The End of American Hegemony
America has become a pretty discouraging place. If Ronald Reagan were 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. Without the Soviet Union as a check on neoconservative ambition, however, 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 benefited 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 Sept. 28, 2008, a New York Times editorial blamed the current financial crisis on "anti-regulation 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 U.S. 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, computer models engineered by hotshots 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 overregulation— 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 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 U.S. 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 U.S. 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 U.S. 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 lawmaking 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 U.S. Treasury has not got $7 dollars, much less $700 billion, it must borrow the bailout money from foreign creditors already overloaded with U.S. paper. At what point do America's foreign bankers decide that the additions to U.S. 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 U.S. dollars as their reserves, to fail so that Paulson can bail out his company and his friends?
The U.S. 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 U.S. dollar as reserve currency. The day the dollar loses its reserve currency role, the U.S. government cannot pay its bills in its own currency. The result will be a dramatic reduction in U.S. 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, who measures inflation, unemployment, and gross domestic product according to the methodology used prior to the Clinton regime's corruption of these measures, the U.S. unemployment rate is currently at 14.7 percent and the inflation rate is 13.2 percent. Consequently, real U.S. GDP growth in the 21st century has been negative. (The Clinton regime (and the Boskin Commission) rigged the consumer price index 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 plan does not address the mortgage problem per se, defaults and foreclosures are likely to rise, thus undermining the Treasury's estimate that 90 percent 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 United States will end up with four giant banks: JPMorgan 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 Corp. refinanced 1 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 U.S. 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 Corp.'s acquisition plans being blocked by federal regulators until its subsidiary entered into a consent agreement with the U.S. 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 1 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 Co. to sell property insurance to preferred minorities on uneconomic terms.
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 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.
COPYRIGHT 2008 CREATORS SYNDICATE INC.
Entries(RSS)
Ronald Reagan also appointed Alan Greenspan as chairman of the Federal Reserve. Paul Volcker, originally appointed by Jimmy Carter (a president generally deemed incompetent) fought inflation off with double-digit interest rates, and it worked, but there was a price to pay: high unemployment for several years at the beginning of the 1980's. It was a necessary price to pay, but it elicited massive protests and hatred.
The 1980's were also the beginning of the mass-media consolidation that accelerated exponentially under the 1996 Telecommunications Act. This deregulatory fever also led to the repeal of the Glass-Steagall Act, which did not serve to ameliorate the speculatory mania unleashed by Greenspan & co.
I would take Ronald Reagan over George W. Bush any day, but his legacy is vastly overestimated. He may have cared about preserving the American landscape; what is less clear is whether he had a coherent vision for the country. Perhaps he would balk at what has become of everything, but the personality cult surrounding governmental figures is a persistent cause for worry.
A great column by Paul Craig Roberts.
See Bacevich in TAC for a counterpoint.
More Reagan worshipping from Paul Craig Roberts. It is true that the repeal of Glass-Steagall was the death sentence for financial market regualtion. However the miasma of deregualtion has the Reagan adminstration's fingerprints all over it. Paul Craig Roberts is well aware of this. There was a lot of continuity in economic philosophy from Reagan to Clinton.
Ronald Reagan was both a war criminal and traitor. His savage and criminal attacks on Nicaragua and other nations in the region should have landed him in the Hague with a noose around his neck.
The Reagan amnesty was the starting point for the catastrophe of 20 million illegal aliens living and breeding within the borders of America. The Reagan Amnesty was crucial in creating the huge housing demand among poor hispanics which was a crucial factor in the subprime mortgage meltdown.
Ultimately,though, it was the interaction of the passage of the 1965 immigration reform act and the deregulation mania of both the Reagan and Clinton adminstrations that created the subprime mortgage meltdown.
Reagan was an incredibly evil man. So is Clinton.
I thought I would expose another BIG LIE being advanced by Paul Craig Roberts. There was and continues to be enormous continuity in the foreign policy from the Reagan adminstration through Bush 1 and 2,up through Clinton and onward to McInsane and Barack Obama. Some of the exact same characters have been recycled from the Reagan adminstration all the way up through to the current crop of war criminal wannabes and traitors who aspire to be the next president of the dissolving United Staes-including the former ass- wiggling beauty Queen from Alaska. Who do you think is tutoring her these days? Some of these former Reagan adminstration foreign policy advisors have to be carefull not to land in Europe these days. High probablity of being tried for war crimes.
