The End of American Hegemony
al92653
By Paul Craig Roberts
06/10/08 "ICH" -- -- America has become a pretty discouraging place. If
Ronald Reagan was still with us, I wonder if he would again refer to the
United States as a city on a hill, a light unto the world.
I think not. Reagan brought America back from discouragement, but it didn't
stick. Subsequent administrations erased Reagan's accomplishments. Reagan
defeated stagflation and ended the cold war, producing a peace dividend to
be divided among taxpayers, social programs, and national debt reduction.
However, without the Soviet Union as a check on neoconservative ambition,
the neoconservatives launched America on an unrealistic path of world
hegemony. The economic restoration that Reagan achieved was not shored up
by his successors. Instead, they used the Reagan restoration to run the
American economy into the ground in ways that benefitted the super rich and
the military-security complex. Some of America's best jobs were offshored
in order to boost share prices and executive compensation, and the financial
sector was recklessly deregulated.
Americans, for the most part, will never know what happened to them, because
they no longer have a free and responsible press. They have Big Brother's
press. For example, on September 28, 2008, a New York Times editorial
blamed the current financial crisis on "antiregulation disciples of the
Reagan Revolution."
What utter nonsense. Every example of deregulation that the New York Times
editorial provides is located in the Clinton Administration and the George
W. Bush administration. I was a member of the Reagan administration. We
most certainly did not deregulate the financial system.
The repeal of the Glass-Steagall Act, which separated commercial from
investment banking, was the achievement of the Democratic Clinton
Administration. It happened in 1999, over a decade after Reagan left office.
It was in 2000 that derivatives and credit default swaps were excluded from
regulation.
The greatest mistake was made in 2004, the year that Reagan died. That year
the current Secretary of the Treasury, Henry M. Paulson Jr, was head of the
investment bank Goldman Sachs. In the spring of 2004, the investment banks,
led by Paulson, met with the Securities and Exchange Commission. At this
meeting with the New Deal regulatory agency tasked with regulating the US
financial system, Paulson convinced the SEC Commissioners to exempt the
investment banks from maintaining reserves to cover losses on investments.
The exemption granted by the SEC allowed the investment banks to leverage
financial instruments beyond any bounds of prudence.
In place of time-proven standards of prudence, computer models engineered by
hot shots determined acceptable risk. As one result Bear Stearns, for
example, pushed its leverage ratio to 33 to 1. For every one dollar in
equity, the investment bank had $33 of debt!
It was computer models that led to the failure of Long-Term Capital
Management in 1998, the first systemic threat to the financial system. Why
the SEC went along with Paulson and set aside capital requirements after the
scare of Long-Term Capital Management is inexplicable.
The blame is headed toward SEC chairman Christopher Cox. This is more of
Big Brother's disinformation. Cox, like so many others, was a victim of a
free market ideology, itself a reaction to over-regulation, that was boosted
by academic economic opinion, rewarded with Nobel prizes, that the market
"always knows best."
The 20th century proves that the market is likely to know better than a
central planning bureau. It was Soviet Communism that collapsed, not
American capitalism. However, the market has to be protected from greed.
It was greed, not the market, that was unleashed by deregulation during the
Clinton and George W. Bush regimes.
I remember when the deregulation of the financial sector began. One of the
first inroads was the legislation, written by bankers, to permit national
branch banking. George Champion, former chairman of Chase Manhattan Bank,
testified against it. In columns I argued that national branch banking would
focus banks away from local business needs.
The deregulation of the financial sector was achieved by the Democratic
Clinton Administration and by the current Secretary of the Treasury, Henry
Paulson, with the acquiescence of the Securities and Exchange Commission.
The Paulson bailout saves his firm, Goldman Sachs. The Paulson bailout
transfers the troubled financial instruments that the financial sector
created from the books of the financial sector to the books of the taxpayers
at the US Treasury.
This is all the bailout does. It rescues the guilty.
The Paulson bailout does not address the problem, which is the defaulting
home mortgages.
The defaults will continue, because the economy is sinking into recession.
Homeowners are losing their jobs, and homeowners are being hit with rising
mortgage payments resulting from adjustable rate mortgages and escalator
interest rate clauses in their mortgages that make homeowners unable to
service their debt.
Shifting the troubled assets from the financial sectors' books to the
taxpayers' books absolves the people who caused the problem from
responsibility. As the economy declines and mortgage default rates rise,
the US Treasury and the American taxpayers could end up with a $700 billion
loss.
