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America's challenge: 1929 or 1941?

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Paul Mason | 21:00 UK time, Tuesday, 30 September 2008

There's been a bonfire of the vanities since the Wall Street meltdown. Major names in banking gone; a whole ideology up in smoke. But could this be the start of a broader American decline? That was the bar-stool talking point when the world's leaders came to New York for the UN General Assembly, and it will be the subject of a discussion here on Newsnight tonight, towards the end of the programme.

Here's my take - and feel free to hit the comments button (my bosses have come over all "American Network" and told me to do an "essay" like real US anchorpeople get to do - I have not managed to get any big hair though. Here goes...)

At the start of this decade it looked like America had unchallengable military power, the economic dynamism to pay for it, and a highly exportable freemarket ideology...after just two weeks, much of this is in doubt. Washington's inability to solve its banking crisis has already harmed the USA's standing in the world. The German finance minister Peer Steinbrueck last week said US financial supremacy is over; today various EU politicians have come in for "afters" on this theme...

Commission spokesman Johannes Laitenberger said that the "United States must take its responsibility in this situation, must show statesmanship for the sake of their own country, and for the sake of the world.".

The financial crisis is now impacting directly on the key sources of America's economic power in the world: its borrowing power and its currency Under President Bush, the USA has moved from a budget surplus to a $438bn this year. It will have to borrow $1 trillion more just to pay for the bailouts under way.

But when you look at what the money has been spent on, you realise how its ability to go on borrowing underpins its place in the world. US military spending has doubled since 2001.

Here's the problem, put brutally: who holds America's debt? China. Who gently told them to bail out Fannie & Freddie or face a run on the dollar? China. Who has been trying to buy in to major US companies but been blocked by politicians? Among others, China.

This is where the ideological problem kicks in.

Throughout the American century US thinkers and strategists insisted that freemarket capitalism is the necessary condition for democracy; this is the premise of Milton Friedman's Capitalism And Freedom. But with China and Russia, we see the rise of new capitalist superpowers where political freedom is curtailed; and now, in its heartland, the market has to go cap in hand to the state.

Where this leaves the much-analysed, not often read in the original "Project for the New American Century" I will let our panel explore.

Globalisation dawned less than 20 years ago; for much of that time Amerca has been the unchallenged hyperpower: its ideas dominant, its dollar resilient.

Maybe the crisis is on a scale parallel to 1929; but for the scale of the strategic challenge, maybe you have to think of another year. It was veteran investor Warren Buffet who raised the parallel with Pearl Harbor - and he might not be far wrong.

In 1941 the American political establishment had to debate the country's entire role and priorities in the world. It was in that year that the concept of the "American Century" was born.

The way the incoming president faces this - and marshals the brains and powercentres around him - will shape the next 50 years.

Comments

  • Comment number 1.

    RAILCRASH

    They had a head-on railcrash in USA recently - didn't they?
    I remember thinking: "Surely railways use that foolproof system of having just one 'key' to the stretch of track in question, so that only one train can be on it?"
    In money terms, that would be analogous to gold and silver coinage I reckon.
    This is all about the fallibility of humans.
    It is the giant fob on the hotel door key.
    It is why I put vital 'take with' items in the way of my exit door.
    The gormless money-manipulators failed to realise that real money can only be in one place at a time, while the notional sort can be anywhere and even collide with itself - redolent of CERN - and be annihilated.
    They called the deregulation of 1986 'The Big Bang' - there's a thought.

  • Comment number 2.

    more like 1989. the us isn't going to disappear, but it is finally going to have to reconcile itself to a more french-style "multi-polar" view of the world.

    the dollar will no longer be number one, and very much flows from that. no more cheap consumption. no more cheap imports. and the rest of the world will suddenly seem much bigger and much more difficult to ignore.

    it will be a bitter pill for the poor ignorant american electorate (especially small town republican voters, with their overdependence on easy credit, the service economy and the motor car). i think the 2012 elections will be much more interesting than the current ones. there will be a lot of angry, hungry voters.

    btw, you got your assets and liabilities mixed up. ireland has guaranteed banks' liabilities, not their assets.

