Even though Gloria claims that the constitutional change has nothing to do with extending her term, the opposition refuses to believe that. Gloria shows her tactical skill by attempting to bend the rules to her aims by having the two houses vote together on the changes since she has a large majority of support in the lower house. Although the Supreme Court will probably have to decided the constitutionality of this scheme it is packed with Arroyo appointments. However, even then the eminent judges sometimes decide enough is enough!
Gloria allies ready final push for Cha-cha
By Angie M. Rosales
12/01/2008
Running short of time, allies of President Arroyo in the House of Representatives are moving at double-time to push Charter change (Cha-cha) efforts with Sen. Aquilino Pimentel warning that Mrs. Arroyo’s allies would likely use numerical superiority to ram through efforts to amend the Constitution.
Insistence of Palace allies in Congress to have the two chambers vote jointly in effecting Cha-cha is obviously aimed at taking advantage of the apparent numerical superiority of lawmakers supporting the administration in the House of Representatives, effectively railroading the move to amend the 1987 Constitution, Pimentel, the Senate minority leader, said.
This will also enable President Arroyo to stay in power even beyond her mandate, he added.
A ranking Lakas CMD executive said Palace allies in the House of Representatives are running short of time in pushing Cha-cha with only barely six months for them to work on it since the law stipulates that efforts to change the Constitution cannot be undertaken one year before elections.
Ed Malay told a a forum held at Dapitan Manila yesterday that people will oppose any move to alter the present form of government.
“People right now would rather wait for 2010 to voice out their sentiments in what is happening now and GMA knows that very well after the debacle of team unity last senatorial election,” he said.
The insistence of administration congressmen for a joint voting is patently unconstitutional, against parliamentary tradition and simply illogical, Pimentel said even as he pointed out that the House has at present 229 congressmen compared to only 23 senators.
“If we vote jointly, we will always be overwhelmed and outnumbered by the House,” he said.
Pimentel said Mrs. Arroyo’s allies are pursuing this devious scheme on the presumption that when the issue of its constitutionality is raised before the Supreme Court, their position will be upheld by the tribunal.
However, he said he firmly believes that the Supreme Court, even if it is packed with Arroyo appointees, will resolve this issue according to the rule of law and the paramount public interest, and not to please the appointing authority.
The senator from Mindanao dared the proponents of the joint voting scheme to drop their proposal altogether to remove a major stumbling block that has set back the process for amending the Constitution.
The opposition lawmaker likewise warned saying that the trashing of the fourth impeachment case against Mrs. Arroyo is a portent of things to come if the administration lawmakers will insist on amending the Constitution through joint voting of the Senate and lower house.
House allies of Mrs. Arroyo, meanwhile, accused anti-charter change groups of exploiting the issue in a bid to derail legitimate attempts to amend the Constitution.
The administration lawmakers said that anti-charter change groups are suffering from paranoia.
“We are not going to extend the term of office of public officials, including the President,” says La Union Rep. Victor Ortega, chairman of the House Committee on Constitutional Amendments.
House Speaker Prospero Nograles, one of the proponents of charter change, reiterated that he himself is against the term extension and proposals to postpone the 2010 elections.
“We will not extend her (President Arroyo) term. Period,” Nograles said.
Taking the cudgels for Mrs. Arroyo, Palawan Rep. Antonio Alvarez, chairman of the House Committee on Trade and Industry, said that the president will step down as mandated by law.
“I am against term extension for the President simply because she is against it. The President has become a collateral damage of this Charter change enterprise,” Alvarez said.
“She has neither given any order, direct or indirect, verbal or written, nor dropped a hint or a text message that she wants to stay in MalacaƱang any minute longer than what’s allowed by law,” Alvarez said.
“What they did to the impeachment case by using their numerical superiority, they will also do on the proposed extension of terms,” Pimentel added.
The minority leader said the administration game plan was pried open when it was discovered that the House committee on constitutional amendments had started discussion on a resolution, authored by Batangas Rep. Hermilando Mandanas, to extend the term of all elective public officials from June 30, 2010 to June 30, 2011.
But the principal objective of the administration, according to Pimentel is to adopt a parliamentary system of government where the constitutional ban against the reelection of the incumbent president will be rendered inoperative. This will enable Mrs. Arroyo to run for Member of Parliament in Pampanga and subsequently for prime minister.
At the same time, Pimentel disagreed on the suggestion of former University of the Philippines and l97l Constitutional Convention secretary general Jose Abueva to hold a Constitutional Convention and the election of its delegates in May, 2010 meaning simultaneously with the scheduled national and local elections.
Pimentel argued that it would be much better to convert Congress into a Constituent Assembly than to call a Con-Con because it is a faster and an inexpensive process.
Moreover, he said it is inadvisable to hold the election of Con Con delegates and national and local government officials at the same time because the public discussion of constitutional issues and specific amendments is likely to be overshadowed by partisan political issues during the election campaign.
“With the many problems she is facing, she certainly doesn’t need this aggravation. Sadly, here is the case of a clueless dorm mother getting the blame for the actions of her boarders. What’s certain is 17 months from now, she’ll do a (outgoing-US President George) Bush, and that is to welcome to Malacanang her successor to kick off an orderly transition.”
Another lawmaker, Cavite Rep. Elpidio Barzaga, said anti-Chacha efforts prevent an “honest-to-goodness” revisiting of the 1987 Constitution, which contains some provisions that are either no longer useful or needs improvement, especially those involving economic policies that is included in the proposals of Nograles.
“Speaker Nograles’s proposal covers only the liberalization of the restrictive economic provisions in order to make the country competitive with other countries in attracting foreign investments, most especially if we consider the current global economic crisis. And therefore the argument that it is intended to extend the term of GMA is certainly and totally misplaced,” Barzaga said.
Nograles had earlier filed House Resolution 737 which calls on the House and Senate to convene into a Constituent Assembly (Con-Ass) to amend the 1987 Constitution. Specifically, the resolution aims to amend only Sections 2 and 3, Article 12 of the 1987 Constitution to allow 100-percent foreign ownership of lands.
Marikina Rep. Marcelino Teodoro described the efforts of anti-Chacha forces as “ill-motivated” and only promotes divisiveness in the country.
“The term extension issue of anti-Charter change groups are but ill-motivated. To think that way is only promoting divisiveness in our country. The Philippine Constitution is a 20-year old manifesto and the present global economic turmoil necessitates major amendments with the economic policies implemented in the country,” he said.
He added: “The conditions of 1987 is no longer our current situation, and the laws of the land must adapt to these conditions. Employment opportunities for Filipinos are no longer limited locally but in a global scale due to the technological advances through the years.”
Senator Loren Legarda also urged the administration and its Congress allies to drop the move for charter change and instead focus on strengthening the economy through a “fiscal stimulus package” in the face of the global financial crisis shaking up the world.
“Instead of throwing away hundreds of millions of pesos to efforts to amend the Constitution, which may only be futile because of rejection by the majority of the people, our government should devise a financial stimulus to boost agricultural productivity and help small businessmen to survive from the financial crisis,” Loren declared.
Loren said that the holding of a constituent assembly or convention and later of a nationwide plebiscite to ratify the amendments “would cost hundreds of millions of pesos which should be better directed to the strengthening of the national economy to prevent mass layoffs as well as the further spread of hunger among our people.”
She noted that 40 percent of Filipinos have experienced chronic hunger as found by a recent opinion survey.
“The work required to draft amendments to the Constitution will also divert Congress from enacting urgent and relevant laws to bolster the economy. It is untimely, considering the global financial crisis, the worst since the Great Depression, that will also set back our economy. Already we are facing a marked slowdown in our economic growth, resulting in the further spread of poverty and hunger,” Loren said.
The lady senator, who is the new chair of the Senate Committee on Agriculture, declared that the money that would be used to effect charter change should be allocated instead to farmers and small and medium enterprises to increase agricultural productivity and prevent the folding up of small businesses.
“At present there is a deep dissatisfaction among our farmers because they are not getting enough financial and infrastructure support from the government while much is expected of them to improve productivity. They also strongly resent and deplore the diversion of P780 milllion intended for farm aid to other uses in 2004, allegedly for the benefit of administration politicians in the 2004 elections as shown by the fertilizer scam,” Loren pointed out. “Small businessmen feel neglected because the promised government aid to them still has to be delivered.”
Loren said that the money allocated for charter change could provide a core for a “fiscal stimulus package” to jump-start the economy and prevent a recession that is being experienced by the United States, Japan and Europe.
“Already our export products, like electronics, are in difficult straits because of lower demand from the US and Japan, which are our biggest export destinations,” Loren asserted. “We can help our export industries to modernize so they can become more competitive.”
Gerry Baldo, Pat C. Santos
Sunday, November 30, 2008
No news out of Afghanistan, just propaganda.
This is from wiredispatch.
The US is more and more taking command in Afghanistan. They will have difficulty recruiting troops from other countries to help them. They may have to buy some troops from East Europe or elsewhere.
""Washington is already scheduled to send another 3,000 troops to arrive in the country in January and is now considering sending 20,000 more troops in the next 12 to 18 months, further tipping the numerical balance among ISAF forces.
"What we are seeing is a gradual increase of American influence in all areas of the war," the NATO official said. "Seeking to gain total control of the information flow from the campaign is just part of that." (Editing by John Chalmers) ""
At least now the news situation is transparent. There will be no news just propaganda to further the war effort. No doubt news will still filter through.
Press, "Psy Ops" to merge at NATO Afghan HQ-sources
Jon HemmingReuters North American News Service
Nov 29, 2008 01:56 EST
KABUL, Nov 29 (Reuters) - The U.S. general commanding NATO forces in Afghanistan has ordered a merger of the office that releases news with "Psy Ops", which deals with propaganda, a move that goes against the alliance's policy, three officials said.
The move has worried Washington's European NATO allies -- Germany has already threatened to pull out of media operations in Afghanistan -- and the officials said it could undermine the credibility of information released to the public.
Seven years into the war against the Taliban, insurgent influence is spreading closer to the capital and Afghans are becoming increasingly disenchanted at the presence of some 65,000 foreign troops and the government of President Hamid Karzai.
Taliban militants, through their website, telephone text messages and frequent calls to reporters, are also gaining ground in the information war, analysts say.
U.S. General David McKiernan, the commander of 50,000 troops from more than 40 nations in NATO's International Security Assistance Force (ISAF), ordered the combination of the Public Affairs Office (PAO), Information Operations and Psy Ops (Psychological Operations) from Dec. 1, said a NATO official with detailed knowledge of the move.
"This will totally undermine the credibility of the information released to the press and the public," said the official, who declined to be named.
ISAF spokesman Brigadier General Richard Blanchette said McKiernan had issued a staff order to implement a command restructure from Dec. 1 which was being reviewed by NATO headquarters in Brussels, but he declined to go into details of the reorganisation.
"This is very much an internal matter," he said. "This is up with higher headquarters right now and we're waiting to get the basic approval. Once we have the approval we will be going into implementation."
But another ISAF official confirmed that the amalgamation of public affairs with Information Operations and Psy Ops was part of the planned command restructure. This official, who also declined to be named, said the merger had caused considerable concern at higher levels within NATO which had challenged the order by the U.S. general.
"DECEPTION ACTIVITIES"
NATO policy recognises there is an inherent clash of interests between its public affairs offices, whose job it is to issue press releases and answer media questions, and that of Information Operations and Psy Ops.
Information Operations advises on information designed to affect the will of the enemy, while Psy Ops includes so-called "black operations", or outright deception.
While Public Affairs and Information Operations, PA and Info Ops in military jargon, "are separate, but related functions", according to the official NATO policy document on public affairs, "PA is not an Info Ops discipline".
The new combined ISAF department will come under the command of an American one-star general reporting directly to McKiernan, an arrangement that is also against NATO policy, the NATO official said.
"While coordination is essential, the lines of authority will remain separate, the PA reporting directly to the commander. This is to maintain credibility of PA and to avoid creating a media or public perception that PA activities are coordinated by, or are directed by, Info Ops," the NATO policy document says.
"PA will have no role in planning or executing Info Ops, Psy Ops, or deception activities," it states.
The United States has 35,000 of the 65,000 foreign troops in Afghanistan, operating both under ISAF and a separate U.S.-led coalition operation, but both come under McKiernan's command.
Washington is already scheduled to send another 3,000 troops to arrive in the country in January and is now considering sending 20,000 more troops in the next 12 to 18 months, further tipping the numerical balance among ISAF forces.
"What we are seeing is a gradual increase of American influence in all areas of the war," the NATO official said. "Seeking to gain total control of the information flow from the campaign is just part of that." (Editing by John Chalmers)
Source: Reuters North American News Service
The US is more and more taking command in Afghanistan. They will have difficulty recruiting troops from other countries to help them. They may have to buy some troops from East Europe or elsewhere.
""Washington is already scheduled to send another 3,000 troops to arrive in the country in January and is now considering sending 20,000 more troops in the next 12 to 18 months, further tipping the numerical balance among ISAF forces.
"What we are seeing is a gradual increase of American influence in all areas of the war," the NATO official said. "Seeking to gain total control of the information flow from the campaign is just part of that." (Editing by John Chalmers) ""
At least now the news situation is transparent. There will be no news just propaganda to further the war effort. No doubt news will still filter through.
Press, "Psy Ops" to merge at NATO Afghan HQ-sources
Jon HemmingReuters North American News Service
Nov 29, 2008 01:56 EST
KABUL, Nov 29 (Reuters) - The U.S. general commanding NATO forces in Afghanistan has ordered a merger of the office that releases news with "Psy Ops", which deals with propaganda, a move that goes against the alliance's policy, three officials said.
The move has worried Washington's European NATO allies -- Germany has already threatened to pull out of media operations in Afghanistan -- and the officials said it could undermine the credibility of information released to the public.
Seven years into the war against the Taliban, insurgent influence is spreading closer to the capital and Afghans are becoming increasingly disenchanted at the presence of some 65,000 foreign troops and the government of President Hamid Karzai.
Taliban militants, through their website, telephone text messages and frequent calls to reporters, are also gaining ground in the information war, analysts say.
U.S. General David McKiernan, the commander of 50,000 troops from more than 40 nations in NATO's International Security Assistance Force (ISAF), ordered the combination of the Public Affairs Office (PAO), Information Operations and Psy Ops (Psychological Operations) from Dec. 1, said a NATO official with detailed knowledge of the move.
