Bernanke remarks at the Economic Club of New York on the day that “Stocks Post Biggest Drop Since 1987 Crash as Retail Sales Fall, Commodities Sink and Investors Worry About Hedge Funds”
A motivation of this blog is capturing a small fragment of history as it is expressed on the World Wide Web. The Credit Crisis has been a main focus for the last 14 months due to its impact on capitalist society, especially in relationship to Globalization. Ben Bernanke’s speech yesterday is an excellent consolidation of events and actions by the Fed, the Administration, and Congress. First, let’s look at economic news from the Wall Street Journal on the day of the speech to sketch the economic climate. I will bold items in the article for skimming.
From the Wall Street Journal “Economic Fears Reignite Market Slump”:
Fears of a deep recession sparked the worst drop in the Dow Jones Industrial Average in 21 years, as retail sales tumbled, demand for commodities sank and bank earnings fell.The latest data suggest the U.S. economy is poised to fall into its deepest recession since the early 1980s. That news, coupled with renewed signs of trouble in the all-important markets for credit, reignited the sell-off in stock markets, all but wiping out the huge gains that shares had made in Monday’s rally.
The Dow dropped 733.08 points, or 7.9%, to 8577.91 as recession fears and continuing doubts about the world financial system’s prospects shook investors. Wednesday’s decline marked the Dow’s largest percentage drop since October 1987 and the second-biggest point drop ever. The index is down 21% this month and almost 40% from its record close a year ago.
Other indexes plunged, too, including the Standard & Poor’s 500 stock index, which fell 9.03%. Overall, investors lost about $1.1 trillion in U.S. stock-market value on Wednesday, the second day in history that they have lost more than $1 trillion in one day.
In Asia Thursday morning, markets were down sharply, including Tokyo’s Nikkei Stock Average, off 9.7% in early trading.
In another sign of economic weakness, demand for the most important raw materials continued to slide, with oil and copper prices falling sharply.
With the big drop in stocks, many investors fled into safe-haven instruments like the two-year Treasury bond, which rose in price, sending its yield down to 1.6%, while the 10-year bond price rose slightly to yield 4%.
The stock market was unnerved late in the day by new fears of instability in the financial system, this time in the hedge-fund industry. Traders heard talk that hedge fund Citadel Investment Group, whose funds are down between 26% and 30% for the year, was facing margin calls. The rumors fed an already anxious market, where investors have grown worried that some big, highly debt-dependent hedge funds could fail, causing more market declines…
Mr. Bernanke subtly left open the possibility of interest-rate cuts in the weeks or months ahead, noting inflation pressures have receded as a result of falling commodities prices.
But it’s far from clear how much effect further rate cuts would have. Investors have been demanding huge premiums — known on Wall Street as spreads — over benchmark interest rates to make loans to businesses and households. As long as these spreads remain large, the benefits of rate cuts are diminished. A big priority for now remains calming the fear that has swept through financial markets.
Evidence is mounting that the U.S. is likely to experience a far worse downturn than the 2001 or 1990-91 recessions. Job losses started at the beginning of this year but started deepening last month, even before the worst of the credit crisis struck. The degree of the declines is sapping consumer incomes after a decade showing few earnings gains for most Americans…
The Commerce Department said its broad gauge of retail sales dropped 1.2% last month, a much sharper decline than in July and August. The figures followed weak September sales reports last week by major retailers, and confirmed that the economy was softening before this month’s market turmoil, suggesting deeper declines in the coming months. Consumer spending, which accounts for more than 70% of the U.S. economy, is likely to record declines in the third and fourth quarters of this year.
Retail sales slipped in almost every sector. Auto sales fell 3.8%, while furniture, electronics, clothing and food stores also declined.
The troubles are weighing heavily on the global economy. Weak prospects around the world are pushing commodity prices sharply lower, a sign that strong demand — which led to huge price surges earlier this year — has abated with the economic turmoil. Crude-oil prices tumbled $4.09, or 5.2%, to $74.54 a barrel, its lowest settlement price this year.
Meanwhile, the continuing turmoil in credit markets is likely to hit the banking sector hard in the coming months. J.P. Morgan Chase & Co. and Wells Fargo & Co., two of the nation’s strongest banks, on Wednesday said their consumer operations are likely to worsen for months amid weaker performance of mortgages, credit cards and auto loans. J.P. Morgan, which is one of the nation’s largest credit-card issuers, said charge-offs — reflecting loans considered to be uncollectible — represented 5% of its card portfolio compared with 3.64% in the third quarter of 2007. That’s expected to grow to 6% in the beginning of next year and 7% by the end of 2009, the bank said.
The Federal Reserve’s latest “beige book” report, a summary of regional economic conditions, showed weakness across the nation into early October. Consumer spending declined, manufacturing activity dropped and several regions reported lower capital spending or reductions in capital spending plans “due to the high level of uncertainty about the economic outlook or concerns over the availability of credit.” Among the few bright spots were agriculture and other natural resources, though drops in commodity prices since the reports were compiled could hurt those sectors.
Job losses, which started at the beginning of this year, are expected to worsen as businesses feel the credit pinch. The effects of the worsening economy were on display at retail outlets around the country.
After years of conspicuous consumption, many middle- and upper-income Americans are morphing into cautious shoppers. The change in mood could have a dramatic effect on consumer spending on everything from cars and travel to electronics, fashion and jewelry, especially heading toward the holiday season. That’s a radical change from the 2001 economic slowdown when many people shopped to feel better.
In Chicago, Fanchon Simons, an avid 60-year-old shopper, says she couldn’t bring herself to buy a $360 blouse that she tried on at a designer-clothing boutique last week. Ms. Simons says she hasn’t bought much for herself in the past couple weeks — and not because she can’t afford it. Buying “is not that important to me right now because of the climate,” she says. “Maybe it’s a way to be in sympathy with the rest of the people…or maybe it’s that I don’t really need anything.”
High-end consumers aren’t the only ones pinching pennies or turning to window-shopping. Synetha Chambers, a 31-year-old single parent from Cedar Hill, Texas, who makes $25 an hour as a service representative for AT&T, says she has pared her grocery list to the necessities — milk is a must, but she no longer buys soda and chips. “And I will be honest with you, Christmas is no longer a necessity in my household,” Ms. Chambers says.
In recent weeks, a slew of forecasters have predicted that holiday spending this year is likely to be at the lowest level in nearly two decades. The National Retail Federation plans to release a survey Thursday reporting that U.S. consumers plan to spend an average of $832.36 on holiday-related shopping, up 1.9% from a year earlier. It is the lowest increase in planned consumer spending since the survey began in 2002. The survey was conducted Sept. 30 to Oct. 7.
Here is a pod cast from the PBS Online NewsHour with a perspective on the days events.
Now lets look at Bernanke’s Remarks which is a concise history and well articulated. The full speech is below the break by Federal Reserve Chairman Ben S. Bernanke before the Economic Club of New York, delivered on October 15, 2008. First, here is the edited and annotated transcript for skimming.
Bernanke Remarks on the Crisis and Stabilization
On what caused the Credit Crisis:
As in all past crises, at the root of the problem is a loss of confidence by investors and the public in the strength of key financial institutions and markets. The crisis will end when comprehensive responses by political and financial leaders restore that trust, bringing investors back into the market and allowing the normal business of extending credit to households and firms to resume…This financial crisis has been with us for more than a year. It was sparked by the end of the U.S. housing boom, which revealed the weaknesses and excesses that had occurred in subprime mortgage lending. However, as subsequent events have demonstrated, the problem was much broader than subprime lending. Large inflows of capital into the United States and other countries stimulated a reaching for yield, an underpricing of risk, excessive leverage, and the development of complex and opaque financial instruments that seemed to work well during the credit boom but have been shown to be fragile under stress. The unwinding of these developments, including a sharp deleveraging and a headlong retreat from credit risk, led to highly strained conditions in financial markets and a tightening of credit that has hamstrung economic growth.
