By Nomi Prins, AlterNet
The speculative nature of the financial industry is a threat to national economic security. It requires a serious exit strategy.
As the Dow hemorrhages, Wall Street firms are betting on which one will bite the dust next, and Federal Reserve Chairman Ben Bernanke probably wishes he could leave as the next administration sets up shop, no one is proposing the long-term solution to the banking crisis: regulating the industry.
The Fed was right to turn Lehman Brothers away from its window during those final moments of doom on Sunday night. As such, the resulting $613 billion Chapter 11 filing, the largest bankruptcy in U.S. history (WorldCom dropped to second with a mere $104 billion in assets) was secured.
It was wrong to back the $30 billion bailout of Bear Stearns in March, which facilitated JPM Chase's acquisition of Bear. It should not be the Fed's responsibility, or the government's, to back investment bank speculation. Instead, regulators should have been more vigilant as speculation outpaced available capital, and transparent quantification of risk went out the window.
However, it should be the government's job to stabilize the financial system; the question is how. Unfortunately, neither the Federal Reserve, nor the government, nor the presidential candidates have the slightest clue. Neither a blame game nor desperate piecemeal fixes will work. This is not about Republican or Democratic policies, but systemic bipartisan deregulation. Only a quick bout of sweeping and decisive regulation can fix what's broken.
In 1932, three years after the 1929 stock market crash, the banking system last stood at a brink of implosion. Franklin Delano Roosevelt zoomed past Herbert Hoover into the White House. The country was struggling through a Great Depression unleashed by the forces of unregulated economic greed. FDR stood up to the unrestrained power of Wall Street and contained it. The resultant New Deal included a stoplight at the heavy intersection of financial capital and unregulated greed, called the Glass-Steagall Act of 1933.
Decisively, the Glass-Steagall Act forced institutions within the banking community to pick a side. If you want to deal with the population at large, take their deposits, give them a safe place for their savings and make reasonable loans for which you are as responsible as the borrowers -- terrific. As a commercial bank, you will have the newly established Federal Deposit Insurance Corporation (FDIC) backing your depositors. We, the federal government, will regulate you.
If you want to raise capital through speculative investors at home or overseas -- fine. But as an investment bank, you don't get our backing and you don't get to mix it up with citizens' lives or use their capital to fund your trading activities.
That simple premise, the pristine logic of the Glass-Steagall Act, not only kept consumer and speculative capital from intertwining within the same institution; it simplified the ability to understand the activities of all financial organizations. Transparency was not perfect, but it was more easily accomplished.
Lehman Brothers got a taste of the intent of Glass-Steagall. Its demise is ugly, not just because of its 156-year history, the 25,000 employees who are suddenly without jobs, or the long list of institutions to which Lehman owed money that will be slugging it out in bankruptcy court.
It is ugly because it underscores the supreme gutlessness of the executive and congressional branches of government. Bernanke is desperately trying to figure out how to save the banking industry from itself. Treasury Secretary Hank Paulson can't wait until the election saves him from himself. And the presidential candidates are giving Wall Street, and each other, a barrage of verbal shellacking.
None of this changes the playing field.
The catalyst for this current crisis may be the housing market -- not because individual borrowers slightly overleveraged, but because the entire banking industry massively overleveraged. The larger culprit is the killing of Glass-Steagall, which paved the way for this recklessness.
Yet, rather than considering the massive risks of merging commercial and speculative banking interests, given the overwhelming evidence, federal officials actually pushed for Bank of America's $50 billion all-stock takeover of Merrill Lynch, rather than questioned it.
I worked on Wall Street, at Lehman and Bear and Goldman Sachs. Take my word for it: You cannot merge risk management systems more quickly than this economic crisis can continue to unfold. It is technologically impossible.
This knee-jerk move follows the same dangerous green-lighting of mega-mergers that began when Citigroup took over Salomon Brothers after Congress killed Glass-Steagall in November 1999, and continued with Chase taking over JPM and recently Bear Stearns.