"This will totally undermine the credibility of the information released to the press and the public," said the official, who declined to be named.
ISAF spokesman Brigadier General Richard Blanchette said McKiernan had issued a staff order to implement a command restructure from Dec. 1 which was being reviewed by NATO headquarters in Brussels, but he declined to go into details of the reorganisation.
"This is very much an internal matter," he said. "This is up with higher headquarters right now and we're waiting to get the basic approval. Once we have the approval we will be going into implementation."
But another ISAF official confirmed that the amalgamation of public affairs with Information Operations and Psy Ops was part of the planned command restructure. This official, who also declined to be named, said the merger had caused considerable concern at higher levels within NATO which had challenged the order by the U.S. general.
"DECEPTION ACTIVITIES"
NATO policy recognises there is an inherent clash of interests between its public affairs offices, whose job it is to issue press releases and answer media questions, and that of Information Operations and Psy Ops.
Information Operations advises on information designed to affect the will of the enemy, while Psy Ops includes so-called "black operations", or outright deception.
While Public Affairs and Information Operations, PA and Info Ops in military jargon, "are separate, but related functions", according to the official NATO policy document on public affairs, "PA is not an Info Ops discipline".
The new combined ISAF department will come under the command of an American one-star general reporting directly to McKiernan, an arrangement that is also against NATO policy, the NATO official said.
"While coordination is essential, the lines of authority will remain separate, the PA reporting directly to the commander. This is to maintain credibility of PA and to avoid creating a media or public perception that PA activities are coordinated by, or are directed by, Info Ops," the NATO policy document says.
"PA will have no role in planning or executing Info Ops, Psy Ops, or deception activities," it states.
The United States has 35,000 of the 65,000 foreign troops in Afghanistan, operating both under ISAF and a separate U.S.-led coalition operation, but both come under McKiernan's command.
Washington is already scheduled to send another 3,000 troops to arrive in the country in January and is now considering sending 20,000 more troops in the next 12 to 18 months, further tipping the numerical balance among ISAF forces.
"What we are seeing is a gradual increase of American influence in all areas of the war," the NATO official said. "Seeking to gain total control of the information flow from the campaign is just part of that." (Editing by John Chalmers)
Source: Reuters North American News Service
Saturday, November 29, 2008
Obama's one trick Wizards.
Failed financiers run the Obama transition team the article notes. Of course they have not failed, in that they are still in control. It is Obama who has failed to bring in change or anyone really outside the elite that caused the mess the US is in. Of course these people are smart enough to know that they must change their tune and there may even be some mildly progressive aspects to the stimulus but the same people are in control and they will do what is in their interests. There will be some collateral crumbs for the people.
Obama's one-trick wizards
By Spengler
One wants to ask the Wall Street wizards who comprise the talent pool for the incoming administration, "If you so smart, how come you ain't rich no more?" Manhattan's toniest private schools, harder to get into than Harvard, quietly are looking for full-tuition pupils now that the children of sacked Wall Street bankers are departing for public schools in cheaper suburbs. Harvard University president Drew Faust has warned of budget cuts to come due to "unprecedented losses" to its US$39 billion endowment. Shares of Citibank
, the current firm of Bill Clinton's treasury secretary Robert Rubin, last week traded at less than a tenth of their year-earlier market price and may require yet another federal bailout. [Citigroup will have more than $300 billion of troubled mortgages and other assets guaranteed by the US government under a federal plan to stabilize the lender after its stock fell 60% last week, Bloomberg reported today, November 24. Citigroup also will get a $20 billion cash infusion from the Treasury Department, adding to the $25 billion the bank received last month under the Troubled Asset Relief Program. In return for the cash and guarantees, the government will get $27 billion of preferred shares paying an 8% dividend.] Rubin, a transition advisor to president-elect Barack Obama, was mentor to Treasury secretary designate Timothy Geithner. Even Goldman Sachs, the thoroughbred trading machine that gave us Treasury Secretary Hank Paulson as well as Rubin, is trading at a fifth of its peak value. These facts came to mind while reading David Brooks' November 21 New York Times panegyric to Obama's prospective cabinet, which gushes, "Its members are twice as smart as the poor reporters who have to cover them, three times if you include the columnists." Brooks added, "... as much as I want to resent these overeducated Achievatrons ... I find myself tremendously impressed by the Obama transition." Has Brooks checked the markets? The cleverest people in the United States, the Ivy-pedigreed investment bankers, have fouled their own nests as well as their own net worth, and persuaded the taxpayers to bail them out. If these are the best and the brightest of 2008, America is in very deep trouble. The one-trick wizards of Wall Street had one idea, which was to ride the trend and pile on as much leverage as credulous investors and crony regulators would allow. It has gone pear-shaped, and those who didn't cash out early along with the cynics are poor. Fortunately for them, Obama will let them play with the budget of the US federal government for the next four years. Failed financiers run the Obama transition team. It used to be that the heads of great industrial companies got the top Cabinet posts. Now it is the one-trick wizards. After George W Bush fired former Treasury Secretary Paul O'Neill, who had run Alcoa, the last survivor of the species was Vice President Dick Cheney, the former CEO of Halliburton. Obama's bevy of talent comes from finance. American industrialists have become figures of ridicule, like the pathetic chief executive of General Motors, Rick Wagoner, begging for a government loan. Stocks rallied on November 22 on reports that Obama would give the Treasury post to Geithner, the New York Federal Reserve Bank president and the architect of the biggest bailout in history. He doubled the size of the Federal Reserve's balance sheet to more than $2 trillion, through the purchase of such risky assets as the commercial paper of near-bankrupt American auto companies. That is in addition to the Treasury's $700 billion bailout plan. Investors like the idea of trillion-dollar transfers from public funds to private companies. Former Treasury secretary Rubin "was an architect of the [Citibank's] strategy," the New York Times reported on November 23. "In 2005, as Citigroup began its effort to expand from within, Mr Rubin peppered his colleagues with questions as they formulated the plan. According to current and former colleagues, he believed that Citigroup was falling behind rivals like Morgan Stanley and Goldman, and he pushed to bulk up the bank's high-growth fixed-income trading, including the [structured credit] business. Former colleagues said Mr Rubin also encouraged [former Citibank CEO Charles] Prince to broaden the bank's appetite for risk, provided that it also upgraded oversight - though the Federal Reserve later would conclude that the bank's oversight remained inadequate." A case in point is the reported implosion of the Harvard and Yale endowments. For years, these giant funds were held up as proof that superior intelligence was the ticket to excess returns. During the 10 years through 2007, Harvard and Yale produced compound annual returns of 15% and 17.8% respectively, far better than the market, the average endowment or the average hedge funds - only to blow up in 2008 by frightful proportions not yet released. According to a recent study [1], the "super endowments" sailed past their peers by loading up real estate, commodities, and "private equity", precisely the sectors that underwent necrosis this year. Private equity is the subprime version of corporate finance, acquiring non-public companies with a minimum down payment and the maximum of debt. David Swenson, the legendary manager of the Yale Endowment, learned one trick: buy on dips in the equity market with all the borrowed money he could get. The alumni network on Wall Street made sure that the university endowments were first in line for the hottest deals. That worked until 2008. We do not know how far the private equity holdings of Harvard and Yale have fallen, but the traded equity price of the Blackstone Group, a leading private equity firm, is a fair gauge. It is down from its $35 initial offering last year to only $4.65 today, a drop of 87%. Commodities, meanwhile, have fallen by half. For a quarter of a century, the inbred products of the Ivy League puppy mills have known nothing but a rising trend in asset prices. About the origin of this trend, they were incurious. The Reagan administration had encountered a stock market in 1981 trading 50% below its the long-term trend. Reagan restored the equity market to trend by cutting taxes, suppressing inflation and easing some regulations. The private equity sharps were fleas traveling on Reagan's dog. They simply rode the trend with the maximum of leverage. Now that the stock market has collapsed, the private equity strategies cannot repay their debt, and their returns have evaporated. Note that equity investors spent a decade in the cold, from 1973 to 1983; it may be even worse this time. The maturities on debt issued to finance private equity deals will come due long before the recovery. Over the long term, we know that the average investment cannot grow faster than the economy, for investments ultimately are valued according to cash flows, and cash flows stem from economic growth. Real American gross domestic product grew by 2% a year on average between 1929 and 2007. Whence came the enormous returns to the Ivy League? Some of them surely came from betting on the right horses, but most came from privileged access to leverage. One recalls Ferdinand I of Austria (1793-1875), deposed for incompetence after the 1848 Revolution, who apocryphally shot an eagle, and said: "It's got to be an eagle, but it's only got one head!" Ferdinand thought the two-headed bird of his family crest was the norm, just as the pink-shirted, suspender-wearing Ivy Leaguers thought that two-digit returns were the norm for their investments. The same privileged access to leverage allowed the investment banks to produce return on equity in excess of 20% year in, year out, by selling structured products, as I explained in a recent essay (Lehman and the end of the era of leverage, Asia Times Online, September 16, 2008). For the 10 years through 2007, American homeowners joined the party, with returns in excess of 20% of their home equity (10% home price appreciation more than doubles with leverage). Investment banks were levered long the leverage, so to speak. The more leverage the world demanded, the more Wall Street could charge for ever-more-arcane methods of packaging leverage, and the higher the returns to leverage providers. That explains how a Washington political operative like Rahm Emanuel, now Obama's chief of staff, who studied ballet rather than balance sheets, could earn a reported $16.2 million in two-and-a-half years at Wasserstein Perella, the mergers and acquisitions boutique. At the height of the bubble, Bruce Wasserstein's firm sold out to Germany's Dresdner Bank for the fairy-tale sum of $1.6 billion. Even the crumbs from Wasserstein's loaf could make a Chicago politician rich. Without leverage, the clever folk around Barack Obama are fleas without a dog. None of them invented anything, introduced an important new product, opened a new market, or did anything that reached into the lives of ordinary people. They wore expensive cufflinks, read balance sheets, exercised regularly, sat on philanthropic boards, and assumed that their flea's ride on the Reagan dog would last forever. All they knew was leverage, and now that the world is de-levering, they are trying to put leverage back into the system. One almost can hear Mortimer Duke, Don Ameche's charcter in Trading Places, shouting, "Now, you listen to me! I want trading reopened right now. Get those brokers back in here! Turn those machines back on!" Of course, nothing excludes the possibility that Obama's team will come up with something constructive. But there is no reason to expect a drastic change from the crisis response of the same sort of people (starting with Treasury Secretary Paulson) in the Bush administration. They will bail out incompetent, failing firms and drop money from helicopters and call it a stimulus package. And it will turn out no better than it did for the humiliated Republicans.