What the Fed did as an initial response in 2007 and the Spring of 2008:
• First, following classic tenets of central banking, the Fed has provided large amounts of liquidity to the financial system to cushion the effects of tight conditions in short-term funding markets.• Second, to reduce the downside risks to growth emanating from the tightening of credit, the Fed, in a series of moves that began last September, has significantly lowered its target for the federal funds rate. Indeed, last week, in an unprecedented joint action with five other major central banks and in response to the adverse implications of the deepening crisis for the economic outlook, the Federal Reserve again eased the stance of monetary policy.
Yet, the credit crisis continued:
Notwithstanding our efforts and those of other policymakers, the financial crisis intensified over the summer as mortgage-related assets deteriorated further, economic growth slowed, and uncertainty about the financial and economic outlook increased. As investors and creditors lost confidence in the ability of certain firms to meet their obligations, their access to capital markets as well as to short-term funding markets became increasingly impaired, and their stock prices fell sharply.
Perspective on normal policy and justification for the strong intervention which began in September 2008:
The Federal Reserve believes that, whenever possible, the difficulties experienced by firms in financial distress should be addressed through private-sector arrangements–for example, by raising new equity capital, as many firms have done; by negotiations leading to a merger or acquisition; or by an orderly wind-down. Government assistance should be provided with the greatest reluctance and only when the stability of the financial system, and thus the health of the broader economy, is at risk. In those cases when financial stability is broadly threatened, however, intervention to protect the public interest is not only justified but must be undertaken forcefully and without hesitation.
Comments illuminating the Fed’s perspective on Freddie Mac, Fannie Mae, Lehman Brothers and AIG:
Fannie Mae and Freddie Mac present cases in point. To avoid unacceptably large dislocations in the mortgage markets, the financial sector, and the economy as a whole, the Federal Housing Finance Agency put Fannie and Freddie into conservatorship, and the Treasury, drawing on authorities recently granted by the Congress, made financial support available.The difficulties at Lehman and AIG raised different issues. Like the GSEs, both companies were large, complex, and deeply embedded in our financial system. In both cases, the Treasury and the Federal Reserve sought private-sector solutions, but none was forthcoming. A public-sector solution for Lehman proved infeasible, as the firm could not post sufficient collateral to provide reasonable assurance that a loan from the Federal Reserve would be repaid, and the Treasury did not have the authority to absorb billions of dollars of expected losses to facilitate Lehman’s acquisition by another firm. Consequently, little could be done except to attempt to ameliorate the effects of Lehman’s failure on the financial system.
In the case of AIG, the Federal Reserve and the Treasury judged that a disorderly failure would have severely threatened global financial stability and the performance of the U.S. economy. We also judged that emergency Federal Reserve credit to AIG would be adequately secured by AIG’s assets. To protect U.S. taxpayers and to mitigate the possibility that lending to AIG would encourage inappropriate risk-taking by financial firms in the future, the Federal Reserve ensured that the terms of the credit extended to AIG imposed significant costs and constraints on the firm’s owners, managers, and creditors.
The Financial Crisis spreads to the real economy, threatening catastrophic consequences unless the government intervened even more deeply. Commercial Paper in this instance = direct link from financial market crisis to the real economy:
AIG’s difficulties and Lehman’s failure, along with growing concerns about the U.S. economy and other economies, contributed to extraordinarily turbulent conditions in global financial markets in recent weeks. Equity prices fell sharply. Withdrawals from prime money market mutual funds led them to reduce their holdings of commercial paper–an important source of financing for the nation’s nonfinancial businesses as well as for many financial firms. The cost of short-term credit, where such credit has been available, jumped for virtually all firms, and liquidity dried up in many markets. By restricting flows of credit to households, businesses, and state and local governments, the turmoil in financial markets and the funding pressures on financial firms pose a significant threat to economic growth.
Treasury and the Fed are compelled in September and October of 2008 to take deeper action:
• To address illiquidity and impaired functioning in commercial paper markets:
- The Treasury implemented a temporary guarantee program for balances held in money market mutual funds to help stem the outflows from these funds.
- The Federal Reserve put in place a temporary lending facility that provides financing for banks to purchase high-quality asset-backed commercial paper from money market funds, thus reducing their need to sell the commercial paper into already distressed markets.
- Moreover, we soon will implement a new, temporary Commercial Paper Funding Facility that will provide a backstop to commercial paper markets by purchasing highly rated commercial paper directly from issuers at a term of three months when those markets are illiquid.• To address ongoing problems in interbank funding markets, the Federal Reserve has significantly increased the quantity of term funds it auctions to banks and accommodated heightened demands for temporary funding from banks and primary dealers.
• Also, to try to mitigate dollar funding pressures worldwide, we have greatly expanded reciprocal currency arrangements (so-called swap agreements) with other central banks.
• Indeed, this week we agreed to extend unlimited dollar funding to the European Central Bank, the Bank of England, the Bank of Japan, and the Swiss National Bank. These agreements enable foreign central banks to provide dollars to financial institutions in their jurisdictions, which helps improve the functioning of dollar funding markets globally and relieve pressures on U.S. funding markets.
It bears noting that these arrangements carry no risk to the U.S. taxpayer, as our loans are to the foreign central banks themselves, who take responsibility for the extension of dollar credit within their jurisdictions.
These steps are helping the bank system:
The expansion of Federal Reserve lending is helping financial firms cope with reduced access to their usual sources of funding and thus is supporting their lending to nonfinancial firms and households.
“Nonetheless, the intensification of the financial crisis over the past month or so made clear that a more powerful, comprehensive approach involving the fiscal authorities was needed to address these problems more effectively”:
• The Emergency Economic Stabilization Act (the Administration, with the support of the Federal Reserve, asked the Congress for a new program aimed at stabilizing our financial markets): provides important new tools for addressing the distress in financial markets and thus mitigating the risks to the economy. The act allows Treasury to buy troubled assets, to provide guarantees, and to inject capital to strengthen the balance sheets of financial institutions. The act also raises the limit on deposit insurance from $100,000 to $250,000 per account, effectively immediately.
• The Troubled Asset Relief Program (TARP) authorized by the Emergency Economic Stabilization Act will allow the Treasury, under the supervision of an oversight board that (Bernanke) will head, to undertake two highly complementary activities.
- First, the Treasury will use the TARP funds to help recapitalize our banking system by purchasing non-voting equity in financial institutions. Details of this program were announced yesterday. Initially, the Treasury will dedicate $250 billion toward purchases of preferred shares in banks and thrifts of all sizes. The program is voluntary and designed both to encourage participation by healthy institutions and to make it attractive for private capital to come in along with public capital. We look to strong institutions to participate in this capital program, because today even strong institutions are reluctant to expand their balance sheets to extend credit; with fresh capital, that constraint will be eased. The terms offered under the TARP include the acquisition by the Treasury of warrants to ensure that taxpayers receive a share of the upside as the financial system recovers. Moreover, as required by the legislation, institutions that receive capital will have to meet certain standards regarding executive compensation practices.
- Second, the Treasury will use some of the resources provided under the bill to purchase troubled assets from banks and other financial institutions, in most cases using market-based mechanisms. Mortgage-related assets, including mortgage-backed securities and whole loans, will be the focus of the program, although the law permits flexibility in the types of assets purchased as needed to promote financial stability. Removing these assets from private balance sheets should increase and liquidity and promote price discovery in the markets for these assets, thereby reducing investor uncertainty about the current value and prospects of financial institutions. Unclogging the markets for mortgage-related assets should put banks and other institutions in a better position to raise capital from the private sector and increase the willingness of counterparties to engage. With time, the provision of equity capital to the banking system and the purchase of troubled assets will help credit flow more freely, thus supporting economic growth.