  • Comment number 3.

    Western economic practioners are in essence economic 'munafiqun'(plural). The Arab-Islamic word 'munafiq' (singular) is more apt description than English near-equivalent word: hypocrite. In Arab-Islam context, the munafiqun brings dire consequences to the society and have to be admonished and punished for it. The Western concept of a hypocrite is a light-hearted one: favourite material for stand-up comics and sometimes held in awe by the general public who perceived it as being just smart-ass.

    It is no surprise that Bush, Paulson and Bernanke are quick to insist that we move away from the blame game and get to the solution quickly. This is the classic explicit act of the munafiqun. Self-serving and self-perservation being more important than societal consideration. Despite their positions of authority and access to resources, their best answer is the Wall Street equivalent of using 'other peoples' money'(OPM) with minimum accountability. No fore-thoughts as to the effect to the morale, patriotism and sense of justice of their fellow USA citizens. This is the initial decline of the USA, but there is still hope, as the US Congress check these munafiqun.

    "Thinking outside the box of munafiqun mindset" is the first step in solving this financial mess. It is well documented fact the financial derivatives are the handiwork of investment banks' 'quants'. Why is there no specific and quantifiable description of US 700 billion problem loans? Are we only to believe Paulson's word that all of it is bad? Can we not use these same 'quants' to analyse and to aid us in getting a quantative handle on this problem.

    Using the contagion effect to scare us is another classic munafiqun tactic: "You will all go to Hell" when in fact they are way ahead of us in reaching Hell. The contagion effect only make sense if there is no alternative.
    For example, if US Banks cannot finance hire-purchase spending, maybe, we could ask the Chinese and Japanese to finance the US consumers. They have sufficient reserves via their surpluses to do so. The Japanese "money shops" are experts in consumer financing.

    The supply chain of raw materials from a foreign country to US factories will not be disrupted due to a lack of US banks' credit. If the foreign countries' financial institutions step in and accept the a part of the finished goods as collateral.

    Domestically, US Fed or other federal departments could start a list of quasi-financial organisations to take over the banking functions. This is practised in developmental economic programmes in many countries. The USA has one administering its farming subsidies.

    What Bush and fellow munafiqun are suggesting is socialism with prejudice. Typically a munafiqun mindset, without any sense of social justice, yet happy to capitalism for "only for my friends" socialism.

  • Comment number 4.

    For a good explanation of the US "managing empire through bankruptcy" read Loren Goldner's Fictitious Capital for Beginners:

    http://home.earthlink.net/%7Elrgoldner/imperialism.html

  • Comment number 5.

    Hmm.. Maybe America is like a UK Supermarket - but I am not sure which one..

    Is it like Tesco, so dominant, that the fact of not having quite so much 'dosh' won't make a difference as its 'footprint' [like military power] will be there for ages. And the powerful strength of its negotiating relationship with suppliers will not disappear overnight [foreign policy influence..]

    Or is it more like Sainsburys, with its Justin King inspired emphasis on building a better relationship with suppliers and environmental soundness - just so long as it isn't bought out by a hedge fund which put those things on the back burner...

    Or is it more like Asda [Wal-Mart] with a pile it high, sell it cheap philosophy which may not be too sustainable and which exports a lot of problems to its foreign suppliers and pays too little emphasis to corporate social responsibility.

    Or will America end up like the German discounters - foreign owned, with other super powers calling the shots, and expecting American values to fall in line with what foreigners tastes are ??

    No doubt this post will soon get deleted for fear of libel action from the folks at Carter-Shilling-and-run, to protect the reputation of the Supermarkets.. but hey it is only an analogy, so respond to it while you can..

  • Comment number 6.

    NUB

    At #3 above, sizzlestick gets to the nub of human failing - in whatever arena; it is the individual human. And when they exhibit a Deadly Sin writ large, we should concentrate on that factor, because its eschewal is, ultimately, the solution to all problems. e.g. Iain Duncan Smith, bedazzled by Blair's charisma, gave us our part in Iraq.