Obama's one-trick wizards
By Spengler
One wants to ask the Wall Street wizards who comprise the talent pool for the incoming administration, "If you so smart, how come you ain't rich no more?" Manhattan's toniest private schools, harder to get into than Harvard, quietly are looking for full-tuition pupils now that the children of sacked Wall Street bankers are departing for public schools in cheaper suburbs. Harvard University president Drew Faust has warned of budget cuts to come due to "unprecedented losses" to its US$39 billion endowment. Shares of Citibank
, the current firm of Bill Clinton's treasury secretary Robert Rubin, last week traded at less than a tenth of their year-earlier market price and may require yet another federal bailout. [Citigroup will have more than $300 billion of troubled mortgages and other assets guaranteed by the US government under a federal plan to stabilize the lender after its stock fell 60% last week, Bloomberg reported today, November 24. Citigroup also will get a $20 billion cash infusion from the Treasury Department, adding to the $25 billion the bank received last month under the Troubled Asset Relief Program. In return for the cash and guarantees, the government will get $27 billion of preferred shares paying an 8% dividend.] Rubin, a transition advisor to president-elect Barack Obama, was mentor to Treasury secretary designate Timothy Geithner. Even Goldman Sachs, the thoroughbred trading machine that gave us Treasury Secretary Hank Paulson as well as Rubin, is trading at a fifth of its peak value. These facts came to mind while reading David Brooks' November 21 New York Times panegyric to Obama's prospective cabinet, which gushes, "Its members are twice as smart as the poor reporters who have to cover them, three times if you include the columnists." Brooks added, "... as much as I want to resent these overeducated Achievatrons ... I find myself tremendously impressed by the Obama transition." Has Brooks checked the markets? The cleverest people in the United States, the Ivy-pedigreed investment bankers, have fouled their own nests as well as their own net worth, and persuaded the taxpayers to bail them out. If these are the best and the brightest of 2008, America is in very deep trouble. The one-trick wizards of Wall Street had one idea, which was to ride the trend and pile on as much leverage as credulous investors and crony regulators would allow. It has gone pear-shaped, and those who didn't cash out early along with the cynics are poor. Fortunately for them, Obama will let them play with the budget of the US federal government for the next four years. Failed financiers run the Obama transition team. It used to be that the heads of great industrial companies got the top Cabinet posts. Now it is the one-trick wizards. After George W Bush fired former Treasury Secretary Paul O'Neill, who had run Alcoa, the last survivor of the species was Vice President Dick Cheney, the former CEO of Halliburton. Obama's bevy of talent comes from finance. American industrialists have become figures of ridicule, like the pathetic chief executive of General Motors, Rick Wagoner, begging for a government loan. Stocks rallied on November 22 on reports that Obama would give the Treasury post to Geithner, the New York Federal Reserve Bank president and the architect of the biggest bailout in history. He doubled the size of the Federal Reserve's balance sheet to more than $2 trillion, through the purchase of such risky assets as the commercial paper of near-bankrupt American auto companies. That is in addition to the Treasury's $700 billion bailout plan. Investors like the idea of trillion-dollar transfers from public funds to private companies. Former Treasury secretary Rubin "was an architect of the [Citibank's] strategy," the New York Times reported on November 23. "In 2005, as Citigroup began its effort to expand from within, Mr Rubin peppered his colleagues with questions as they formulated the plan. According to current and former colleagues, he believed that Citigroup was falling behind rivals like Morgan Stanley and Goldman, and he pushed to bulk up the bank's high-growth fixed-income trading, including the [structured credit] business. Former colleagues said Mr Rubin also encouraged [former Citibank CEO Charles] Prince to broaden the bank's appetite for risk, provided that it also upgraded oversight - though the Federal Reserve later would conclude that the bank's oversight remained inadequate." A case in point is the reported implosion of the Harvard and Yale endowments. For years, these giant funds were held up as proof that superior intelligence was the ticket to excess returns. During the 10 years through 2007, Harvard and Yale produced compound annual returns of 15% and 17.8% respectively, far better than the market, the average endowment or the average hedge funds - only to blow up in 2008 by frightful proportions not yet released. According to a recent study [1], the "super endowments" sailed past their peers by loading up real estate, commodities, and "private equity", precisely the sectors that underwent necrosis this year. Private equity is the subprime version of corporate finance, acquiring non-public companies with a minimum down payment and the maximum of debt. David Swenson, the legendary manager of the Yale Endowment, learned one trick: buy on dips in the equity market with all the borrowed money he could get. The alumni network on Wall Street made sure that the university endowments were first in line for the hottest deals. That worked until 2008. We do not know how far the private equity holdings of Harvard and Yale have fallen, but the traded equity price of the Blackstone Group, a leading private equity firm, is a fair gauge. It is down from its $35 initial offering last year to only $4.65 today, a drop of 87%. Commodities, meanwhile, have fallen by half. For a quarter of a century, the inbred products of the Ivy League puppy mills have known nothing but a rising trend in asset prices. About the origin of this trend, they were incurious. The Reagan administration had encountered a stock market in 1981 trading 50% below its the long-term trend. Reagan restored the equity market to trend by cutting taxes, suppressing inflation and easing some regulations. The private equity sharps were fleas traveling on Reagan's dog. They simply rode the trend with the maximum of leverage. Now that the stock market has collapsed, the private equity strategies cannot repay their debt, and their returns have evaporated. Note that equity investors spent a decade in the cold, from 1973 to 1983; it may be even worse this time. The maturities on debt issued to finance private equity deals will come due long before the recovery. Over the long term, we know that the average investment cannot grow faster than the economy, for investments ultimately are valued according to cash flows, and cash flows stem from economic growth. Real American gross domestic product grew by 2% a year on average between 1929 and 2007. Whence came the enormous returns to the Ivy League? Some of them surely came from betting on the right horses, but most came from privileged access to leverage. One recalls Ferdinand I of Austria (1793-1875), deposed for incompetence after the 1848 Revolution, who apocryphally shot an eagle, and said: "It's got to be an eagle, but it's only got one head!" Ferdinand thought the two-headed bird of his family crest was the norm, just as the pink-shirted, suspender-wearing Ivy Leaguers thought that two-digit returns were the norm for their investments. The same privileged access to leverage allowed the investment banks to produce return on equity in excess of 20% year in, year out, by selling structured products, as I explained in a recent essay (Lehman and the end of the era of leverage, Asia Times Online, September 16, 2008). For the 10 years through 2007, American homeowners joined the party, with returns in excess of 20% of their home equity (10% home price appreciation more than doubles with leverage). Investment banks were levered long the leverage, so to speak. The more leverage the world demanded, the more Wall Street could charge for ever-more-arcane methods of packaging leverage, and the higher the returns to leverage providers. That explains how a Washington political operative like Rahm Emanuel, now Obama's chief of staff, who studied ballet rather than balance sheets, could earn a reported $16.2 million in two-and-a-half years at Wasserstein Perella, the mergers and acquisitions boutique. At the height of the bubble, Bruce Wasserstein's firm sold out to Germany's Dresdner Bank for the fairy-tale sum of $1.6 billion. Even the crumbs from Wasserstein's loaf could make a Chicago politician rich. Without leverage, the clever folk around Barack Obama are fleas without a dog. None of them invented anything, introduced an important new product, opened a new market, or did anything that reached into the lives of ordinary people. They wore expensive cufflinks, read balance sheets, exercised regularly, sat on philanthropic boards, and assumed that their flea's ride on the Reagan dog would last forever. All they knew was leverage, and now that the world is de-levering, they are trying to put leverage back into the system. One almost can hear Mortimer Duke, Don Ameche's charcter in Trading Places, shouting, "Now, you listen to me! I want trading reopened right now. Get those brokers back in here! Turn those machines back on!" Of course, nothing excludes the possibility that Obama's team will come up with something constructive. But there is no reason to expect a drastic change from the crisis response of the same sort of people (starting with Treasury Secretary Paulson) in the Bush administration. They will bail out incompetent, failing firms and drop money from helicopters and call it a stimulus package. And it will turn out no better than it did for the humiliated Republicans.
Still opposition to SOFA agreement
This is from Juancole.
Even though there is still opposition to the SOFA there does not seem to be any increase in insurgency even the Sadr group. It remains to be seen how things will work out in practice. The Iraqi's still have little jurisdiction over troops or contractors when they commit crimes while on duty. I understood that the Iraqis did have the power to open mail but perhaps not.
Al-Hayat reports in Arabic that controversy continues to rage around the security pact, dividing communities against one another. The Association of Muslim Scholars condemned the Iraqi Islamic Party and other Sunni Arab parties for "selling Iraq" with their votes in its favor. Muqtada al-Sadr announced three days of mourning in protest against its enactment, but he did not order his supporters to engage in confrontation to overturn it, "in order to safeguard the unity of the country. One of the aides to Grand Ayatollah Ali Sistani called it a "diminution" of Iraq's sovereignty.Muqtada asked his followers to mourn formally in mosques for three days, and to hold wakes (for all the world as though someone had died in the family). Muqtada all by himself will leave behind enough material to keep symbolic anthropologists busy for centuries. He sent out a statement expressing his "condolences" to Iraqis at this calamity, an agreement of abasement and humiliation. Hundreds of Sadrists managed to demonstrate after Friday prayers, despite strict security, and to burn American flags.In Karbala, an aide to Sistani, Sheikh Ahmad al-Safi, said he had two concerns. First, would the Iraqi government actually exercise sovereignty to the degree stipulated in the agreement? And, second, he regretted the lack of any guarantee that Iraq would be removed from Chapter 7 of the UN Charter (and thus regain its independence from the UNSC). He pointed out that as long as US troops were on Iraqi soil, the government in Baghdad would not be truly sovereign, since it could not inspect the mail of American residents of Iraq, and US troops retained freedom of movement. Ayatollah Muhammad al-Ya`qubi expressed his "disappointment" that the pact was enacted. (He is the spiritual leader of the Islamic Virtue Party or Fadhila, which is strong in Basra).The Bush administration finally released the official English text on Friday. Some parliamentarians have expressed fears that it is not exactly the same as the Arabic text.
Even though there is still opposition to the SOFA there does not seem to be any increase in insurgency even the Sadr group. It remains to be seen how things will work out in practice. The Iraqi's still have little jurisdiction over troops or contractors when they commit crimes while on duty. I understood that the Iraqis did have the power to open mail but perhaps not.
Al-Hayat reports in Arabic that controversy continues to rage around the security pact, dividing communities against one another. The Association of Muslim Scholars condemned the Iraqi Islamic Party and other Sunni Arab parties for "selling Iraq" with their votes in its favor. Muqtada al-Sadr announced three days of mourning in protest against its enactment, but he did not order his supporters to engage in confrontation to overturn it, "in order to safeguard the unity of the country. One of the aides to Grand Ayatollah Ali Sistani called it a "diminution" of Iraq's sovereignty.Muqtada asked his followers to mourn formally in mosques for three days, and to hold wakes (for all the world as though someone had died in the family). Muqtada all by himself will leave behind enough material to keep symbolic anthropologists busy for centuries. He sent out a statement expressing his "condolences" to Iraqis at this calamity, an agreement of abasement and humiliation. Hundreds of Sadrists managed to demonstrate after Friday prayers, despite strict security, and to burn American flags.In Karbala, an aide to Sistani, Sheikh Ahmad al-Safi, said he had two concerns. First, would the Iraqi government actually exercise sovereignty to the degree stipulated in the agreement? And, second, he regretted the lack of any guarantee that Iraq would be removed from Chapter 7 of the UN Charter (and thus regain its independence from the UNSC). He pointed out that as long as US troops were on Iraqi soil, the government in Baghdad would not be truly sovereign, since it could not inspect the mail of American residents of Iraq, and US troops retained freedom of movement. Ayatollah Muhammad al-Ya`qubi expressed his "disappointment" that the pact was enacted. (He is the spiritual leader of the Islamic Virtue Party or Fadhila, which is strong in Basra).The Bush administration finally released the official English text on Friday. Some parliamentarians have expressed fears that it is not exactly the same as the Arabic text.
Philippines: Catholic bishops lead march calling on people to oust Arroyo.
This is from the Tribune (Manila)
The Pope's demand that clerics keep out of politics seems to have fallen on deaf ears in the Philippines. Many of the country's clerics take the view that they are responsible to their flock to see that they are treated better by the government and not just exploited. They fight for their interests to gain the respect of their charges.
Many clerics are particularly upset that Arroyo is trying to push through constitutional change to keep herself in power. Of course they are also upset by the pervasive corruption that they see within the Arroyo administration. Many clerics have been at the forefront of people power uprisings in the Philippines before.
It is doubtful that the clerics will actually be charged with sedition although calling for an uprising to remove Arroyo does seem a bit provocative! To charge the clerics with sedition would be likely to destabilise the situation even more and make them all heroes.
Bishops-led march on to oust Arroyo
By Riza Recio and Pat C. Santos
11/30/2008
Tagged as “pied pipers” by MalacaƱang, Catholic bishops who called for an uprising to remove President Arroyo from power said they are keen to continue their campaign, adding they will not be deterred by Justice Secretary Raul Gonzalez’s threat of sedition charges when they lead today a people’s protest in Caloocan City.
The mass action today, to be led by Novaliches Bishop Antonio Tobias, Caloocan Bishop Deogracias IƱiguez, the Kilusang Makabansang Ekonomiya (KME) and participated in by labor and cause-oriented groups, will primarily call for the public to block efforts of Mrs. Arroyo’s allies in the House of Representatives to amend the Constitution.
The revived Charter change (Cha-cha) attempt is being billed by the Palace and Mrs. Arroyo’s House allies as a measure to amend economic provisions in the Constitution but it is widely seen as an effort to further extend the term of Mrs. Arroyo which will end in 2010.
The bishops said they are unfazed by Gonzalez’s threats to file sedition charges against them.
Tobias and IƱiguez yesterday said they are open to “extra-legal” means to oust Mrs.Arroyo.
“We are already used to the threat of the old secretary of injustice. We will just wait what he will do,” said Tobias.
The 67-year-old bishop also warned MalacaƱang allies in Congress over their aggressiveness to push Charter Change, saying that it could fuel fury among the public.
In Thursday’s press conference, he said the moves for constitutional amendments despite the lack of public support just show the “real color of the administration.”
Invoking a Biblical passage that supposedly orders people “to fear and honor duly constituted authorities” MalacaƱang said the bishops are making “reckless and irresponsible” acts.
Deputy presidential spokesman Anthony Golez Jr. called IƱiguez and Tobias “pied pipers” for what he called as their acts on influencing the public to sympathize with them in searching for extra-legal means to oust Mrs. Arroyo.
Golez said the two bishops violated Biblical teachings in particular the Book of Romans Chapter 13 which supposedly told the faithful “to fear and honor the duly-constituted authority”.
“It is foremost that all bishops who are encouraging our people to resort to extra-constitutional means can be likened to the pied piper blowing their flute to innocent children and leading them to drown in the river” said Golez.
The Pied Piper is a mythical character who supposedly led hundreds of children to drown to retaliate against townsfolk who withheld payments for his previous service of ending a rat infestation.
Tobias said that the whole Catholic Church is heading for a consensus in calling for the ouster of Mrs. Arroyo.
“Masyado ng garapal kaya papunta na diyan. Papunta na diyan na magkakasama-sama kami (Their brazenness have become too much. We are all heading in one direction),” Tobias said.
Manila Archbishop Gaudencio Cardinal Rosales told an assembly at St. Paul’s College in Manila that “self-serving public servants exploit the ignorant poor.”
“The worst possible scenario is where people approach the poor not to help but to take advantage of them,” Rosales added.
There are more bishops now (who are joining the call for Mrs. Arroyo to step down). I’m very sure the initial five (who called for a new government) and the others like us are growing,” Tobias furthered.
Such was the case, he added, during the Martial Law years, when the religious leaders in the Philippines all expressed opposition to the continued stay of then-president Ferdinand Marcos.
Last month, Lagdameo along with Lingayen-Dagupan Archbishop Oscar Cruz, Masbate Bishop Joel Baylon, Balanga Bishop Socrates Villegas and Legazpi Bishop emeritus Jose Sorra, called on the public to start preparing for a new government to remove the present one that is riddled with massive corruption.
Some bishops, who are known to be friendly with MalacaƱang, however, tried to downplay the statement of the five bishops saying this does not represent the CBCP as a body.
Golez said the Palace had no plans on what measures to implement when the bishops lead today’s mass action.
It would depend on the action that the Department of Justice would be implementing related to this recent development, Golez said.
Gonzalez had said the DoJ would be monitoring any clear violation of the Revised Penal Code pertaining to rebellion and inciting to sedition of the rallyists.
Golez added with the country reeling from the current global crisis, the people would be unlikely to support any destabilization effort.
MalacaƱang, however, ordered police forces to exercise maximum tolerance on today’s mass actions.
In preparation for the mass protest, the Armed Forces of the Philippines and the National Capital Region Police Office will be on full alert tomorrow, according to the Palace.
AFP spokesperson Leopoldo Batawil said the armed forces has been coordinating with the AFP National Capital Region Command and the Region IV-A and Region III in order to ensure peace and order during today’s protest action.
The AFP has called on the protesters to stage rallies within the designated freedom parks and to ensure banning of bringing guns among rallyists.
The rallyists are also expected to protest the rushed junking of the impeachment case against Mrs. Arroyo, the fourth in so many years.
The impeachment bid was junked by the House committee on justice after two days of deliberations ruling that it was insufficient in substance. The impeachment case will be debated in the plenary tomorrow.
Gabriela Women’s Party Representative Liza Maza Saturday scored Justice Secretary Raul Gonzales for threatening two Catholic Bishops on “inciting to rebellion” cases for their critical stand against the Arroyo administration.