These measures are moves towards a more stable Financial System in the future.
Yet, there is still “the immediate problem of lack of trust and confidence.” The Administration, Congress and the Fed have taken the above measures, yet that does not mean a return of credit to markets. Looking at LIPOR and the TED, the banks are hoarding capital to keep their books solvent in the future instead of taking on the risk of lending to opaque institutions whose books may or may not be toxic:
Accordingly, also announced yesterday was a plan by the Federal Deposit Insurance Corporation (FDIC) to provide a broad range of guarantees of the liabilities of FDIC-insured depository institutions, including their associated holding companies. The guarantee covers all newly issued senior unsecured debt, including commercial paper and interbank funding, and it will also cover all funds held in non-interest-bearing transactions accounts, such as payroll accounts. This broad guarantee will be effective immediately, and fees for coverage will be waived for 30 days. After the 30-day grace period, banks may continue to participate in the guarantee program by paying reasonable fees.
Articulating what the Tax Payer has invested in and what their risk is to the Tax Payer now that the Federal Government has deeply intervened into the Financial Markets:
…(T)he taxpayers’ interests were very much in our minds and those of the Congress when these programs were designed.
• The costs of the FDIC guarantee are expected to be covered by fees and assessments on the banking system, not by the taxpayer.
• In the case of the TARP program, the funds allocated are not simple expenditures, but rather acquisitions of assets or equity positions, which the Treasury will be able to sell or redeem down the road.
• Indeed, it is possible that taxpayers could turn a profit from the program, although, given the great uncertainties, no assurances can be provided.
• Moreover, the program is subject to extensive controls and to oversight by several bodies.
• The larger point, though, is that the economic benefit of these programs to taxpayers will not be determined primarily by the financial return to TARP funds, but rather by the impact of the program on the financial markets and the economy. If the TARP, together with the other measures that have been taken, is successful in promoting financial stability and, consequently, in supporting stronger economic growth and job creation, it will have proved itself a very good investment indeed, to everyone’s benefit.
“Stabilization of the financial markets is a critical first step, but even if they stabilize as we hope they will, broader economic recovery will not happen right away.” These measures alone do not correct the trajectory of the economy towards growth.
Conditions restraining the economy:
• Economic activity had been decelerating even before the recent intensification of the crisis.
• The housing market continues to be a primary source of weakness in the real economy as well as in the financial markets
• We have seen marked slowdowns in consumer spending, business investment, and the labor market. • Credit markets will take some time to unfreeze.
• With the economies of our trading partners slowing, our export sales, which have been a source of strength, very probably will slow as well.
The restraining influences are currently being off set somewhat:
• by the favorable effects of lower prices for oil and other commodities on household purchasing power
The big factor according to Bernanke effecting the economy
Ultimately, the trajectory of economic activity beyond the next few quarters will depend greatly on the extent to which financial and credit markets return to more normal functioning.
So far Bernanke has been commenting on the first of his two tier initiatives–supporting economic growth. His second initiative is to control inflation:
• Inflation has been elevated recently, reflecting the steep increases in the prices of oil, other commodities, and imports that occurred earlier this year, as well as some pass-through by firms of their higher costs of production.
• However, expected inflation, as measured by consumer surveys and inflation-indexed Treasury securities, has held steady or eased
• Prices of imports now appear to be decelerating.
• These developments, together with the recent declines in prices of oil and other commodities as well as the likelihood that economic activity will fall short of potential for a time, should lead to rates of inflation more consistent with price stability.
Globalisation measures. “This past weekend, the finance ministers and central bank governors of the Group of Seven industrialized countries met in Washington.”
• We committed to work together to stabilize financial markets and restore the flow of credit to support global economic growth.
• We agreed to use all available tools to prevent failures that pose systemic risk.
• We affirmed we will ensure our deposit insurance programs instill confidence in the safety of savings.
• We agreed to ensure that our banks and other major financial intermediaries, as needed, can raise capital from public as well as private sources.
• We further agreed that we would take all necessary steps to unfreeze interbank and money markets, and that we will act to restart the secondary markets for mortgages and other securitized assets.
• Finally, we recognized that we should take these actions in ways that protect taxpayers and avoid potentially damaging effects on other countries.I believe that these are the right principles for action, and I see the steps announced by our government yesterday as fully consistent with them.
What Bernanke said in closing:
I have laid out for you today an extraordinary series of actions taken by policymakers throughout our government and around the globe. Americans can be confident that every resource is being brought to bear to address the current crisis: historical understanding, technical expertise, economic analysis, financial insight, and political leadership. I am not suggesting the way forward will be easy, but I strongly believe that we now have the tools we need to respond with the necessary force to these challenges. Although much work remains and more difficulties surely lie ahead, I remain confident that the American economy, with its great intrinsic vitality and aided by the measures now available, will emerge from this period with renewed vigor.
The full speech is below the break
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Asia’s revenge
Financial Times
By Martin Wolf
Published: October 8 2008 19:54 | Last updated: October 8 2008 23:48
“Things that can’t go on forever, don’t.” – Herbert Stein, former chairman of the US presidential Council of Economic Advisers
What confronts the world can be seen as the latest in a succession of financial crises that have struck periodically over the last 30 years. The current financial turmoil in the US and Europe affects economies that account for at least half of world output, making this upheaval more significant than all the others. Yet it is also depressingly similar, both in its origins and its results, to earlier shocks.
To trace the parallels – and help in understanding how the present pressing problems can be addressed – one needs to look back to the late 1970s. Petrodollars, the foreign exchange earned by oil exporting countries amid sharp jumps in the crude price, were recycled via western banks to less wealthy emerging economies, principally in Latin America.
This resulted in the first of the big crises of modern times, when Mexico’s 1982 announcement of its inability to service its debt brought the money-centre banks of New York and London to their knees.
Carmen Reinhart of the University of Maryland and Kenneth Rogoff of Harvard University identify the similarities in a paper published earlier this year.* They focus on previous crises in high-income countries. But they also note characteristics that are shared with financial crises that have occurred in emerging economies.
This time, most emerging economies have been running huge current account surpluses. So a “large chunk of money has effectively been recycled to a developing economy that exists within the United States’ own borders”, they point out. “Over a trillion dollars was channelled into the subprime mortgage market, which is comprised of the poorest and least creditworthy borrowers within the US. The final claimaint is different, but in many ways the mechanism is the same.”
The links between the financial fragility in the US and previous emerging market crises mean that the current banking and economic traumas should not be seen as just the product of risky monetary policy, lax regulation and irresponsible finance, important though these were. They have roots in the way the global economy has worked in the era of financial deregulation. Any country that receives a huge and sustained inflow of foreign lending runs the risk of a subsequent financial crisis, because external and domestic financial fragility will grow. Precisely such a crisis is now happening to the US and a number of other high-income countries including the UK.
These latest crises are also related to those that preceded them – particularly the Asian crisis of 1997-98. Only after this shock did emerging economies become massive capital exporters. This pattern was reinforced by China’s choice of an export-oriented development path, partly influenced by fear of what had happened to its neighbours during the Asian crisis. It was further entrenched by the recent jumps in the oil price and the consequent explosion in the current account surpluses of oil exporting countries.
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When I read, and especially when I hear Thomas L. Friedman, I associate him as either a Salesman or a Cheerleader of globalization thoughts. I quoted large swatches from his book “The Lexus and the Olive Tree” and “The World is Flat” when I began this blog over two years ago. Now he has a new book and I would like to direct you to this video from Charlie Rose where Thomas is absolutely trying to sell you on his ideas. In the end he has sold me to buy his new book “Hot, Flat, and Crowded: Why We Need a Green Revolution–and How It Can Renew America”. As for further content for this post lets take a look at his most recent op ed on the New York Times:
No Laughing Matter
September 21, 2008
OP-ED COLUMNIST
By THOMAS L. FRIEDMANOf all the points raised by different analysts about the economy last week, surely the best was Representative Barney Frank’s reminder on “Charlie Rose” that Ronald Reagan’s favorite laugh line was telling audiences that: “The nine most terrifying words in the English language are: ‘I’m from the government, and I’m here to help.’ ”
Hah, hah, hah.
