

Given such profound and widespread pessimism, vultures from investment houses and banks have begun to position themselves to profit from imminent business distress, a crisis they see as a matter of timing rather than principle. There is now a growing consensus among financial analysts that defaults will increase substantially in the near future. Because there is money to be made in the field, there is now great demand on Wall Street for experts in distressed debt and in restructuring companies in or near bankruptcy.

______________
Gabriel Kolko is a historian and author of `The Age of War' (Lynne Rienner, Boulder, Colorado, 2006) and `After Socialism: Reconstructing Critical Social Thought' (Routledge, London, 2006).

 

(1) IMF Survey, New York, 29 May 2006; IMF in Focus, New York, September 2006. (.pdf files) See also : IMF Survey index 2006 page.

(2) Roberto Zagha, "Rethinking Growth", Finance & Development, Washington DC, March 2006; Stephen Roach, Global Economic Forum, Morgan Stanley, New York, 16 June 2006.

(3) Financial Times, London, 17 July and 14 August 2006.

(4) Garry J Schinasi, Safeguarding Financial Stability: Theory and Practice, IMF, New York, 2006. (.pdf file).

(5) The term was coined by the economist John Williamson in 1989 and summarises the recommendations made to states, including tax reductions, free markets, privatisation and financial deregulation. To qualify for IMF loans, governments must implement such measures.

(6) This and following quotes are from Schinasi, op cit.

(7) Kern Alexander, Rahul Dhumale and John Eatwell, Global Governance of Financial Systems: The International Regulation of Systemic Risk, Oxford University Press, 2005.

(8) Financial Times, 27 July 2006.

(9) With assets of only $5bn, LTCM found itself owing some $100bn. The Federal Reserve and Wall Street paid out $3.6bn to prevent the system from collapsing.

(10) As with all derivatives, operators bet on foreseeable risks but in this case it was credit (bonds, debts, etc) that was exchanged.

(11) The seller undertakes, subject to payment of a surcharge, to compensate the customer in the event of a default on payment or simply a deterioration in the quality of its debtors.

(12) Gillian Tett, "The dream machine, invention of credit derivatives", Financial Times Magazine, London, 24-25 March 2006; Financial Times, 10 and 19 July 2006, 14, 24 and 29 August 2006.

(13) Financial Times, 23 and 24-25 June 2006.

(14) See Tom Frank, "Enron: Elvis lives", Le Monde diplomatique, English language edition, February 2002.

(15) Financial Times, 17 July; 31 May; 8 June 2006.

(16) Amaranth, based in Connecticut, incurred huge losses speculating on the price of natural gas. Brian Hunter, the energy trader said to be largely responsible for the gas losses, was later said to have left the company; at the same time, the company's chief executive officer, Nick Maounis, told investors that it planned to get out of energy trading, in which it had previously invested more than half its capital.

(17) With these loans it is possible to buy a company with a very small capital outlay and loans at rates lower than the expected rate of profit.

(18) Global Economic Forum, Morgan Stanley, 24 April 2006.

(19) Ibid, 23 June and 5 September 2006.

(20) Financial Times, 6 September 2006.

(21) Alexander, Dhumale and Eatwell, op cit.

(22) 76th Annual Report, Bank for International Settlements, Basel, 26 June 2006.

(23) Ibid..

 
_____________
E.
from Michael Klare :
21 Octoberr 2006

T he common wisdom circulating in Washington these days is that the United States is too bogged down in Iraq to consider risky military action against Iran or­God forbid­North Korea. Policy analysts describe the U.S. military as “over-burdened” or “stretched to the limit.” The presumption is that the Pentagon is telling President Bush that it can't really undertake another major military contingency.

Added to these pessimistic assessments of U.S. military capacity is the widespread claim that a “new realism” has taken over in the administration's upper reaches, that cautious “realists” like Condoleezza Rice have gained the upper hand over fire-breathing neoconservatives. Ergo: No military strike against Iran or North Korea.

But I'm not buying any of this.
Just as an empire on the rise, like the United States on the eve of the invasion of Iraq, is often inclined to take rash and ill-considered actions, so an empire on the decline, like the British and French empires after World War II, will engage in senseless, self-destructive acts. And I fear the same can happen to the United States today, as we, too, slip into decline.

The decline of an empire can be a hard and painful thing for the affected imperial elites. Those who are used to commanding subservience and respect from their subjects and from lesser powers are often ill-prepared to deal with their indifference and contempt. Even harder is overcoming the long-inbred assumption that one's vassals are inferior­mentally, morally, and otherwise. The first malady makes the declining elites extraordinarily sensitive to perceived slights or insults from their former subjects; the second often leads elites to overestimate their own capabilities and to underestimate those of their former subjects­an often fatal error. The two misjudgments often combine to produce an extreme readiness to strike back when a perceived insult coincides with a (possibly deceptive) military superiority.


