OPINION

Wall Street - Cold, Flat, and Broke

October 06, 2008
C R Sridhar

“Dreamed about AIG and the stock market, woke up with the urge to stock up on canned goods and shotguns.” - Michele Catalano of Long Island, an angry blogger.

The month of September was cruel for Wall Street. Stormy winds blew away the venerable institutions of Wall Street and they collapsed one by one like a pack of cards. Lehman Brothers, the 158-year investment global investment bank, went belly up. Merrill Lynch was swallowed up by Bank of America. American International Group (AIG), a $1 trillion insurance company, had to be rescued by $85 billion dollar deal by the Federal Government on the ground that it was too big to fall. Capturing the mood of panic in Wall Street Mike Whitney, a widely quoted freelance writer, wrote ‘Lehman gone; Merrill Lynch swallowed up; AIG Going… Who’s Next for Madam Defarge?’1

Madam Defarge and the tumbrels were kept busy while heads rolled in the basket in a grisly fashion. Fannie Mae and Freddie Mac, the biggies of Mortgage lenders, became terminally ill requiring a massive bail out at a cost estimated to be in the region of $5.3 trillion. Washington Mutual went bust followed by Wachovia. Earlier in March, Bear Stearns became insolvent after bad bets turned into bad debts requiring Fed intervention. The concept of Wall Street investment banking was blown sky high when the remaining Goliaths Morgan Stanley and Goldman Sachs haemorrhaged sustaining huge losses and took the unprecedented step to covert themselves into low risk and tightly regulated commercial banks. The pervasive mood of despair and anger of Main Street was reflected by the black humour on Wall Street, one of the most popular being-“Question-What is the difference between a pigeon and an investment banker? Answer- Only a pigeon can make a deposit on a BMW.”

The dour looking, Harvard educated economist Nouriel Roubini was one of the early sceptics to predict the financial meltdown in Wall Street when he dropped the bombshell way back in 2006 that US would be heading towards the most serious financial and banking crisis since the Great Depression. His dark prophecies were met with derision and disbelief earning him the epithet- the prophet of doom. But Roubini had the last laugh when the US financial system melted down as he had predicted and he became an instant celebrity on media channels.

A bipartisan blunder

One of the contributing factors for the financial meltdown was the reckless financial deregulation that led to financial concentration and inefficient markets. The perception of regulation as hampering the animal magnetism of Wall Street bankers was a dangerous delusion that fostered the irrational drive to take unacceptable risks. As the economist Arthur MacEwan explains-“When financial firms are not regulated, they tend to take on more and more risky activities. When markets are rising, risk does not seem to be very much of a problem; all—or virtually all—investments seem to be making money. So why not take some chances? Furthermore, if one firm doesn’t take particular risk—put money into a chancy operation—then one of its competitors will. So competition pushes them into more and more risky operations.”2

Moreover, the extent of deregulation reached dangerous levels with the repeal of Glass- Steagall Act of 1933, which was passed after the financial debacle of 1929. This act separated investment banking from commercial banking and protected the investors from risky speculation of investment banking. Thus a commercial bank could not be in both insurance and/or investment business.

Hectic lobbying for Wall Street by Phil Gramm -the Republican Senator from Texas and the economic advisor for John McCain - and Robert Rubin in the Clinton administration were the guiding forces for the repeal of the act. This repeal became law when it received President Clinton’s assent in 1999. In 2000 another nail was driven in the regulatory coffin when Gramm introduced the Commodity Futures Modernisation Act, which excluded the scrutiny of counter derivatives, credit derivatives, credit defaults, and swaps, by regulatory agencies. Many economists hold the view that the repeal of the Glass –Steagal Act was instrumental in causing the 2007 subprime mortgage crisis.

The crucial point is to note that Wall Street enjoyed the support of both the Republicans and the Democrats for the repeal of the act. Even today both the presidential candidates Obama and McCain receive campaign money from Wall Street bankers and executives. This prompted Ralph Nader, the consumer activist, to acidly comment that there are no significant differences between Democrats and Republicans on major issues pertaining to Wall Street.

A flawed business model

The reward system is skewed in favour of brokers who make money for their Wall Street employer and not how well the client portfolios perform. As Pam Martens, an insider of Wall Street, says “A Wall Street broker receives remuneration that rises from approximately 30 to 50 per cent of the gross commission based on their cumulative trading commissions with zero regard to how well the clients’ accounts have done.” This attitude is responsible in her words for “ the industry to be irreconcilably incentivized to corruption just as brokers have been socialized to silence.” This is on account of the fact that the broker receives more commission on investing junk bonds in client portfolios rather than investing in safe treasuries.

The other questionable practice is housing a trading desk inside the same company that is supposed to give unbiased research to the public. As Pam Martens points out “For example, let’s say that XYZ Brokerage buys a big stake in ABC Company on its proprietary trading desk (the desk that trades for profits for the firm) on Wednesday afternoon. On Thursday afternoon, it could almost guarantee profits for itself by issuing a research report upgrading the stock. Conversely, it could short the stock on Wednesday and issue a negative report to drive down the price on Thursday, also guaranteeing itself a profit. Other than a fictional Chinese Wall, there is absolutely nothing to stop this type of public looting.”3

Perils of a casino economy

While greed, corruption, and an excessively deregulated financial market offer interesting explanations about the systemic collapse of Wall Street, they remain unsatisfactory as they not explain or explore the deeper malaise afflicting the US economy. For a rigorous and conceptually sound analysis, one must turn to the series of extraordinary essays written by Harry Magdoff and Paul Sweezy in Monthly Review during 1970 and 1980’s.