Are you still laughing? If it weren’t for the government bailing out Fannie Mae, Freddie Mac and A.I.G., and rescuing people from Hurricane Ike and pumping tons of liquidity into the banking system, our economy would be a shambles. How would you like to hear the line today: “I’m from the government, and I can’t do a darn thing for you.”
In this age of globalization, government matters more than ever. Smart, fiscally strong governments are the ones best able to empower their people to compete and win. I was just in Michigan to give a talk on energy. I can’t tell you how many business cards I collected from innovators who had either started renewable-energy companies or were working for big firms, like the Dow Chemical Company, on clean energy solutions.
It just reminded me how much innovative prowess and entrepreneurial energy is exploding from below in this country. If it were channeled and enhanced by better leadership in Washington, no one could touch us.
If I were to draw a picture of America today, it would be of the space shuttle taking off. There is all this thrust coming from below. But the booster rocket — Washington — is cracked and leaking energy, and the pilots in the cockpit are fighting over the flight plan. So we can’t achieve escape velocity to enter the next orbit — the next great industrial revolution, which is going to be E.T., energy technology.
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• “…(Congress) seemed alternately grateful and resentful of the new power couple in Washington. Some referred to “President Paulson” and others groused about an unelected central bank chairman doling out hundreds of billions of dollars…
In the end, what left so many lawmakers and economists frustrated was the sense that no one had a better idea. So they waited for Mr. Paulson and Mr. Bernanke to give them more details about what they wanted to do.” – from A Professor and a Banker Bury Old Dogma on Markets
• “(T)he prospect that the government is preparing to wade in deep — perhaps sparing families from foreclosure and banks from insolvency — has muted talk of the most dire possibilities: a severe shortage of credit that would crimp the availability of finance for many years, effectively halting economic growth.
“The risk of ending up like Japan, with 10 years of stagnation, is now much lessened,” said Nouriel Roubini, an economist at the Stern School of Business at New York University. “The recession train has left the station, but it’s going to be 18 months instead of five years.”
If the plan works, it will attack the central cause of American economic distress — the continued plunge in housing prices. If banks resumed lending more liberally, mortgages would become more readily available. That would give more people the wherewithal to buy homes, lifting housing prices or at least preventing them from falling further. This would prevent more mortgage-linked investments from going bad, further easing the strain on banks. As a result, the current downward spiral would end and start heading up.
“It’s easy to forget amid all the fancy stuff — credit derivatives, swaps — that the root cause of all this is declining house prices,” Mr. Blinder said. “If you can reverse that, then people start coming out of their foxholes and start putting their money in places they have been too afraid to put it.”…
…(Financial) institutions are deeply intertwined with the American economy. When the financial system is in danger, it stops investing and lending, depriving ordinary people of financing for homes, cars and education. Businesses cannot borrow to start up and expand…
…The economy has shed roughly 600,000 jobs since the beginning of the year. If healthy companies cannot get their hands on financing, they will not be able to expand and hire.
“What we’re looking at now is simply an amplified version of what we’ve been in since last August,” Mr. Bernstein added. “You’re witnessing a sudden death instead of a slow bleed.”
The impact of the pullback among banks was evident in the interest rates banks pay other banks to borrow money short-term. Traditionally, banks charge one another a little more than 0.2 percentage point over the rate on the safest investment, United States Treasury bills. But on Friday that spread was more than two percentage points, meaning a bank must pay an enormous premium to persuade another to part with its money.
And still no one knows the extent of the carnage. The financial system has acknowledged roughly $400 billion in losses so far, Mr. Roubini estimates, yet as much as another $1.1 trillion may be lying in wait.
As the government steps in to take over bad debts, it is aiming to clear away the detritus and lift the uncertainty, emboldening banks to lend anew.
Whether it will work in the long term is a question that awaits reaction from investors. But even the most skeptical economists say this is the path the government must take for confidence to crystallize that a genuine fix is under way…” – from But Will It Work?
$700 Billion Is Sought for Wall Street in Massive Bailout
New York Times
September 21, 2008 (found on the NYT.com web site one day before publishing)
By DAVID M. HERSZENHORNWASHINGTON — The Bush administration on Saturday formally proposed to Congress what could become the largest financial bailout in United States history, requesting unfettered authority for the Treasury Department to buy up to $700 billion in mortgage-related assets.
The proposal, not quite three pages long, was stunning for its stark simplicity. It would raise the national debt ceiling to $11.3 trillion. And it would place no restrictions on the administration other than requiring semiannual reports to Congress, granting the Treasury secretary unprecedented power to buy and resell mortgage debt.
Staff members from Treasury and the House Financial Services and Senate banking committees immediately began meeting on Capitol Hill, where negotiations were likely to be complicated but quick. Democratic Congressional leaders have pledged to approve legislation by the end of this week.
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Form the OPB NewsHour.
Here is a link to the video.
After a week on Wall Street that saw stalwart financial firms fall and unprecedented levels of government intervention, NewsHour economics correspondent Paul Solman and market historian Richard Sylla offer perspective on the events.
JIM LEHRER: Next, a bit of a history lesson about this unprecedented week on Wall Street and in Washington. Jeffrey Brown has that part of the story.
JEFFREY BROWN: The fall of storied Wall Street institutions, huge government interventions, and a sense of spreading global panic. It has been a history-making week and one that has evoked much comparison to past crises.
To look at that big picture, we’re joined by Richard Sylla, an economist and financial historian at New York University’s Stern School of Business. And with me here is our own economics correspondent, Paul Solman.
Well, Professor Sylla, the comparisons have been made to the biggest crises of the past, including the Great Depression. How do you see all this?
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This post includes:
• US takes control of Fannie and Freddie
While the Bush administration stopped short of using the word “nationalisation”, analysts said the moves amounted to a de facto government control. Fannie and Freddie have $5,400bn in outstanding liabilities and guarantee three-quarters of all new US mortgages.
“Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that a failure of either of them would cause great turmoil in our financial markets here at home and around the globe,” Hank Paulson, Treasury secretary, said. Mr Paulson said the intervention would “accelerate stabilisation in the housing market” by bringing down the cost of home loans.
• A delicate balance in the Freddie and Fannie action
The levees in New Orleans held fast as hurricane Gustav landed last week, sparing the city from the physical devastation experienced under Katrina. And had the levees fallen, the human tragedy would have been significantly reduced as most of the population had already been evacuated from the city.
This situation stands in stark contrast to the devastation that a deleveraging hurricane continues to wreak in the US and other parts of the world. Unlike New Orleans, the levees of the global economy have broken, one after another.
• Cost of US loans bail-out emerging
With the stock market tumbling, the non-partisan Congressional Budget Office said the government takeover of Fannie and Freddie meant the companies should no longer be regarded as outside the public sector.
Peter Orszag, CBO director, said: “It is the CBO view that Fannie Mae and Freddie Mac should be directly incorporated into the federal budget.”…
The CBO bombshell came as it raised its baseline estimate for the US budget deficit to $407bn this year and a record $438bn next year owing to falling revenues and higher spending, some of it related to the fiscal stimulus.
***
Now for the Lehman Brothers story: “Lehman is the fourth biggest investment bank in the US. Its assets are larger than Bear’s were and it is involved in many different financial markets, all of which could be disrupted by its failure…Lehman’s problems are only an extreme version of the problems confronting all stand-alone investment banks, which now face not only losses on credit securities but existential questions about their future business models too. If Lehman’s debtholders suffer losses in a failure or takeover, the cost of funds for other investment banks could go up. Letting Lehman go would represent a policy decision that the market must decide whether the sector has a future.”