“It is so unbecoming of Gonzales to utter such statements. He should learn to respect the viewpoints of people who chose not to be gagged and fooled by the Arroyo administration,” said Maza.
“The Bishops’ call is valid and in no way impedes the constitutional right of anyone; rather it is a solid exercise of our basic right for expression and redress and to demand for accountability from our public officials, more so from the highest position in the country.”
“It appears that the allies of the Arroyo administration are guilty of hiding the truth, They might have killed the impeachment complaint but they will never succeed in thwarting our civil liberties,” she added.
The Gabriela solon further encouraged the people to be more vigilant against all the schemes of the Arroyo administration now that its “Charter Change express” had been exposed.
“It is high time for us Filipinos to unite against the evils in MalacaƱang. We can never allow the culture of greed, violence, and corruption to thrive further and consequently poison the minds of our children.” Charlie V. Manalo
The Pope's demand that clerics keep out of politics seems to have fallen on deaf ears in the Philippines. Many of the country's clerics take the view that they are responsible to their flock to see that they are treated better by the government and not just exploited. They fight for their interests to gain the respect of their charges.
Many clerics are particularly upset that Arroyo is trying to push through constitutional change to keep herself in power. Of course they are also upset by the pervasive corruption that they see within the Arroyo administration. Many clerics have been at the forefront of people power uprisings in the Philippines before.
It is doubtful that the clerics will actually be charged with sedition although calling for an uprising to remove Arroyo does seem a bit provocative! To charge the clerics with sedition would be likely to destabilise the situation even more and make them all heroes.
Bishops-led march on to oust Arroyo
By Riza Recio and Pat C. Santos
11/30/2008
Tagged as “pied pipers” by MalacaƱang, Catholic bishops who called for an uprising to remove President Arroyo from power said they are keen to continue their campaign, adding they will not be deterred by Justice Secretary Raul Gonzalez’s threat of sedition charges when they lead today a people’s protest in Caloocan City.
The mass action today, to be led by Novaliches Bishop Antonio Tobias, Caloocan Bishop Deogracias IƱiguez, the Kilusang Makabansang Ekonomiya (KME) and participated in by labor and cause-oriented groups, will primarily call for the public to block efforts of Mrs. Arroyo’s allies in the House of Representatives to amend the Constitution.
The revived Charter change (Cha-cha) attempt is being billed by the Palace and Mrs. Arroyo’s House allies as a measure to amend economic provisions in the Constitution but it is widely seen as an effort to further extend the term of Mrs. Arroyo which will end in 2010.
The bishops said they are unfazed by Gonzalez’s threats to file sedition charges against them.
Tobias and IƱiguez yesterday said they are open to “extra-legal” means to oust Mrs.Arroyo.
“We are already used to the threat of the old secretary of injustice. We will just wait what he will do,” said Tobias.
The 67-year-old bishop also warned MalacaƱang allies in Congress over their aggressiveness to push Charter Change, saying that it could fuel fury among the public.
In Thursday’s press conference, he said the moves for constitutional amendments despite the lack of public support just show the “real color of the administration.”
Invoking a Biblical passage that supposedly orders people “to fear and honor duly constituted authorities” MalacaƱang said the bishops are making “reckless and irresponsible” acts.
Deputy presidential spokesman Anthony Golez Jr. called IƱiguez and Tobias “pied pipers” for what he called as their acts on influencing the public to sympathize with them in searching for extra-legal means to oust Mrs. Arroyo.
Golez said the two bishops violated Biblical teachings in particular the Book of Romans Chapter 13 which supposedly told the faithful “to fear and honor the duly-constituted authority”.
“It is foremost that all bishops who are encouraging our people to resort to extra-constitutional means can be likened to the pied piper blowing their flute to innocent children and leading them to drown in the river” said Golez.
The Pied Piper is a mythical character who supposedly led hundreds of children to drown to retaliate against townsfolk who withheld payments for his previous service of ending a rat infestation.
Tobias said that the whole Catholic Church is heading for a consensus in calling for the ouster of Mrs. Arroyo.
“Masyado ng garapal kaya papunta na diyan. Papunta na diyan na magkakasama-sama kami (Their brazenness have become too much. We are all heading in one direction),” Tobias said.
Manila Archbishop Gaudencio Cardinal Rosales told an assembly at St. Paul’s College in Manila that “self-serving public servants exploit the ignorant poor.”
“The worst possible scenario is where people approach the poor not to help but to take advantage of them,” Rosales added.
There are more bishops now (who are joining the call for Mrs. Arroyo to step down). I’m very sure the initial five (who called for a new government) and the others like us are growing,” Tobias furthered.
Such was the case, he added, during the Martial Law years, when the religious leaders in the Philippines all expressed opposition to the continued stay of then-president Ferdinand Marcos.
Last month, Lagdameo along with Lingayen-Dagupan Archbishop Oscar Cruz, Masbate Bishop Joel Baylon, Balanga Bishop Socrates Villegas and Legazpi Bishop emeritus Jose Sorra, called on the public to start preparing for a new government to remove the present one that is riddled with massive corruption.
Some bishops, who are known to be friendly with MalacaƱang, however, tried to downplay the statement of the five bishops saying this does not represent the CBCP as a body.
Golez said the Palace had no plans on what measures to implement when the bishops lead today’s mass action.
It would depend on the action that the Department of Justice would be implementing related to this recent development, Golez said.
Gonzalez had said the DoJ would be monitoring any clear violation of the Revised Penal Code pertaining to rebellion and inciting to sedition of the rallyists.
Golez added with the country reeling from the current global crisis, the people would be unlikely to support any destabilization effort.
MalacaƱang, however, ordered police forces to exercise maximum tolerance on today’s mass actions.
In preparation for the mass protest, the Armed Forces of the Philippines and the National Capital Region Police Office will be on full alert tomorrow, according to the Palace.
AFP spokesperson Leopoldo Batawil said the armed forces has been coordinating with the AFP National Capital Region Command and the Region IV-A and Region III in order to ensure peace and order during today’s protest action.
The AFP has called on the protesters to stage rallies within the designated freedom parks and to ensure banning of bringing guns among rallyists.
The rallyists are also expected to protest the rushed junking of the impeachment case against Mrs. Arroyo, the fourth in so many years.
The impeachment bid was junked by the House committee on justice after two days of deliberations ruling that it was insufficient in substance. The impeachment case will be debated in the plenary tomorrow.
Gabriela Women’s Party Representative Liza Maza Saturday scored Justice Secretary Raul Gonzales for threatening two Catholic Bishops on “inciting to rebellion” cases for their critical stand against the Arroyo administration.
“It is so unbecoming of Gonzales to utter such statements. He should learn to respect the viewpoints of people who chose not to be gagged and fooled by the Arroyo administration,” said Maza.
“The Bishops’ call is valid and in no way impedes the constitutional right of anyone; rather it is a solid exercise of our basic right for expression and redress and to demand for accountability from our public officials, more so from the highest position in the country.”
“It appears that the allies of the Arroyo administration are guilty of hiding the truth, They might have killed the impeachment complaint but they will never succeed in thwarting our civil liberties,” she added.
The Gabriela solon further encouraged the people to be more vigilant against all the schemes of the Arroyo administration now that its “Charter Change express” had been exposed.
“It is high time for us Filipinos to unite against the evils in MalacaƱang. We can never allow the culture of greed, violence, and corruption to thrive further and consequently poison the minds of our children.” Charlie V. Manalo
Venezuela: After the regional elections
This is from links.org.
This is an analysis of the results from a socialist perspective. Those supporting Chavez are it would seem a motley crew. As this critique shows some of the losses of the Chavez group were due to the poor quality of the candidates. As in most movements that have an electoral aspect there is always the problem of mobilising the grass roots to create genuine social change rather than simply electing some champion of the people and then the people are left on the sidelines.
I gather that there is considerable corruption withing Venezuelan politics and that this is a problem within the Chavistas as well as the opposition groups.
Venezuela: After the regional elections, the workers propose a clean out and more revolution
Stalin Perez Borges
By Stalin Perez Borges, translated by Kiraz Janicke and Federico Fuentes for Links International Journal of Socialist Renewal
November 25, 2008 -- I want to give some preliminary and personal impressions, in the heat of the moment, where many comrades are very preoccupied by the significance of the [Chavista movement’s] loss of the Mayor of Greater Caracas and of some important or key governorships in the country.
It’s time to calm down and sit down together in order to evaluate in depth with the comrades. There are various points that we should analyse in order to draw conclusions that truly reflect reality. It is necessary to open a profound debate within the party [United Socialist Party of Venezuela – PSUV], to reflect and proceed with self-criticism, as President Chavez indicated on Sunday night.
First, I think it is necessary to stress the increase of votes for Chavismo across the entire country compared to last December 2 [the constitutional reform referendum]. At the same time the opposition has demonstrated once again that there is a ceiling of votes that it cannot overcome, even if abstention levels are much lower. Nevertheless, it managed to reach a level of support that allowed it to obtain political victories in important cities.
Second, I think it is necessary to stress that having gone into these elections divided in many states, as is the case of Carabobo, the candidates of Chavez carried out a very good election campaign although some of them did not win.
Third, I think that the warning that we gave from Marea Socialista [Socialist Tide] about some of the candidates, and above all the indication that they are leaders that express something that the revolutionary people profoundly reject, such as is the case of the endogenous right-wing, had a very important weight in fundamental districts such as the governorship of Miranda and others, for example Tachira. The action of previous governments is what explains the defeat in Greater Caracas. This is one of the most serious political problems that confronts the revolutionary process.
But there is a problem that is graver still. That is the dynamic within the PSUV itself. It is necessary to transform the party into a truly revolutionary party. We cannot continue with the method of an electoral machine where the base only participates in an irregular manner, in limited primaries, that in general are controlled by the power of the endogenous right-wing.
The party demonstrates that it could be a great party, but it is necessary to stimulate the participation of the workers, of the popular sectors that are the fundamental base of the revolution. And this stimulation should be political. The fact is the party has taken little account of its trade union movement. These electoral results, although they are positive, leave open the necessity of knowing that what is lacking is more democracy and more participation. The militants must feel it is their party, not the party of the leaders, otherwise it will run the risk of converting itself into just one more party, just like the other ones.
Nevertheless, it is not enough to simply announce that there should be self-criticism. The revolutionary people across the whole country must participate. We, on our part, believe that the moment has arrived to clean out the government and the party. A cleaning out and more revolution is what we need in order to ensure that working people govern in this revolution.
[Stalin Perez Borges is a national coordinator of the National Union of Workers (UNT), a militant of the PSUV and a national leader of Marea Socialista.]
This is an analysis of the results from a socialist perspective. Those supporting Chavez are it would seem a motley crew. As this critique shows some of the losses of the Chavez group were due to the poor quality of the candidates. As in most movements that have an electoral aspect there is always the problem of mobilising the grass roots to create genuine social change rather than simply electing some champion of the people and then the people are left on the sidelines.
I gather that there is considerable corruption withing Venezuelan politics and that this is a problem within the Chavistas as well as the opposition groups.
Venezuela: After the regional elections, the workers propose a clean out and more revolution
Stalin Perez Borges
By Stalin Perez Borges, translated by Kiraz Janicke and Federico Fuentes for Links International Journal of Socialist Renewal
November 25, 2008 -- I want to give some preliminary and personal impressions, in the heat of the moment, where many comrades are very preoccupied by the significance of the [Chavista movement’s] loss of the Mayor of Greater Caracas and of some important or key governorships in the country.
It’s time to calm down and sit down together in order to evaluate in depth with the comrades. There are various points that we should analyse in order to draw conclusions that truly reflect reality. It is necessary to open a profound debate within the party [United Socialist Party of Venezuela – PSUV], to reflect and proceed with self-criticism, as President Chavez indicated on Sunday night.
First, I think it is necessary to stress the increase of votes for Chavismo across the entire country compared to last December 2 [the constitutional reform referendum]. At the same time the opposition has demonstrated once again that there is a ceiling of votes that it cannot overcome, even if abstention levels are much lower. Nevertheless, it managed to reach a level of support that allowed it to obtain political victories in important cities.
Second, I think it is necessary to stress that having gone into these elections divided in many states, as is the case of Carabobo, the candidates of Chavez carried out a very good election campaign although some of them did not win.
Third, I think that the warning that we gave from Marea Socialista [Socialist Tide] about some of the candidates, and above all the indication that they are leaders that express something that the revolutionary people profoundly reject, such as is the case of the endogenous right-wing, had a very important weight in fundamental districts such as the governorship of Miranda and others, for example Tachira. The action of previous governments is what explains the defeat in Greater Caracas. This is one of the most serious political problems that confronts the revolutionary process.
But there is a problem that is graver still. That is the dynamic within the PSUV itself. It is necessary to transform the party into a truly revolutionary party. We cannot continue with the method of an electoral machine where the base only participates in an irregular manner, in limited primaries, that in general are controlled by the power of the endogenous right-wing.
The party demonstrates that it could be a great party, but it is necessary to stimulate the participation of the workers, of the popular sectors that are the fundamental base of the revolution. And this stimulation should be political. The fact is the party has taken little account of its trade union movement. These electoral results, although they are positive, leave open the necessity of knowing that what is lacking is more democracy and more participation. The militants must feel it is their party, not the party of the leaders, otherwise it will run the risk of converting itself into just one more party, just like the other ones.
Nevertheless, it is not enough to simply announce that there should be self-criticism. The revolutionary people across the whole country must participate. We, on our part, believe that the moment has arrived to clean out the government and the party. A cleaning out and more revolution is what we need in order to ensure that working people govern in this revolution.
[Stalin Perez Borges is a national coordinator of the National Union of Workers (UNT), a militant of the PSUV and a national leader of Marea Socialista.]
The Summers Conundrum
Read this and weep. In the US it seems centrist means a deregulation promoter, an arrogant sexist, a person who ravaged the Lithuanian economy often involving personal enrichment for his friends, a key employee of a hedge fund and of the World Bank, a person who worked in the Reagan administration and on and on. Anyone who was even remotely leftist would send this guy packing back to his corporate buddies.
