(updated below - Update II)
Desmond Lachman -- the former chief strategist for emerging markets at Salomon Smith Barney and a long-time official with the IMF (no raving socialist he) -- argues today that the most apt comparison for the U.S. now is not Japan's "lost decade," but rather, "that the United States is coming to resemble Argentina, Russia and other so-called emerging markets, both in what led us to the crisis, and in how we're trying to fix it." He begins by recounting an IMF trip to Yeltsin-era Russia:
I still recall the shock I felt at a meeting in Russia's dingy Ministry of Finance, where I finally realized how a handful of young oligarchs were bringing Russia's economy to ruin in the pursuit of their own selfish interests, despite the supposed brilliance of Anatoly Chubais, Russia's economic czar at the time.
He then describes the numerous similarities between the U.S. today and those corrupt, collapsing nations he studied in the past:
The parallels between U.S. policymaking and what we see in emerging markets are clearest in how we've mishandled the banking crisis. We delude ourselves that our banks face liquidity problems, rather than deeper solvency problems, and we try to fix it all on the cheap just like any run-of-the-mill emerging market economy would try to do. And after years of lecturing Asian and Latin American leaders about the importance of consistency and transparency in sorting out financial crises, we fail on both counts: . . . .
In visits to Asian capitals during the region's financial crisis in the late 1990s, I often heard Asian reformers such as Singapore's Lee Kuan Yew or Japan's Eisuke Sakakibara complain about how the incestuous relationship between governments and large Asian corporate conglomerates stymied real economic change. How fortunate, I thought then, that the United States was not similarly plagued by crony capitalism! However, watching Goldman Sachs's seeming lock on high-level U.S. Treasury jobs as well as the way that Republicans and Democrats alike tiptoed around reforming Freddie Mac and Fannie Mae -- among the largest campaign contributors to Congress -- made me wonder if the differences between the United States and the Asian economies were only a matter of degree. . . .
In the twilight of my career, when I am hopefully wiser than before, I have come to regret how the IMF and the U.S. Treasury all too often lectured leaders in emerging markets on how to "get their house in order" -- without the slightest thought that the United States might fare no better when facing a major economic crisis. . . . If we insist on improvising and not facing our real problems, we might soon lose our status as a country to be emulated and join the ranks of those nations we have patronized for so long.
Does anyone really doubt any more that the predominant characteristic of our political culture is "the incestuous relationship between governments and large [] corporate conglomerates"? Yet another former Goldman Sachs official and long-time derivatives advocate who played a major role in the repeal of key banking regulations, Gary Gesner, is now poised to become Obama's chief of the Commodities Futures Trading Commission, the body charged with regulating commodities and financial futures. The sleazy, central role Goldman Sachs has played in the events of the last six months -- from their current CEO's still-unexplained presence with Paulson (its former Chairman) and Geithner (protegé of its other former Chairman, Robert Rubin) as the AIG bailout was designed to the massive government windfalls that firm has received (including from that very AIG bailout) -- is merely illustrative of how our Government has long functioned and continues to.
Yves Smith last night noted the rather extraordinary (though unsurprising) development that the very institutions that played such a critical role in the crisis -- Citibank and Bank of America -- are now using TARP funds they received not to extend more loans (the ostensible purpose of the bailout), but rather, to buy up more and more of the very distressed assets that Geithner insists they need to be relieved of, because they now know that, under Geithner's plan, they will be able to sell them at a substantial profit courtesy of public funds (i.e, the Government will buy those crippled assets at well above their current market price). As Smith puts it: "So not only are they seeking to extract far more than was intended even with the already generous subsidies embodied in this program, but this activity is also speculating with taxpayer money. . . .Welcome to yet more looting."
Despite the limitless gorging on public funds by the very oligarchs (government owners) who caused the financial crisis in the first place, the predominant sentiment from our establishment media now is that Obama needs to force ordinary Americans to "sacrifice more." Back in 2006, Jonathan Schwarz wrote this very prescient post predicting that the U.S. would soon adopt the type of so-called "structural adjustments" which, through the IMF, we repeatedly forced upon other heavily indebted, defaulting nations: whereby we would demand that they pursue solutions that further enriched their economic elites while massively cutting the social spending that provided the barest of safety nets to their ordinary citizens. As Schwarz put it yesterday in citing highly revealing comments by Tim Geithner at a CFR conference this week:
There's been a common phenomenon in the third world over the past three decades or so. A country's financial sector, in collaboration with the larger financial world, would create some type of gigantic economic fuck up. The IMF would then (in collaboration with the local financial elites) step in and provide loans in return for what was called "structural adjustment." Structural adjustment involved getting rid of any kind of social spending that made life bearable for everyone else.