The Fed wants to avoid another huge failure in Merrill Lynch by pushing it under the rug of Bank of America. That is bad policy. Bank of America cannot possibly have a clue about the extent of Merrill's potential losses. This commercial bank taking over a speculative giant is much more dangerous than Lehman Brothers tanking. The Fed was within all of its rights and sanity to say no to Lehman's plea for a bailout. But it won't be able to do the same thing with Bank of America, which, unlike Lehman or Bear, is responsible for the accounts of millions of customers -- real people with real money on the line.
The speculative nature of the industry, in which commercial and investment banks can borrow beyond their abilities to repay, is a threat to national economic security. It requires a serious exit strategy.
There is no easy answer, but there is only one solution -- and it lies polar opposite to the Bank of America-Merrill Lynch merger logic. The only real way to stabilize the financial industry is to take it apart, quantify and separate its risks, and begin again. We can do this. FDR did it. The market is larger now, and more global. That is not an excuse for inaction; it belies a screaming need for useful action and meaningful regulation. Period.
by Robert Scheer - TruthDig / Common Dreams
Gag me with a spoon, as Valley girls used to say. Did you see that McCain-Palin ad promising "tougher rules on Wall Street to protect your life savings, no special interest giveaways"? Just how dumb do they think we are?
Seriously, 20 minutes of Google searches should be sufficient to convince all but the dimwits among us that John McCain has been a master of the special-interest giveaways to Wall Street that enabled this meltdown. He voted for abolishing all of the significant rules put in place at the time of the Great Depression designed to prevent a repeat. The two main bills accomplishing that, bills which McCain enthusiastically supported, were the Commodity Futures Modernization Act and the Gramm-Leach-Bliley Act. The Gramm is former Sen. Phil Gramm, who was chair of the Senate Banking Committee when he acted as chief sponsor of both pieces of legislation. The same Gramm that McCain picked to co-chair his presidential campaign.
Gramm proved an embarrassment when he cavalierly insisted there was no real crisis but only the panic of "whiners," but even on Monday as his "Crisis" ad ran, McCain, in person, was still denying that there was one. "The fundamentals of our economy are strong," he told NBC's Matt Lauer, as two more of the nation's most venerable financial institutions crashed and the stock market shed more than 500 points. When a perplexed Lauer asked McCain to square his optimism with his own ad's use of the crisis word, McCain came to his senses and, discovering his inner Karl Marx, insisted he hadn't been speaking of the bankers but rather was saying "that the workers of America are the fundamentals of the economy."
OK, but never heard that from him before, as he consistently carried water for the bankers going back to his supporting role in the savings and loan scandal, a harbinger of the consequences of a severely deregulated financial market that McCain still favors. Nor did he worry then about the workers who lost their savings while McCain's wife made a million in profit from her deal with Charles Keating, the banker for whom McCain lobbied. Even on Tuesday, while McCain suddenly was thundering against the "unbridled corruption and greed that caused the crisis on Wall Street," he still did not urge anything more stringent than convening a national commission.
Barack Obama has been way ahead of McCain in grasping the severity of the problem and back in March offered a scorching criticism of the deregulation mania, in particular the Gramm-Leach-Bliley law, which allowed the stockbrokers, insurance companies and banks to merge for the first time since the 1930s, ushering in this era of irresponsibility. But that was in the primaries, and now he has turned for advice to Robert Rubin and Lawrence Summers, who both served as treasury secretaries in the Clinton administration and talked the president into signing that wretched legislation.
As recently as Jan. 31, Rubin, by then Citigroup's executive committee chair, was, like McCain until Tuesday, still in denial on the meltdown, insisting it was merely "all part of a cycle of periodic excess leading to periodic disruption." Fortunately, at that time he was an adviser to Hillary Clinton and remained so past March 27, when Obama delivered his main economic speech blaming for the meltdown the Gramm deregulation that Rubin had helped make law. Referring to the repeal of the Depression-era regulations, Obama stated all too correctly: "Unfortunately, instead of establishing a 21st century regulatory framework, we simply dismantled the old one -- aided by a legal but corrupt bargain in which campaign money all too often shaped policy and watered down oversight. In doing so, we encouraged a winner-take-all, anything-goes environment that helped foster devastating dislocations in our economy."