• Poser for Paulson: the US Treasury chief wants a halt to public bail-outs
The US Treasury secretary began the week with a multi-billion dollar rescue of Fannie Mae and Freddie Mac, twin pillars of the country’s mortgage market, only to end it digging in against calls for a second bail-out, to help save Lehman Brothers, the investment bank.
After deploying public funds in the Fannie and Freddie deal, and earlier to help rescue Bear Stearns in March, it will not be easy for Mr Paulson to refuse to support a Lehman takeover. Yet by late on Friday, that was what he appeared determined to do…
His message: regulators were prepared to be pragmatic to help facilitate a deal but there would be no repeat of the Bear Stearns model, in which the government sweetened the bank’s takeover by JPMorgan Chase by taking on all but the first $1bn (£559m, €706m) of losses on a $30bn portfolio of mortgage-backed securities. This time Mr Paulson has been determined to take the back seat. While pushing hard for a rescue takeover, he has appeared willing to countenance the risk that one might not be forthcoming and Lehman could fail.
In Mr Paulson’s eyes there are big differences between Lehman and Fannie and Freddie. The mortgage giants were vastly more important to the global financial system – their total liabilities are $5,400bn, a large chunk of which is held by foreign central banks whose support for the dollar is crucial. Fannie and Freddie were also much more important for the US economy, since they account for about three-quarters of all new US mortgages.
Moreover, their problems were rooted in their hybrid structure as “government-sponsored” private companies. Mr Paulson believed that the US government had caused this problem and was obliged to deal with it in a way that kept faith with the world’s investors. “Because the US government created these ambiguities, we have a responsibility to both avert and address the systemic risk,” he said last Sunday.
Mr Paulson also sees big differences between the situation at Lehman today and at Bear Stearns in March. The Treasury chief always insisted that he had intervened in March not to help Bear or its investors but to contain the systemic risks raised by its imminent failure. He sees the situation today as different for two main reasons: the markets have had six months to prepare for the possibility that Lehman could fail, and a new Fed facility ensures that it cannot suddenly run out of liquidity in the way that Bear did…
Mr Paulson does not wish to fuel any further a growing bail-out culture in the US, which has already led the troubled automotive industry to seek billions of dollars in loan guarantees.
• No Fed bail-out this time round
“Several Washington-based experts have argued Lehman did not endear itself to the authorities by walking away from earlier rescue proposals because it felt the prices on offer were too low.
“Lehman may be the poster child for enough-is -enough,” says a senior executive at a private equity firm that has been in talks with Lehman in regard to possible asset sales.
Policymakers want to get away from the notion there was a standard formula for resolving financial crises – ie. deploy public money to keep the debt whole once the equity is all but wiped out – knowing this has sponsored specific destabilising trades in financial markets.
The US government may judge that – with a record budget deficit looming next year and Fannie and Freddie’s $5,400bn of liabilities now in public hands – its fiscal ammunition is not limitless, and it may be wise to keep some in reserve for what may prove to be many more such crises further down the road.”
• Lehman Heads Toward Brink as Barclays Ends Talks
Unable to find a savior, the troubled investment bank Lehman Brothers appeared headed toward liquidation on Sunday, in what would be one of the biggest failures in Wall Street history.
The fate of Lehman hung in the balance as Federal Reserve officials and the leaders of major financial institutions continued to gather in emergency meetings on Sunday trying to complete a plan to rescue the stricken bank.
But Barclays, considered the leading contender to buy all or part of Lehman, said Sunday that it could not reach a deal without financial support from the federal government or other banks, making a liquidation more likely…
…how a liquidation might proceed. One option that was discussed on Saturday would have major banks and brokerage firms continue to do business with Lehman as it unwinds its assets and liquidates over a period of months, according to several people briefed on the discussions. That would buy Lehman time to sell those assets in an orderly way and avoid a fire sale that could depress prices of similar assets held by other banks.
The overarching goal of the weekend talks was to prevent a quick liquidation of Lehman, a bank that is so big and so interconnected with others that its abrupt failure would send shock waves through the financial world. Of deep concern is what impact a Lehman failure would have on other securities firms, insurance companies and banks, notably the American International Group, both of which have come under mounting pressure in the markets…
…Both Barclays and Bank of America expressed interest in buying Lehman and were negotiating hard, initially insisting that the government provide financial support. But federal officials were adamant that no public money be used — a big point of contention because many of the top Wall Street executives believe that their banks, which have each written down tens of billions of dollars in assets, do not have the capacity to lead the rescue on their own.
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• Rush Is on to Prevent Big Insurer From Failing : American International Group
As the credit storm has raged in recent months, insurance companies like A.I.G. have been better positioned than the nation’s banks and brokerage firms to weather it because accounting rules do not require insurers to mark the investments held in their long-term portfolios to market. Insurance companies like A.I.G. can hold their investments until they mature, riding out the ups and downs in the market for those assets.
But the moment it began trying to raise capital, A.I.G. had to open its books to potential investors who were likely to take a sharp pencil to the company’s portfolio values, analysts said. And with Lehman Brothers last week providing investors with a valuation for the same types of assets held by A.I.G., subprime and Alt-A mortgage securities, the investment bank’s marks can now be applied to the big insurer’s books.
As of the most recent quarter, for example, A.I.G. had $20 billion of subprime mortgages marked at 69 cents on the dollar and $24 billion in Alt-A securities valued at 67 cents on the dollar.
But Lehman officials on a conference call with investors last week said it was valuing similar subprime mortgage securities to those held by A.I.G. at 34 cents on the dollar; its mark on the Alt-A holdings was 39 cents. Those valuations suggest almost a $14 billion decline in A.I.G.’s holdings, after taxes, an amount representing 18 percent of the company’s book value…
…A.I.G., which is based in New York, has also been under pressure from the derivatives contracts that its London-based financial products unit sold in connection with complex debt securities. Those contracts, called credit default swaps, acted as a type of insurance on the debt securities, making them more attractive to buyers. The swaps also gave speculators an opportunity to bet on the debt securities’ overall creditworthiness, which has declined in response to the turmoil in the housing markets.
When A.I.G.’s financial products unit sold the credit default swaps, it effectively promised to compensate buyers of the debt securities if the mortgages underlying them got into trouble. At the time, the securities were rated AAA, so it seemed at first that A.I.G. was not taking on inordinate risk.
But that picture changed as the housing crisis took hold and homeowners began to default. A.I.G. wrote down the value of its swap portfolio by $25 billion, telling investors that the markdowns did not represent a cash loss of that magnitude. It estimated possible cash payouts on the swaps of between $5 billion and $8 billion.
But because the debt securities covered by the swaps are so complex and opaque, it has been hard for investors to verify A.I.G.’s numbers on their own, and investors have grown impatient as A.I.G. reported big losses they did not expect in the last two quarters.
A.I.G. also said recently that it might have to post collateral to its swap counterparties, heightening concerns that the company would have to raise capital in tight markets. A.I.G. said in a filing with the Securities and Exchange Commission that if its own credit were downgraded one notch by Moody’s and Standard & Poor’s, its swap contracts would require it to post collateral of about $13 billion.
***
This post could easily be broken into several separate posts, yet the stark reality of these three issues occurring in the same week, over one year after the Credit Crisis began to take shape publicly, shows that the financial institutions are not yet in a position to begin creating credit opportunities for the American Economy. In other words, there are serious fundamental problems with the American Economy and the way it was managed (or deregulated therefore not managed) over the last 28 years.
**********
US takes control of Fannie and Freddie
By Krishna Guha, Chris Giles, Saskia Scholtes and Joanna Chung
Published: September 7 2008 19:07 | Last updated: September 8 2008 00:29
The US government on Sunday seized control of the troubled Fannie Mae and Freddie Mac mortgage groups in what could become the world’s biggest financial bail-out.