In other words, the country's financial elites would use the catastrophes they'd created themselves in order to do what they'd always wanted to but couldn't get away with in normal times. They took the profit, and then imposed all the costs on everyone else.
Isn't that exactly what is now happening here? When I first heard Chuck Todd questioning Obama at Tuesday's Press Conference about why Obama wasn't demanding "sacrifice" from ordinary Americans -- as though the massive loss of jobs, homes, retirement security and financial opportunities isn't sufficient "sacrifice" -- I mistakenly attributed Todd's question to the standard vapid ignorance and insularity of our media stars. I assumed that Todd was just mimicking a question he heard about 9/11 and decided to repeat it seven years later without realizing what a complete nonsequitur it is when applied to the financial crisis.
But there was actually a more pernicious aspect to his question. He was basically demanding of Obama: shouldn't you be telling those dirty masses that they can't have health care and education improvements and that they're also going to have to give up their Medicare, Medicaid and Social Security benefits (while Citibank and BoA use taxpayer money to buy up distressed assets that they will then sell at a huge profit, also to the taxpayer under the Geithner plan)? Among our coddled elites, anger at the oligarchs who pillaged and who continue to pillage is misplaced, irresponsible and dangerous populist rage that must be stigmatized and suppressed. Instead, what is needed -- as Digby and DougJ noted weeks ago would be the prevailing message from our media class -- is a further reduction in the standard of living for average Americans in the name of "fiscal responsibility" to ensure that the subsidies to our oligarchical class -- the ones who enriched themselves for the last decade (and who own our media outlets) -- can continue (and that is, more or less, what Lachman advocates today as the necessary solution).
The key dynamic underlying all of this -- the linchpin that allows it all to happen and, historically, the primary hallmark of a deeply broken nation -- is the total elimination of the rule of law for the ruling class, with a simultaneous intensification of the law as a weapon against the citizenry. Does anyone expect there to be any widespread prosecutions for those most responsible for the looting, systematic fraud and grand-scale theft of the last decade? Identically, as more and more evidence emerges of the vast war crimes of the prior administration, the failure to enforce the law and our legal obligations against our nation's most powerful becomes even more transparent. As law professor Jonathan Turley put it on Rachel Maddow's show Monday night:
The president refuses to allow the investigation of war crimes. And we just found out the international Red Cross, also the definitive body on torture, found that this was a real torture program. And yet, the president is having a debate with the guy [Cheney] over whether it was good policy. . . .
It is just as bad to prevent the investigation and prosecution of a war crime as its commission because you become part of it. There‘s no question about a war crime here. . . .
You know, some people say, what do you need, a film? We actually had films of us torturing people. So this would be the shortest investigation in history. You have Bush officials who have said that we tortured people. We have interrogators who have said we tortured people. The Red Cross has said it. A host of international organizations have said it. . . .
He should be appointing a special prosecutor. There is no question about that. This is the most well-defined and publicly known crime I have seen in my lifetime. There is no debate about it. There is no ambiguity. It is well known.
Contrast these desperate efforts to avoid any criminal accountability at all for the country's most powerful lawbreakers with the merciless application of criminal law to ordinary Americans. As Brown University Glenn Loury recently wrote:
Simply put, we have become a nation of jailers and, arguably, racist jailers at that. The past four decades have witnessed a truly historic expansion, and transformation, of penal institutions in the United States — at every level of government, and in all regions of the country. We have, by any measure, become a vastly more punitive society. Measured in constant dollars and taking account of all levels of government, spending on corrections and law enforcement in the United States has more than quadrupled over the last quarter century. As a result, the American prison system has grown into a leviathan unmatched in human history.
Here, as in other areas of social policy, the United States is a stark international outlier, sitting at the most rightward end of the political spectrum: We imprison at a far higher rate than the other industrial democracies — higher, indeed, than either Russia or China, and vastly higher than any of the countries of Western Europe. . . . With approximately one twentieth of the world’s population, America had nearly one fourth of the world’s inmates.