    We are now informed that Shiny Boy Cameron has a personal weasel and dodgy big-money chums, EXACTLY LIKE BLAIR. If Clegg has nothing similar, it might explain his position in the league table. One thing is sure - he will go the same way. Westminster will get him.

    British hypocrisy is second to none and we exercise a subtlety, in corruption, that passeth all understanding. The seat of such magnificence, is Westminster where, to the essence of party politics, hypocrisy is MSG, and corruption is salt of their inherited Earth.

    LET'S GET PERSONAL. Don't let the political hooligans hide in the crowd. Read their speeches carefully (and wonder who wrote them) spot the trickery; shame the DISHONOURED individual, and thereby the whole process.

    These Westminsterites roam our lives like 'Feral Youth' roam our streets. We have FERAL GOVERNANCE - a law to itself, small minded and power mad, casually inflicting pain, cerebrally challenged and dodgy as Hell. SPOIL WESTMINSTER GAMES!

  • Comment number 7.

    I usually like Mr Mason's work, and he has always seemed like a nice fellow when I have bumped into him in Heathrow. If this were an 'essay', however, it would barely pass sixth-form. Why the Newsnight editors would even allow such a quick-fire assessment to pass as real reportage, I have no idea. Where was the usual depth of argument? There are plenty of counter-points that can be made to suggestions he casually bandies about.

    Mr Mason neglects to mention, for one, that China is hardly 'calling the shots' . Chinese and Indian economies do indeed have more liquidity at this time, but only thanks to American and European money: if the Western economies collapsed, so too would China's, which is fundamentally reliant on Western spending power. I'm also sure Mr Mason is well aware of the many potential pitfalls which await the growing Asian economies, not least among them a level of widespread poverty and social tension far beyond that of most developed economies.

    As to the possibility, mentioned last evening, that the more 'top-down' governmental approach to market management along the lines of a Chinese or Russian model may gain favour, this is highly questionable at best. History gets forgotten so quickly. It is worth remembering the doom-mongering about capitalist economies throughout much of the Cold War when many people believed the Soviet economy was going to be the most robust. We all saw how well that worked out. Then, in the 90's, everyone foretold of a growing Asian superpower -- Japan. It was buying up Western businesses and set to exceed the American GDP. The Anglo-American model was 'finished'. Yes, we all saw how that went too. This is old territory. Perhaps some of us are too young or forgetful to recall that. As far as Russia is concerned, its economy is still fundamentally volatile (not to mention corrupt). The idea that it could be seen as an economic model is frankly laughable. It might have been useful to mention that their recent -- emphasis on 'recent' -- economic growth has almost entirely been built upon natural resource wealth. Oil and gas are indeed fueling their economy, but that has also left them badly exposed to the volatility of those commodities (one need only look at the powerful impact the recent swings in oil prices have had). That is to say nothing of the position of strategic vulnerability this places them in to boot.

    People have prophesied doom in one form or another for decades. These modern day soothsayers -- the economists -- have often done as well as the weatherman when it comes to the accuracies of prediction. Some people would no doubt like to believe we are entering a 'multi-polar' phase, and though there is much talk of that, there is little proof: America's economy still utterly dwarfs that of any other, including China's and our own (their bailout plan is in the whereabouts of 33% of our GDP alone). Whatever one thinks of the quality of life it produces, its economy is more productive, and in terms of its higher education, technology, the military, cultural influence, and even its space programme, the US remains far ahead of any up-and-comers. Nor does hyperpower influence dissapear overnight.

    Lastly, I seem to recall that the US suffered a Great Depression, and that they never recovered. Wait, actually they did.

    Market economies are ultimately very resilient, and I expect the case will be no different here. It has its flaws undoubtedly, but greed and stupidity are not unique to capitalism. The idea that America is going to collapse is, however, simply poppycock. And if it did, the rest of the world will go with it, which makes it exceedingly unlikely that others will be in a better position.