Initially, the House, but not the Senate, resisted the bailout of the
financial institutions,whose executives had received millions of dollars in
bonuses for wrecking the US financial system. However, the people's
representatives could not withstand the specter of martial law and Great
Depression with which Paulson and the Bush administration threatened them.
The people's representatives succumbed as they did during the New Deal.
The impotence of Congress traces to the Great Depression. As Theodore Lowi
in his classic book, The End of Liberalism, makes clear, the New Deal
stripped Congress of its law-making power and gave it to the executive
agencies. Prior to the New Deal, Congress wrote the laws. After the New
Deal a bill is merely an authorization for executive agencies to create the
law through regulations. The Paulson bailout has further diminished the
legislative branch's power.
Since Paulson's bailout of his firm and his financial friends does nothing
to lessen the default rate on mortgages, how will the bailout play out?
If the $700 billion bailout is based on an estimate of the current amount of
bad mortgages, as the recession deepens and Americans lose their jobs, the
default rate will rise. The $700 billion might not suffice. The Treasury
will have to go hat in hand to its foreign creditors for more loans.
As the US Treasury has not got $7 dollars, much less $700 billion, it must
borrow the bailout money from foreign creditors, already overloaded with US
paper. At what point do America's foreign bankers decide that the additions
to US debt exceed what can be repaid?
This question was ignored by the bailout. There were no hearings. No one
consulted China, America's principal banker, or the Japanese, or the OPEC
sovereign wealth funds, or Europe.
Does the world have a blank check for America's mistakes?
This is the same world that is faced with American demands that countries
support with money and lives America's quest for world hegemony. Europeans
are dying in Afghanistan for American hegemony. Do Europeans want their
banks, which hold US dollars as their reserves, to fail so that Paulson can
bail out his company and his friends?
The US dollar is the world's reserve currency. It comprises the reserves of
foreign central banks. Bush's wars and economic policies are destroying the
basis of the US dollar as reserve currency. The day the dollar loses its
reserve currency role, the US government cannot pay its bills in its own
currency. The result will be a dramatic reduction in US living standards.
Currently Treasuries are boosted by the habitual "flight to quality," but as
Treasury debt deepens, will investors still see quality? At what point do
America's foreign creditors cease to lend? That is the point at which
American power ends. It might be close at hand.
The Paulson bailout is predicated on cleaning up financial institutions'
balance sheets and restoring the flow of credit. The assumption is that
once lending resumes, the economy will pick up.
This assumption is problematic. The expansion of consumer debt, which kept
the economy going in the 21st century, has reached its limit. There are no
more credit cards to max out, and no more home equity to refinance and
spend. The Paulson bailout might restore trust among financial institutions
and enable them to lend to one another, but it doesn't provide a jolt to
consumer demand.
Moreover, there may be more shoes to drop. Credit card debt could be the
next to threaten balance sheets of financial institutions. Apparently,
credit card debt has been securitized and sold as well, and not all of the
debt is good. In addition, the leasing programs of the car manufacturers
have turned sour. As a result of high gasoline prices and absence of growth
in take-home pay, the residual values of big trucks and SUVs are less than
the leasing programs estimated them to be, thus creating more financial
problems. Car manufacturers are canceling their leasing programs, and this
will further cut into sales.
According to statistician John Williams [
http://www.shadowstats.com/section/commentaries ] who measures inflation,
unemployment, and GDP according to the methodology used prior to the Clinton
regime's corruption of these measures, the US unemployment rate is currently
at 14.7% and the inflation rate is 13.2%. Consequently, real US GDP growth
in the 21st century has been negative. [The Clinton regime (and the Boskin
Commission) rigged the CPI in order to cheat retirees out of their Social
Security cost of living adjustments and ceased to count discouraged workers
who cannot find a job as unemployed. To be counted as unemployed, a person
has to be actively seeking a job.]
This is not a picture of an economy that a bailout of financial institution
balance sheets will revive. As the Paulson bailout does not address the
mortgage problem per se, defaults and foreclosures are likely to rise, thus
undermining the Treasury's estimate that 90% of the mortgages backing the
troubled instruments are good.
Moreover, one consequence of the ongoing financial crisis is financial
concentration. It is not inconceivable that the US will end up with four
giant banks: J.P. Morgan Chase, Citicorp, Bank of America, and Wachovia
Wells Fargo. If defaulting credit card debt then assaults these banks'
balance sheets, who is there to take them over? Would the Treasury be able
to borrow the money for another Paulson bailout?