The main thrust of the articles was to show that the general economic tendency of mature capitalism is toward stagnation. The main challenge of capitalist economy is surplus capital, which has diminishing opportunities for profitable investment. Deploying investment in the mature productive economy yields fewer returns as the markets are saturated. A number of strategies such as military spending, government spending, consumer spending, exploitation of third world economies as sources of cheap labour, raw materials and markets are used to counter stagnation in capitalist economies but do not resolve the problem of stagnation. As the authors point out “The tendency to stagnation is inherent in the system, deeply rooted and in continuous operation. The counter-tendencies, on the other hand, are varied, intermittent, and (most important), self-limiting.”4

The problem of surplus capital finding suitable avenues for profitable return is sometimes solved by key inventions and technologies, which provide economic stimuli. The invention of automobile in the “early twentieth century led eventually to huge developments that transformed the U.S. economy, even aside from the mass ownership of automobiles: the building of an extensive system of roads, bridges, and tunnels; the need for a network of gas stations, restaurants, automotive parts and repair shops; the efficient and inexpensive movement of goods from any location to any other location.” But the new information technologies such as computers, software, and the Internet do not appear to provide the same epoch making long-term economic stimuli as automobiles did.5

In the productive economy, money is used to purchase raw materials, machines, and labour to produce commodities, which are sold, with the capitalist receiving back money (M-C-M). While in speculation, money makes more money directly, represented as M–M. A significant change in the way banks and financial institutions operate today as opposed to the past lies in the fact that the massive borrowed money goes into speculative finance and very little is invested in the productive economy. There is practically no stimulatory effect on the economy as there are few jobs created as there are relatively fewer people employed in the speculative economy. The profits generated by speculation are rarely invested in factories or the service sector but finds its way for financing more risky financial schemes creating speculative bubbles.

This sorry state of affairs is evident when one examines the failed financial institutions of Wall Street. One common denominator linking these institutions is that all were under capitalised and over leveraged. As Mike Whitney points out “when Bear Stearns went down, it was levered at a ratio of 26 to 1. When Carlyle capital blew up, it was levered at 32 to 1. And when Fannie and Freddie were finally taken over by the US Treasury; the two behemoths were levered at 80 to 1, which is to say that they had a one dollar cushion for every $80 they had loaned out.”

With huge quantity of money sloshing around the world and being invested into financial speculation there has been an explosion of speculation. One mind-boggling figure is “the daily trading on the world currency markets, which has gone from $18 billion a day in 1977, to the current average of $1.8 trillion a day! That means that every twenty-four days the dollar volume of currency trading equals the entire world’s annual GDP!” Moreover, “Today financial analysts frequently pretend that finance can levitate forever at higher and higher levels independently of the underlying productive economy. Stock markets and currency trading (betting that one nation’s currency will change relative to another) have become little more than giant casinos where the number and values of transactions have increased far out of proportion to the underlying economy.”6

This flight of investment from the productive economy to the casino economy is made worse by the availability of easy credit to persons who are least credit worthy. Many Americans who had little financial stability to buy houses took on mortgages, which were attractive on the face of it but carried a heavy debt burden. As real wages declined for the American household, it took on more debts for meeting the consumption needs. Total household debt stood at the end of March 2006 at 11.8 trillion.

Prudence in lending money to credit worthy persons was thrown to the winds as the banks encouraged people to borrow more and spend more. As the report in Wall Street Journal says “The banks are more aggressive because they rarely keep the loans they make. Instead, they sell them to others, who then repackage, or securitize, the loans and sell them to investors in exotic-sounding vehicles, such as CLOs, or collateralized-loan obligations. Every week brings announcements of billions of dollars in new CLOs, created by traditional money-management and hedge funds, which then sell them to other investors.”7

The toxic power of optimism

The belief in alchemy led mankind in the futile quest of converting base metal into gold. The bankers and traders in Wall Street were the practitioners of the alchemy of finance, which was the elusive quest of converting junk bonds into real wealth. There was an incorrigible optimism and conviction that ordinary people were meant to be rich. There was also goodwill for the captains of finance whose investment schemes were magic wands to transport investors to prosperity. Such a feeling of trust, as Galbraith reminds us, is essential for the boom.

The media played its role by lulling us into a false feeling of comfort by assuring that the fundamentals of the economy was strong and invincible. Critical views were suppressed in debates as the effusions of malcontents. A financial disaster was merely technical correction and there was more money to be made in depressed stock prices. As the financial pillars collapsed in Wall Street last month, a pie hit the glum faces of the financial analysts. The malcontents were right. As Galbraith again reminds us wisely-“when people are cautious, questioning, misanthropic, suspicious, or mean, they are immune to speculative enthusiasms.”8 In the aftermath of the melt down, the sceptics were rehabilitated quickly and became instant celebrities on talk shows. They taught us an important lesson, which the financier Bernard Baruch learned during the Great Depression: “ Any one taken as a individual is tolerable sensible and reasonable- as a member of a crowd, he at once becomes a blockhead.”

