Page 2 of 2 Rules, leverage and the fall of man
By Julian Delasantellis
rapidly rising standing of living, object to the nation's treasure being
frittered away, essentially to be used as kindling in American backyard
suburban barbecue pits?
If the lenders don't object, will the borrowers? In the current fiscal year,
the US government will spend $281 billion, about 10% of the budget, on
servicing the national debt; the only line items bigger are the Pentagon, and
the mandatory income support programs of Social Security, Medicare, and
unemployment compensation. The huge, budget-busting bailout efforts will
certainly push up the interest on the national debt budget line, probably past
Pentagon spending, by early next decade.
Will taxpayers object to that, the fact that their government and
taxes are now essentially a confiscation mechanism that funds a previous era's'
profligacy? If they do, what if some populist demagogue arises to contend for
power by advocating welshing on this debt? By this time, China and the other
central banks would be massively invested in US debt (they already hold $2.4
trillion of Treasury and US agency debt); if they see the prospect of not
getting paid back, through either an outright default, or by the government
acquiescing in the development of runaway inflation that would essentially
amount to the same thing, they'd be wanting to sell-fast
But the exit doors to the US government's debt market and, to the US dollar in
the foreign exchange market, aren't wide enough if everybody's trying to get
out at once. The first sellers would get out with the most, and that could
engender a seller's panic to see who can force their way to the front of the
pack.
In that case, perhaps all that Paulson and Co would be doing is delaying the
crisis of 2008 to the crisis of 2012.
Just since Wednesday, these international implications of the bailout have
caused the US dollar to fall from 1.41 to 1.45 against the euro. But, as I said
above, as for right now, this is an issue of politics.
The supply and demand curves of the political market operate totally different
from those of economics. Economic actors act to maximize return, political ones
act to minimize risk. In markets, it's most important to charge what the market
will bear; in politics, a similar operating credo would be defined by the
initials CYA, and, no, that doesn't mean to "cover young appletrees".
Politicians most desperately strive to stay in office, for, with every next day
of incumbency another credit, another chit, can be garnered from wealthy
petitioners to power that will be most profitably exchanged for cash on the
final day of Mr Man of the People's suckling on that big juicy public teat.
Paulson's bailout proposal was wildly unpopular when it was first announced,
and, as the hours pass, it becomes even more so - he made it even more
dislikedd on Sunday by admitting that foreign banks would also be eligible for
taxpayer largesse in the bailout - there's absolutely no place Americans would
rather have their taxes go than to foreign financial institutions, right Henry?
That should not matter if the bill's proponents, which include most of American
society's power elite, even the usually rabid anti-government editorial page of
the Wall Street Journal, can get it through the congress fast. After all, it is
only the foolish American public who really still believes that the people have
any real voice in government in matters other than such critical issues as gay
marriage and flag burning.
But if the process slows down, if the bailout proposal doesn't pass congress by
Thursday or so, things could get interesting.,
For the free market, anti-government Republicans in congress, the prospect of
having to vote for a government market-rescue plan this huge must be about as
appealing as the Ku Klux Klan having to bring the clean sheets for their
daughters' sleepover at the men's dormitory of the Black Panther Party.
Still, I have not yet heard of any plans to use the well-worn (they've done it
92 times just since this congress convened in January, 2007 ) parliamentary
tactic of a filibuster, a threat of endless debate, to stop the bailout when it
comes up for a vote in the senate. As of early this weekend, the party is on
board for the bailout - just as long as they get what is called a "clean" bill,
one without any added Democratic Party legislative assistance for the
unemployed, or protections for mortgage borrowers threatened with imminent
foreclosure. To put it colloquially, the Republicans well know that they are
being served with a big hot (obscenity for human waste) sandwich, but pride has
them objecting to any added extra excrement condiments placed on their hoagie
by the Democrats.
Will the Democrats do this, will the party finally get some payback for all its
months and years of legislative outmaneuvering and humiliation by finally
trying to use their thin legislative majority for something other than just
producing an impressive letterhead on their stationery? If they do, how far can
they push before the Republicans bail, killing the entire bailout bill and
leaving the markets poised on the razor's edge of catastrophe?
In reality, the maximum utility solution for both sides is for the bill to
fail, with the other side getting the blame for the subsequent market
pandemonium. Since that solution can only be attained by one side, the
"prisoner's dilemma" result that maximizes the return for both sides is to
compromise and agree on the Paulson plan - as long as both sides are confident
that the other side is not double dealing behind their back in trying to claim
credit for the most beneficent parts of the bill while sticking the other side
with all the costly unpleasantness.
The enemy here is time. If passage through the legislative process gets
delayed, it would allow an anti-bailout popular movement to form and flourish
in talk radio and the blogosphere. That would put tremendous pressure on one,
and then probably the other, side to kill the bill - exactly the mechanism that
sunk the elite-favored but popularly opposed Dubai ports deal in 2006 (when an
Emirate company could have bought up interests in US ports).
What will John McCain do? Barack Obama, being the veritable poster boy for what
is called "goo-goo ( good government) liberalism" will undoubtedly support the
bill come hell or high water, but for McCain the calculus is more complex. His
post convention Sarah Palin bounce had him up in the polls by 5-7 percentage
points two weeks ago, but with the crisis blowing in at full howl, the public's
association of the Republican Party with Wall Street and greed has flipped
those numbers to about a current 5% Obama lead. If his numbers continue to
slip, will he go full throttle populist demagogue and oppose the bill?