The Summers Conundrum
By Mark Ames
November 10, 2008
. The conventional wisdom is that Summers is the "centrist" choice--Fareed Zakaria ("I think Summers is an extraordinarily brilliant guy") and David Gergen ("Larry Summers would be superb at this job"), two titans of centrism, both weighed in Sunday on the Stephanopoulos show in favor of Summers. And yet so far the debate over Summers has been largely confined to two outrageous moments in his career: his 1991 World Bank memo calling Africa "UNDER-polluted," and his more recent declarations, while serving as president of Harvard, about women's genetic inferiority in math and science. By themselves, these two incidents might be dismissed as merely provocative in a maverick-moron sort of way, as many of Summers' supporters argue; but in the context of Summers's track record, in which he oversaw the destruction of entire economies and covered up cronyism and corruption, his Africa memo and sexist declarations aren't exceptions but rather part of a disturbing pattern.
From the start, Summers has been on the wrong side of Obama's supporters. In 1982, while still a graduate student at Harvard, Summers was brought to Washington by his dissertation advisor Martin Feldstein, the supply-side economist, to serve on Ronald Reagan's Council of Economic Advisors. Those first years in the Reagan administration were crucial in the right-wing war against New Deal regulation of the banking system and financial markets--a war that Reagan's team won, and that we're all paying for today. Although Summers eventually identified himself with the Democratic Party--albeit the right wing of that party--nevertheless, as the New York Times's Peter T. Kilborn wrote in 1988:
He worked for 10 months as a top analyst in President Reagan's Council of Economic Advisers when his mentor, Martin S. Feldstein, was running it, and his colleagues don't recall him venting anti-Reagan heresies then....
"One of the ironies of this business is that Summers's economics are quite close to Feldstein's," said William A. Niskanen, who was a member of the Feldstein council.
It's ironic if you expected Summers to be a liberal Democrat--but par for the course in the context of Summers's real record. Some fifteen years after Summers's stint in the Reaganomics war room, he reappears as one of the key villains fighting to suppress the regulatory efforts of a top official, Brooksley Born, who was trying to call attention to the dangers of the unregulated derivatives, such as credit swap defaults, which today are considered the key to the current economic crisis.
But let's return to the Summers timeline. After his stint in the Reaganomics brain trust, he returned to Harvard to serve as one of the university's youngest professors. In 1988, he was Michael Dukakis's chief economic advisor, but when that campaign failed to bring Summers to power, he turned to America's great rival, the former Soviet Union, to try out his economic experiments. In 1990, Lithuania, a restive Soviet republic seeking independence, hired Summers to advise on that country's economic transformation. Poor Lithuania had no idea what it got itself into. This was Summers's first opportunity to tackle a country in economic crisis and put his wunderkind theories into practice. The results were literally suicidal: in 1990, when Summers first arrived, Lithuania's suicide rate was 26.1 per 100,000 and falling. Just five years after Summers got his hands on Lithuania's economy, life became so unbearable under the economic transition that the suicide rate nearly doubled to 45.6 per 100,000, worse than any other ex-Soviet republic in transition. In fact, it was the highest suicide rate in the world, suggesting something particularly harsh and brutal about the economic transition in that country as opposed to the others, where suffering and pain were common. Things got so bad that in 1992, after just two years of Summers-nomics, the traumatized Lithuanians voted the communist party back into power, the first East European nation to do so--even though just a year earlier Lithuanians actually died on the streets fighting communism.
Fresh off his success in Lithuania, Summers moved to the World Bank, where he was named the chief economist in 1991, the year he issued his famous let's-pollute-Africa memo. It was also the year that Summers, and his Harvard protƩgƩ Andrei Schleifer (who worked with Summers on the Lithuania economic transformation), began their catastrophic "rescue" of Russia's crisis-ridden economy. It's a complicated story involving corruption, cronyism and economic devastation. But by the end of the 1990s, Russia's GDP had collapsed by more than 60 percent, its population was suffering the worst death-to-birth ratio of any industrialized nation in the twentieth century, and the financial markets that Summers and Schleifer helped create had collapsed in what was then the world's biggest debt default ever. The result was the rise of Vladmir Putin and a national aversion to free markets and anything associated with Western liberalism.
But that's not all. Summers, through Schleifer, was also tainted with some of that country's corruption, which resulted in a US Justice Department lawsuit against Schleifer and others. While Schleifer was being paid by US taxpayers to advise the Russians on capital markets in the 1990s, his wife, Nancy Zimmerman, bought and traded Russian equities for a Boston hedge fund she ran--they even used Schleifer's US taxpayer-funded offices to run Zimmerman's Moscow-based hedge fund operations.
How close were Larry Summers and Andrei Schleifer? According to former Boston Globe economics correspondent David Warsh, Summers and Schleifer "were among each other's best friends," and Summers taught Schleifer "as an undergraduate, sent him on to MIT for his PhD, took him along on an advisory mission to Lithuania in 1990, and in 1991, shepherded his return to Harvard as full professor, where he was regarded, after Martin Feldstein and Summers, as the leader of the next generation."
In 2000, the Justice Department sought $102 million in damages from Schleifer, one of Schleifer's Harvard associates and Harvard University in a conflict-of-interest suit resulting from Schleifer's role as the lead US adviser to Russia's economic reforms--questioning the way Schleifer and his wife profited from his position. Schleifer's Harvard team in Moscow was funded by USAID in a no-bid contract, and supported by Summers as soon as he moved into the Treasury Department in 1993. So Schleifer benefited from his relationship with Summers twice: first, by getting a choice contract as the US government's man in Moscow in the 1990s when Summers was in power in the US government, one that benefited his wife's hedge fund (earlier this year, Portfolio suggested that the Schleifers' hedge funds made them billionaires ). Then after Schleifer returned to Harvard to face the lawsuit, Summers, now president of Harvard, presided over a controversial settlement that all but let his protƩgƩ off the hook. Thanks to pressure by Summers, Schleifer kept his chair at Harvard, where he continues to teach today.
Summers's other favorite man in Russia was Anatoly Chubais--who consistently ranks at the top of Russia's " most hated man" polls. Chubais was executor of the Russian government's privatization program, in which state companies worth tens of billions of dollars were handed over to insiders for a fraction of their worth in blatantly rigged auctions. Summers praised Chubais as a "demigod" and called Chubais and his free-market cohorts "the dream team." In September 1998, after Russia's capital markets collapsed, along with billions in US-taxpayer-backed loans, Chubais boasted to a Russian newspaper, "We swindled them." By "them," he meant the Western and American aid institutions that funded his reforms.
In light of all of the corruption, cronyism and devastation that have marked his career, Summers' statements about an under-polluted Africa or intellectually-inferior women no longer seem like provocative eccentricities but part and parcel of the Summers shtick. And now there's talk that President-elect Obama may hand the keys to national treasury to Summers--meaning that he'll be in charge of overseeing a trillion-dollar taxpayer bailout of the entire financial industry, a process already rife with conflicts of interest, cronyism and corruption--as detailed by Naomi Klein.
The bailout, as currently implemented, threatens to devastate America's economy much as Russia's and Lithuania's were devastated before. The idea that this is exactly the right time and place to put Larry Summers in charge of our economy's future is so frightening that it makes the Sarah Palin vice presidential choice seem almost quaint by comparison. Let's hope the rumors are wrong.
The Summers Conundrum
By Mark Ames
November 10, 2008
. The conventional wisdom is that Summers is the "centrist" choice--Fareed Zakaria ("I think Summers is an extraordinarily brilliant guy") and David Gergen ("Larry Summers would be superb at this job"), two titans of centrism, both weighed in Sunday on the Stephanopoulos show in favor of Summers. And yet so far the debate over Summers has been largely confined to two outrageous moments in his career: his 1991 World Bank memo calling Africa "UNDER-polluted," and his more recent declarations, while serving as president of Harvard, about women's genetic inferiority in math and science. By themselves, these two incidents might be dismissed as merely provocative in a maverick-moron sort of way, as many of Summers' supporters argue; but in the context of Summers's track record, in which he oversaw the destruction of entire economies and covered up cronyism and corruption, his Africa memo and sexist declarations aren't exceptions but rather part of a disturbing pattern.
From the start, Summers has been on the wrong side of Obama's supporters. In 1982, while still a graduate student at Harvard, Summers was brought to Washington by his dissertation advisor Martin Feldstein, the supply-side economist, to serve on Ronald Reagan's Council of Economic Advisors. Those first years in the Reagan administration were crucial in the right-wing war against New Deal regulation of the banking system and financial markets--a war that Reagan's team won, and that we're all paying for today. Although Summers eventually identified himself with the Democratic Party--albeit the right wing of that party--nevertheless, as the New York Times's Peter T. Kilborn wrote in 1988:
He worked for 10 months as a top analyst in President Reagan's Council of Economic Advisers when his mentor, Martin S. Feldstein, was running it, and his colleagues don't recall him venting anti-Reagan heresies then....
"One of the ironies of this business is that Summers's economics are quite close to Feldstein's," said William A. Niskanen, who was a member of the Feldstein council.
It's ironic if you expected Summers to be a liberal Democrat--but par for the course in the context of Summers's real record. Some fifteen years after Summers's stint in the Reaganomics war room, he reappears as one of the key villains fighting to suppress the regulatory efforts of a top official, Brooksley Born, who was trying to call attention to the dangers of the unregulated derivatives, such as credit swap defaults, which today are considered the key to the current economic crisis.
But let's return to the Summers timeline. After his stint in the Reaganomics brain trust, he returned to Harvard to serve as one of the university's youngest professors. In 1988, he was Michael Dukakis's chief economic advisor, but when that campaign failed to bring Summers to power, he turned to America's great rival, the former Soviet Union, to try out his economic experiments. In 1990, Lithuania, a restive Soviet republic seeking independence, hired Summers to advise on that country's economic transformation. Poor Lithuania had no idea what it got itself into. This was Summers's first opportunity to tackle a country in economic crisis and put his wunderkind theories into practice. The results were literally suicidal: in 1990, when Summers first arrived, Lithuania's suicide rate was 26.1 per 100,000 and falling. Just five years after Summers got his hands on Lithuania's economy, life became so unbearable under the economic transition that the suicide rate nearly doubled to 45.6 per 100,000, worse than any other ex-Soviet republic in transition. In fact, it was the highest suicide rate in the world, suggesting something particularly harsh and brutal about the economic transition in that country as opposed to the others, where suffering and pain were common. Things got so bad that in 1992, after just two years of Summers-nomics, the traumatized Lithuanians voted the communist party back into power, the first East European nation to do so--even though just a year earlier Lithuanians actually died on the streets fighting communism.
Fresh off his success in Lithuania, Summers moved to the World Bank, where he was named the chief economist in 1991, the year he issued his famous let's-pollute-Africa memo. It was also the year that Summers, and his Harvard protƩgƩ Andrei Schleifer (who worked with Summers on the Lithuania economic transformation), began their catastrophic "rescue" of Russia's crisis-ridden economy. It's a complicated story involving corruption, cronyism and economic devastation. But by the end of the 1990s, Russia's GDP had collapsed by more than 60 percent, its population was suffering the worst death-to-birth ratio of any industrialized nation in the twentieth century, and the financial markets that Summers and Schleifer helped create had collapsed in what was then the world's biggest debt default ever. The result was the rise of Vladmir Putin and a national aversion to free markets and anything associated with Western liberalism.
But that's not all. Summers, through Schleifer, was also tainted with some of that country's corruption, which resulted in a US Justice Department lawsuit against Schleifer and others. While Schleifer was being paid by US taxpayers to advise the Russians on capital markets in the 1990s, his wife, Nancy Zimmerman, bought and traded Russian equities for a Boston hedge fund she ran--they even used Schleifer's US taxpayer-funded offices to run Zimmerman's Moscow-based hedge fund operations.
How close were Larry Summers and Andrei Schleifer? According to former Boston Globe economics correspondent David Warsh, Summers and Schleifer "were among each other's best friends," and Summers taught Schleifer "as an undergraduate, sent him on to MIT for his PhD, took him along on an advisory mission to Lithuania in 1990, and in 1991, shepherded his return to Harvard as full professor, where he was regarded, after Martin Feldstein and Summers, as the leader of the next generation."
In 2000, the Justice Department sought $102 million in damages from Schleifer, one of Schleifer's Harvard associates and Harvard University in a conflict-of-interest suit resulting from Schleifer's role as the lead US adviser to Russia's economic reforms--questioning the way Schleifer and his wife profited from his position. Schleifer's Harvard team in Moscow was funded by USAID in a no-bid contract, and supported by Summers as soon as he moved into the Treasury Department in 1993. So Schleifer benefited from his relationship with Summers twice: first, by getting a choice contract as the US government's man in Moscow in the 1990s when Summers was in power in the US government, one that benefited his wife's hedge fund (earlier this year, Portfolio suggested that the Schleifers' hedge funds made them billionaires ). Then after Schleifer returned to Harvard to face the lawsuit, Summers, now president of Harvard, presided over a controversial settlement that all but let his protƩgƩ off the hook. Thanks to pressure by Summers, Schleifer kept his chair at Harvard, where he continues to teach today.
Summers's other favorite man in Russia was Anatoly Chubais--who consistently ranks at the top of Russia's " most hated man" polls. Chubais was executor of the Russian government's privatization program, in which state companies worth tens of billions of dollars were handed over to insiders for a fraction of their worth in blatantly rigged auctions. Summers praised Chubais as a "demigod" and called Chubais and his free-market cohorts "the dream team." In September 1998, after Russia's capital markets collapsed, along with billions in US-taxpayer-backed loans, Chubais boasted to a Russian newspaper, "We swindled them." By "them," he meant the Western and American aid institutions that funded his reforms.
In light of all of the corruption, cronyism and devastation that have marked his career, Summers' statements about an under-polluted Africa or intellectually-inferior women no longer seem like provocative eccentricities but part and parcel of the Summers shtick. And now there's talk that President-elect Obama may hand the keys to national treasury to Summers--meaning that he'll be in charge of overseeing a trillion-dollar taxpayer bailout of the entire financial industry, a process already rife with conflicts of interest, cronyism and corruption--as detailed by Naomi Klein.
The bailout, as currently implemented, threatens to devastate America's economy much as Russia's and Lithuania's were devastated before. The idea that this is exactly the right time and place to put Larry Summers in charge of our economy's future is so frightening that it makes the Sarah Palin vice presidential choice seem almost quaint by comparison. Let's hope the rumors are wrong.