During the Great Depression of the 1930s, the Home Owners' Loan Corporation
refinanced one million home mortgages in order to prevent foreclosures. The
refinancing apparently succeeded, and HOLC returned a profit. The problem
then, as now, was not "deadbeats" who wouldn't pay their mortgages, and the
HOLC refinancing did not discourage others from paying their mortgages.
Market purists who claim the only solution is for housing prices to fall to
prior levels overlook that rising inventories can push prices below prior
levels, thus causing more distress. They also overlook the role of interest
rates. If a worsening credit crisis dries up mortgage lending and pushes
mortgage interest rates higher, the rise in interest rates could offset the
fall in home prices, and mortgages would remain unaffordable even in a
falling housing market.
Some commentators are blaming the current mortgage problem on the pressure
that the US government put on banks to lend to unqualified borrowers. The
proliferation of privilege that bureaucrats pulled out of the Civil Rights
Act led in 1993 to Shawmut National Corporation's acquisition plans being
blocked by federal regulators until its subsidiary entered into a consent
agreement with the US Department of Justice to racially norm its mortgage
lending. This agreement was quickly incorporated into the growing body of
regulations. Next, Chevy Chase Federal Savings Bank was forced by the DOJ
to open new branches in "majority African-American census tracts." Chevy
Chase had to provide below-market loans to preferred minorities at interest
rates "at either one percent less than the prevailing rate or one-half
percent below the market rate combined with a grant to be applied to the
down payment requirement." In 1995 the DOJ forced American Family Mutual
Insurance Company to sell property insurance to preferred minorities on
uneconomic terms. [See Roberts and Stratton, The New Color Line]
Thus, it is true that it was the federal government that forced financial
institutions to abandon prudent behavior. However, these breaches of
prudence only affected the earnings of individual institutions. They did
not threaten the financial system. The current crisis required more than
bad loans. It required securitization and its leverage. It required Fed
chairman Alan Greenspan's inappropriate low interest rates, which created a
real estate boom. Rapidly rising real estate prices quickly created home
equity to justify 100 percent mortgages. Wall Street analysts pushed
financial companies to improve their bottom lines, which they did by extreme
leveraging. The full story goes far beyond the propaganda videos put out by
Republicans blaming Democrats.
An alternative to refinancing troubled mortgages would be to attempt to
separate the bad mortgages from the good ones and revalue the
mortgage-backed securities accordingly. If there are no further defaults,
this approach would not require massive write-offs that threaten the
solvency of financial institutions. However, if defaults continue,
write-downs would be an ongoing enterprise.
Clearly, all Secretary Paulson thought about was getting troubled assets off
the books of financial institutions.
The same reckless leadership that gave us expensive wars based on false
premises has now concocted an expensive bailout that does not address the
problem, which will fester and become worse.
Roy Blankenship
"al92653" <al9...@xyz.com> wrote in message
news:EzzGk.95$St5...@newsfe03.iad...
> The End of American Hegemony
>
>
> By Paul Craig Roberts
>
> investment banking, was the achievement of the Democratic Clinton
> Administration. It happened in 1999, over a decade after Reagan left
office.
Why do these guys continue to ignore the fact that the bill was passed
overwhelmingly (and veto-proofed)by Republicans?
SheBlewHimDidYouBlowHim
"Roy Blankenship" <point...@earthlink.net> wrote in message
news:7aednWJgLJPYWnfV...@earthlink.com...
because neocons are idiots
Gary A
is facing the end of its hegemony (and good riddance!), he bowdlerizes
the true history of the Reagan presidency. Is it by accident that in
the ‘Authors Bio’ that Craig gives in this paean to Reagan, he
describes himself as an “assistant of the US Treasury,” but neglects
to mention he served in the Reagan era and that he was a Reagan
appointee? [Google other pieces by Roberts and he mentions his ties to
Reagan.]
Inter alia, Roberts writes, "Reagan defeated stagflation and ended the
cold war, producing a peace dividend to be divided among taxpayers,
social programs, and national debt reduction."
First off, Reagan only defeated stagflation by jacking up interest
rates so high it led to a severe recession in the early 1980s, the
worst since the depression, with a surge in unemployment.
Here’s how Mike Hersh debunks this oft-repeated myth:
Quote Hersh:
Which brings us to myth number two: Jimmy Carter wrecked the economy,
and Reagan's bold tax cuts saved it.
This is utterly absurd. Economic growth indices -- GDP, jobs, revenues
-- were all positive when Carter left office. All plunged after Reagan
policies took effect.
Reagan didn't cure inflation, the main economic problem during the
Carter years. Carter's Federal Reserve Chairman Paul Volcker tried
when he raised interest rates. That's the opposite of what Fed
Chairman Alan Greenspan has done to keep inflation low.