I shouldn't even reply to a man like Horace Grady, but I am partially responsible for instigating his comments and so obligated to qualify myself. I'll not be offended if the moderator deletes this comment along with the predecessor's, if it comes to that.
My criticism is directed against naïve nostalgising of a dead president whose policies were not such a boon to this country as conservatives are inclined to think. I cannot speak of Ronald Reagan's moral character for the simple fact that I did not know the man. Whatever one thinks of his actions in Nicaragua and elsewhere, however, the Communists had given the West plenty of reason to fear, loathe and distrust them. As for the "savagery" of it all, Nicaragua and Chile remain two of the only countries in the Christian world where abortion is still illegal, so I fail to see how their U.S.-supported right-wing regimes could be any more "savage" than an ordinary Social Democrat.
One should fully expect Paul Craig Roberts to defend the intentions and actions of his former boss, who for all his faults was nowhere near as loathsome as any of his successors have been and to call Dr. Roberts a "LIAR" is nothing short of libel.
Well said, NGPM, and I wish I had said it.
Nicaragua was a pawn being used by the Evil Empire - the one that this Evil Empire destroyed - in a campaign of world hegemony. That Evil Empire had to be stopped and the operations in Nicaragua were a necessary part of that. How could anyone be more savage than the Communists?
Reagan left much to be desired and was a great disappointment, but he was no evil man, and for all his faults and failures he was the last president worthy of any respect at all.
Why does the US just lock up the illegal immigrants put them in jail and get them to work as cheap labour in a prison economy?
It would also help create jobs as you would have to build prisons and hire people to work in them.
The Reagan adminstrtion was convicted of war crimes against Nicaragua in the World Court. The charges would have been much more severe if the US hadn't used it's clout to weaken the international legal system. The vicious contra war against Nicaragua was opposed by a majority of Americans. This is why the contra war had to be kept secret in its early years. Iran-contra was the end result. Iran contra nearly put war criminal. neo-con and Reagan administration foriegn policy advisor Elliot Abrams behind bars for lying before congress. These days, war criminal,neocon Elliot Abrams formulates Bush jr mideast policy one of whose "great acheivments" is over four thousand dead American teenagers mostly from the rural heartland of America.
Nicaragua posed no threat to the United States. Henry Kissinger who played a major role in the Reagan adminstration terror wars-Kissinger commission-was almost picked up by the authorities at Heathrow airport to face war crime charges at the Hague. He was within minutes of being arrested. He would have suffered fate the same as war criminal Augusto Pinochet.
Ronald Reagan hated anyone who wasn't wealthy. This included a large percentge of the US population. The general economic trend of the Reagan adminstration which continued through the Clinton and Bush the imbecile administrations is indisputable:the wealthy became much more wealthier and the rest of us become poorer. Ronald Reagan allowed the greedy rich to steal from ordinary Americans.
Before he entered politics,Reagan was a whore for the weapons of mass destruction Industry(GE).
Ronald Reagan was an evil creature.
I'll debate Paul Craig Roberts anytime about the shallow phony Ronald Reagan.
It was despicable of Peter Brimelow to come to Elliot Abrams defense.
"Some of America’s best jobs were offshored in order to boost share prices and executive compensation, and the financial sector was recklessly deregulated."
Well said Paul!
Since empty factories languish in the Rust Belt, one has to wonder just exactly what those declining stock prices represent. Could it be something as ephemeral as the consumers' willingness to purchase name brands produced more cheaply elsewhere? The re-adjustment on Wall Street is long overdue, and may just be the shot in the arm that our economy needs to bring manufacturing back to small town America.
@8 Horace
I think you're dead wrong about Reagan. I was one of a very small minority who listened to his Saturday radio addresses in the 1980s. Buchanan did not write those speeches, Reagan himself did. They were masterpieces worthy of the man labeled the Great Communicator. His book Abortion and the Conscience of a Nation was equally brilliant. You have figured Reagan wrong, he indeed became a true conservative believer.
His biggest mistake was bringing in the evil Bush family, along with their cronies.
Etienne Gervaise
Reagan may have had excellent socially conservative credentials. I'll take you at your word. Sarah Palin has excellent socially conservative crecentials. She opposses abortion and gay marriage. However, the trade off is too terrifying. We had a big discussion about this a few weeks ago here at Chronicles. Go back and read TJF's comments about this tradeoff. Sarah Palin in extremely horible in other ways.