The government’s move, its most dramatic since the start of the credit crisis, is aimed at ensuring the two groups’ woes do not cripple the country’s housing market or worsen to the point that they fail and send shockwaves through global markets.
While the Bush administration stopped short of using the word “nationalisation”, analysts said the moves amounted to a de facto government control. Fannie and Freddie have $5,400bn in outstanding liabilities and guarantee three-quarters of all new US mortgages.
“Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that a failure of either of them would cause great turmoil in our financial markets here at home and around the globe,” Hank Paulson, Treasury secretary, said. Mr Paulson said the intervention would “accelerate stabilisation in the housing market” by bringing down the cost of home loans.
In a sign of the magnitude and historic nature of the decision, Mr Paulson briefed presidential contenders Barack Obama and John McCain, as well as President George W. Bush and senior members of Congress before the announcement.
As regulators took charge of the companies, the government said it had agreed to inject up to $100bn in each of them as needed to ensure they meet their debts. In addition, it would buy mortgage bonds backed by these companies starting with an initial $5bn purchase, and provide an unlimited liquidity facility to them until the end of next year.
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This post picks up on the theme that was the genesis of this blog–the Bush Doctrine and the Bush ‘War on Terror’ is framed as an escalation of military intervention in the region of the world shown above in the age of economic and cultural globalization. The term World War III was first used on this blog in the Summer of 2006 when Israel used the Bush Doctrine to invade and destabilize Lebanon instead of using Soft Power to reach out to their neighbors in order to bring about peace. Soft Power–the subtle effects of culture, values, and ideas on others’ behavior from more direct coercive measures called hard power such as military action or economic incentives–is a much stronger means of developing good relationships with other groups of people while blunt military intervention murders civilians, devastates their way of life and creates animosity towards the occupying force.
This week bombings in India continue the violence across this large region of the world. Below the break there are two articles on this weeks bombings plus paragraphs from Wikipedia on the Mujahideen:
Five bomb blasts hit New Delhi
Financial Times
By James Lamont in New Delhi and Joe Leahy in Mumbai
Published: September 13 2008 14:44 | Last updated: September 13 2008 18:02Multiple bomb blasts ripped through some of Delhi’s best known shopping areas Saturday night, creating chaos across India’s capital.
Five blasts over a 45-minute period killed as many as 18 people, Shivraj Patil, the home minister, said. Early reports estimated that 90 people were injured. Three other bombs failed to detonate.
The audacious terror attacks were claimed by the Indian Mujahideen, a little known militant group. They targeted some of Delhi’s best known landmarks and markets, exposing the inadequacy of India’s security forces.
Two bombs exploded in Connaught Place, the heart of the city and a major business and shopping centre. An unexploded bomb was discovered at India Gate, a symbol of India’s nationhood and close to the presidential palace and Indian parliament.
The attack on Delhi follows recent bomb blasts in Bangalore, Ahmedabad and Jaipur. More than 400 people have died in terror attacks over the past three years.
The latest attack comes as the US Congress is considering the approval of the US-India civil nuclear deal and days before Prime Minister Manmohan Singh visits Washington.
Mr Patil said the attacks were intended to disrupt India’s social harmony. ”We will find out who has done it and make sure those responsible will be punished,” he vowed.
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Globalization quote: “When China decides they want to build a car, somebody runs a steel mill with coal and iron ore out of Australia, and they mine it with Caterpillar dump trucks which are full of Timken bearings. What is driving our success is the globalization of markets.”
When China makes fewer computers, it needs fewer computer chips forged in Taiwan and designed in the United States. It needs less steel, and so less iron ore from Brazil and Australia. Which means those countries need less construction equipment made in Germany, Japan or Ohio.
New York Times
August 24, 2008
By PETER S. GOODMAN
Economic trouble has spread far beyond the United States to major countries in Europe and Asia, threatening American businesses with the loss of foreign sales and investment that have become increasingly vital to their sustenance.
Only a few months ago, some economists still offered hope that robust expansion could continue in much of the world even as the United States slowed. Foreign investment was expected to keep replenishing American banks still bleeding from their disastrous bets on real estate and to provide money for companies looking to expand. Overseas demand for American goods and services was supposed to continue compensating for waning demand in the States.
Now, high energy prices, financial systems crippled by fear, and the decline of trading partners have combined to choke growth in many major economies. The International Monetary Fund expects global growth to slow significantly through the end of this year, dipping to 4.1 percent from 5 percent in 2007.
“The global economy is in a tough spot, caught between sharply slowing demand in many advanced economies and rising inflation everywhere,” the I.M.F. declared last month in its official World Economic Outlook.
All this means that economic troubles in the United States could intensify into the presidential election season and beyond. It could also make it harder for financial companies like Lehman Brothers — which has been seeking fresh investment in South Korea — and the government-backed mortgage giants Fannie Mae and Freddie Mac to attract much-needed capital from abroad.
As the United States and many other large economies slip in unison, the reality of integrated markets is being underscored: just as globalization spreads prosperity — linking cotton farmers in Texas to textile mills in China — the same forces spread hurt when times go bad.
“The slowdown has reached such a wide range of countries that they’re now feeding on one another,” said Alan Ruskin, chief international strategist at RBS Greenwich Capital.
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In the New York Times article below, the third paragraph states “…the Kremlin is nearing formal recognition of the independence of the enclaves, South Ossetia and Abkhazia, possibly as early as next week.” To see a history on the struggle for independence by Abkhazia, a democratic territory that has been oppressed by Georgia, here are links to an Online NewsHour segment: video and transcript
The importance of the Online NewsHour report from inside Abkhazia is that you see a different perspective that the Bush Administration will not speak about since in undermines their intentions. The Bush Administrations justifications for their present politics/policy in Georgia do not match reality-which means that the Russians can not be written off as the crazy bad guys to be feared. The Russians have done nothing worse this month than what the United States regularly choses to do-which includes US aggression for their own economic and political interest in the Philippines, Cuba, Iran, Vietnam and Iraq.
Liana Kvarchelia
Centre for Humanitarian Programmes–Abkhazia
“Georgia wanted to isolate us from the rest of the world, including Russia. But the result was that we were isolated from the rest of the world, except Russia. So Russia was the only route for us.”
Russian soldiers on armored personnel carriers between Tbilisi and Gori, Georgia, on Friday, the last day of their withdrawal.
Despite Pullout, Russia Envisions Long-Term Shift
New York Times
August 23, 2008
By CLIFFORD J. LEVY
MOSCOW — As the Russian Army withdrew most of its forces from Georgia, it was becoming ever more clear on Friday that Moscow had no intention of restoring what once was — either on the ground or diplomatically.
The West wants a return to early August, before an obscure territorial dispute on the fringes of the old Soviet empire erupted into an international crisis. But Russia’s forces are digging in and seizing ribbons of Georgian land that abut two breakaway enclaves allied with Moscow, effectively extending its zone of influence.
At the same time, the Kremlin is nearing formal recognition of the independence of the enclaves, South Ossetia and Abkhazia, possibly as early as next week.
These moves indicate that despite the French-brokered cease-fire framework that Russia accepted, it is striving to maintain considerable economic and military pressure on Georgia, a close ally of the United States. The ultimate goal, it seems, is the ouster of its president, Mikheil Saakashvili, who is detested by the Russian leadership, and the installation of a government that it considers less hostile.
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This post is an aggregation of topics linking American politics, the global economy, oil, State and Department of Defense policy.
Russia’s invasion of Georgia territory initially created a risk on commodity inflation which, at this point, has not created a bump up in oil prices:
Military tensions between Russia and Georgia have offered little support to the price of gold, while oil prices have continued to fall in spite of interruptions to two key pipelines carrying crude from the Caspian sea to Turkey.