Looking at the manner of which he has already chosen to attack Obama, including
charging that the Illinois Senator wants to give a complete sex education class
to kindergarten students, one would guess that the answer would be yes.
If he does, the initiative collapses, and then the markets do the same. The
Democrats are not all alone going to carry the cross of the bailout's
unpopularity to their electoral crucifixion in November.
So it's not as if the markets have found their way to the promised land just
yet - it's just that, after wandering around in the desert for over a year now,
salvation's fields of milk and honey are now in at least a hazy view.
But one must really slow down with speculations on the endless possibilities of
the future to relish the momentous significance of the present. The world
historical era of ultimate faith in markets, and ultimate derision of
government, ended last week. The era's end was announced on Friday morning by
one of its previously most fervent proponents, President George W Bush. He
addressed the public from the White House Rose Garden with a pronounced hangdog
look on his face, like a naughty schoolboy kept after school being made to
write "I will re-regulate the markets" 100 times on a chalkboard.
"There will be ample opportunity to debate the origins of this problem. Now is
the time to solve it. In our nation's history, there have been moments that
require us to come together across party lines to address major challenges.
This is such a moment. Last night, Secretary Paulson and [Federal Reserve]
Chairman [Ben] Bernanke and [Securities and Exchange Commission] chairman
[Christopher] Cox met with congressional leaders of both parties - and they had
a very good meeting. I appreciate the willingness of congressional leaders to
confront this situation head on. Our system of free enterprise rests on the
conviction that the federal government should interfere in the marketplace only
when necessary. Given the precarious state of today's financial markets - and
their vital importance to the daily lives of the American people - government
intervention is not only warranted, it is essential."
If this is the right hand side bookend for an era, when was the left hand
bookend placed down? When did the era begin?
Some would say it was the economic dislocations that followed upon the Arab oil
boycotts of 1973, or maybe the election of Margaret Thatcher as British prime
minister in 1979, or that of Ronald Reagan as president in 1980.
For me, it was in New York City on the hot, muggy night of July 13, 1977, that
faith in government died. That was the night of the famed New York City
blackout, when a lightning strike on a Hudson River substation plunged the City
into darkness, upon which followed a night and a day of looting, mayhem and
arson.
At the time, Newsweek magazine described the night this way:
The "night
of terror," in Mayor Abraham Beame's anguished phrase, spread from slum to slum
out of Harlem to Bedford-Stuyvesant in Brooklyn, Jamaica in Queens and the
down-and-out South Bronx - and in some neighborhoods flamed on into high-noon
daylight. More than 2,000 stores were pillaged, and guestimates of property
losses ran as high as $1 billion - enough to qualify the stricken areas for
Federal disaster aid. A mile and a half of Brooklyn's Broadway was put to the
torch. Protective metal grills were tom off storefronts with crowbars, battered
down with cars and dragged down by brute force. Teenagers first, then grade
schoolers and grownups rifled shops and markets for clothes, appliances,
furniture,television sets, groceries - even 50 Pontiacs from a Bronx
dealership.
One looter in Flatbush was caught returning a black-and white TV for a color
model. Others in Harlem set up shop in an abandoned store and retailed their
loot, the offerings ranging from Pro-Keds sneakers for $5 to color consoles for
$135. Hospital emergency rooms were jammed with the wounded - many of them cut
in encounters with plate-glass windows.
The conclusion that
America took away from that night was that New York City's very expansive and
ambitious attempt to set up government institutions that socialized its
citizens as well as the family had failed, and that would make all government
suspect.
Thirty years later, we have witnessed another round of merciless looting,
pillage, and destruction, that of the world financial system. The blackout
looting only cost, according to Newsweek, $1 billion; this latest lesson will
probably, before all is and done, cost $2 trillion, more than it cost to defeat
Nazism and Fascism in World War II.
What was the lesson that was forgot here and now has had to be relearned? I
think it is that no human seventh heaven on earth will ever be so perfect as to
not need regulations, laws, and the cops to enforce them. The Pilgrims who
landed on the rocky shores of Massachusetts in 1620 to construct God's paradise
in the New World knew that when they took with them stocks, and gaolers to put
citizens in them. Vladimir Lenin knew that after the 1917 Communist revolution
in Russia, when he converted the Lubyanka insurance building to a prison and
secret police headquarters, and appointed the fearsome Felix Dzerzhinsky to run
the Cheka that operated out of it.
But the free-market revolutionaries of the past third of a century always
considered the market to be such a pure and noble institution that no
regulations and regulators were needed to keep it so; it would magically do
that by itself.
It didn't. For conservatives, a group that can never seem to end a spoken
paragraph without a reference to the Bible, it's surprising that they forgot
the funny part in the beginning about the fall of man out of the Garden of
Eden.
Well, maybe that's the difference between reading a book and using it as a
fashion accessory.
Julian Delasantellis is a management consultant, private investor and
educator in international business in the US state of Washington. He can be
reached at juliandelasantellis@yahoo.com.
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