The treatment in our justice system of ordinary citizens ("a nation of jailers") and our elites (immunity from lawbreaking) could not be more disparate. We have (and are continuing to solidify) exactly the state of affairs that political science literature and the American government itself have long self-righteously warned other countries is the prime enabler for tyrannical rot: a two-tiered system of justice which exempts the country's elites from accountability. I've previously cited this 1998 essay in Foreign Affairs entitled "The Rule of Law Revival," by Thomas Carothers of the Carnegie Endowment for International Peace, because it so perfectly expresses long-standing Western lectures to the "developing world" about the need for a robust rule of law for a nation's ruling elite class:
LEGAL BEDROCK
THE RULE of law can be defined as a system in which the laws are public knowledge, are clear in meaning, and apply equally to everyone. They enshrine and uphold the political and civil liberties that have gained status as universal human rights over the last half-century. . . . Perhaps most important, the government is embedded in a comprehensive legal framework, its officials accept that the law will be applied to their own conduct, and the government seeks to be law-abiding. . . .
The primary obstacles to such reform are not technical or financial, but political and human. Rule-of-law reform will succeed only if it gets at the fundamental problem of leaders who refuse to be ruled by the law. Respect for the law will not easily take root in systems rife with corruption and cynicism, since entrenched elites cede their traditional impunity and vested interests only under great pressure.
It should be fairly significant when someone like Lachman -- who spent his career at Salomon and the IMF -- warns that the U.S. has now adopted the worst and most decadent attributes that drove and defined the era of collapse in Russia, Argentina and similar places. As he says, this is true not only "in what led us to the crisis" but also "in how we're trying to fix it." There is fundamental corruption in our political system that has led to all of this, and that corruption, in so many ways, is now being exacerbated and fortified rather than uprooted.
UPDATE: Salon's Andrew Leonard has a very good analysis of the significance (or lack thereof) of Geithner's call for new regulatory oversight over the financial industry.
UPDATE II: In a superb article just published in The Atlantic, former IMF Chief Economist and current MIT Professor Simon Johnson makes a very similar argument, using his IMF experience with failing economies to document numerous similarities between the U.S. and other collapsing nations. He notes specifically "that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises." The article should be read in full, but a couple of excepts are here:
Typically, these countries are in a desperate economic situation for one simple reason—the powerful elites within them overreached in good times and took too many risks. Emerging-market governments and their private-sector allies commonly form a tight-knit—and, most of the time, genteel—oligarchy, running the country rather like a profit-seeking company in which they are the controlling shareholders. When a country like Indonesia or South Korea or Russia grows, so do the ambitions of its captains of industry. As masters of their mini-universe, these people make some investments that clearly benefit the broader economy, but they also start making bigger and riskier bets. They reckon—correctly, in most cases—that their political connections will allow them to push onto the government any substantial problems that arise. . . .
The downward spiral that follows is remarkably steep. Enormous companies teeter on the brink of default, and the local banks that have lent to them collapse. Yesterday’s “public-private partnerships” are relabeled “crony capitalism.” . . . The government, in its race to stop the bleeding, will typically need to wipe out some of the national champions—now hemorrhaging cash—and usually restructure a banking system that’s gone badly out of balance. It will, in other words, need to squeeze at least some of its oligarchs.
Squeezing the oligarchs, though, is seldom the strategy of choice among emerging-market governments. Quite the contrary: at the outset of the crisis, the oligarchs are usually among the first to get extra help from the government, such as preferential access to foreign currency, or maybe a nice tax break, or—here’s a classic Kremlin bailout technique—the assumption of private debt obligations by the government. Under duress, generosity toward old friends takes many innovative forms. Meanwhile, needing to squeeze someone, most emerging-market governments look first to ordinary working folk—at least until the riots grow too large. . . .
In its depth and suddenness, the U.S. economic and financial crisis is shockingly reminiscent of moments we have recently seen in emerging markets (and only in emerging markets): South Korea (1997), Malaysia (1998), Russia and Argentina (time and again). . . .But there’s a deeper and more disturbing similarity: elite business interests—financiers, in the case of the U.S.—played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them.
It's rather difficult to dismiss as fringe hysteria the observations of those most familiar with what took place in other financial crises around the world.
Related to Johnson's observation that "needing to squeeze someone, most emerging-market governments look first to ordinary working folk," here is The Washington Post's Paul Kane today explaining what the U.S. must do to solve its deficit and debt problems:
Even if you were to curb a bunch of Obama's most ambitious programs, you're still looking at trillions and trillions of dollars in debt.
The real fiscal answer is entitlement reform -- that's code word, everyone, for slashing Medicare benefits and raising the retirement age/payout time for Social Security recipients.
So our political class cheers on treasury-draining wars, allows financial elites to rob and pillage, witnesses huge transfers of wealth to the richest, and then when the whole thing explodes, the "real fiscal answer" is for ordinary Americans to have their Medicare benefits "slashed" and Social Security benefits reduced.
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