Plus ça change, plus c'est la même chose.

From the financial bubbles of the Mississippi scheme and South-Sea Bubble to the delusions of Tulip mania and the Great Depression nothing much has changed. As Charles Mackay says in his book Extraordinary Popular Delusions & the Madness of Crowds, “Money, again, has often been a cause of the delusion of multitudes. Sober nations have all at once become desperate gamblers, and risked almost their existence upon the turn of a piece of paper.”

But there is very little that one learns from speculative disasters, as human memory is short and unreliable. The Great Depression taught the American public the perils of unregulated market and the elected representatives passed the Glass- Steagal Act to protect the ordinary investors from financial ruin. The Act was repealed in 1999 when the memory dimmed about the Great Depression. Then another financial disaster hit Wall Street. Now there is talk of imposing controls on financial markets again.

“Wall Street”, a cynic once said, “ is a Street with a river at one end and a graveyard at the other.” Perhaps it would be appropriate to inscribe on the tombstone the words, Plus ça change, plus c'est la même chose. The inscription in French simply means, the more things change, the more they're the same.

----------------
1 The Tumbrils Roll at Dawn- Mike Whitney
2 The Greed Fallacy- Arthur MacEwan-Dollars & Sense.
3 The Wall Street Model: Unintelligent Design- Pam Martens- Counterpunch.org
4 Stagnation and the Financial Explosion- Monthly Review Press.
5 The explosion of debt and speculation- Fred Magdoff- Monthly Review
6 The explosion of debt and speculation- Fred Magdoff- Monthly Review
7 Wall Street Journal, March 3, 2006.
8 The Great Crash 1929-J.K.Galbraith- Pelican Book.

Sridhar is a Koshy's regular, a Tinto Brass fan, and a cynical Bangalorean
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#1
Aaman
URL
October 6, 2008
11:47 AM

Great article, Sridhar - I like the dig at Thomas Friedman's "Hot, Flat and Crowded" in the title.

#2
Homeless
October 6, 2008
11:56 AM

This article has been written by CR Sridhar and not Aaman Lamba as mentioned.

#3
Deepti Lamba
URL
October 6, 2008
12:01 PM

There was a glitch in the system and has been fixed.

#4
Crash and Burn
October 6, 2008
12:08 PM

An end of an era of greed symbolised by Henry Paulson in abject genuflection at the feet of Nancy Pelosi the speaker of the House of Congress.

The WSJ is reporting that Treasury Secretary Henry Paulson is expected to tap Neel Kashkari, a key adviser on whom he has come to rely heavily during the financial crisis, to oversee Treasury's $700 billion program to buy distressed assets from financial institutions, according to people familiar with the matter.Mr. Kashkari, 35 years old, a Treasury assistant secretary for international affairs and a former Goldman Sachs Group Inc. banker, is expected to be named interim head of Treasury's new Office of Financial Stability as early as Monday.

It's quite fitting that Kashkari sounds like Cash & Carry.

#5
Dave
October 6, 2008
12:15 PM

These snake-oil salesmen,financial hucksters and ponzi schemers make Gordon Gekko look very tame.

#6
Shankar
October 6, 2008
01:00 PM

In the wake of the Asian Crisis,people like Lawrence Summers who were at the forefront of derugulation were sniffing out aloud that Third World countries should be taking lessons in financial accountability and transparency from the West.Who needs a lesson in all these things now?Where is the Free market???We only see bailouts for the parasitic bankster class.

#7
Vidya
October 6, 2008
01:17 PM

Why should we subsidise the education of these people who study at the so called IIMB's when all that they want to do is go and work for the scamsters on Wall Street just to get their seven figure salaries?In what way are they contributing to India?Why are they celebrated in the media?

#8
Ruvy
URL
October 6, 2008
03:59 PM

Great piece Sridhar! It looks like economics writing is going to become what sports writing has been - filled with great description and tragic metaphors. I suspect that you'll be writing more of these pieces in the near future.

But when you do, please go light on the Schadenfreude. For all the greed and viciousness that has finally bitten these hucksters in the butt, the metaphors about tragedy are far more real than a missed goal at a football game or a lost cricket match.

#10
temporal
October 6, 2008
10:25 PM

crs:

following tokyo and hong kong, dow, nasdaq, tse (at one point 1100 down)....all indicators are southbound...(blacker black monday)...and those who took perverse delight in US "come-uppance" are disappointed.... as this affliction will affect the whole world

you mentioned nouriel roubini...i think nassim nicholas taleb (the black swan) predicted this earlier....(khair...this is a minor point)

***

it is a variation of double or nothing

Here's how to make money flipping a coin. Bet 100 bucks on heads. If you win, you walk away $100 richer. If you lose, no problem; on the next flip, bet $200 on heads, and if you win this time, take your $100 profit and quit. If you lose, you're down $300 on the day; so you double down again and bet $400. The coin can't come up tails forever! Eventually, you've got to win your $100 back.