The long-running surge in commodities and resulting inflationary pressures had been a main factor in slowing global economic activity – playing a bigger role than global financial turmoil, for instance, in the eurozone.
It is the two pipelines that create potential pressure on the global economy, particularly on the Eurozone’s ability to secure energy resources. Sure, John McCain tried to drum up the votes for all those ‘freedom fighters’ in the Republican ranks as he said all Americans would agree we are ‘all Georgians’ today. Let’s face it, the GOP supports freedom fighters fight for ‘open economies’ so that resources can flow to the developed world. From the Big Picture, “McCain certainly has received more Oil firm donations ($971,418), Obama certainly is no stranger to Oil company largesse ($345,150).”
This graphic shows how ridiculous Republican politics has become. The GOP is running an ad that states John McCain fights Big Oil and McCain, not Obama, should lead the United States as we transform our Oil habit into renewable energy. (Excuse me for a second : “ha ha, he, HA HA HA.” The Republican party is inundated by a bunch of self oriented jerks who only understand solidarity if it fits their narrow perceptions of the world and advances their own power. Meanwhile they lie to the American people filling their politics with empty words like ‘freedom’–who could be against ‘freedom’. If the Republicans are so into freedom, lets get rid of government and civilization so that we can retreat into a primal freedom of anarchy. Too bad that the Republicans have grabbed a leadership role in our democracy. The party is full of social darwinist idiots who shouldn’t be given power to make military decisions because the American military is too powerful and violent–just look at the number of Iraq civilians who were killed by not so smart bombs dropped by blunt American war planes.)
We should all remember who is currently in charge at the State Department: Big Oil. From wikipedia: “(Secretary of State Condoleezza) Rice headed Chevron’s committee on public policy until she resigned on January 15, 2001, to become National Security Advisor to President George W. Bush. Chevron honored Rice by naming an oil tanker Condoleezza Rice after her, but controversy led to its being renamed Altair Voyager.”
Here is a caption from a New York Times photo that shows the former Chevron Board of Director at work: “Secretary of State Condoleezza Rice and Mikheil Saakashvili, the Georgian president, arriving at a news conference in Tbilisi on Friday. Ms. Rice persuaded Mr. Saakashvili to sign a revised pact” and here is the photo from yesterdays New York Times:
Here are some paragraphs from the NYT article:
MOSCOW — Russia’s president, Dmitri A. Medvedev, on Saturday signed a revised framework for a deal to halt the fighting in neighboring Georgia, which has stirred some of the deepest divisions between world powers since the cold war. But the Kremlin then indicated that despite the accord’s approval, it would not immediately pull its troops from the country…
The Russian announcements came a day after Secretary of State Condoleezza Rice went to Georgia to demand a Russian pullout and win the Georgian president’s support for the revised cease-fire agreement.
But on Saturday, Russian troops remained within 25 miles of the Georgian capital, Tbilisi. And overall, the situation in Georgia was largely unchanged, with the Russians occupying wide swaths of territory.
So now we are seeing ‘Gazprom’ vs. ‘Chevron’ in Georgia. ‘Chevron’ has moved into secure pipelines feeding the West while Russia is maintaining pressure on the sovereignty of Georgia. It seems clear that Russia has grabbed the regions of Abkhazia and South Ossetia. It will be difficult to dislodge the Russian’s from these two areas yet from the perspective of the West/Chevron/Big Oil, these two areas are worth giving up as long as the pipelines flow in the future.
Appearing on the podium with President Saakashvili as he blasted the Russians, Rice was also able to salvage the appearance of supporting ‘freedom fighters for democracies’.
MIKHEIL SAAKASHVILI, President of Georgia: Never, ever we will surrender. Never, ever will we give our freedom and independence. Never, ever will we give any piece of our territory.
And freedom will go to every part of Georgia, to every ethnic group, to every community in Georgia, and we will definitely get rid of these invaders for good.
Unfortunately, today we are looking evil directly in the eye. And today, this evil is very strong, very nasty, and very dangerous, for everybody, not only for us…
So who invited the trouble here? Who invited this arrogance here? Who invited these innocent deaths here? Who is — not only those people who perpetrate them are responsible, but also those people who failed to stop that.
And who is trying now to look for every excuse saying, “Oh, you know, Georgians might have started it.” Excuse me, 1,200 tanks came into Georgia within a few hours. There is no way you can mobilize those tanks in such a fast period unless you are ready.
Early in the conflict, Georgian’s were disappointed in the West for not coming to their aid as columns of Russian armor flooded into the Georgian State. The United States will send military humanitarian aid to support the cease fire.
As the West/Chevron/Big Oil shore up their position in Georgia (Azerbaijan should not be forgotten to the east), the not so surprising move on the Chess board appeared in Poland. Wednesday saw the move take shape:
Missile talks with Poles gain urgency
Talks on building part of a US missile defence shield on Polish soil restarted on Wednesday, with Polish officials sending much more positive signals than recently, in part because of fears awakened by the Russian attack on Georgia.
Donald Tusk, the Polish prime minister, said this week: “The Georgian issue shows that in the generally understood area of the former Soviet bloc, real security guarantees are important.”
The US would like to build a base containing 10 missile interceptors in Poland, which would be linked with a radar located in neighbouring Czech Republic. The Czechs have already agreed to host the radar, but Mr Tusk’s government has been much more wary.
Warsaw has been concerned that a missile base would become a target of Russian hostility, a not unreasonable assumption in light of the threats Moscow has issued over the programme. In order to ensure that Polish security does not suffer, negotiators have been pressing the US to station Patriot interceptor batteries in Poland to protect Polish airspace.
“One Patriot missile battery permanently stationed in Poland, that is our government’s minimum condition,” Bogdan Klich, the defence minister, said on Wednesday on Polish radio.
The missile defence shield is unpopular with voters in both the Czech Republic and in Poland, but the centre-right governments of both countries feel that having the bases, with their US troops, would improve their security. Neither country’s officials see an attack by a rogue state – the raison d’être of the missile shield – as a realistic threat, but they regard the presence of the bases as a bulwark against a possible threat from Russia. -Financial Times
The Russians are testing the American Military as the US admitted publicly in July that the two wars in Iraq and Afghanistan are stretching their ability thin. Still, the US stated that they still had plenty of bandwidth to handle other situations, particularly in relation to Iran. Yet, it is Georgia that shows what the Americans can still do while fighting two wars: ‘military humanitarian aid’ to create a presence without deploying ‘fighting forces’ plus strengthening military relationships in Europe. The West/Chevron/Big Oil scored big on expanding their military reach on Thursday.
Missile shield accord draws Russian fire
Moscow lashed out at Washington and Warsaw on Friday, saying the plan to site a US anti-missile defence shield in Poland would undermine the global balance of power and put Poland at risk of nuclear attack.
Washington and Warsaw reached a preliminary agreement on Thursday to build part of the missile defence shield in Poland, station US Patriot missiles there and bolster the two countries’ military co-operation.
The US claims the shield in Poland, as well as a radar tracking base to be located in the Czech Republic, is designed to defend against “rogue states” such as Iran.
The timing of this week’s agreement, as relations between Russia and the US deteriorated over the Georgia crisis, has strengthened Moscow’s conviction that the move is anti-Russian.
“The deployment of new anti-missile forces in Europe has the Russian federation as its aim,” said Dmitry Medvedev, the Russian president, at a press conference with Angela Merkel, the German chancellor, on Friday.
Anatoly Nogovitsin, the deputy head of the Russian armed forces, warned Poland that by hosting the shield it could become the target of a nuclear attack in war time. “The US is concerned with its own anti-missile defence, not Poland’s. But Poland, by deploying [the shield], will be exposed to attack.”