    PS - 'Benegyrek', do you typically draw such broad generalisations? It is deliciously ironic to see people who can stereotype so crudely and yet speak of the ignorance of others.

  • Comment number 8.

    Your reference to the increase in US military spending parallel to the growth in US debt is useful.

    As I've pointed out previously, that form of national welfare support for the war industry has always been there, swallowing up the Federal budget.

    Let's hope these parallels are being noticed also in the US. Stop the war on Iraq.

    And how much better would our national account look if we hadnt been splashing out on killing people overseas, including the absolute hopeless war in Afghanistan, against - the Afghanis?

  • Comment number 9.

    NAIVE (OR CYNICAL?) EGALITARIANISM

    Citheroun (#7) What's driving the economic/political decline of the USA and EU is differential fertility (and its consequences). It's worried behaviourally informed analysts/demographers for years. US (and UK) census projections (linked elsewhere) show no sign of these trends getting any better (see the Feb 2007 ETS(USA) report 'America's Perfect Storm')

    The USA and EU try to export anarchism as freedom/democracy and wonder why this is making enemies in countries which have struggled to develop political systems precisely to keep these dysgenic forces at bay.

    But of course, most people don't want to know, even when anarchists tell them.

  • Comment number 10.

    Barrie #6

    I am with you all the way on that one. I haven't voted for a mainstream candidate for many a year yet still they get elected. I complain bitterly about the stinking stew that is Westminster to all those I meet and most agree. It appears to be a majority view. So how come still nothing happens? We can't shame them - they are shameless. How CAN we spoil the party games? Armed insurrection?

  • Comment number 11.

    INTEGRITY IS POWER?

    Thanks New Fazer. In my youth (1995) I approached Rowntree with a scheme to empower the young with a view to promoting true maturity, wherein lies integrity. Naive - moi?

    As you know, I stood for parliament under the 'banner' SPOIL PARTY GAMES, but while the local paper loved it, few knew what I was on about. (Only 3000 between Con and Lib/D here so I shall be out again - not as a candidate - but as agent provocateur, come the day.

    Perhaps (!) if there is enough anger over bad governance still around at the election, the point can begin to be driven home.
    I think 'None of the above' might be a start.


    PS How squirm-inducing to see Cameron suddenly 'unsure' that they will win - presumably because that does not sit well with the 'statesmanship' of cooperation in dire times. Hypocrite.

  • Comment number 12.

    And here comes the Shock Doctrine from the Tories. The bank, bank, bailout talk has left it wide open to them to attack public services (after all 'the cupboard is bare' ) and use the current situation to propose a public service paradigm shift.

    Which is why there needs to be a counter to this - a questioning of all the rubbish we've been told as a sell for public service privatisation eg private provision better than state, consumer choice rules, competition is the way to go etc etc. All these are failing in other arenas and in fact are failing in public servcie provision too.

    It is time for sound arguments from a left base - using the current events, not getting dragged along or left behind by them.

    It will not, unfortunately, come from the Labour Party - a bit hard really when they have pushed through the privatisations.

    But if they were to grasp it, it would still be the way to win the next election.

  • Comment number 13.

    STICKING IT TO OURSELVES

    NewFazer (#10), Barrie (#11) Look around at countries estimated mean IQs (there are national samples for many, it's how tests are constructed after all). or look at OECD PISA scores. Then look for democracies where the means are low (their GDPs are crude proxies). If dysgenic demographic trends in the EU and USA continue, I predict Barrie will have his one-party state soon enough as low literacy and numeracy levels make anything else non-viable/productive. This temporary Brown-Cameron's fusion in the wake of decades of anarchism and living beyond our means can't hold for much longer, can it? Please. It's this obsession with anarchistic economics and the absence of effective governance which has brought this mess about isn't it? So many have been conditioned to believe that the absence of Liberal-Democracy is inherently evil, that few now will listen, after all, that was the whole point of post WWII de-Nazification, then the Evil Empire propaganda, and then the 'War on Terror'. It was all just to reinforce domestic free-market anarchism as a Human Right. They've even tried to enshrine it in the Lisbon Treaty. But I just see it all as peddling ..well what would you call it?.