This analysis applies to Reagan. You mentioned his weely radio addresses. In these radio addressess Reagan expressed his enthusiasm for murdering people in Central America via his friends the bloodthirsty contras and salvadora death squads. These were the kinds of big goverment programs that the big faker was enthusiastic about. Also,during one of his weekend radio addresses Reagan joked about starting a nuclear WW3. The Reagan adminstration was not only infested with neocons, it was also infested with screwball Christian Evangelical true belivers in the Rapture at thehighest levels. One credible witness to all of this-a secretary to a Reagan adivisor who was one of these screwballs-stated that Reagan believed in this nonesense. She write a article about this.
The Ronald Reagan was a very serious threat to all human life on the planet, his opossition to abortion notwithstanding. What is true about Ronald Regan is also true abut Sarah Palin. When it comes to war, both of then have expressions on their faces that indicate very strong murderous impulse.
"Conservatives" who worship Ronald Reagan and SArah Palin are ultimately morally bankrupt.
The cold war, the phony war on drugs and the current war on terror are about killing thousands of innocent human beings who resisted having imposed on them the racket of Ronald Reagan's. George B
Didn't have time to proof read the last post of mine. The end of it should read:resisted having imposed on them the gangster rackets of Ronald Reagan's, George and George jr,rapist Bill Clinton and gangster wannabe Barack Obama's friends on Wall Street and in the military industrial complex. And that is why they all are gangsters. And like all gangsters, they wear expensive suits. Essentially this is what they are. I make very little distinction between John Gotti and the aforementioned US presidents.
Cuba, Vietnam, Latin and Central America,the Serbians posed no theat to America. Neither does Iraq and Iran. There is complete continuity in policy from one adminstration to another. The same gangsters find employment from one adminstration to another.
But I'll say this. Israel has murdered US citizens. Remeber the Liberty. Ronald Reagan was a fanatical supporter of Israel.
General Smedley Butler nailed it down in his book 70 years ago.
I find it ironical and ludicrous that a self-styled "White Nationalist" like Horace Grady is flinging around liberal anathemas like "war crimes" and calling down the wrath of the anti-European, anti-Western Hague on his new target Mr. Reagan. Grady shows an utter ignorance of history and a willingness to beat his enemies with a liberal stick that erases any sympathy I might have felt for him after his somewhat rough handling by Dr. Fleming on one of the Obama discussions.
The whole idea of punishing soldiers and statesmen for "war crimes" is a leftist one, begun, one could argue, by those Yankees after the War Between the States who were desperate to invent a new code of wartime conduct which they could use to execute Jeff Davis and some of the other more notable Confederates. Had Henry Wirz been forced to name Davis as the man who had ordered him to commit his so-called "crimes against humanity" at Andersonville, there is a chance the President might have been hung in his place (there is evidence that Wirz turned down an under-the-table offer by the evil Edwin M. Stanton to buy his own safety in exchange for an "incrimination" of Davis).
Excellent article. Very elucidating. Wish I could write like that.
Inflation (tripling the price of gold)
+ a long expensive pointless war
+ record increases in domestic spending
+ record deficit spending
+ loosey-goosey credit standards
= depression
Wasn't the National Endowment for Democracy created under Reagan?
Paul is right though Reagan stopped the Neocons from taking aggressive step against the USSR inside its own territory like sabotaging oil pipelines or military assault after the downing of the commercial airliner that got shot down after it breached Soviet airspace with probably would have lead to nuclear war.
Reagan chose a more cooperative approach letting the USSR fall under its own weight.
...producing a peace dividend to be divided among taxpayers...
Due to the continued inefficiency of The U.S. Post Office, I have yet to receive my dividend.
Nevertheless, as we eagerly anticipate the 25th Anniversary Celebrations of Operation Urgent Fury, (Grenada liberated by a Coalition of the Willing - including militaristic Jamaica and blood-thirsty Barbados), this is hardly the time to slight President Reagan. He is among the top 40 Presidents of all-time.
For a celebration on October 25 (A day of Thanksgiving in Grenada) I have purchased a pinata in the likeness of Hudson Austin. I will fill it with bananas, bats, Che Guevara T-Shirts and Mao Buttons and I will blow it up at 5 A.M. - which, as you well know, - was when OUF began.
I hope I don't scare the neighbors.