Gobind Thukral

AMERICA is in deep financial crisis, perhaps worse than what it suffered during the great depression around 1930. It is also in deep moral crisis. It finds no justification in invading one after one country; Iraq and Afghanistan, all in the name of fighting terrorism. It has definitely led to more terrorism, caused death of thousands of innocent people. In Iraq alone at least six lakh people have died during the war since 2001. Afghanistan is being pushed to Stone Age with daily bombings. A secular country like Iraq has been pushed into the quagmire of sectarian violence. These wars are huge economic burdens for both the attackers and the attacked. Its economic consequences are now hitting America right and left.

America, the super power of the world, is caught in a vicious trap of its own making. The deficit for this budget year, which ends in September, is expected to rise to $407 billion, more than double of $161.5 billion imbalance for 2007. It evidently reflects the economic slowdown and this year's $168 billion economic stimulus programme is already in the government's books. The Bush Administration estimates that the deficit that begins in October will be $482 billion, a record. This is the legacy which Bush leaves for his successor. It does not include the $200 billion the administration is committed to spending two weeks ago when it took over the two biggest mortgage companies in the U.S., Fannie Mae and Freddie Mac. The merchandise trade deficit has touched a record $847 billion in 2007.

America has a staggering debt burden of over $ ten trillion ending this year, highest so far in American history. Mortgage giants Fannie Mae and Freddie Mac hold $ 5.2 trillion in mortgages. This burden stands transferred after the government takeover. With rising interest rates, the value of these mortgages and the solvency of these two agencies are questionable. The Pension Benefit Guarantee Corporation insures pension funds totaling $1.5 trillion. These pension funds are presently $450 billion under funded, and the situation may get much worse. At present there are $13 trillion in mortgages outstanding in the United States, involving 111 million homes. Three million mortgage defaults in 2008. This means three lakh people are now homeless. And then there is the matter of the country's large trade imbalances which mean the U.S. has to borrow $2 billion a day from foreigners. Now President Bush has requested the Congress for a package of $ 700 billion as a second fiscal stimulus package later this month. Treasury Secretary Henry Paulson wants unprecedented and unilateral authority to buy up $700 billion in souring mortgage assets from the very financial institutions that "engineered the current crisis." This week key members of Congress were told "that we're literally maybe days away from a complete meltdown of our financial system, with all the implications here at home and globally."

For India it is not good news. India’s $1 trillion economy exported $158 billion of goods last financial year, one third to America. This may not be possible now. This year’s $200 billion merchandise export target looks a bit difficult under the circumstances. Much of the $40 billion India earned as software exports last year came in from the US, half of which was for services rendered to American banks, brokerage houses and insurance companies. Indian software services exports look shaky this year. Within a week since Lehman Brothers and Merrill Lynch went burst, portfolio investors have pulled $2 billion out. And the cheap foreign loans that were driving the economy are now drying up. Since the world recovered from the dotcom bust financial investors poured $29 billion last year. Now these financial investors have sold $9 billion of Indian stock since the beginning of 2008. More billions are moving out. The economies of China, India and Southeast Asian countries have slowed, causing the fall of stock markets.

The fundamental question is why an economic giant like America is in such deep depression that is further upsetting the entire world. There had been series of financial bankruptcies shocking the country during the last one year. A major insurance corporation like AIG which has business in 130 countries has gone bust, forcing the government to put in billions of dollars to save the insured people. The latest is Merrill Lynch, swallowed by the Bank of America and the abrupt demise of the Lehman Brothers investment bank with $128 billon long-term commitments. It is socialism of a different kind where the big private corporations after making huge profits are being bailed out by the government with tax payer’s money. So far America has been presenting a model of a free market model and forcing the world to adopt this through the World Bank and International Monetary Fund.

The basic economic formula on which most countries including America depend is that demand breeds supply. Yet mass production with its plentiful supply does breed more demand, consumerism. This demand is not real and is pushed by clever maneuvers of the money spinning financial institutions, all in the name of growth. Repeated, it leads to outgrowth of this model. As America uses the world's resources [according to one estimate six per cent population using 46 per cent of world’s resources], its economy provides high standards of living. This all looks rosy. When resources run out, the system is bound to crumble. The warnings about the possibility of a financial collapse were frequent. However, it was very profitable to make money out of money, thus the funds in the bubble outdid the real economy.

At another level, excessive greed for profit which is the basis for any market driven economy finally leads to collapse. Evidently consumerism that drives the economy leads to this kind of crisis. Add the huge defence spending and there is a sure recipe for apocalypse.