Carter's policies and people fought inflation, but maintained real
growth. On the other hand, Reagan's policies helped cause the worst
recession since the Great Depression: two bleak years with nearly
double-digit unemployment! Reaganomics failed in less than a year, and
it took an entire second year for the economy to recover from the
failure.
Carter didn't cause the inflation problem, but his tough policies and
smart personnel solved it. Unfortunately for Carter, it took too long
for the good results to kick in. Not only didn't Reagan help whip
inflation, he actually opposed the Volcker policies!
End Hersh. On-line at: http://www.americanpolitics.com/20020319Hersh.html
Reagan didn’t end the Cold War. Reaganistas argue the USSR collapsed
after trying to keep up with The Gipper’s increasing defense spending.
But in fact defense spending in the USSR was flat during the Reagan
era. The USSR collapsed of its own weight of fiscal and military
mismanagement, something that plagues America today. (See: "Reagan
and the Russians," in The Atlantic Monthly, on-line at:
http://www.theatlantic.com/politics/foreign/reagrus.htm)
Roberts’ comments about Reagan’s contributions to fiscal soundness,
social programs and national debt reduction are breathtakingly cynical
and misleading.
Re the national debt, the San Francisco Chronicle’s business writer,
David Lazarus, has noted that, “In 1981, shortly after taking office,
Reagan lamented "runaway deficits" that were then approaching $80
billion, or about 2.5 percent of gross domestic product. Within only
two years, however, his policies had succeeded in enlarging the
deficit to more than $200 billion, or 6 percent of GDP.”
He added that, according to economics professor Alan Auerbach, “‘It
was up to the first President Bush, the loyal soldier, to clean up the
mess by raising taxes, and he didn't get re-elected because of it,’
Auerbach observed. ‘Clinton also had to raise taxes because of
Reagan.’ Over time, the Reagan deficit became the Clinton surplus.”
http://sfgate.com/cgi-bin/article.cgi?f=/c/a/2004/06/09/BUGBI72U8Q1.DTL
Re Reagan’s kindheartedness on social programs, Lazarus writes, “When
homelessness first became a national issue, however, the Reagan
administration all but turned a blind eye to the problem. Federal
expenditures for low-cost housing plunged during Reagan's watch from
$32 billion in 1981 to just $7 billion in 1987.
“At the same time, funding was slashed for a variety of social
services, including public health, drug rehab and food stamps --
programs that were relied upon by the thousands of mentally ill people
who'd been released from state facilities as a cost-cutting move.
“Reagan was asked in a 1988 interview, shortly before Christmas, what
he thought of the homeless people sleeping just across the street from
the White House in Lafayette Park. ‘There are always going to be
people,’ he replied. ‘They make it their own choice for staying out
there.’ (!)
“A couple of years later, Reagan's daughter, Patti Davis, commented on
her fear that she might be recognized by a homeless person while out
jogging.
"’What would I say if I were asked why I didn't talk to my father, or
argue with him, about this national tragedy?’ she wrote in Parade
magazine. ‘How do you argue with someone who states that the people
who are sleeping on the streets of America 'are homeless by choice?'”
How about Reagan’s efforts on the AIDS epidemic? Lazarus writes:
“Last but not least, AIDS. Reagan is not to blame for this horrific
epidemic, or for the high cost to the nation in terms of lost lives
and lost productivity. What he is responsible for is the government's
callous failure to respond to this crisis in a timely manner.
“Reagan famously did not utter the word AIDS in public until 1987. He
did precious little to arrest the spread of HIV, the virus that causes
AIDS, in the early 1980s, and limited the amount of official resources
dedicated to what was perceived by his administration as an affliction
exclusively of the gay community.”
Roberts is entitled to his own opinions about Reagan, but he shouldn’t
be allowed to get away with rewriting history to make his patron and
mentor (and himself) look good.
Sid9
"Gary A" <garag...@gmail.com> wrote in message
news:742594b3-8a83-48ac...@t18g2000prt.googlegroups.com...
Thank you for posting this.
I've been debunking the St. Reagan myth here for a
long time.
Reagan and Reaganomics was the beginning of the
financial downfall of America.
With only an eight year pause, Reagan and the
Bushes have wrecked America
The much maligned Jimmy Carter had an energy plan
thirty years ago that is as valid today was it was
when he presented it. Thirty years wasted.
The "blame government" mantra of Reagan, Grover
Norquist, the Republican party have brought our
nation to its knees.
It will take years to repair the damage....if
ever.