Summers and Hedge Funds
These two articles give some of the background of Summers insofar as he was associated with Hedge Funds. His work and pay are both secrets it seems. The Hedge Funds as a group were active in lobbying against their regulation and regulation of derivatives. The latter are often part of the toxic wastes floating about in the paper sewage generated by bright financial entrepreneurs as a source of profit.
Summers and Hedge Funds
By Ken Silverstein
After being named as Barack Obama’s top White House economics adviser, Lawrence Summers resigned from his post as a managing director of D.E. Shaw & Co, a leading hedge fund. “Neither the Obama transition team nor D.E. Shaw would say exactly what Summers had done in his two years of work for the $36 billion hedge fund, or how much he has been paid, Politico reports. A 2007 article in Institutional Investor’s Alpha says only that Summers was hired to work “with the senior management team to ļ¬nd new ways to generate proļ¬t and manage risk.”D.E. Shaw is a member of the Managed Funds Association, the leading lobbying organization for the hedge fund industry. The MFA was founded last year and since then has spent about $3.5 million lobbying the federal government, according to federal disclosure records. Its priorities include blocking regulation of hedge funds and financial instruments like derivatives. The MFA also opposes higher taxes on hedge funds and their managers. Incidentally, David E. Shaw, the founder of Summers’ recent employer, earned about $210 million last year.Top lobbyists at the MFA include former Louisiana Congressman Richard Baker, previously of the House Financial Services Committee, and Roger Hollingsworth, who was hired in August. Hollingsworth was hired from the Senate Banking Committee, where he served as deputy staff director and senior policy advisor to Committee Chairman Christopher J. Dodd,” says his bio. (Hollingsworth is a one-man revolving door. Before going to work for Dodd, he lobbied for the Securities Industry Association, and before that he worked for Democratic senators Jon Corzine and Charles Schumer.)The MFA spent a few million more on lobbyists from eight outside firms it retained. The roll call of former officials working for the association include, at one firm alone, Senator Don Nickles; Rachel Jones Hensler, tax policy director for the Budget Committee under Nickles; Hazen Marshall, staff director for the Senate Budget Committee; and Brian Wild, a former top aide to Vice President Dick Cheney. The list goes on and on.The MFA and people affiliated with it donate lavishly to politicians as well, overwhelmingly to Democrats. Trey Beck, the managing director of D.E. Shaw who helped hire Summers and who is also a board member of the MFA, gave more than $40,000 to the Democratic Senatorial Campaign Committee in recent years (not to mention $2,200 to Moveon.org in 2004).“As citizens, we’re delighted that President-elect Barack Obama has selected Larry Summers to head the National Economic Council,” D.E. Shaw said in a newly released statement.The MFA is surely delighted as well.<http://harpers.org/archive/2008/11/hbc-90003922>
And here is another post about Summers and Hedge Funds:
<http://www.politico.com/news/stories/1108/15995.html>Summers has ties to prominent hedge fund
By: Eamon JaversNovember 28, 2008 12:08 PM EST
On the same day Lawrence Summers was announced as President-elect Barack Obama’s top White House economics adviser, the veteran economist said he would resign as the part-time managing director of one of the nation’s largest and most successful hedge funds, D.E. Shaw & Co.But even as Summers takes the lead of economic policy thinking for the Obama White House, which has promised to be one of the most open and transparent in history, neither the Obama transition team nor D.E. Shaw would say exactly what Summers had done in his two years of work for the $36 billion hedge fund, or how much he has been paid.In a press release issued Monday, D.E. Shaw said only that Summers had been working on “various strategic initiatives, high-level research and advising the executive committee on the overall business.”Whatever he did for the hedge fund, Summers seems to have impressed his bosses.“As citizens, we’re delighted that President-elect Barack Obama has selected Larry Summers to head the National Economic Council," said D.E. Shaw managing director Max Stone in the statement. “Larry is an enormously gifted economist, and has already made major contributions to this country as a public servant, a researcher, and an academic leader.”As a treasury secretary under President Bill Clinton and a former president of Harvard University, Summers would have been enormously valuable for the hedge fund that prides itself on bringing together top talent from a wide range of backgrounds.D.E. Shaw was founded in 1988 by David E. Shaw, a former computer science professor at Columbia University, and is known as a major “quant” fund that specializes in using advanced mathematics and computer software to generate trading strategies.The aggressively nerdy firm brags that its 1,600 employees include the 2003 U.S. women's chess champion, a life master bridge player, a “Jeopardy” winner, as well as writers, athletes, musicians and former professors. One early employee was Jeff Bezos, who went on to greater renown as the founder of Amazon.com.In 2007, Shaw personally earned an estimated $210 million, reports Alpha magazine, and he spent a chunk of it on contributions to prominent Democratic politicians during the 2008 presidential cycle, including more than $3,000 to Barack Obama and $6,000 to Hillary Rodham Clinton, according to the Center for Responsive Politics.Overall, the hedge fund’s employees skew heavily Democratic, contributing more than $200,000 to political candidates in the 2008 campaign cycle, according to the center. Only $2,000 of that went to a Republican: Sen. Pat Roberts of Kansas.The hedge fund also has gotten much more involved in Washington policymaking in recent years, contributing to the Managed Funds Association, the trade group that has led the charge on resisting increased regulation and taxation of hedge funds in Washington.In 2007, the fund sold a 20 percent stake to Lehman Brothers, which filed for bankruptcy in September.One knowledgeable hedge-fund observer says Summers’ work at D.E. Shaw partly involved conducting research into emerging markets – those volatile but potentially lucrative stock exchanges in remote areas of the world.It’s not clear exactly what Summers would have been interested in. But a recent area of interest among hedge funds has been identifying ways the switch to electronic markets will create new liquidity on those exchanges, providing arbitrage opportunities for savvy American investors who can use the newly sped-up processes to take advantage of mismatches in prices.Summers, the observer said, provided valuable research to the firm. “This wasn’t a vanity job,” the observer said. “The Lawrence Summers connection makes sense – their approach is to get the best and brightest and figure out what to do with them.”The firm’s core specialty is in statistical arbitrage, which involves buying and selling huge numbers of stocks in very short amounts of time, ranging from mere seconds to several days. But how they make those decisions is very closely held information.“That’s where they get very secretive and squirrely and won’t tell you what they’re doing,” the observer said.A spokesperson for the Obama transition team declined to say what Summers had done for the hedge fund and how much he had been paid. But the Obama camp likely knows the answers, since the vetting questionnaire for applicants for administration posts requests tax returns and other detailed financial information, including the applicant’s net worth, real estate holdings, business partnerships, even gifts.Lightly regulated hedge funds are not required to file detailed information on their financial performance with the Securities and Exchange Commission. So, it’s difficult to estimate how well or poorly D.E. Shaw has weathered the global financial crisis in recent months.One person familiar with the industry says that investors generally believe that the firm has not had a disastrous year – which stands in stark contrast with many funds that have seen their value plummet. “Basically they are riding out the storm – so far,” the expert said.Executive compensation and lavish perks have become a hot-button issue in the midst of the economic calamity. In recent days, the insurance giant AIG announced that its CEO will accept only $1 in annual salary in the wake of that firm’s taxpayer bailout.And the Big Three automakers hinted that their CEOs won’t use their private jets next week to travel to Washington and plead for a government bailout, a symbolic response to criticism of their use of the jets to commute to the last round of congressional hearings.
Summers and Hedge Funds
By Ken Silverstein
After being named as Barack Obama’s top White House economics adviser, Lawrence Summers resigned from his post as a managing director of D.E. Shaw & Co, a leading hedge fund. “Neither the Obama transition team nor D.E. Shaw would say exactly what Summers had done in his two years of work for the $36 billion hedge fund, or how much he has been paid, Politico reports. A 2007 article in Institutional Investor’s Alpha says only that Summers was hired to work “with the senior management team to ļ¬nd new ways to generate proļ¬t and manage risk.”D.E. Shaw is a member of the Managed Funds Association, the leading lobbying organization for the hedge fund industry. The MFA was founded last year and since then has spent about $3.5 million lobbying the federal government, according to federal disclosure records. Its priorities include blocking regulation of hedge funds and financial instruments like derivatives. The MFA also opposes higher taxes on hedge funds and their managers. Incidentally, David E. Shaw, the founder of Summers’ recent employer, earned about $210 million last year.Top lobbyists at the MFA include former Louisiana Congressman Richard Baker, previously of the House Financial Services Committee, and Roger Hollingsworth, who was hired in August. Hollingsworth was hired from the Senate Banking Committee, where he served as deputy staff director and senior policy advisor to Committee Chairman Christopher J. Dodd,” says his bio. (Hollingsworth is a one-man revolving door. Before going to work for Dodd, he lobbied for the Securities Industry Association, and before that he worked for Democratic senators Jon Corzine and Charles Schumer.)The MFA spent a few million more on lobbyists from eight outside firms it retained. The roll call of former officials working for the association include, at one firm alone, Senator Don Nickles; Rachel Jones Hensler, tax policy director for the Budget Committee under Nickles; Hazen Marshall, staff director for the Senate Budget Committee; and Brian Wild, a former top aide to Vice President Dick Cheney. The list goes on and on.The MFA and people affiliated with it donate lavishly to politicians as well, overwhelmingly to Democrats. Trey Beck, the managing director of D.E. Shaw who helped hire Summers and who is also a board member of the MFA, gave more than $40,000 to the Democratic Senatorial Campaign Committee in recent years (not to mention $2,200 to Moveon.org in 2004).“As citizens, we’re delighted that President-elect Barack Obama has selected Larry Summers to head the National Economic Council,” D.E. Shaw said in a newly released statement.The MFA is surely delighted as well.<http://harpers.org/archive/2008/11/hbc-90003922>
And here is another post about Summers and Hedge Funds:
<http://www.politico.com/news/stories/1108/15995.html>Summers has ties to prominent hedge fund
By: Eamon JaversNovember 28, 2008 12:08 PM EST
On the same day Lawrence Summers was announced as President-elect Barack Obama’s top White House economics adviser, the veteran economist said he would resign as the part-time managing director of one of the nation’s largest and most successful hedge funds, D.E. Shaw & Co.But even as Summers takes the lead of economic policy thinking for the Obama White House, which has promised to be one of the most open and transparent in history, neither the Obama transition team nor D.E. Shaw would say exactly what Summers had done in his two years of work for the $36 billion hedge fund, or how much he has been paid.In a press release issued Monday, D.E. Shaw said only that Summers had been working on “various strategic initiatives, high-level research and advising the executive committee on the overall business.”Whatever he did for the hedge fund, Summers seems to have impressed his bosses.“As citizens, we’re delighted that President-elect Barack Obama has selected Larry Summers to head the National Economic Council," said D.E. Shaw managing director Max Stone in the statement. “Larry is an enormously gifted economist, and has already made major contributions to this country as a public servant, a researcher, and an academic leader.”As a treasury secretary under President Bill Clinton and a former president of Harvard University, Summers would have been enormously valuable for the hedge fund that prides itself on bringing together top talent from a wide range of backgrounds.D.E. Shaw was founded in 1988 by David E. Shaw, a former computer science professor at Columbia University, and is known as a major “quant” fund that specializes in using advanced mathematics and computer software to generate trading strategies.The aggressively nerdy firm brags that its 1,600 employees include the 2003 U.S. women's chess champion, a life master bridge player, a “Jeopardy” winner, as well as writers, athletes, musicians and former professors. One early employee was Jeff Bezos, who went on to greater renown as the founder of Amazon.com.In 2007, Shaw personally earned an estimated $210 million, reports Alpha magazine, and he spent a chunk of it on contributions to prominent Democratic politicians during the 2008 presidential cycle, including more than $3,000 to Barack Obama and $6,000 to Hillary Rodham Clinton, according to the Center for Responsive Politics.Overall, the hedge fund’s employees skew heavily Democratic, contributing more than $200,000 to political candidates in the 2008 campaign cycle, according to the center. Only $2,000 of that went to a Republican: Sen. Pat Roberts of Kansas.The hedge fund also has gotten much more involved in Washington policymaking in recent years, contributing to the Managed Funds Association, the trade group that has led the charge on resisting increased regulation and taxation of hedge funds in Washington.In 2007, the fund sold a 20 percent stake to Lehman Brothers, which filed for bankruptcy in September.One knowledgeable hedge-fund observer says Summers’ work at D.E. Shaw partly involved conducting research into emerging markets – those volatile but potentially lucrative stock exchanges in remote areas of the world.It’s not clear exactly what Summers would have been interested in. But a recent area of interest among hedge funds has been identifying ways the switch to electronic markets will create new liquidity on those exchanges, providing arbitrage opportunities for savvy American investors who can use the newly sped-up processes to take advantage of mismatches in prices.Summers, the observer said, provided valuable research to the firm. “This wasn’t a vanity job,” the observer said. “The Lawrence Summers connection makes sense – their approach is to get the best and brightest and figure out what to do with them.”The firm’s core specialty is in statistical arbitrage, which involves buying and selling huge numbers of stocks in very short amounts of time, ranging from mere seconds to several days. But how they make those decisions is very closely held information.“That’s where they get very secretive and squirrely and won’t tell you what they’re doing,” the observer said.A spokesperson for the Obama transition team declined to say what Summers had done for the hedge fund and how much he had been paid. But the Obama camp likely knows the answers, since the vetting questionnaire for applicants for administration posts requests tax returns and other detailed financial information, including the applicant’s net worth, real estate holdings, business partnerships, even gifts.Lightly regulated hedge funds are not required to file detailed information on their financial performance with the Securities and Exchange Commission. So, it’s difficult to estimate how well or poorly D.E. Shaw has weathered the global financial crisis in recent months.One person familiar with the industry says that investors generally believe that the firm has not had a disastrous year – which stands in stark contrast with many funds that have seen their value plummet. “Basically they are riding out the storm – so far,” the expert said.Executive compensation and lavish perks have become a hot-button issue in the midst of the economic calamity. In recent days, the insurance giant AIG announced that its CEO will accept only $1 in annual salary in the wake of that firm’s taxpayer bailout.And the Big Three automakers hinted that their CEOs won’t use their private jets next week to travel to Washington and plead for a government bailout, a symbolic response to criticism of their use of the jets to commute to the last round of congressional hearings.