Not devastating for Rubin and Citigroup, where Rubin went to work, and which was a leader in that $300-million lobbying effort and the first huge beneficiary of the new law that permitted a merger with Travelers Insurance that previously had been illegal.
So, yes, there is a world of difference between Obama and McCain on the main issue that now challenges the American way of life, in which people's homes, retirement, kids' college education and all other dreams are threatened by a mindless deregulation led by the Republicans but which too many influential Democrats supported. What Obama needs to do, both to win and to help save the country, is denounce the whole lot of those scoundrels from both parties and rediscover his populist voice.
By David Corn - DavidCorn.com
It is almost literally unbelievable.
John McCain, responding to the current economic troubles, says that "Wall Street has betrayed us." He calls the current mess the "result of excess and greed and corruption." He adds,
We've got to make sure that people like Fannie and Freddie, organizations such as Fannie and Freddie, never have the influence again that they had in Washington. You saw it, Joe. The old boy network -- Republicans, Democrats, they had influence with everybody. So therefore, we didn't act to have the sufficient oversight while these organizations grew and grew and became the corrupt institutions that they are today."
Old boy network? Influence? Can't McCain smell the stench of old-boy influence-peddling every time he enters his campaign headquarters? As I noted yesterday, several of McCain's top campaign aides lobbied for Fannie and Freddie. His campaign overall has at least 177 lobbyists working for his campaign. These are people who get paid large amounts of money to win special treatment for corporate interests, public interest be damned.
Then there's Phil Gramm, the onetime chairman of McCain's campaign. As I explained elsewhere, when Gramm chaired the Senate banking committee in 2000, he slipped into a massive must-pass spending bill a piece of legislation totally deregulating the the market for credit default swaps, a little-understood financial instrument. The swaps market then exploded, and the rampant use of unregulated swaps--which function kind of like insurance policies for big financial institutions--helped grease the way for the subprime meltdown.
So whose greed and excess is McCain now decrying? It is the greed and excess of some of the people who have helped run his campaign. His denunciation of influence peddlers, asleep-at-the-switch regulators, and me-first CEOs is absurd, given his own ties to these folks. His most prominent economic policy surrogate is Carly Fiorina, who pocketed $42 million in severance pay and other goodies when she was forced out as CEO of Hewlett-Packard. The question is, how long can McCain get away with this?
Obama has a slight but narrowing edge in the polls when voters are asked who's best able to handle the economy. It's certainly obvious that voters don't review the details of each presidential candidate's economic policy before deciding whom they want in the driver's seat when the economy heads into a ditch. Many voters pick a favorite based on impressions. Right now, McCain is sounding a more populist tone than Obama, whose strategy seems to be to portray McCain as too tied to George W. Bush and too out of touch to be trusted with this hurting economy. So even with McCain stumbling (by declaring the "fundamentals" are strong), McCain looks more like the fighter, the guy who's ready to knock heads together--the heads of the greedy SOBs responsible for this mess--and get things going again with a healthy dose of reform. It's phony populism. It's like the head of a Mafia family decrying a crime wave caused by his own lieutenants. But that doesn't mean it cannot work politically.
In politics, being right doesn't always count. You have to show you can fight. McCain is ignoring reality to position himself as a populist reformer. Obama better burst that bubble.
By Mark Ames - The Nation
If the polls are correct, then come this January, Palin will find herself one melanoma growth away from the presidency. So when she says she's ready to go to war with Russia on behalf of Georgia, we better take it seriously.