This doubling game, sometimes called "the martingale," offers something for nothing--certain profits, with no risk. You can see why it's so appealing to gamblers.

The carefully synthesized financial instruments now seeping toxically from the hulls of Lehman Bros. and Washington Mutual are vastly more complicated than the martingale. But they suffer the same fundamental flaw: They claim to create returns out of nothing, with no attendant risk. That's not just suspicious. In many cases, it's mathematically impossible. How the financial markets fell for a 400-year-old sucker bet. By Jordan Ellenberg

#11
Vidya
October 6, 2008
10:35 PM

Our stupid self serving middle class doesn't mind the fact that our kids go to work for these scamsters who enrich themselves while asking for aid.Read this...'Your company is bankrupt, you keep $480m. Is that fair?'

Its time that we joined the ranks of that protester on Wall Street who held up a placard towards the shiny glass windows of the investment banks with the words JUMP!...YOU FUCKERS!!!

#12
K. M.
URL
October 7, 2008
11:31 AM

There is ample evidence that suggests that government and fed policies were responsible for this crisis, not the so called free market.
Take a look at this article from the New York Times, by no means a defender of free markets.
The US economy, commonly regarded as a free market economy runs on a fiat currency, the price of credit is decided by a central banking system, investments and production are controlled by antitrust laws and regulatory authorities, prices are controlled by tariffs and subsidies, distribution is controlled by federal grants and welfare schemes. This is not a free market by any stretch of the imagination.
A fiat currency allows the government (or the fed) to artificially inflate or deflate the money supply at will causing distortions in the market. It was the unnaturally low interest rates imposed by the fed coupled with the rules for lending to unqualified borrowers through Fannie and Freddie imposed by the congress that resulted in the current crisis. Fiat currency and rate regulation has been around for almost a century now. And we have seen a number of crises around the world despite Keynesian theory. And yet the blame for the crises invariably goes to free markets and not Keynesian economics!!!
In a free market, there would be no fiat currency, no federally mandated interest rates, no Freddie and Fannie, no laws forcing lenders to lend against their judgements, in short none of the factors that started the crisis and allowed it to reach such large proportions.

#13
Ruvy
URL
October 7, 2008
03:21 PM

Nice link, Run!!!

#14
blokesablogin
October 7, 2008
08:27 PM

and this is just the beginning- yesterday, an Indian financial chap took the life of all his family and himself in LA. And we are barely started on the road of "down dow"! Oh well- hope springs eternal in the hearts of humans and we have those who squeeze the gun too soon.

#15
Vidya
October 8, 2008
01:11 AM

[Edited - refrain from personal attacks]

#16
K. M.
URL
October 8, 2008
03:58 PM

Vidya,
Perhaps you would show some of your mental acuity by making some intelligent comments on my blog? I have three posts regarding the crisis here, here and here. This is a forum for discussing ideas, not emotional responses and there is also a policy against personal attacks.

#17
sridhar
October 9, 2008
09:56 AM

Dear K.M,
"There is ample evidence that suggests that government and fed policies were responsible for this crisis, not the so called free market."

Thank you very much for your comments.

The problem appears to be that there was lax supervision of financial products such as Derivatives described by Warren Buffet as weapons of mass destruction. With the repeal of the Glass Steagal Act the Fed controls ceased and replaced by a lax SEC.Intense lobbying was done by Wall Street for the repeal of the Glass Steagal Act.

Alan Greenspan- a great admirer of Ayn Rand -was the Fed Chief during the height of the Internet boom, who held forth lyrically on the benefits of Derivatives to help his Wall friends.Incidentally, Greenspan is an ideologue of the Free Market. Henry Paulson, the present Secretary of Treasury,was the ex-CEO of Goldman Sachs.

All the major Fed policies were tailored to suit the interests of Wall Street by removing controls of risky financial products. This helped Wall Street to plunder the economy.

So the view that Fed policies were alone responsible for the present crisis is not borne out by facts. A more credible view appears to be that Fed policies shaped by Wall Street screwed the economy.

Free market is merely a myth- to use a sports analogy- it is like playing cricket without umpires!

#18
sridhar
October 9, 2008
10:12 AM

Dear Temporal,
"those who took perverse delight in US "come-uppance" are disappointed.... as this affliction will affect the whole world."

I think it is not a question of perverse delight- but merely a hope that the US military machine would come to a grinding halt.In a world where US is no longer a super power is a good thing.With Russia and China bailing out US- a counter balancing force- US has to adjust itself in a multi polar world.

Hopefully it would pave way for a peaceful world where problems are resolved by diplomatic initiatives.

#19
Aaman
URL
October 9, 2008
11:59 AM

Congratulations, Sridhar - your excellent article has been republished on the Monthly Review, a journal of note

#20
commonsense
October 9, 2008
12:39 PM

Sridhar:

""Free market is merely a myth- to use a sports analogy- it is like playing cricket without umpires!""

great one! will remember to use it when i do get to teach social science courses once in a while.

and yes, congratulations on getting this piece out in MR. Not that you do it for the "accolades".