    I'd rather like someone to show that this pessimism is unjustified, but sadly, as evidence-driven, refutations have to be too, and most of the time I just get complaints that it's all a bit upsetting (suggesting that I just want to make people miserable). Alternatively, why are so many people so happy? I've been drawing attention to the ETS data for nearly two years now (and I worry they picked up the basic idea from me as I've been saying it for many years). Our trends here aren't much better, in fact, they're worse given all his recent immigration, and education, education (read dysgenics, dysgenics, dysgenics) which ha been making matters worse, worse, worse (albeit slowly via differential fertility so you don't notice). Too much of the population is suffering from what seems like 'developmental disability' or (deluded) narcissistic entitlement (just think adolescence, debt, 'opining' etc) as it is, and New Labour and the Consrvatives before them have just made it worse. Is New Labour trying to break up the country, top the intelligentsia and swell the proletariat to slot hoards of debt-hungry sub-primers into the EU NUTS so their backers can milk us more easily under EU wide standard conditions via the supemarkets, casinos etc? Markets indeed.

    Stayingcool (#12) Yes, but they won't, as they're too scared of being called Stalinists, Fascists or Nazis which is clearly far worse than being called idiots. They know there aren't enough dissidents to matter in any election. We'll go the way of Kenya, Pakistan soon.

  • Comment number 14.

    JJ #13

    OK, let's say we accept all that. And also let's say that we have pretty much established that the source of all our woes is Westminster with a bit of help from Brussels. Added to that it seems that we cannot vote them out, we cannot shame them out and we can't ignore them out either.

    What's your plan JJ?

  • Comment number 15.

    Citheroun # 7

    Your enthusiasm for USA's resiliency in the past is seductive point but is not evidence for USA's future success. As in Lehman Bros' and ilk's advertising of their structured products, the proviso 'past performance is not a predicator nor a guarantee of future success' is applicable to your analysis.

    This may be a surprise to you, but the rest of the world excluding the Western Bloc is better prepared for the decline of USA's economic supremacy than the dire contagion effects described in the popular Western media.

    Of course you do not hear their leaders saying so because diplomatic nice-speak does not permit it. As you read this, I am not surprised that sound domestic banks from Singapore to Sao Paolo has curtailed their lendings to USA banks. I am sure a domestic bank from Singapore has no problem in setting up a branch network in an American state of similar population size of 4 million, if permitted.

    Even non-White Hispanic Chavez of Venezuela sounds sensible against the recent fuzzy-wuzziness of Bush. The ultimate free riders got to be the Indians of Bangalore, they leveraged on patent-free and low royalty fees computer knowledge to command a decent piece of the global information technology market.

    The rest of the world is not as dumb and helpless as you think.

  • Comment number 16.

    NewFazer (#14) Encourage as many people as you can to pressure Labour to eject its Neocons/New-Left state-busting Trotskyites/Mensheviks, and return to the National Socialism of the 1930s (and Britain in 1945)? Failing that, expect a new party to emerge soon, hopefully not like the BNP/UKIP?

    Whatever aberations occurred between 1939-45, a lot that was good in Italy under Mussolini, the USA under FDR, Germany under Hitler, and Stalin in the USSR gave people collective hope and stability. In the 1930s, people in the USA, UK, Europe and USSR didn't look upon National Socialism the way that we do now, that's largely been conditioned through distortion of the facts as 'terrorist' propaganda from those who wanted free-market anarchism to prevail and we've seen recently how that works/who it benefits. That's exactly how things went wrong in the 1920s/1930s and it's what Hitler was fighting in Germany (i.e. the perncious influence of international finance, which he associated with Bolshevism (athough maybe he should have referred to Menshevikism, see how the Mensheviks and their journal, 'The Socialist Messenger' ended up in 'Liberal' New York). Both anarcho-capitalsts and Trotskyites undermine statism/regulation, which is why, in the early 1920s USSR, an anarchistic liberalism prevailed for a while until Stalin took over and why Stalin told the German communists that's the future of socialism in Germany lay with Hitler. Hitler had a lot of support (see the extent of the Axis Powers, and sympathy in the UK and USA), but depriving Jews of their citizenship, businesses, homes etc was bound to elicit extreme retribution, and of course, he got it. All forms of National Socialism have been savagely attacked ever since.