What's even more frightening is that Palin's comments weren't some amateurish slip-up but rather the culmination of a neocon campaign to avenge Russia's crushing defeat of US-backed Georgian forces in August. What the neocons and McCainites want is another war--this time one in which Russia loses. And they have another brilliant plan to make it happen: transform picturesque little Georgia into the bloodiest hellhole on earth... and if that doesn't work, then hand the button to Palin and let her bring on The Rapture.
On August 14, just as the Georgians and Russians signed their ceasefire, the pro-McCain neocon rag The Weekly Standard published an article "The Pain Game: A military response to Russia's aggression?" calling for the Pentagon to refit Georgian forces to fight a protracted, Chechnya-style guerrilla war against Russia. The author, an old cold war goon named Stuart Koehl, admitted that pushing Georgia into a Chechnya-style guerrilla struggle against Russia would result in a "long and difficult war" and would be "messy," because the Russians "will probably respond to this as they did to the bloodletting in both Afghanistan and Chechnya"--in other words, by killing tens or hundreds of thousands of Georgians. But that's no skin off this neocon's back, because if Georgia managed to hang in as long as it takes for such a war, victory over Russia could be achieved "in a way that would not directly involve US or NATO forces." In other words, Koehl and the rest of the neocons are ready to fight Russia to the last Georgian. And that might literally mean the last Georgian, if you look at what the Russians did to Chechnya.
The idea seems to be gaining traction, as an anonymous defense analyst told a military reporter a couple of weeks ago that America should convert the Georgian armed forces into a "Hezbollah" guerrilla force for the same purpose--bleed the Russians into defeat, while we sit back and chant "Hoo-ah!"
Lost in all of these apocalyptic plans for "helping" Georgia is what the Georgian people themselves might think. How do they feel about the McCainites' plans for turning their ancient, charming country into one of the world's bloodiest hellholes--Chechnya meets South Lebanon by way of Afghanistan, according to the neocons' own words. As the popular war blogger Gary Brecher explained: "Starting a guerrilla war means sentencing most of the people in your address book to a very nasty death." Do Georgians really want that?
Last Friday, after hearing Palin say she was ready for war with Russia, I got on the phone and called some leading Georgian figures. Right away, it became clear to me why the neocons and Sarah Palin don't want you to know what the Georgians think about their plans for Georgia.
"If America goes to war against Russia, that would mean nuclear war," said a bewildered Alexander Rondeli, president of the Georgian Foundation for Strategic and International Studies, a think-tank closely tied to the government of President Mikheil Saakashvili. "As for Georgia becoming like Chechnya, Chechnya is a disaster. What the Russians have done there is a genocide, so Chechnya is not a good scenario for us. We Georgians want to live normally. No, our country is not in favor of starting an insurgency."
Manana Kochladze, who founded Green Alternative, a leading NGO backed by the US Embassy, the European Commission and others, agreed: "Maybe there is some crazy Georgian--like my president--who would support this, just to save his seat in power. But this would be a disaster. It wouldn't just be about Georgia and Russia and the US, but it would be about a Third World War. I hope your citizens understand that."
She added, "I really hope that John McCain won't win the elections. We understand all the problems we have in Georgia that have come from the Republican Party."
In our conversation, Kochladze raised the most important issue that no one in America will talk about: Georgia's president, Mikheil Saakashvili's anti-democratic credentials. The false spin on Saakashvili as the Jefferson of the Caucasus has driven the hysterical talk of going to war with Russia. Maintaining this false image of Saakashvili has also been key to McCain's candidacy, given McCain's tight relationship with the controversial Georgian strongman.
Jefferson he is not. A former senior US diplomat who served in the former Soviet Union and the Balkans told me, "What Saakashvili has done since coming to power--controlling the television media, rigging elections, attacking opposition protesters and driving his opponents out of the country and now launching a war against an ethnic minority--I've seen this before. Saakashvili is just another Milosevic. He's the kind of guy who will do anything to stay in power for life." It's not like Saakashvili's authoritarian credentials are the world's biggest secret. Freedom House this year downgraded Georgia's freedom rating to the lower end of the "partly free" category, placing it on par with such beacons of democracy as Venezuela--yes, that's right, Hugo Chávez's Venezuela--and Guinea Bissau.