#21
Ruvy
URL
October 9, 2008
01:50 PM

Sridhar,

I stuck a link to this comment at Blogcritics Magazine, and noted its republication at Monthly Review. I also bookmarked the article for myself - so until my computer crashes next, I'll have access to it.... Nice job.

#22
Ruvy
URL
October 9, 2008
02:02 PM

Sorry Sridhar, that should have read, "I stuck a link to this article at Blogcritics Magazine."

#23
kerty
October 9, 2008
03:44 PM

Sridhar

Not to take anything away from your well-written article, I find running an economy like a cricket sport(especially Indian cricket) lot more scarier than it being played without umpires.

Cricket

- winner takes it all, zero-sum game. It must create winners and losers. Somebody must lose.
- players are chosen. Its not democratic
- rules of the game are fixed and never change, no matter what be the scenario and circumstances in a game - game does not adapt to circumstances. Only players have to be dynamic and not the sport itself
- Cricket board acts like a cartel. It decides who plays, where, who gets paid what etc.

#24
sridhar
October 11, 2008
02:04 AM

Dear Ruvy,#8
'please go light on the Schadenfreude.'

I know there is a cynical saying, 'Happiness is a serene contemplation of other people's misfortunes.'

With the US economy tanking, there would an indirect adverse effect on the Indian economy.That is in the sphere of Information tecnology sector.Outsourcing would be hit as America under Obama would protect their country from job losses.The India shining story would be dented.

Recent news about a second largest bank in Indian Private sector losing millions of dollars in its foreign operations is serious but not fatal as the Public sector banks are sound with a robust capital base.

The stock market has taken a beating as the foreign investors are selling.The battering of the stock market was severe as the sensex index fell from 21000 to around 11000 over the past few months.

But nothing can prevent us from landing hard on our backside as recession would also hit emerging economies like India.

#25
sridhar
October 11, 2008
02:23 AM

Dear commonsense,

'and yes, congratulations on getting this piece out in MR. Not that you do it for the "accolades".'

The article was a tribute to the extraordinary scholarship of Paul Sweezy, Harry Magdoff and Baran who pointed out the dangers of financial speculation when US Capitalism was at the height of glory.They were marginalized in US and they had to start their own publication Monthly Review as no publisher would print books/ articles authored by them.

Their view that capitalism is inherently stagnant leading to crisis of investment avenues was a bold theory which is tragically vindicated by the present crisis in US.

#26
sridhar
October 11, 2008
02:31 AM

Dear Kerty, #23

Touche! You have a point- running any economy like Indian cricket is more hazardous than a speculative, deregulated economy like the US.

#27
commonsense
October 11, 2008
10:26 AM

Sridhar:

""[baran, sweezy, magdoff]They were marginalized in US and they had to start their own publication Monthly Review as no publisher would print books/ articles authored by them.""

yes, and the journal thrives; as does the book series! once again, not just a great piece, but extremely well written too (as in a lot of political pieces might get it right, but are penned in a dour, preachy, "i know it all but you morons need to hear it from me" tone...you skilfully avoid such childish rhetorical gestures!). I'm not the editor of DC, but please write more for DC!!

What/Who by the way, is Koshy's?

#28
temporal
URL
October 11, 2008
10:50 AM

cs:

a hangout

if you visit banglore, dee and aaman will take you there (i hope)
;)

#29
K. M.
URL
October 11, 2008
10:59 AM

Sridhar #17,
First, though the most visible part of the crisis is the fall of Wall Street investment banks, the cause of the fall is obviously the large number of loans that should not have been made in the first place. These loans were made primarily by quasi-governmental agencies like Freddie and Fannie because of intervention by the congress through acts like the Community Reinvestment Act. The massive leverages taken by the investment banks certainly multiplied the problem, but the leverage was not the cause of the problem.
Second, I am not saying that the Fed policies alone were responsible for the present crisis. Certainly private banks handed out loans when they should have known better. But that does not clear the Fed policies of blame. It was the Fed policies that allowed banks to make huge profits on risky loans by keeping interest rates artificially low. With easy money available, it is no wonder that banks fell for it.
Third, you write "All the major Fed policies were tailored to suit the interests of Wall Street by removing controls of risky financial products. This helped Wall Street to plunder the economy." Whether that is true or not, it is the precise reason for dismantling the Fed itself. When a small number of men effectively control the global economy, not by means of their ability but by the force of law, crises are inevitable.
Finally, Free market is certainly a myth today. Nothing close to it exists anywhere. But the concept is not a myth. It is not like a game without umpires. The proper umpires in the economy are the law courts meant to protect people from fraud. To play along with your analogy, note that umpires do not make the rules. The rules are fixed well in advance and do not change. The regulated economy is a game where the umpires change the rules at whim.