    Still, in practice, I think it helps to see post war Old Labour as National Socialist. New Labour, like the anarcho-capitalist Conservatives, have spent decades taking all that apart (privatising it) knowing that the absence of a state makes regulation impossible (regardless of all the very 'busy' legislation in parliament, much of it so complex that it's hardly enforceable by Civil Servants or regulators if these exist in sufficiently competent numbers). Both New Labour and the Conservatives are clearly internationalists (just as the USA Democrats and Republicans are) and just as Trotsky was. Neocons are essentially ex-Trotskyite 'Liberals' (though most won't/don't see/admit it), and what they hate is big government, anywhere. 'The free-market' is just a euphemism for Trotskyite predatory anarchism, made-over and sold as Politically Correct, but contrary to common-sense, freedom and grass roots democracy. It all makes predatory business much easier.

  • Comment number 17.

    Criticism from the EU about Ireland protecting savers, in case savers go there.

    (thus telling them that were right to vote against Lisbon Treaty?!)

    But funny - no criticism when Ireland offers the lowest corporate tax rate around, and corps relocate there

    What does it all mean??

  • Comment number 18.

    PLAN WARS

    Well done NewFazer - you got a plan out of JJ.

    I am miffed at being told my plan is a 'one party state' by JJ, when I keep writing 'SPOIL PARTY GAMES' - that surely includes one party? I have forgotten the name of that pedantic language pedant, dear to JJ, but I am sure he would agree!

    Also miffed that JJ is having a go at opining.
    If I could not - O how I would pine!

    I just want to see if we can raise individual stability and competence (before the dysgenic curtain falls) to a point where a lot of stuff comes right - de facto. It is just my choice (plan) out of all the other pointless things I can do in retirement.

  • Comment number 19.

    Barrie #18

    JJ and I work rather like Morecambe and Wise. I do the feeds, JJ does the punchlines. Or just makes scornful noises.

    Looks like we have to start a new Old Labour Party. I wonder if it wold fare any better than did the old Liberal party?

    What a game eh?

  • Comment number 20.

    THERE'S NO ANSWER TO THAT

    Who came on?

  • Comment number 21.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 22.

    Been a while since I looked in - gratified tonight (Wednesday) to see that American and French politicians anyway are still capable of holdings sensible and productive conversations with their television interviewers.

    Surely Warren Buffet's 'Pearl Harbour' remark more figurative than a reflection on US strategic role in the world? That's how I took it and anyway I don't rate the Sage of Omaha all that much - sure he turns a few bucks now and then but real money - nah.

    I so much enjoyed the panel discussion - Irwin Stelzer, Josef Stiglitz and Gillian Tett. On this occasion I thought Irwin Stelzer a little cut out but I understand it's difficult with time constraints: 'Place the Face' could perhaps have waited another day but then all the same I confess I did enjoy it. I noticed George Osborne ducked - which just goes to show how serious he is and absolutely not that he's simply dull or anything like that of course.

    For what it's worth I thought Irwin Stelzer most straightforward: fix the mess and make sure it doesn't happen again. Joseph Stiglitz also right to remark the root of all this goes back to the SE Asia crisis and the IMF handling of it. Lord Lamont concluded a newspaper piece recently with the observation that in future we shall be less inclined to tell other people what they should do and perhaps no bad thing he thinks.

    I suggested some time ago in one of these blogs that it would be an idea to get some perspectives on the crisis and suggested a starting point might be the irony that it is America's poor and underpriviliged who have brought the US financial system to its knees and again they were a force in the Congress 'no' vote (because it was their representatives amongst others who felt they couldn't vote 'yes'), this time with global implication.

    Still time before Friday's re-vote (not a done deal by any means I fancy).