It seems no one has any clear idea of the current U.S. crisis. Yet the world ought to be aware of huge international empires that once united a part of the world with language, ideology, religion, government system and economy but collapsed because of their own burden. Is this happening to American dream and American empire?

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Financial crisis likely to further erode U.S. influence

Jim Lobe

WHILE the White House and U.S. lawmakers hash out final terms of a proposed 700-billion-dollar Wall Street bailout, foreign policy analysts are warning that the current financial crisis could very well hasten the decline of U.S. power and influence overseas.

Of course, much depends on whether the impending bailout will be sufficient to quickly restore international confidence in the U.S. economy, and particularly the U.S. dollar whose status as the world's preferred reserve currency has long encouraged foreigners to buy U.S. Treasury bills, thus propping up an economy which consumes far more than it produces.

But coming on top of unprecedented deficits racked up by the administration of Pres. George W. Bush, especially in its ongoing 15-billion-dollar-a-month wars in Iraq and Afghanistan, the current crisis -- and the major new burden it adds to U.S. taxpayers -- will almost certainly damage Washington's ability to get its way abroad, according to many experts.

"It's not as if the rest of the world is looking at America's financial crisis and jumping to the conclusion that they can now test American power," Charles Kupchan, an analyst at the Council on Foreign Relations who teaches at Georgetown University. "But I do think that, from a psychological perspective, this financial crisis, coupled with America's troubles in Iraq and Afghanistan, will take a toll on respect for and deference to American strength as concerns both hard and soft power."

Coincidentally, it was just two weeks ago that the nation's top intelligence analyst, Thomas Fingar, warned that, while Washington "will remain the (world's) pre-eminent power in 2025, "...(its) dominance will be much diminished." Moreover, he told other intelligence professionals, Washington's leadership will ''erode at an accelerating pace (in the) political, economic and arguably cultural arenas."

The subsequent collapse, or nationalisation, of several of the country's leading financial institutions seemed to confirm that prognosis all too quickly. Notable was not entirely sympathetic reaction of foreign leaders who, assembling in New York for the annual opening of the UN General Assembly, seemed agreed that the drastic measures taken by the U.S. Treasury marked the effective end of the "Anglo-Saxon" model of free markets and unfettered capitalism that Washington has been avidly exporting for several decades, often through the World Bank and the International Monetary Fund (IMF).

"Models in history are very important, and I think this clearly damages the prestige of the Anglo-American model that we've been pushing," according to Michael Lind, a senior fellow at the New America Foundation (NAF), a Washington-based think tank. "The Chinese model could now be seen as more the wave of the future."

"People in Latin America, the Middle East, and elsewhere are probably saying, 'The Americans have been preaching this free-market ideology, and look what it did to them, so maybe we should try a different model,' he said. "In terms of competing in terms of soft power, reputation and prestige, I think we've been severely damaged right now."

Indeed, China in recent years has already become a much bigger player in terms of aid and investment in Africa and Latin America, and, what with the "U.S. banking sector in a shambles...it's much less likely that countries will go to New York to get finance and do business" than before, according to Dean Baker, co-director of the Centre for Economic and Policy Research (CEPR) here.

Moreover, the latest crisis is likely to contribute to growing dissatisfaction both with the neo-liberal model at home and with the public willingness to make economic sacrifices for other countries.

"I don't expect the United States to be the enthusiastic supporter of free trade that it has been over the last several decades," Kupchan told IPS. "If there were to be a serious economic crisis abroad, would the U.S. today serve as the lender of last resort as it did in the 1997-98 financial crisis? I doubt it. We're too busy bailing ourselves, as opposed to bailing out Malaysians or Mexicans."

Similarly, Congress is certain to be tempted to reduce the skyrocketing budget deficit by cutting traditionally unpopular programmes, such as foreign aid, that Washington has used as another means of leverage to influence the behaviour of countries overseas.

Whether that budget-cutting pressure will apply as well to more than half-trillion-dollar defence budget (not including spending on the Iraq and Afghanistan wars) -- the largest single pot of discretionary spending in the national budget -- is not so clear, although one key lawmaker, the chairman of the House of Representatives Appropriations Defence Subcommittee, Rep. John Murtha, predicted Wednesday that it would.

"If I were in the Pentagon, I'd be as worried as one of the people at investment banks, because its budget is going down," according to Lind. "Suddenly all kinds of cuts in the military that were unthinkable up to a couple of weeks ago will become clear."