Here is where the West/Chevron/Big Oil creates even more military tension and instability in the world by adhering to Neo Con policy. This quote below shows how the Bush Administration has become a farce as they stick to double standards:
As much as Mr. Bush has argued that the old characterizations of the cold war are no longer germane, he drew a new line at the White House on Friday morning between countries free and not free, and bluntly put Russia on the other side of it.
“With its actions in recent days Russia has damaged its credibility and its relations with the nations of the free world,” Mr. Bush said in his fourth stern statement on the conflict in five days, and the strongest to date. “Bullying and intimidation are not acceptable ways to conduct foreign policy in the 21st century.”
Mr. Bush in the quote above has just articulated one big reason why he should not have authorized the unilateral invasion of Iraq. The Bush Administrations and Republicans actions (policy) are far removed from what they say (politics). This is one main reason why the nation must vote for the Democrats in overwhelming numbers this Fall. An Obama presidency will automatically give America new credibility on the world stage which is important in unwinding the actions of the Bush Administration.
A senior Russian general promptly gave credence to Poland’s worst fears by saying Friday that the country had just made itself a target of Russia’s nuclear arsenal.
These repercussions have prompted some to question the wisdom of Mr. Bush’s aggressive response to the Russian incursion into Georgia.
“What worries me about this episode is the United States is jeopardizing Russian cooperation on a number of issues over a dispute that at most involves limited American interests,” said Ted Galen Carpenter, vice president for defense and foreign policy at the Cato Institute in Washington.
Voting for McCain will continue the tensions and heighten them since it is McCain’s position to oust Russia from the G-8. McCain’s strong support of the War in Iraq and the surge will continue the Bush Administrations Neo Con legacy and tie the United States to a course that makes Russia increasingly nervous.
The war in Iraq troubled the Russians as an example of unchecked American unilateralism. But the Bush administration’s relentless pursuit of missile defenses in Europe, the expansion of NATO to Russia’s borders and the support of Kosovo’s independence from Serbia have simply infuriated them.
Russia has used its oil and natural gas to fill its coffers and rebuild its military after the disarray of the 1990’s.
The Russians are acting today because they are being provoked by the United States, Europe and the West/Chevron/BigOil.
The question of NATO membership for Georgia and Ukraine — which the alliance in April pledged would one day happen, while declining to start the process — appears to have hardened Mr. Putin’s resolve over Georgia’s separatist regions.
No matter how much the Americans argue that NATO is now focused on other threats, for Russia, it remains an enemy force. And no matter how often the Americans say missile defense is aimed at Iran and other so-called rogue nations, it remains an existential threat to Russia’s aging and shrinking nuclear capacity. Both are part of what Russia views as remnants of American cold war policy.
The same is true of Kosovo’s independence from Serbia, a close Russian ally. Russian officials now cite Kosovo as precedent for the independence or annexation of Abkhazia and South Ossetia.
“It’s clear the policies we have pursued regarding missile defense and installations in Europe, regarding further expansion of NATO have created difficulties with Russia,” said James F. Collins, the last American ambassador to the Soviet Union and now a director at the Carnegie Endowment for International Peace. “It takes two to tango.”
On the matter of Georgia, though, Mr. Bush has put an end to the dance. He made it clear that his push for democracy trumps his relationship with Mr. Putin and Russia as a whole, describing the matter as a stark choice of a new era.
“Only Russia can decide whether it will now put itself back on the path of responsible nations,” he said, “or continue to purse a policy that promises only confrontation and isolation.”
Bush also stated why Georgia was important to Americans even though Americans disagree with how the Bush Administration pursues its goals:
“Some Americans listening today may wonder why events taking place in a small country halfway around the world matter to the United States. In the years since it’s gained independence after the Soviet Union’s collapse, Georgia has become a courageous democracy. Its people are making the tough choices that are required of free societies. Since the Rose Revolution in 2003, the Georgian people have held free elections, opened up their economy, and built the foundations of a successful democracy.
Georgia has sent troops to Afghanistan and Iraq to help others achieve the liberty that they struggled so hard to attain. To further strengthen their democracy, Georgia has sought to join the free institutions of the West. The people of Georgia have cast their lot with the free world, and we will not cast them aside.” - George Bush
Yet Americans are content to stay on the sidelines instead of exhausting more American blood and treasure:
In March 2007, only 15 percent of those surveyed answered “yes” to the following question: “Should the United States try to change a dictatorship to a democracy where it can, or should the United States stay out of other countries’ affairs?” 68 percent were content to stay on the sidelines.
Democratization, of course, was an inaugural theme of the Bush administration. However, the campaign in the Middle East was faltering by 2006 as elections in Iraq, Egypt and the Palestinian failed to spark wider gains. In May, James Traub wrote in The New York Times Magazine, “We don’t hear much about the propagation of democracy these days.”
Further, Georgia isn’t even the Democracy that Bush Administration would like for you to think that it is worth defending–Georgia might be more like a democracy than Russia yet Mr. Saakashvili’s government has taken pages from the Putin government as they establish power in the post USSR era. This situation is more about expanding the reach of the West into a territory to contain Gazprom and the Russians. The ‘pro-Democracy’ rhetoric is smoke and mirrors to utter to the American people to create an excuse to expand American Military proliferation. Here are some quotes from the PBS NewsHour to gain perspective :
If you look at his record after coming into office, (Mr. Saakashvili) very sharply strengthened the presidency at the expense of the parliament. There’s been harassment of opposition figures.
There’s been harassment of opposition media businesspeople who try to fund the opposition, to the extent that the State Department’s own human rights report has raised very serious questions, troubling questions about how Georgia is ruled…
(Mr. Saakashvili ) studied very carefully the solutions that Putin put forward, including the aggregation of power in the hands of the presidency and dealing with breakaway regions. And I think, to a substantial extent, if you look at his first year in office, you see the echoes of things that Putin did.
But there’s one major difference between Putin and Saakashvili, and that is a commitment to democracy and democratic institutions. I think, in the case of Saakashvili, that was sincere and real from the beginning. And in the case of Putin, we have the appearance of democracy without much substance…
I think, in this case, there was a strong sense in the Georgian government that this was the last shot, that, in fact, South Ossetia and Abkhazia were in the process of being fully incorporated and integrated into the Russian Federation.
There was a long complex program in place under which the Russians had been issuing passports to local Abkhaz. In fact, Tskhinvali was covered with posters that said, “Putin, our president.” So it was de facto being incorporated into the Russian Federation.
And I think they understood this was a last shot, that if Georgia didn’t assert its control over this territory, it was going to be lost forever. And I think the tragedy here is that it probably was already lost and there was little they could do. Certainly, without the support of the United States and Europe, they were not going to be able to wrest this back from Russia…
Well, the (US) administration absolutely was telling him not to provoke the Russians and to resolve the dispute peacefully. The problem is that Mr. Saakashvili was also getting a number of other mixed messages from the administration.
The administration was making it very clear that they were willing to take on the European opposition to bring Georgia into NATO. There was considerable support for the Georgian military, a variety of other steps.
And then, just a month ago, you had Secretary Rice in Tbilisi standing next to Saakashvili saying, in response to a question from him, “Mr. President, we always fight for our friends.”
And it’s clear that she had something else in mind. She was talking about the dispute with our allies over joining NATO. But this very open-ended statement on her part, I think, cannot but have created some opportunities for misunderstanding, let me put it that way…
I want to go back to the question about American — the American voice here. I think he’s absolutely right. America wasn’t speaking with a single, clear voice.
We had lower-level State Department officials giving a correct message, but it was confused and it was overridden by a louder voice from Washington that came particularly from the neocon community. I think we see tragic consequences from that.
But right now, Misha Saakashvili personally and his government are Russia’s target. Russia’s first object here is to take two pieces of Georgian territory. Its second objective is to remove Misha Saakashvili and his government. And I think he’s got the fight of his life before him.