Georgia's freedom index dropped below even such basketcases as Sierra Leone and Papau New Guinea, where nearly a third of the registered voters for last year's heavily-criticized elections were found to have been long deceased. What's more, Georgia's slide towards authoritarianism has only gotten worse, as Freedom House reports:
Georgia's political rights rating declined from 3 to 4 due to the restrictions placed on political opposition following the November 2007 emergency declaration, and the civil liberties rating declined from 3 to 4 due to the circumscription of media and expression in the aftermath of the November protests.
Georgians took to the streets to oppose President Mikheil Saakashvili in October and November 2007, turning out in the largest numbers since the 2003 "Rose Revolution," which swept Saakashvili to power. The authorities violently dispersed the demonstrators, causing hundreds of injuries, and imposed a state of emergency on November 7. The next day, Saakashvili called a snap presidential election for January 5, 2008. The state of emergency, which remained in place until November 16, banned all news broadcasts except state-controlled television and restricted public assembly. Also in 2007, former defense minister Irakli Okruashvili, a onetime Saakashvili ally who subsequently emerged as a principal political rival, was charged with corruption, jailed, and then quickly released.
That report came out a few months ago. Since then, things have deteriorated even further. The OSCE's election monitoring arm just released a damning report about May's parliamentary elections. As Reuters reported last week:
Ballot-box stuffing, beatings of opposition activists, biased news coverage and government officials campaigning for President Mikheil Saakashvili's party tainted Georgia's parliamentary elections this year, Europe's main election watchdog said on Tuesday.
And yet McCain, whose top foreign policy adviser, Randy Scheunemann, was paid nearly one million dollars by Saakashvili to lobby his interests, described Georgia last month as a "tiny little democracy." Saakashvili, meanwhile, bragged that he speaks to McCain "several times a day." One wonders, what do they speak about? Do they avoid touchy issues like the recent Reporters Without Borders report denouncing Saakashvili for stomping on the media and restricting access to the internet?
Almost all of the Georgian TV stations support President Mikhail Saakashvili and the only opposition station, Kavkasia, is having difficulty broadcasting.
One person who knows all too well how seriously Saakashvili has undermined Georgia's democracy is David Usupashvili, leader of the Georgian Republican Party. Usupashvili used to be an ally of Saakashvili's until his strongman tactics pushed him into opposition. Last October, Usupashvili was in Washington meeting with government officials, warning them about Saakashvili. Shortly after he returned to Tbilisi, Saakashvili sent his troops on protesters and declared martial law. "This man is very dangerous for Georgia and for the world," said Usapashvili, whose party is pro-American and supports Georgia's entry into NATO.
"Any aid packages from the US and EU for Georgia should be accompanied by strict conditions for democratization in our country: that means opening up the electronic media to all sides, increasing the parliament's power [Georgia's constitution gives even more power to Saakashvili than Russia gives to its president, he says], and organizing parliamentary elections under very close observation by the OSCE. Unfortunately, the situation with Georgian democracy is so bad that we need the OSCE to administer the elections, just as we had to do in 2003."
The Freedom House report goes further, decrying Saakashvili's total control over the judiciary, a brutal prison system and trafficking in women. As Kochladze notes, Saakashvili's Georgia looks disturbingly similar to Vladimir Putin's Russia.
Even Saakashvili's closest allies have turned against him. Nino Burjanadze, a major figure in Georgian politics who led the Rose Revolution with Saakashvili, quit his party this past May, criticizing his democracy credentials.
Last week, Burjanadze dropped a bombshell when she called for an investigation into how last month's war really started--sharply implying that Saakashvili was at least as responsible as Putin for launching the war, and letting it be known that she is considering running against her former ally. "I consider it very important to hold a serious investigation into what led to those events," Nino Burjanadze told a news conference. "The time to ask questions has come."