"Depending on the actual expense, this package is going to be put a huge squeeze on all kinds of security-related spending," said Bill Hartung, who heads NAF's Arms and Security Initiative. "It'll force the Pentagon to finally make some trade-offs [among weapons systems] and will make it a lot easier for advocates of getting rid of some of the Cold-War conventional systems, like the F-22 fighter, the Osprey [warplane], and attack submarines that don't seem relevant to wars in Iraq and Afghanistan to prevail."

Other analysts, however, are not so sure the Pentagon, which currently accounts for nearly half of the world's total military spending, will be forced to cut back.

"One would think that an economic crisis like this would produce a re-ordering of priorities," said Boston University Prof. Andrew Bacevich, an author and retired Army colonel whose just-released book is entitled 'The Limits of Power: The End of American Exceptionalism'.

"But I'm not sure that it will because there seems to be this strange unwillingness on the part of our political leaders to simply acknowledge that American power has limits and then to examine the implications of that fact," he said.

Indeed, Kupchan noted that, while the financial crisis "will encourage a more restrained and less costly foreign policy, national security will still trump economic expediency."

Nonetheless, depending on the seriousness and duration of the crisis, he said, "there is likely to be a rising inner voice [in the public] saying it's time for the United States to tend its own garden and focus on its own problems instead of other peoples'. It necessarily means a more inward-looking and pre-occupied America."

Indeed, a poll by the Pew Research Centre just before the Treasury announced its bailout package earlier this month found a sharp decline in public support for an assertive foreign policy compared to four years ago. Forty-five percent of respondents said that reducing U.S. overseas military commitments should be a top policy priority of a new administration, up from 35 percent in 2004. [Courtesy IPS]

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US: National protests erupt over bailout plan

Haider Rizvi reports for IPS from New York

THE George W. Bush administration's plan to spend hundreds of billions of dollars to rescue giant Wall Street firms from their current financial meltdown has unleashed a spontaneous wave of protests across the United States.

"Cash for trash," shouted activists who gathered near Wall Street to express their outrage at Bush's proposal to buy bad debts of financial institutions at the cost of 700 billion dollars of taxpayer money.

Protesters said they want the Congress to protect millions of U.S. citizens who are on the verge of losing their homes due to bad lending practices of creditors instead of doling out public money to big investment firms responsible for ruining the economy.

"People are up in arms about this," Matt Holland of the TrueMajority.org, an advocacy group comprising 700,000 members that played a major role in organising the protests, told IPS. "Our members are livid. They're hitting the streets."

According to the group, thousands of people in more than 190 cities and towns across the country took part in demonstrations against the corporate bailout bill proposed by U.S. Treasury Secretary Henry Paulson last Friday.

The four-page draft bill, which is currently under discussion on Capitol Hill, did not initially require any legal and financial measures to protect homeowners from possible foreclosures, nor did it put any limits on the salaries of the corporate executives -- although legislators say that has since been amended.

On Thursday, Democratic and Republican lawmakers declared they were close to reaching a deal on a modified version of the bill, but still there was no indication if it would pass the Senate and the House.

"While many are focused on providing relief to the Wall Street, millions of homeowners are at risk of being left behind," said Janet Murgula, president of the National Council of La Raza (NCLR), the nation's largest Hispanic civil rights group.

To Murgula, "it is irresponsible public policy to ask taxpayers to foot the bill for a Wall Street rescue package while simultaneously denying them a sustainable response to the devastation the rising foreclosures rate is having throughout the country."

Independent presidential candidate and populist consumer advocate Ralph Nader agrees.

"The public outrage out there is really enormous," he said in an interview with the left-wing television programme Democracy Now!, calling the Bush proposal "a double standard between the guys at the top and the people who are going to have to pay the bills."

But President Bush does not think there is anything thing wrong with his proposal.

"I understand there's a lot of nervousness, and -- but the economy is growing, productivity is high, trade's up," he said in a televised speech Wednesday. "People are working. It's not as good as we would like, but -- and to the extent that we find weakness, we'll move."

To Nader, there is no logic in Bush's remarks. "I mean, look at all his statements: this could do this, this would do that, farms failing, small business, tada, tada," he said. "The first question we have to ask as citizens is: why is there a need for a bailout?

"If there is a need for a bailout, why 700 billion dollars?" he asked. "If there is a need for a bailout, what kind of bailout? Taxpayer equity? So the taxpayer can recover if these companies make a profit, they can recover surplus."

On Thursday, at the invitation of President Bush, both presidential hopefuls Barack Obama and John McCain attended a meeting at the White House to discuss the current financial crisis facing the Wall Street. However, it remains unclear to what extent they agreed on the Paulson bill.