  • Comment number 23.

    rinpoche1 (#22) "For what it's worth I thought Irwin Stelzer most straightforward: fix the mess and make sure it doesn't happen again. "

    Is that irony?

  • Comment number 24.

    citheroun

    i agree with a lot of what you say. the coming recession of the us economy will be disastrous for the rest of the world, not least china which has huge problems of its own (including a very shaky banking sector). the usa and a more regulated "anglo-saxon" model will of course survive this crisis intact.

    however, this crisis is fundamentally about the us economy and its unsustainable binge on cheap credit that has been fuelled more than anything else by the role of the dollar as the world's reserve currency. if the chinese and others decide it is no longer sustainable for them to continue subsidising the us consumer, the dollar will capitulate, with far-reaching consequences.

    and have no doubt that this crisis is going to get a lot lot worse, even with the bailout:

    http://sastocks.files.wordpress.com/2008/07/veneroso-why-the-second-wave-is-inevitable-61908.pdf

    imo we are entering an era in which the usa will no longer seem exceptional, neither to the rest of the world nor to its own electorate. i think in the long run this is a good thing. but in the short run i think we will see a lot of confusion and anger among the us public and throughout the world (a la 1930s), and this could be dangerous.

  • Comment number 25.

    Too early for Thursday so I'll put this here.

    I watched Christine Lagarde on Newsnight last night and thought her a decent old bat so the following in a piece in DT by Ambrose Evans-Pritchard caught my attention:

    "We now know that it was French finance minister Christine Lagarde who begged Mr Paulson to save the US insurer AIG last week. AIG had written $300 billion in credit protection for European banks, admitting that it was for "regulatory capital relief rather than risk mitigation". In other words, it was underpinning a disguised extension of credit leverage. Its collapse would have set off a lending crunch across Europe as banking capital sank below water level."

    The AIG thing comes from an FT piece "European banking on borrowed time " September 23rd and the source was AIG itself (2007 AIG annual report) but I can't find a source for the claim that Lagarde put pressure on Paulson.

    Worth chasing?

    The $300 billion "regulatory capital relief" (read "regulatory requirements avoidance") is a story in itself.

    USA General Electric's continuing woes also worth noting imho. That could easily be the next one to go and I'd be curious to know how much credit insurance is out on its bonds: a couple of trillion dollars give or take a few Goldman luncheons is my guess.

  • Comment number 26.

    rinpoche1, that is fascinating if true.

    watch out for ambac as well. they should be due for a business-model-wrecking downgrade soon..

  • Comment number 27.

    DARE TO IMAGINE

    Once upon a time, not so very long ago, on a planet not so very far from here. The curious ape-like inhabitants spent much of their time beating seven bells out of each other. As they progressed and became more civilised they grouped together in gangs and developed better methods for causing grief. The gangs became tribes and the tribes became nations and set about one another with ever increasing effectiveness.

    One particular group over extended itself and as a result got beaten to a pulp by all the other nations who had cleverly called a truce amongst themselves for the duration of the event. Delighted with the results of this best scrap so far, the group of nations swaggered about all over the territory of the vanquished nation and generally threw their weight about. They stole most of the goodies, annexed large portions of the territory, imposed all sorts of restrictions and made themselves completely unbearable.

    After a while one of the vanquished ones got a bit fed up with all this and developed a cunning plan. He started talking to his fellow countrymen and gave them the idea that they were still worthy types and deserved better. He said that they should become a proper nation again. That they should no longer accept the tyranny of the other nations and take back what was rightfully theirs. They closed their borders, ejected those whose views were not helpful and set about rebuilding. The nation became proud once more and its citizens laboured for the good of all their fellow countrymen. Not everybody was happy about this, particularly a group of roving merchants whose profits were reduced by events. They went and complained to all the other nations and tried to stir up trouble for our heroes. But the other nations would have none of it. They went and spoke to the man with the big idea and learnt from him, went back to their own countries and used his ideas. Peace reigned and the inhabitants of the planet prospered in the new age of industry and general all-round friendliness.