#30
temporal
URL
October 11, 2008
11:21 AM

crs:

digression:

there is another angle to consider in this free-fall madness... since i need not elaborate with you i'd be cryptic:

"star-wars" ronnie (reagon) spent a fragile and spluttering USSR to the ground (afghanistan - where a little known cia operative was OBL)...the ruskies had all the nuclear weapons...but did not have the moolah to sustain their world power status

this lesson was not lost on OBL

if you read the transcript in full released couple of years back (the one where he accepted blame/credit for 9/11 for the first time )...he warned dubya that al-faeda would rub the US to the ground...he hinted to duplicate the reagonesque maneuvers...the mighty (but hollow) US economy would bankrupt itself chasing al qaeda behind every newspaper stand...

this coupled with other neoconzix misreads, bunglings and misadventures have led to the Great Depression Part II

#31
temporal
URL
October 11, 2008
11:31 AM

crs:

another quote:

the iron curtain is gingerly lifting "state control" as the free world is lowering it - mahajirzadeh

#32
commonsense
October 12, 2008
05:40 PM

thanks temp re: info about koshys. quite an institution it seems!

#33
sridhar
October 13, 2008
01:23 AM

Dear commonsense, #32

'thanks temp re: info about koshys. quite an institution it seems!

The general impression of Koshy as a coffee house in Bangalore where intellectuals, artists ,and writers hang out appears to be a self serving illusion.

If a poll were to be conducted in the cafe about major issues such as Nuke deal or Iraq war the views- at least majority- would be pro war, pro nuke and pro Bush.Chandra- a desicritics blogger- was dead serious when he said that Bush was the greatest President of USA. He was merely reflecting the dominant public opinion in the cafe.

If your views veer towards ant-war, anti-nuke and anti Bush you would be subjected to vituperative abuse and called a 'commie nutter.'If you mention Sweezy in conversation most of them would think you are taking about a brand of Swiss cheese.

But you do meet nice people like Aaman and Deepti. We had a great time in Koshy when temporal joined us. But those pleasant memories remain too few and too distant as memories go...

#34
Sridhar
October 13, 2008
01:38 AM

Dear temporal,
Thanks for all your comments.

Imperial overstretch combined with financial collapse signify the decline of any Great power. US is no exception to this rule.I wrote about this in Blowback ( Blogcritics),where I said that financial implosion in US cannot be ruled out.This was blogged much before the subprime crisis broke out as major news in the media.

#35
suresh.naig
October 16, 2008
03:23 AM

Sridhar #33, Regarding Koshy, if a vote is taken on nuke deal, Iraq or Bush, majority would be pro USA. You conclude that is not intellectualism.

I agree with commonsense, where he commented for my post Who is an intellectual? use brains. He is right.

Emotions for and against USA is not intellectualism, for intellect is free from emotions.

Otherwise a great article crs.

#36
Ledzius
October 16, 2008
03:50 AM

Sridhar, nice article. Continue posting and, who knows, maybe you could get the Economics Nobel Prize next year :)

#37
Vidya
October 16, 2008
11:34 AM

Re #34 ..I wrote about this in Blowback ( Blogcritics),where I said that financial implosion in US cannot be ruled out.The link to that article can be found here..Chalmers Johnson's Blowback - The Costs and Consequences of American Empire: Is America in Decline?

#38
sridhar
October 16, 2008
12:35 PM

Dear Suresh,
Thanks for your comments.
I merely said if one is pro war, pro nuke and pro Bush it shows that one is not using ones brains.

The war in Iraq has killed thousands of innocent people and has bankrupted the US economy. Bush is one of the most unpopular Presidents of US as the recent polls in US show. Obama is not in favour of Nuke energy but is for alternative energy (wind, solar etc)In fact US has not built a single new reactor on her soil since 1979( Three Mile high incident) The reason? There is growing opposition to nuclear energy as unsafe energy.

To sum up- to be anti- nuke, anti-Bush and anti- war is not the same as being anti- American.

Finally, who is an intellectual? a person who uses his brains for the good of society.

#39
kerty
October 16, 2008
12:43 PM

Vidya

Thanks for the link to Chalmers Johnson's Blowback. It presents a compelling counter view. http://blogcritics.org/archives/2007/05/06/044649.php

#40
kerty
October 16, 2008
12:49 PM

Dr. Marc Faber, the investment guru and great entrepreneur concluded his monthly bulletin by commenting about the US economy as follows:

"The federal government is sending each of us a $600 rebate. If we spend that money at Walmart, the money goes to China. If we spend it on gasoline it goes to Arab. If we buy computers it goes to India. If we purchase fruit and vegetables it will go to Mexico. If we purchase a good car it will either go to Japan or Germany. If we purchase
useless crap it will go to Taiwan and none will help the US economy. The only way to keep the money at home is to spend it on prostitutes and beer since these are the only products still produced in US. I have been doing my part"

#41
Vidya
October 16, 2008
01:00 PM

Quotable-“Financial operations do not lend themselves to innovation. What is recurrently so described and celebrated is, without exception, a small variation on an established design . . . The world of finance hails the invention of the wheel over and over again, often in a slightly more unstable version.”

John Kenneth Galbraith, A Short History of Financial Euphoria

#42
Vidya
October 16, 2008
01:02 PM

Kerty ...welcome to the pussy economy.