Friday, November 28, 2008
Excerpts from the SOFA with Iraq
Some excerpts from a translation of the agreement at NYtimes. There are innocuous sounding packages that will actually give the US control over oil profits:
See my post and article at kenthink.
3. Consistent with a letter from the President of the United States to be sent to the Prime
Minister of Iraq, the United States remains committed to assist Iraq in connection with its
request that the UN Security Council extend the protections and other arrangements
established in Resolution 1483 (2003) and Resolution 1546 (2003) for petroleum,
petroleum products, and natural gas originating in Iraq, proceeds and obligations from
sale thereof, and the Development Fund for Iraq.
The sections on Iraq jurisdiction over criminal acts of troops and contractors is very limited:
The United States shall have the primary right to exercise jurisdiction over members of
the United States Forces and of the civilian component for matters arising inside agreed
facilities and areas; during duty status outside agreed facilities and areas; and in
circumstances not covered by paragraph 1.
Obviously even contractors are not subject to Iraq law when on duty!
The US is to do everything to ensure that Iraq does not meet its financial responsibilities incurred under Saddam. This will surely infuriate many especially Kuwait.
a. Support Iraq to obtain forgiveness of international debt resulting from the policies of
the former regime.
b. Support Iraq to achieve a comprehensive and final resolution of outstanding reparation
claims inherited from the previous regime, including compensation requirements imposed
by the UN Security Council on Iraq.
2. Recognizing and understanding Iraq’s concern with claims based on actions
perpetrated by the former regime, the President of the United States has exercised his
authority to protect from United States judicial process the Development Fund for Iraq
and certain other property in which Iraq has an interest. The United States shall remain
fully and actively engaged with the Government of Iraq with respect to continuation of
such protections and with respect to such claims.
See my post and article at kenthink.
3. Consistent with a letter from the President of the United States to be sent to the Prime
Minister of Iraq, the United States remains committed to assist Iraq in connection with its
request that the UN Security Council extend the protections and other arrangements
established in Resolution 1483 (2003) and Resolution 1546 (2003) for petroleum,
petroleum products, and natural gas originating in Iraq, proceeds and obligations from
sale thereof, and the Development Fund for Iraq.
The sections on Iraq jurisdiction over criminal acts of troops and contractors is very limited:
The United States shall have the primary right to exercise jurisdiction over members of
the United States Forces and of the civilian component for matters arising inside agreed
facilities and areas; during duty status outside agreed facilities and areas; and in
circumstances not covered by paragraph 1.
Obviously even contractors are not subject to Iraq law when on duty!
The US is to do everything to ensure that Iraq does not meet its financial responsibilities incurred under Saddam. This will surely infuriate many especially Kuwait.
a. Support Iraq to obtain forgiveness of international debt resulting from the policies of
the former regime.
b. Support Iraq to achieve a comprehensive and final resolution of outstanding reparation
claims inherited from the previous regime, including compensation requirements imposed
by the UN Security Council on Iraq.
2. Recognizing and understanding Iraq’s concern with claims based on actions
perpetrated by the former regime, the President of the United States has exercised his
authority to protect from United States judicial process the Development Fund for Iraq
and certain other property in which Iraq has an interest. The United States shall remain
fully and actively engaged with the Government of Iraq with respect to continuation of
such protections and with respect to such claims.
Michael Perelman: How to Create a Crisis
This is from Michael Perelman's blog a US economist. Unfortunately the paper often of little or no real value creates real debt via the government bailout that involves borrowing that the US citizen must eventually repay. In fact the taxpayer is paying to rescue the people who brought about the crisis in the first place. Many of those same people are in charge of this bailout.
Matter and Antimatter: How to Create a Crisis: A Thanksgiving Rant
Posted November 27, 2008Filed under: economics
Skilled physicists do not know how to take nothing and turn it into matter and antimatter, but finance behaves as if it had the capacity to do something similar. Imagine a simple market economy about to create a bubble. I want to tell the story of this bubble, only to put the current, crazy stimulus package into perspective.
Somebody says to me they have a piece of paper worth $1 million. I can buy for half the price. I borrow the money to cover most of the cost. People are willing to lend me the money confident in the belief that my paper will increase in value. Other people are engaging in the same transaction, spreading confidence that these papers are now increasing in value, say to $600,000.
The seller of the paper now has a half-million dollars, having given up nothing but blank piece of paper. I have a capital gain of hundred thousand dollars. My lenders have a credit with a half-million dollars. We are all better off, even though nothing has been produced.
Feeling secure in the increasing value of our paper, I along with the other “investors” now start consuming more, spreading prosperity for the economy. Virtually everybody is enjoying the benefit of the bubble. Within a short period of time, people throughout the economy making decisions based on the increasing appearance of health and the economy.
At some point, people realize that this paper is nothing more than a blank sheet of writing paper. The bubble may have stimulated some investment that is capable of producing real economic benefits, but mostly it has induced people to consume and commit themselves to pay back debts.
Remember, this prosperity was built out of nothing. In the end, matter and antimatter collided. The lenders have lost their money. The speculators and consumers are in debt. Most lack the wherewithal to repay their debts. But in the case of the current bubble, the economy does not have the productive capacity to put everything together. The loans came from abroad and so did many consumer goods.
At the same time, the government loans are ultimately dependent on another set of loans, also largely from abroad. How will these loans ever be repaid? Will new loans keep coming as the bubble engulfs the rest of the world?
Should the government come in and give me a half-million dollars so that I can repay my loan? Should I be rewarded for my stupidity and naĆÆvetĆ©? Will that policy really make the economy healthy? Or will it policy just facilitate the creation of even greater bubbles?
Obviously, the most sensible decision would be to put the money into making a more healthy economy, one less susceptible to speculation — something impossible under capitalism, but that is another question. Eventually, somebody will have to pay the piper. The policy today seems to be an effort to shield the very people who created the crisis, placing the burden on the most innocent.
The graphic picture of the stimulus package that I posted yesterday suggests a government response just as foolish as the speculations that set off the bubble in the first place.
Happy Thanksgiving.
Matter and Antimatter: How to Create a Crisis: A Thanksgiving Rant
Posted November 27, 2008Filed under: economics
Skilled physicists do not know how to take nothing and turn it into matter and antimatter, but finance behaves as if it had the capacity to do something similar. Imagine a simple market economy about to create a bubble. I want to tell the story of this bubble, only to put the current, crazy stimulus package into perspective.
Somebody says to me they have a piece of paper worth $1 million. I can buy for half the price. I borrow the money to cover most of the cost. People are willing to lend me the money confident in the belief that my paper will increase in value. Other people are engaging in the same transaction, spreading confidence that these papers are now increasing in value, say to $600,000.
The seller of the paper now has a half-million dollars, having given up nothing but blank piece of paper. I have a capital gain of hundred thousand dollars. My lenders have a credit with a half-million dollars. We are all better off, even though nothing has been produced.
Feeling secure in the increasing value of our paper, I along with the other “investors” now start consuming more, spreading prosperity for the economy. Virtually everybody is enjoying the benefit of the bubble. Within a short period of time, people throughout the economy making decisions based on the increasing appearance of health and the economy.
At some point, people realize that this paper is nothing more than a blank sheet of writing paper. The bubble may have stimulated some investment that is capable of producing real economic benefits, but mostly it has induced people to consume and commit themselves to pay back debts.
Remember, this prosperity was built out of nothing. In the end, matter and antimatter collided. The lenders have lost their money. The speculators and consumers are in debt. Most lack the wherewithal to repay their debts. But in the case of the current bubble, the economy does not have the productive capacity to put everything together. The loans came from abroad and so did many consumer goods.
At the same time, the government loans are ultimately dependent on another set of loans, also largely from abroad. How will these loans ever be repaid? Will new loans keep coming as the bubble engulfs the rest of the world?
Should the government come in and give me a half-million dollars so that I can repay my loan? Should I be rewarded for my stupidity and naĆÆvetĆ©? Will that policy really make the economy healthy? Or will it policy just facilitate the creation of even greater bubbles?
Obviously, the most sensible decision would be to put the money into making a more healthy economy, one less susceptible to speculation — something impossible under capitalism, but that is another question. Eventually, somebody will have to pay the piper. The policy today seems to be an effort to shield the very people who created the crisis, placing the burden on the most innocent.
The graphic picture of the stimulus package that I posted yesterday suggests a government response just as foolish as the speculations that set off the bubble in the first place.
Happy Thanksgiving.
Bernanke on Deflation causes and cure.
This is a six year old speech but quite relevant to what is happening in the present crisis. Many of the policies he recommended are now being implemented. It remains to be seen if they will work.
Remarks by Governor Ben S. BernankeBefore the National Economists Club, Washington, D.C.November 21, 2002
Deflation: Making Sure "It" Doesn't Happen Here
Since World War II, inflation--the apparently inexorable rise in the prices of goods and services--has been the bane of central bankers. Economists of various stripes have argued that inflation is the inevitable result of (pick your favorite) the abandonment of metallic monetary standards, a lack of fiscal discipline, shocks to the price of oil and other commodities, struggles over the distribution of income, excessive money creation, self-confirming inflation expectations, an "inflation bias" in the policies of central banks, and still others. Despite widespread "inflation pessimism," however, during the 1980s and 1990s most industrial-country central banks were able to cage, if not entirely tame, the inflation dragon. Although a number of factors converged to make this happy outcome possible, an essential element was the heightened understanding by central bankers and, equally as important, by political leaders and the public at large of the very high costs of allowing the economy to stray too far from price stability.
With inflation rates now quite low in the United States, however, some have expressed concern that we may soon face a new problem--the danger of deflation, or falling prices. That this concern is not purely hypothetical is brought home to us whenever we read newspaper reports about Japan, where what seems to be a relatively moderate deflation--a decline in consumer prices of about 1 percent per year--has been associated with years of painfully slow growth, rising joblessness, and apparently intractable financial problems in the banking and corporate sectors. While it is difficult to sort out cause from effect, the consensus view is that deflation has been an important negative factor in the Japanese slump.
So, is deflation a threat to the economic health of the United States? Not to leave you in suspense, I believe that the chance of significant deflation in the United States in the foreseeable future is extremely small, for two principal reasons. The first is the resilience and structural stability of the U.S. economy itself. Over the years, the U.S. economy has shown a remarkable ability to absorb shocks of all kinds, to recover, and to continue to grow. Flexible and efficient markets for labor and capital, an entrepreneurial tradition, and a general willingness to tolerate and even embrace technological and economic change all contribute to this resiliency. A particularly important protective factor in the current environment is the strength of our financial system: Despite the adverse shocks of the past year, our banking system remains healthy and well-regulated, and firm and household balance sheets are for the most part in good shape. Also helpful is that inflation has recently been not only low but quite stable, with one result being that inflation expectations seem well anchored. For example, according to the University of Michigan survey that underlies the index of consumer sentiment, the median expected rate of inflation during the next five to ten years among those interviewed was 2.9 percent in October 2002, as compared with 2.7 percent a year earlier and 3.0 percent two years earlier--a stable record indeed.
The second bulwark against deflation in the United States, and the one that will be the focus of my remarks today, is the Federal Reserve System itself. The Congress has given the Fed the responsibility of preserving price stability (among other objectives), which most definitely implies avoiding deflation as well as inflation. I am confident that the Fed would take whatever means necessary to prevent significant deflation in the United States and, moreover, that the U.S. central bank, in cooperation with other parts of the government as needed, has sufficient policy instruments to ensure that any deflation that might occur would be both mild and brief.
Of course, we must take care lest confidence become over-confidence. Deflationary episodes are rare, and generalization about them is difficult. Indeed, a recent Federal Reserve study of the Japanese experience concluded that the deflation there was almost entirely unexpected, by both foreign and Japanese observers alike (Ahearne et al., 2002). So, having said that deflation in the United States is highly unlikely, I would be imprudent to rule out the possibility altogether. Accordingly, I want to turn to a further exploration of the causes of deflation, its economic effects, and the policy instruments that can be deployed against it. Before going further I should say that my comments today reflect my own views only and are not necessarily those of my colleagues on the Board of Governors or the Federal Open Market Committee.
Deflation: Its Causes and Effects Deflation is defined as a general decline in prices, with emphasis on the word "general." At any given time, especially in a low-inflation economy like that of our recent experience, prices of some goods and services will be falling. Price declines in a specific sector may occur because productivity is rising and costs are falling more quickly in that sector than elsewhere or because the demand for the output of that sector is weak relative to the demand for other goods and services. Sector-specific price declines, uncomfortable as they may be for producers in that sector, are generally not a problem for the economy as a whole and do not constitute deflation. Deflation per se occurs only when price declines are so widespread that broad-based indexes of prices, such as the consumer price index, register ongoing declines.
The sources of deflation are not a mystery. Deflation is in almost all cases a side effect of a collapse of aggregate demand--a drop in spending so severe that producers must cut prices on an ongoing basis in order to find buyers.1 Likewise, the economic effects of a deflationary episode, for the most part, are similar to those of any other sharp decline in aggregate spending--namely, recession, rising unemployment, and financial stress.
However, a deflationary recession may differ in one respect from "normal" recessions in which the inflation rate is at least modestly positive: Deflation of sufficient magnitude may result in the nominal interest rate declining to zero or very close to zero.2 Once the nominal interest rate is at zero, no further downward adjustment in the rate can occur, since lenders generally will not accept a negative nominal interest rate when it is possible instead to hold cash. At this point, the nominal interest rate is said to have hit the "zero bound."
Deflation great enough to bring the nominal interest rate close to zero poses special problems for the economy and for policy. First, when the nominal interest rate has been reduced to zero, the real interest rate paid by borrowers equals the expected rate of deflation, however large that may be.3 To take what might seem like an extreme example (though in fact it occurred in the United States in the early 1930s), suppose that deflation is proceeding at a clip of 10 percent per year. Then someone who borrows for a year at a nominal interest rate of zero actually faces a 10 percent real cost of funds, as the loan must be repaid in dollars whose purchasing power is 10 percent greater than that of the dollars borrowed originally. In a period of sufficiently severe deflation, the real cost of borrowing becomes prohibitive. Capital investment, purchases of new homes, and other types of spending decline accordingly, worsening the economic downturn.