The Suez Blunder
One of the most spectacular examples of such miscalculation in modern times­and an especially illuminating one­was the Suez Canal crisis of 1956. The crisis began in July 1956 when Egyptian President Gamal Abdel Nasser, angry at the West's failure to support construction of the Aswan High Dam on the Nile, nationalized the Suez Canal, then owned principally by a British-French company and long regarded as a pre-eminent symbol of the British Empire.

A reasonable Anglo-French response to Nasser's move might have been to negotiate a dignified turnover of the canal (as President Carter did in 1977 with the Panama Canal, thereby removing a major irritant in U.S.-Latin America relations). But no: it was beneath their dignity to negotiate with rabble like Nasser. Instead, with images of imperial grandeur still fresh in their minds, the British and French embarked on October 29, 1956 upon an invasion of Egypt (wisely bringing in the Israelis for a little backup).

Then the second malady kicked in. From what can be reconstructed today, it never occurred to British and French leaders that their former subjects would even consider putting up any resistance to modern European armies, and so victory would occur swiftly. Instead, it was pure debacle. The British and French were far too few on the ground to win any military victories, and the Egyptians didn't cry “uncle” at the first sight of the Union Jack.

Desperately, the British and French­who had first dismissed any need for American help­pleaded with then-President Eisenhower for American assistance. But Ike wasn't in a mood to help. Having seen which way the wind was blowing in the Middle East, he decided it was better to abandon his NATO allies than support the old imperialists in a battle with pan-Arab nationalism (which might then choose to align with Moscow). And so the British and French were forced to withdraw in utter humiliation.

Much in this extraordinary episode bears on the situation in Washington today. Once again, a former subject state­in this case, Iran­is thumbing its nose at its former imperial overlords­Britain and the United States (which together put the megalomaniacal Shah in power there in 1953). Once again, extreme discomfort and distress has been the result. Yes, I recognize that Iran's pursuit of nuclear technology poses a different sort of danger than Egypt's seizure of the Suez Canal (though to hear the British tell it, that was no less of a strategic peril).

But there nevertheless remains a symbolic aspect to this whole crisis that cannot be entirely ignored. A once subservient Third World nation confronts the Greatest Power the World Has Ever Known on something approaching equal terms. It is precisely these sorts of circumstances that are likely to trigger rash, ill-considered action on the part of the declining power.

“How dare they stand up to us in that way?” British and French officials must have been muttering to themselves back in 1956. And: “We'll teach them a thing or two!­Just you watch!”

“How dare they stand up to us in that way?” White House officials must be saying to one another in private today. And: “We'll teach them a thing or two!­Just you watch!”

Overcoming Objections to War
But what about the problem of the over-stretched U.S. military and all those American soldiers now bogged down in Iraq? This is where the second post-imperial malady comes in. Yes, American ground troops are bogged down in Iraq, but American air and sea power, currently under-utilized in the Iraq conflict, can be used to cripple Iranian military capabilities with minimum demand on U.S. ground forces. Despite the Israeli inability to emasculate Hezbollah with airpower during the Lebanon fighting last summer, American air and naval officers, I suspect, believe that they can inflict punishing damage on the Iranians with airpower alone, and do so without suffering significant casualties in return. I also suspect that well-connected neoconservatives and, no doubt, Vice President Cheney and Secretary of Defense Rumsfeld are whispering this message into the ear of President Bush.

And what about all the forms of retaliation we might expect from the Iranians, like an upsurge in Shiite disorder in Iraq and chaos in the oil markets? These and other likely Iranian responses are also said to be deterring a U.S. military strike. But the Iranians will be incapable of such coordinated action after the U.S. Air Force subjects them to Shock and Awe, and anyway there are contingency plans in place to deal with the fallout. Or so say the neocons, I would imagine.

So I believe that the common wisdom in Washington regarding military action against Iran is wrong. Just because American forces are bogged down in Iraq, and Condoleezza Rice appears to enjoy a bit more authority these days, does not mean that “realism” will prevail at the White House. I suspect that the response of declining British and French imperial elites when faced with provocative acts by a former subject power in 1956 is a far more accurate gauge of what to expect from the Bush administration today.

The impulse to strike back must be formidable. Soon, I fear, it will prove irresistible.

_______________
Michael T. Klare is a professor of peace and world-security studies at Hampshire College, a Foreign Policy In Focus columnist, and the author of Blood and Oil: The Dangers and Consequences of America's Growing Dependence on Imported Petroleum (Metropolitan Books, 2004).



______________
F.
from Truthout :
Subject: Iraq Mayhem Triggers Hunt for Exit Strategy
Date: 22 October 2006
http://www.truthout.org


Frantic efforts are under way in Washington and London to find an exit strategy for Iraq as a renewed surge in violence led Bush to admit yesterday that tactics there might need to change. Diplomats and politicians in both capitals are desperately reviewing and debating options that were once regarded as unthinkable.