McCain, however, is so deep in bed with the increasingly unpopular Georgian strongman that he will do whatever it takes to keep word of Saakashvili's Putin-like record a big secret. Usupashvili recounted a disturbing and revealing episode from McCain's famous trip to Georgia in August, 2006, which shows just how blind--willfully or otherwise--McCain is to Saakashvili's authoritarian nature.
That year, Georgia's local elections were to be held in December. But on the day that McCain arrived in late August, Saakashvili signed a secret presidential decree calling for local elections in forty days. According to the Georgian election laws, the decree should be published immediately, since parties only have two days to submit their candidate list.
"Instead, Saakashvili kept the decree in his pocket, without telling anyone, including McCain," said Usupashvili. "Saakashvili introduced McCain as 'the next president of the United States,' while McCain praised Georgian democracy. Meanwhile, he kept the presidential decree in his pocket for two days, which is against the law. We were only able to register our candidates at the very last second, thanks to help from people I knew in some ministries who kept the door open for us."
I asked Usupashvili if he'd ever met McCain or Scheunemann; he only indicated that he once met Scheunemann at a party. It was clear that McCain has intentionally avoided contact with Georgia's pro-democracy opposition. That's what one million dollars in lobbying fees will get you.
Given this spin-free account of the real Mikheil Saakashvili, what we have is one of the most absurd apocalypse scenarios imaginable: McCain and Palin are ready launch World War III and turn us all into moose burgers in order to support a Mini-Me version of Vladimir Putin against the real Vladimir Putin. Because you know, Mini-Me is just so darned cute!
So who benefits from this (besides Randy Scheunemann's client)? The same old sleazy goons as always. This year, Big Oil companies have donated three times as much money to McCain's campaign as they have to Obama's. And as for the lipstick-glossed drill-'n-kill pitbull, according to Carl Pope, executive director of the Sierra Club, "No one is closer to the oil industry than Governor Palin."
The issue of "conflict of interest" takes on a new and apocalyptic meaning when you consider the role of energy giant BP in all of this. Palin's husband has spent most of his adult life, eighteen years, working for BP. The company is even more important to his wife, as BP owns Alaska's (and America's) largest gas and oil fields. BP hates Russia at least as much as their tools Palin and McCain: the company has been locked in a nasty battle over its 50 percent stake in Russian energy giant TNK--BP's stake in that company is key to BP's stock price. If BP loses TNK to Putin's goons, then billions could be wiped off the stock price. That's something to go to war for.
Meantime, BP all but controls Georgia thanks to the Baku-Ceyhan pipeline, in which BP is the largest stakeholder. As Manana Kochladze explained, the pipeline was supposed to bring in huge benefits to average Georgians, raising the country out of its dire economic straits. Instead, "very little if any of those revenues have gone to social programs or environmental protection. Instead, the military budget has massively increased to 25 percent of the state budget. The BP pipeline has militarized the country."
One provision of Georgia's agreement to allow the BTC pipeline to pass through its territory was that Georgia is obligated to protect and secure the pipeline--which, Georgians allege, was bombed by Russian pilots during the August conflict.
"From the beginning, we said that Georgia would pay more defending this pipeline than we've received, and now look at our situation," Kochladze lamented.
Another figure tied to BP is, surprise surprise, Randy Scheunemann. He earned handsome fees lobbying for BP in 1999-2000, during McCain's first run for President. More recently, Scheunemann lobbied for the Caspian Alliance, which represents one of the oil majors that pumps oil into BP's pipeline.
From BP's perspective, things look very grim. It's in danger of losing its largest source of booked reserves via its stake in Russia's TNK. And now with the war, investors are worried about the BTC pipeline. What better way to kill two birds with one stone than by fomenting a war that would bleed Putin's Russia until the regime finally collapsed--thereby securing BP's position in both countries. No wonder Big Oil is throwing its weightbehind the McCain-Palin ticket. Those two understand the meaning of "Better dead than having BP in the red."
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