Is the financial crisis more about money or geopolitics?

Is the the financial crisis more about money or Washington’s geopolitics? That may sound a bit like finding your contact lense after loosing them swimming across the Mississippi river. Yet there are growing voices that have begun to question what all of the noise in Washington and New York is all about.

 

To begin with, let’s start with the generally Democratic leaning New York Times. On September 29  it wrote timidly that “The ($700 billion) bailout plan released yesterday is a lot better than the proposal Henry Paoulson first put out—sufficiently so to be worth passing. But it’s not what you’d actually call a good plan, and it won’t end the crisis.”

 

In an article for “The Nation,” (September 26, “A Better Bailout”) Noble Prize economist  Joseph E. Stiglitz went a little bit further: “To a skeptic, Paulson's proposal looks like another of those shell games that Wall Street has honed to a fine art. Wall Street has always made money by slicing, dicing and recombining risk. This "cure" is another one of these rearrangements: somehow, by stripping out the bad assets from the banks and paying fair market value for them, the value of the banks will soar.”

 

He proposes an alternative explanation for Wall Street’s gleeful reaction the the staunchly conservative Bush Administreation’s push to have the government take over the mess created by financers: “the banks realized that they were about to get a free ride at taxpayers' expense. No private firm was willing to buy these toxic mortgages at what the seller thought was a reasonable price; they finally had found a sucker who would take them off their hands--called the American taxpayer.”

 

Stiglitz continues:

“The administration attempts to assure us that they will protect the American people by insisting on buying the mortgages at the lowest price at auction. Evidently, Paulson didn't learn the lessons of the information asymmetry that played such a large role in getting us into this mess. The banks will pass on their lousiest mortgages. Paulson may try to assure us that we will hire the best and brightest of Wall Street to make sure that this doesn't happen. (Wall Street firms are already licking their lips at the prospect of a new source of revenues: fees from the US Treasury.) But even Wall Street's best and brightest do not exactly have a credible record in asset valuation; if they had done better, we wouldn't be where we are. And that assumes that they are really working for the American people, not their long-term employers in financial markets. Even if they do use some fancy mathematical model to value different mortgages, those in Wall Street have long made money by gaming against these models. We will then wind up not with the absolutely lousiest mortgages, but with those in which Treasury's models most underpriced risk. Either way, we the taxpayers lose, and Wall Street gains.”

He then points out what he considers to be four fundamental problems in the U.S. financial system: “The first is that the financial institutions have all these toxic products--which they created--and since no one trusts anyone about their value, no one is willing to lend to anyone else. The Paulson approach solves this by passing the risk to us, the taxpayer--and for no return. The second problem is that there is a big and increasing hole in bank balance sheets--banks lent money to people beyond their ability to repay--and no financial alchemy will fix that. If, as Paulson claims, banks get paid fairly for their lousy mortgages and the complex products in which they are embedded, the hole in their balance sheet will remain. What is needed is a transparent equity injection, not the non-transparent ruse that the administration is proposing. The third problem is that our economy has been supercharged by a housing bubble which has now burst. The best experts believe that prices still have a way to fall before the return to normal, and that means there will be more foreclosures. No amount of talking up the market is going to change that. The hidden agenda here may be taking large amounts of real estate off the market--and letting it deteriorate at taxpayers' expense. The fourth problem is a lack of trust, a credibility gap. Regrettably, the way the entire financial crisis has been handled has only made that gap larger. “

Well, we should add that right on the eve of the financial “crash” or “plop” or whatever you want to call it, Bush as well as Republican presidential candidate John McCain were saying in unison that the economy was “basically healthy.” Obviously, not everyone agrees on what is healthy. With those words still dangling on the tips of its tongues people in Washington were putting on worried faces and saying that the record State bailout of private mishap was necessary to prevent something hear to doomsday.

Stiglitz goes on to express the notion that: “the administration is once again holding a gun at our head, saying, "My way or the highway." We have been bamboozled before by this tactic. We should not let it happen to us again,” adding: “The president's economic credentials are hardly stellar. Our national debt has already climbed from $5.7 trillion to over $9 trillion in eight years, and the deficits for 2008 and 2009--not including the bailouts--are expected to reach new heights. There is no such thing as a free war--and no such thing as a free bailout. The bill will be paid, in one way or another. “

According to the June congressional testimony of William Beach, director of the Center for Data Analysis, the so-called war against terrorism has cost som $646 billion to date, so you would have to add the $700 billion bailout to that and then scratch your head trying to figure out how the government proposes to pay for its self-declared war and the financial crisis. The figures go beyond anyone’s craziest imagination and can only be explained by the de facto complicity of financial interests with the war. The new defense budget, for example, tacks on another $68.6 billion for Iraq and Afghanistan next year, while the cost of a single week in Iraq is put at around $3.5 billion, or $180 billion per year.

McCain and Bush insist that the U.S. will only leave Iraq once a clear victory has been achieved. The cost of the Iraq war was once predicted by Washington officials as perhaps $50 to 60 billion, but since the costs seem to be on an endless spiral...now independent observers calculate the total cost may go to somewhat more the $800 billion. If you include indirect costs, say payments of health care and veterans benefits, etc. the figures keep on soaring.

What former President Dwight Eisenhower once warned about, the “military-industrial complex” is no more good business, apparently, on the contrary the marriage of big business to war is leading to bankrupcy. Who is going to foot the bill?

(to be continued)