#43
Aaman
URL
October 16, 2008
01:50 PM

Kerty, in case it wasn't clear, that article - Blowback - is written by Sridhar

#44
commonsense
October 16, 2008
02:32 PM

Suresh:

""I agree with commonsense, where he commented for my post Who is an intellectual? use brains. He is right."'

hey, not so fast! brains and emotions are not in a state of total disconnect. unless the intellectual in question happens to be a robot masquerading as a human!

#45
kerty
October 16, 2008
06:12 PM

Myth Buster:

Does tax cuts and consumer spending in energy sector boost economy?

Conventional wisdom is as follow:

1) More money in the pockets of consumers can boost consumer spending which in term can boost the sagging economy

2) Higher consumer spending on energy can boost sagging economy

3) Tax cuts and tax rebates can boost consumer spending which in turn can boost sagging economy.

If current economic mess proves the conventional wisdom wrong. Because pricing in the market place is not driven my market forces alone(demand and supply) but by many other factors ie speculation, ability of market to bear the price. Infusion of additional purchasing power allows certain sectors to adjust its pricing to what consumer markets can bear. The main sectors to take advantage of it are oil sector, health care sector, auto industry, housing sector and taxation. That is why same drug that sells for peanuts in India costs a fortune in USA, because pricing is adjusted to what market will allow it to bear. That is why every time Bush issued tax rebates, the energy sector escalated its pricing to rob away all those tax rebate checks from consumers. The oil lobbyists justified the price hike on increased oil demand from China and India, as if demand for Oil spiked in those countries out of the blue. And on the wake of recent mess in USA, the price for oil dropped by half - is that because demand fell in India and China? Nope. It is because market can now bear only lower price because of losses suffered by consumers. When consumers have more money, oil cartel boosts the price of oil, when consumers have less money, oil cartel is forced tp lower prices. That means tax rebates did not boost the economy as intended, but only fed the oil cartel. Same will be true of bail out plan. The additional bailout money pumped in the economy means oil cartel will position its pricing to steal away most of that additional money supply from the economy.

Pricing is not just function of demand and supply. It is also function of ability of people to bear the price. When people make only $1 a day, the pricing structure in such economy also adjusts to what such people can afford to bear. That means, escalating pay scales, tax rebates, government spending can only be inflationary and harmful for aam adami.


#46
kerty
October 20, 2008
12:34 PM

Good article on how housing bubble was built

Building a flawed American Dream:
By DAVID STREITFELD and GRETCHEN MORGENSON
(you might have to register(free) to access the article)

http://www.nytimes.com/2008/10/19/business/19cisneros.html?em

#47
Vidya
October 21, 2008
10:45 PM

The NewYork Times stands guilty of cheerleading the housing bubble during the boom years.Now that their credibility is at stake these selfannointed soothsayers have decided to study the entrails of a dead pig.

There have been other commentators far more prescient and reliable than the NyTimes and this issue has already been discussed threadbare with comments exceeding a 1000 on the link provided at #37

#48
kerty
October 21, 2008
11:08 PM

Vidya

NYT has some of the finest conservative and liberal commentators, though its overwhelming leftist bent is unmistakable. The NYT link in #46 traces how housing bubble originated during Clinton presidency and its liberal politics. I was surprised to find such a candid investigation implicating liberals in a liberal newspaper, when it is more fashionable and politically profitable to blame it all on free-market, conservatism and GOP. I think there is enough blame to go around for both sides for the housing mess, and it wouldn't have been possible without the excesses from each side.

#49
Vidya
October 22, 2008
11:02 AM

finest commentators indeed...you must be referring to people like "The Earth is Flat(AND THE MIND IS BLANK)Friedman

#50
kerty
October 22, 2008
11:53 AM

Vidya

Finest conservative and liberal commentators means those commentators are the finest in their respective field of ideological expertise. Their analysis and opinions are well-respected in their respective ideological camps.

#51
Vidya
October 25, 2008
12:17 AM

Their analysis and opinions are well-respected in their respective ideological camps.

couldn't agree with you more....one needs to keep one's mind blank if Friedman's ideology has to be understood.

#52
kerty
October 27, 2008
09:43 AM

Did you know?
source: unknown

Petro Dollar Scam: Fall of US Dollar
------------------------------------
People do not realize the real reason for the Iraq war and the current war threat against Iran by USA.
It's not the nukes, it's not the terrorism and it's not the oil.
It's all about the protection and propping up of the greatest con-job in recent history, the US Petrodollar Scam.
Back in 1971, the USA printed and spent far more paper money than it could cover by gold.
Few years later, French demanded redemption of its paper-dollar holdings in gold. But the USA rejected as it actually didn't have enough gold for the dollars it had already printed and spent all over the world, thus committing an act of bankruptcy.
So the USA went to the Saudis and cut a deal - OPEC denominate all sales of oil in US dollars.
From that point, every nation that needed to buy oil had to firstly hold US dollars, which meant that they exchanged their goods and services for dollars, which the Americans just printed.
The Americans brought their oil literally for free by printing those dollars. The ultimate free lunch for the Americans at the expense of the rest of the world.
However, the scam began to unravel when Saddam Hussein started selling Iraq's oil directly for Euro, abrogating the cozy arrangement the Americans had with OPEC. Thus Saddam had to be stopped. How?
USA concocted up a pretext to wage war (drama of twin tower blast) and invade Iraq and the first thing the Americans did was to revert sales of oil back to dollars. The currency crisis was averted for the moment.
But Hugo Chavez (Venezuela President) also started selling Venezuelan oil for currencies other than dollars, so there were a number of attempts on his life and "regime change", traceable right back to the CIA. The petrodollar cat was out of the bag.
Iran President (Ahmedinejad), watching all of this, decided to kick The Great Satan in the goolies and do the same thing - sell oil for every currency EXCEPT US dollars.
The shell game is coming to an end for the Americans. As the nations of the world find that they can buy oil for their own currencies instead of holding paper US dollars, more OPEC nations will abandon the dollar.
The worst thing for the Americans is that eventually, they will also have to buy their oil with Euro or Rubles instead of just printing paper money to get it.
That will be the end of the American Empire, the end of funding for the US military and the destruction of the US economy.
The great scam is coming to an end and there's not a lot that the USA can do about it, except start another world war!!!