Latest reports from Hill suggest that members of the both political parties on the legislative committee on banking agreed to put limits on the pay of corporate executives, but there was no news about protection for vulnerable low-income homeowners.

While proposals continue to evolve and be debated, according to NCLR, a pro-homeowner package must include a model for the broad, systematic modification of failing mortgages, which is the best way to keep working families in their homes.

"Unless we respond to the needs of millions of struggling homeowners," said NCLR's Murgula, "a rising inventory of foreclosed homes will continue to overload the market, pushing housing prices down even further." [Courtesy IPS]

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Roots of the fiscal mess up in America

Harjap Singh Aujla writes from New Jersey

AMERICA is passing through an extreme fiscal crisis, perhaps never seen since the dark days of the depression of 1929. In recent months a number of major banks and other financial institutions have either failed or were taken over by other firms or were rescued by massive injection of tax payer’s money. This crisis did not befall the nation as a bolt from the blue. A lot of greed driven blunders were committed over a period of seven years and in the absence of an effective oversight mechanism, a long rope was given to the blighters. Now the rope is wrapped around the necks of the blighters and the innocent alike.

In a capitalistic system, as a principle, no mercy or help is extended towards any unsuccessful entrepreneur big or small. The wisest and the fittest survive and the weak fall by the wayside. But in the case of Fanny May, Freddie Max and several other troubled institutions, massive amounts of federal cash were injected to keep the defaulters afloat. We understand that we are passing through grave circumstances; the economy of whole World is hinged to that of America. Any collapse of the American fiscal institutions shall result in a chain reaction collapse of the leading economies of the World. Something needs to be done and that too very quickly. We have been forced to willingly swallow the bitter pill. Now we are in the process of legislating the commitment of a 700 billion dollar federal fiscal package to help other shaky companies and financial institutions to stay afloat. Let us wish and pray that this massive dole-out gesture succeeds in the long run. If it does not succeed, even the fiscal sense and wisdom of our highly esteemed lawmakers will come under severe criticism.

Let us think as to why we got into this unprecedented mess. Even a lay man knows that in a capitalistic system of society, there are periods of expansion of economy followed by recessions. Normally we have a four to six year period of expansion followed by a six months to a year long period recession. But our elite financial managers (including the chairman of the Federal Reserve Board) tried to postpone or possibly avoid a recession long past its due time. Creating artificial conditions to prevent a recession sometimes can lead to much bigger breakdowns of economies.

We had runaway inflation during the fag end of the Jimmy Carter Presidency. This was followed by a seven year long period of expansion of economy and low inflation during the Presidency of Ronald Reagan. The recession came during the period of George Bush Senior. Then again we had a period of expansion during the Bill Clinton Presidency. This was supposed to be followed by a down turn during the Presidency of George W. Bush. Every big financial boss in America tried his level best to postpone the onset of a recession during Junior Bush’s Presidency. This led to the present crisis. Bush created a big hole in the American economy by pumping between 200 to 300 billion dollars into the War in Iraq. This war was not giving anything in return to the economy of America. The financial institutions tried to keep the economy afloat by keeping the housing market hot for longer than it could be sustained. What was the logic behind keeping the home loan rates at 5%+ -, when the prime rate was between 5 and 6%. The housing loan rate at that time should have been kept at 7 to 8%.

The balloon or variable mortgage rates were misleading to the home buyers. These rates were kept unreasonably low in the initial year or two in order to allure the buyers into a fiscal trap. Sooner or later these rates were bound to go up in accordance with other loan rates in the market. The buyers had a false hope of massive increases in their incomes in future, which was also speculative. To the lending institutions, keeping the housing markets hot was necessary. Because housing is the biggest prime-mover of American economy. For building a house you need a lot of stuff such as bricks, timber, steel, concrete, floor coverings, insulation materials, doors windows, heaters, and refrigerators, air-conditioners, ducting material, various types of alarms and all kinds of furniture. Whenever the housing market is hot, the overall economy keeps booming. But housing loans can never be kept at par or below the prime rate. This blunder was committed by every financial institution that was directly or indirectly involved in the business of home mortgages.

Logically a mild recession could have occurred in 2003 or 2004. Its worst fall out could have been the possible election defeat for President George W. Bush in 2004. That would have been a small price for the nation to pay. During this period of extreme fiscal irresponsibility, the bosses of big companies made it big. Their salaries and fringe benefits were unreasonably lucrative and their severance packages were outrageously high. Let us try to curb such practices, especially at a time when the economy of the nation is in doldrums. [ harjapaujla@gmail.com ]

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