Tuesday, September 30, 2008

Paulson is wrong

Time will tell whether I am right but so far for at least a year, I have been saying that apart from following a disastrous Foreign Policy, the US Economic System is broken, There is now unanimity that this is so. I have been saying that it is broken because of greed. There is almost a consensus that this is so. I have been saying that this is unlike any other crisis that the US has faced. There is unanimous consensus that this is so. I have been saying that we cannot look to the past to resolve this. There is some agreement on this but not unanimity. I have been saying that checks and balances are also broken. There is now a grudging consensus on this. I have been saying that the system is unrepairable most certainly by the people who created it. There is very little acceptance of this and I will say in a little while why it is important to accept this.
If my analysis is correct then we will see a series of band aids and will lurch from crisis to crisis. I agree with Kamal that because of the position that the US enjoys, it is a matter of concern for the whole world except that the whole world is not being consulted as to its solutions.
With the attitude of the US as it is, which is a denial that Capitalism as they practice it ( combined with secularism or self interest), is the reason for this state of affairs, there is in my opinion little hope that we have the luxury of waiting for an alternative before we scrap this system. We have been living with a corrupt system for some time now and some have benefited from it hugely. The majority have been exploited. I am amongst the people who have benefited from it, yet I cannot turn my back and deny the mass of humanity whom I have indirectly exploited.
If the US were to admit that this system has outlived its usefulness then we can all work towards an orderly transition from this to a better one. If the US were to admit that we are living in an interconnected world then it will seek the counsel of others to come up with suggestions. The US is not about to do this. The US is interested in creating a civil war in Pakistan after creating one in Iraq and Afghanistan. The US is interested in attacking Iran. The US wants to confront Russia in it's own backyard. The US is not interested in resolving the Israel/Palestine issue except on terms dictated by Israel. The US is in denial that the world is sick of Empires and their vain attempts to enforce their writ by force.
Since we cannot work towards an orderly transition, we will have a chaotic transition. The only other way to have an orderly transition is for the rest of the world to get together and say to the US enough is enough, stop destroying our planet or we will pull the rug from under you by asking for our money back, unless you behave. The world is in a position to do that. The US owes Trillions of dollars to every one but a lot of it to China, Japan, the Gulf Arabs.
An alternative system will only emerge if the US stops pushing a broken system on to the world and the only people who can make them to do it is the rest of the world. The US is incapable of coming out of this morass all by themselves. As long as the world does not suffer chaos there is no chance that they will have the guts to stand up to The US. So I am not advocating chaos, I point to it's inevitability.
This is not idle Email chatter, it is educating people to look at a point of view which they are reluctant to look at. The forces of status quo are too strong to move away from the beaten path. The world has entered a chaotic phase because serious imbalances have been created between rich and poor, justice and injustice, peace and armed conflict, the US and the rest of the world.
I am an optimist by nature and do not look at the dark side and therefore six months ago I could not have predicted that two huge Investment banks will go bankrupt and the worlds largest Insurance company and the worlds largest Mortgage facilitators will be nationalized, that oil will cross $150 and that the US Economy will be facing the most serious crisis since the 30s but I have to be a realist and one year ago I did predict that the Dow will slump to 11,000.
The writing that is on the wall is for all to see and for all to deny at their own peril. Incidentally, I have written as to why the Economy is broken but people better than me have also written about it. Read Kevin Phillips Bad money: Reckless Finance,Failed Politics and the Global crisis of American Capitalism. The title says it all.
A solution will emerge but not until all parties agree to sit at a table to discuss it. The US is incapable of resolving this one by itself


There is a massive problem and an even worse potential problem. Glib solutions or sniping will certainly not provide the answer. Urgent action is needed even if it is not perfect.There is no alternative to a huge bailout package, i.e. a massive injection of liquidity not only in the US but else where as well.Even George Soros says belowNow that the crisis has been unleashed a large-scale rescue package is probably indispensable to bring it under control. Rebuilding the depleted balance sheets of the banking system is the right way to goHis criticisms are about who will implement (not Paulson alone) and who will be the beneficiaries. These are very reasonable points for debate. But these are very different conclusions to saying that the bailout package is doomed.He and many commentators also talk about the complex problems in the financial systems as a whole which should be addressed. These are issues that have to be tackled, but not in a hurry, because the cure is complex and long term.There are others who say the whole system is flawed that there is no solution but to change it all and introduce something else. What new system? Is this real talk or idle drawing room (email!) chatter?I for one am not so disillusioned with the system as to totally discount its self correcting mechanism. Many crises have, come all different from the others, and the system has coped, albeit not perfectly. However imperfect, the present system will have to do until something better comes along ( and none is visible to me). As a practical matter, I believe we should concentrate on improving its imperfections rather than destroying it.

RegardsKemal Shoaib

Your meat-packing industry analogy is precisely right (if somewhat unappetizing) . The bailout plan is insane on its face but the issues are so tangled, particularly to those (most Americans, actually) who have not been paying attention, that figuring out whether one or another alternative is preferable is beyond the capabilities of most of us. The only certainty is that we will be stuck holding the bag.Particularly galling is the demand for unchecked Treasury discretion and unaccountability. But we are talking about the Bush Regime, which has elevated the "fox in the henhouse" approach to the level of policy. Having an independent panel chaired by, say, Stiglitz, come up with an workable plan is not something to even be considered.

Mary Fox

I have been saying for some time that the Capitalist is no longer in charge. They serve at the alter of Capitalism and can only behave according to it's dictates. Paulson and Congress are bound to act in ways that are destructive to them without realising it.This is a mouthful since they are supposed to be amongst the smartest people in the world but greed makes us stupid. If they were so smart how come we are in this mess?
There is unprecedented conflict of Interest in the system. The top management of Fannie and Freddie have received favorable mortgages, all from Country wide the biggest hawker of sub prime mortgages. A lot more graft and mutual back scratching has yet to come to light.
No one is focussed on the real issue. Mortgages have been given to people with no ability to repay them. The problem is not that Real Estate prices have come down ( according to Bush), the problem is that loans were made that should never have been made. The way to make these loans good is to look at each one of them and renegotiate the terms according to the ability of the borrower to repay. Some may just have to be written off but not all. No one wants to do the hard work. Every one is looking at a formula. The customer is just a number and will either fit into a formula or not.
Banking has deteriorated from my time. The branch manger does not know his/her borrower. The transactions are done by faceless call center employees with faceless numbered individuals. Banking is no different today then the meat packing Industry. Parts of the animal are sliced and diced and packed in bundles of a certain weight and then sold as just meat. The shoulder, the thigh, the shank are all mixed up and no one knows the quality of the meat. Mixed in is meat from young animals, old animals and some downright stale animals. There is a lot of meat in there unfit for human consumption. No wonder there is such a stink around.
There needs to be a bailout but not one authored by the people who created the problem in the first place. The package presented by Paulson and Bernanke is an insult to Congress. It is long on Dollars and short on specifics and it asks for the fox to be appointed incharge of the chicken.
I will not repeat the arguments given by experts and let you read them. This package, if accepted, in it's present form will postpone the problem for a very short while, it will not resolve it. In fact it has all the makings of making it worse. My recommendation would be to get out of the stock market as fast as you can, if you have not already done it. This is not a bottom, there is worse to come. As a nation we have become addicted to living on credit. We are now borrowed to the hilt and the tax payer is being asked to lend ( give) money when no one else wants to.

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