#53
kerty
October 27, 2008
10:43 AM

#52

Politics of petro dollar might explain what is at stakes for both sides. The oil cartel might use it as quid pro quo to preempt usa from investing in energy alternatives that can threaten dependence on oil. It also explains why no serious energy alternative has emerged over last several decades even when politicians have kept promising it. They know that entire edifice of American economy would come crashing down if oil cartel decides to do away with dollar as a currency of oil.

#54
George Sore-Ass
October 31, 2008
01:02 PM

Hey...MR.KNOW-ALL Kerty...school boy Kerty....copy and paste Kerty...source -unknown??...who are you kidding?....why??...cant't you acknowledge...ever heard of plagiarism or if you understand plain English THEFT?? Do you have anything fresh/original/insightful to add apart from your copy paste jobs?We kinda surf the internet too you know?If you are going to lift an article word for word you might as well acknowledge the source or even simpler...create a hyperlink.

What you tried to palm off as your own comments is available hereKnow-all Kerty's amateurish copy paste job...word for word lifting of article exposed

#55
kerty
October 31, 2008
01:27 PM

#54

I did acknowledge that the source of the post is 'unknown'. It is in the very first line. I had received it by email which must be making rounds on internet, so I had no way to attribute the source. BTW, what I had received is a professional-looking PPT presentation, which I had to cut and paste into a text post as I do not know how to post a PPT file on DC.

Does plagiarism lessen the power of ideas or validity of truth, testimony of facts? May be plagiarism is a code of dishonor among writers and journalists but I pretend to be neither. In the end, in the real world of ideas, it is not the source, not who said it and how it is being said, but what is being said that matters the most. World has to deal with the message no matter who is the messenger is and where it originated from.

#56
curious
November 16, 2008
06:11 AM

“ The ultimate result of shielding men from the effects of folly is to fill the world with fools” -- Herbert Spencer, English philosopher (1820-1903)

#57
kerty
November 18, 2008
08:21 PM

GM is now on the verge of bankruptcy and seeking a bailout. There was once a saying 'as goes GM, so goes the economy'. Auto industry was truly an engine of economic growth until foreign cars raptured it. Thankfully, tech sector came along to replace auto sector as the chief mascot of economy. And when outsourcing cracked the tech-sector, real-estate sector became the main engine to pull the economy along. They all are falling like a domino - tech, real estate, and now auto - three pillars who have sustained the economy for last 50 years. The finance and insurance that have provided the economic infra-structure have fallen too. In a nut shell, there is no bottom for this economy from free fall. Only thing that can pre-empt depression and pull it out of recession is government.

Thankfully, government is in an able hands who believes in government as a cure all. Perfect timing. Had it been McCain, he would have dogmatically limited government's role in economic rescue and America would have crashed for sure. Obama can use government without restraints and it will be a good thing for the economy. Forget tax and spend, it should go all out for 'print and spend' - it should bailout every key sector until economy turns around. Worry not deficits - Obama should go for it without remorse or restraints. Deficit financing was invented precisely to tackle this kind of situations. Let there be only thing that remains sick in the end - deficit-ridden government. Government should mop up sickness from US economy. When economy finally turns healthy, sick government can eventually be cured, so worry not about it at the moment. As along as bailouts do not engineer welfare state or entitlements that stay on beyond economic recovery, and that should be the role of GOP to make sure. I think in 2-3 years, this economy should turn around. If Obama pulls it off, and I think he can, he will be hailed as a great president for a generation. Yes He Can.

#58
kerty
December 22, 2008
12:25 PM

How India Avoided a Crisis
By JOE NOCERA: Dec. 19, 2008
NY Times

"Part of the reason is cultural. Indians are simply not as comfortable with credit as Americans. "A lot of Indians, when you push them, will say that if you spend more than you earn you will get in trouble," an Indian consultant told me. "Americans spent more than they earned.""

"Mr. Parekh said, "Savings are important. Joint families exist. When one son moves out, the family helps them. So you don't borrow so much from the bank." Even mortgage loans tend to have down payments in India that are a third of the purchase price, a far cry from the United States,
where 20 percent is the new norm"

Read Full article
http://www.nytimes.com/2008/12/20/business/20nocera.html

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