    The man with the big idea was hailed by all the nations as the saviour of their planet. And so he was.

    But just supposing the others hadn't seen the sense of it and had reverted to their old ways and set about each other all over again. What would the outcome have been then? Just imagine. Would the single nation have been devastated once more? How would our hero have been remembered? Would the victors have written their history with him as the very devil incarnate? Would they have passed laws preventing people from even talking about it? Would anyone have dared to imagine he might not have been all bad?

  • Comment number 28.

    LEGALITIES AND ARRESTED DEVELOPMENT

    Barrie (#18) 1) I'm just not sure how the election of Independents could ever work unless it was within a one-party system given the function of a Parliament (or any other assembly) is essentially to legislate. 2) I meant adolescent (narcissistic) opining. Yours clearly is neither.

    NewFazer (#27) Imagine maybe, but openly discuss? Unlikely.

    Another interesting perspective on responsibility and intelligence and
    public policy/political correctness
    . In decades past, IQ was a function of mental and chronological age. People forget that some people never grow up, even if they do reach legal age.

  • Comment number 29.

    (SELF-)CENSORSHIP AND CENSURE

    In the context of other points I've laboured (perhaps ad nauseam?), see this discussion about the USA's Communities Reinvestment Act (1975) And Google "Barney Frank Greg Mankiw".

    As to Blogdog's savaging of (#21), OK, I can see how it might have upset some... but, perhaps some should be (empirically) challenged under the circumstances? Politics is a dirty game, and pretending otherwise has its costs too - as the Frank-Makiw exchange above and the current crisis (clearly, one hopes) illustrates.

  • Comment number 30.

    Erratum: Community Reinvestment Act (not Communities).

  • Comment number 31.

    CRA is a sideshow - the banks have always done bad lending, what changed this time was that they were able to leverage up that bad lending thanks to SIVs.

    More interestingly - is the year of interest 1976? Just like Nigeria leaving the sterling bloc, what happens if the Gulf and China leave the dollar bloc?

  • Comment number 32.

    Documentries, newspapers and underground medi

  • Comment number 33.

    Documentries, newspapers and underground media , all clearily reflects that after America's government sent its troops to Iraq and some other borders,they are suffering too much. All trilions and billions on armed forces and hence the whole country's economy is being effected. I think they should consider balancing their military.

  • Comment number 34.

    Whether it's war or toffee apples, it's all done for profit. This time they have really gone for broke. Same old litmus test here, who gains?

  • Comment number 35.

    Dear Paul - as an ex MD of the Isle of Man subsidiary of the oldest clearing bank I experienced possibly the start of the present crisis back in 1993 - yes that far back. On or around that time the old regime of "plain vanilla" bankers on my board was replaced by chartered accountants some of whom had no experience at all of banking. I have nothing against accountants as many of my friends are of that profession. However banks should be run by bankers and boring old farts maybe but they would adhere to the basic canons of lending. Lending is done against a propostion backed by a good income and as a precaution the lending is secured by assets which have been valued and discounted in value by a lending matgin. Where have the basics of lending gone? The three C's - Character, capability and capital are now not considered at all when they should all be given a green light before lending is done. Lending [as my then mentor once said] is simple - it's about loaning money to people or entities in the more or less certain knowledge that it will be paid back. Let's get back to basics as John Major [I think] said. Ask the borrower for a deposit so the risk is not all one-sided and ask the lenders to consider that assets are not to be lent against in the expectation that their value will always rise - they are a safety net! - a frustrated ex-banker FCIB and very boring [maybe]!

  • Comment number 36.

    "The role of the US rating agencies and regulators (particularly the SEC) is key. By permitting worthless assets to be securitised AND graded as AAA, they opened the floodgates to ruin. Wall Street and the City simply took advantage of their joint failure and incompetence."


    Despite remarks such as this, rating agencies largely seem to avoid being in the line-up of guilty parties - bankers, hedge funds etc.

    By continuing to lower ratings they contribute to the death spiral of institutions already in dire straits.

    Time you put them under the spotlight.


 

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