Although deflation and the zero bound on nominal interest rates create a significant problem for those seeking to borrow, they impose an even greater burden on households and firms that had accumulated substantial debt before the onset of the deflation. This burden arises because, even if debtors are able to refinance their existing obligations at low nominal interest rates, with prices falling they must still repay the principal in dollars of increasing (perhaps rapidly increasing) real value. When William Jennings Bryan made his famous "cross of gold" speech in his 1896 presidential campaign, he was speaking on behalf of heavily mortgaged farmers whose debt burdens were growing ever larger in real terms, the result of a sustained deflation that followed America's post-Civil-War return to the gold standard.4 The financial distress of debtors can, in turn, increase the fragility of the nation's financial system--for example, by leading to a rapid increase in the share of bank loans that are delinquent or in default. Japan in recent years has certainly faced the problem of "debt-deflation"--the deflation-induced, ever-increasing real value of debts. Closer to home, massive financial problems, including defaults, bankruptcies, and bank failures, were endemic in America's worst encounter with deflation, in the years 1930-33--a period in which (as I mentioned) the U.S. price level fell about 10 percent per year.
Beyond its adverse effects in financial markets and on borrowers, the zero bound on the nominal interest rate raises another concern--the limitation that it places on conventional monetary policy. Under normal conditions, the Fed and most other central banks implement policy by setting a target for a short-term interest rate--the overnight federal funds rate in the United States--and enforcing that target by buying and selling securities in open capital markets. When the short-term interest rate hits zero, the central bank can no longer ease policy by lowering its usual interest-rate target.5
Because central banks conventionally conduct monetary policy by manipulating the short-term nominal interest rate, some observers have concluded that when that key rate stands at or near zero, the central bank has "run out of ammunition"--that is, it no longer has the power to expand aggregate demand and hence economic activity. It is true that once the policy rate has been driven down to zero, a central bank can no longer use its traditional means of stimulating aggregate demand and thus will be operating in less familiar territory. The central bank's inability to use its traditional methods may complicate the policymaking process and introduce uncertainty in the size and timing of the economy's response to policy actions. Hence I agree that the situation is one to be avoided if possible.
However, a principal message of my talk today is that a central bank whose accustomed policy rate has been forced down to zero has most definitely not run out of ammunition. As I will discuss, a central bank, either alone or in cooperation with other parts of the government, retains considerable power to expand aggregate demand and economic activity even when its accustomed policy rate is at zero. In the remainder of my talk, I will first discuss measures for preventing deflation--the preferable option if feasible. I will then turn to policy measures that the Fed and other government authorities can take if prevention efforts fail and deflation appears to be gaining a foothold in the economy.
Preventing DeflationAs I have already emphasized, deflation is generally the result of low and falling aggregate demand. The basic prescription for preventing deflation is therefore straightforward, at least in principle: Use monetary and fiscal policy as needed to support aggregate spending, in a manner as nearly consistent as possible with full utilization of economic resources and low and stable inflation. In other words, the best way to get out of trouble is not to get into it in the first place. Beyond this commonsense injunction, however, there are several measures that the Fed (or any central bank) can take to reduce the risk of falling into deflation.
First, the Fed should try to preserve a buffer zone for the inflation rate, that is, during normal times it should not try to push inflation down all the way to zero.6 Most central banks seem to understand the need for a buffer zone. For example, central banks with explicit inflation targets almost invariably set their target for inflation above zero, generally between 1 and 3 percent per year. Maintaining an inflation buffer zone reduces the risk that a large, unanticipated drop in aggregate demand will drive the economy far enough into deflationary territory to lower the nominal interest rate to zero. Of course, this benefit of having a buffer zone for inflation must be weighed against the costs associated with allowing a higher inflation rate in normal times.
Second, the Fed should take most seriously--as of course it does--its responsibility to ensure financial stability in the economy. Irving Fisher (1933) was perhaps the first economist to emphasize the potential connections between violent financial crises, which lead to "fire sales" of assets and falling asset prices, with general declines in aggregate demand and the price level. A healthy, well capitalized banking system and smoothly functioning capital markets are an important line of defense against deflationary shocks. The Fed should and does use its regulatory and supervisory powers to ensure that the financial system will remain resilient if financial conditions change rapidly. And at times of extreme threat to financial stability, the Federal Reserve stands ready to use the discount window and other tools to protect the financial system, as it did during the 1987 stock market crash and the September 11, 2001, terrorist attacks.
Third, as suggested by a number of studies, when inflation is already low and the fundamentals of the economy suddenly deteriorate, the central bank should act more preemptively and more aggressively than usual in cutting rates (Orphanides and Wieland, 2000; Reifschneider and Williams, 2000; Ahearne et al., 2002). By moving decisively and early, the Fed may be able to prevent the economy from slipping into deflation, with the special problems that entails.
As I have indicated, I believe that the combination of strong economic fundamentals and policymakers that are attentive to downside as well as upside risks to inflation make significant deflation in the United States in the foreseeable future quite unlikely. But suppose that, despite all precautions, deflation were to take hold in the U.S. economy and, moreover, that the Fed's policy instrument--the federal funds rate--were to fall to zero. What then? In the remainder of my talk I will discuss some possible options for stopping a deflation once it has gotten under way. I should emphasize that my comments on this topic are necessarily speculative, as the modern Federal Reserve has never faced this situation nor has it pre-committed itself formally to any specific course of action should deflation arise. Furthermore, the specific responses the Fed would undertake would presumably depend on a number of factors, including its assessment of the whole range of risks to the economy and any complementary policies being undertaken by other parts of the U.S. government.7
Curing DeflationLet me start with some general observations about monetary policy at the zero bound, sweeping under the rug for the moment some technical and operational issues.
As I have mentioned, some observers have concluded that when the central bank's policy rate falls to zero--its practical minimum--monetary policy loses its ability to further stimulate aggregate demand and the economy. At a broad conceptual level, and in my view in practice as well, this conclusion is clearly mistaken. Indeed, under a fiat (that is, paper) money system, a government (in practice, the central bank in cooperation with other agencies) should always be able to generate increased nominal spending and inflation, even when the short-term nominal interest rate is at zero.
The conclusion that deflation is always reversible under a fiat money system follows from basic economic reasoning. A little parable may prove useful: Today an ounce of gold sells for $300, more or less. Now suppose that a modern alchemist solves his subject's oldest problem by finding a way to produce unlimited amounts of new gold at essentially no cost. Moreover, his invention is widely publicized and scientifically verified, and he announces his intention to begin massive production of gold within days. What would happen to the price of gold? Presumably, the potentially unlimited supply of cheap gold would cause the market price of gold to plummet. Indeed, if the market for gold is to any degree efficient, the price of gold would collapse immediately after the announcement of the invention, before the alchemist had produced and marketed a single ounce of yellow metal.
What has this got to do with monetary policy? Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.
Of course, the U.S. government is not going to print money and distribute it willy-nilly (although as we will see later, there are practical policies that approximate this behavior).8 Normally, money is injected into the economy through asset purchases by the Federal Reserve. To stimulate aggregate spending when short-term interest rates have reached zero, the Fed must expand the scale of its asset purchases or, possibly, expand the menu of assets that it buys. Alternatively, the Fed could find other ways of injecting money into the system--for example, by making low-interest-rate loans to banks or cooperating with the fiscal authorities. Each method of adding money to the economy has advantages and drawbacks, both technical and economic. One important concern in practice is that calibrating the economic effects of nonstandard means of injecting money may be difficult, given our relative lack of experience with such policies. Thus, as I have stressed already, prevention of deflation remains preferable to having to cure it. If we do fall into deflation, however, we can take comfort that the logic of the printing press example must assert itself, and sufficient injections of money will ultimately always reverse a deflation.
So what then might the Fed do if its target interest rate, the overnight federal funds rate, fell to zero? One relatively straightforward extension of current procedures would be to try to stimulate spending by lowering rates further out along the Treasury term structure--that is, rates on government bonds of longer maturities.9 There are at least two ways of bringing down longer-term rates, which are complementary and could be employed separately or in combination. One approach, similar to an action taken in the past couple of years by the Bank of Japan, would be for the Fed to commit to holding the overnight rate at zero for some specified period. Because long-term interest rates represent averages of current and expected future short-term rates, plus a term premium, a commitment to keep short-term rates at zero for some time--if it were credible--would induce a decline in longer-term rates. A more direct method, which I personally prefer, would be for the Fed to begin announcing explicit ceilings for yields on longer-maturity Treasury debt (say, bonds maturing within the next two years). The Fed could enforce these interest-rate ceilings by committing to make unlimited purchases of securities up to two years from maturity at prices consistent with the targeted yields. If this program were successful, not only would yields on medium-term Treasury securities fall, but (because of links operating through expectations of future interest rates) yields on longer-term public and private debt (such as mortgages) would likely fall as well.
Lower rates over the maturity spectrum of public and private securities should strengthen aggregate demand in the usual ways and thus help to end deflation. Of course, if operating in relatively short-dated Treasury debt proved insufficient, the Fed could also attempt to cap yields of Treasury securities at still longer maturities, say three to six years. Yet another option would be for the Fed to use its existing authority to operate in the markets for agency debt (for example, mortgage-backed securities issued by Ginnie Mae, the Government National Mortgage Association).
Historical experience tends to support the proposition that a sufficiently determined Fed can peg or cap Treasury bond prices and yields at other than the shortest maturities. The most striking episode of bond-price pegging occurred during the years before the Federal Reserve-Treasury Accord of 1951.10 Prior to that agreement, which freed the Fed from its responsibility to fix yields on government debt, the Fed maintained a ceiling of 2-1/2 percent on long-term Treasury bonds for nearly a decade. Moreover, it simultaneously established a ceiling on the twelve-month Treasury certificate of between 7/8 percent to 1-1/4 percent and, during the first half of that period, a rate of 3/8 percent on the 90-day Treasury bill. The Fed was able to achieve these low interest rates despite a level of outstanding government debt (relative to GDP) significantly greater than we have today, as well as inflation rates substantially more variable. At times, in order to enforce these low rates, the Fed had actually to purchase the bulk of outstanding 90-day bills. Interestingly, though, the Fed enforced the 2-1/2 percent ceiling on long-term bond yields for nearly a decade without ever holding a substantial share of long-maturity bonds outstanding.11 For example, the Fed held 7.0 percent of outstanding Treasury securities in 1945 and 9.2 percent in 1951 (the year of the Accord), almost entirely in the form of 90-day bills. For comparison, in 2001 the Fed held 9.7 percent of the stock of outstanding Treasury debt.
To repeat, I suspect that operating on rates on longer-term Treasuries would provide sufficient leverage for the Fed to achieve its goals in most plausible scenarios. If lowering yields on longer-dated Treasury securities proved insufficient to restart spending, however, the Fed might next consider attempting to influence directly the yields on privately issued securities. Unlike some central banks, and barring changes to current law, the Fed is relatively restricted in its ability to buy private securities directly.12 However, the Fed does have broad powers to lend to the private sector indirectly via banks, through the discount window.13 Therefore a second policy option, complementary to operating in the markets for Treasury and agency debt, would be for the Fed to offer fixed-term loans to banks at low or zero interest, with a wide range of private assets (including, among others, corporate bonds, commercial paper, bank loans, and mortgages) deemed eligible as collateral.14 For example, the Fed might make 90-day or 180-day zero-interest loans to banks, taking corporate commercial paper of the same maturity as collateral. Pursued aggressively, such a program could significantly reduce liquidity and term premiums on the assets used as collateral. Reductions in these premiums would lower the cost of capital both to banks and the nonbank private sector, over and above the beneficial effect already conferred by lower interest rates on government securities.15
The Fed can inject money into the economy in still other ways. For example, the Fed has the authority to buy foreign government debt, as well as domestic government debt. Potentially, this class of assets offers huge scope for Fed operations, as the quantity of foreign assets eligible for purchase by the Fed is several times the stock of U.S. government debt.16
I need to tread carefully here. Because the economy is a complex and interconnected system, Fed purchases of the liabilities of foreign governments have the potential to affect a number of financial markets, including the market for foreign exchange. In the United States, the Department of the Treasury, not the Federal Reserve, is the lead agency for making international economic policy, including policy toward the dollar; and the Secretary of the Treasury has expressed the view that the determination of the value of the U.S. dollar should be left to free market forces. Moreover, since the United States is a large, relatively closed economy, manipulating the exchange value of the dollar would not be a particularly desirable way to fight domestic deflation, particularly given the range of other options available. Thus, I want to be absolutely clear that I am today neither forecasting nor recommending any attempt by U.S. policymakers to target the international value of the dollar.
Although a policy of intervening to affect the exchange value of the dollar is nowhere on the horizon today, it's worth noting that there have been times when exchange rate policy has been an effective weapon against deflation. A striking example from U.S. history is Franklin Roosevelt's 40 percent devaluation of the dollar against gold in 1933-34, enforced by a program of gold purchases and domestic money creation. The devaluation and the rapid increase in money supply it permitted ended the U.S. deflation remarkably quickly. Indeed, consumer price inflation in the United States, year on year, went from -10.3 percent in 1932 to -5.1 percent in 1933 to 3.4 percent in 1934.17 The economy grew strongly, and by the way, 1934 was one of the best years of the century for the stock market. If nothing else, the episode illustrates that monetary actions can have powerful effects on the economy, even when the nominal interest rate is at or near zero, as was the case at the time of Roosevelt's devaluation.
Fiscal PolicyEach of the policy options I have discussed so far involves the Fed's acting on its own. In practice, the effectiveness of anti-deflation policy could be significantly enhanced by cooperation between the monetary and fiscal authorities. A broad-based tax cut, for example, accommodated by a program of open-market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices. Even if households decided not to increase consumption but instead re-balanced their portfolios by using their extra cash to acquire real and financial assets, the resulting increase in asset values would lower the cost of capital and improve the balance sheet positions of potential borrowers. A money-financed tax cut is essentially equivalent to Milton Friedman's famous "helicopter drop" of money.18
Of course, in lieu of tax cuts or increases in transfers the government could increase spending on current goods and services or even acquire existing real or financial assets. If the Treasury issued debt to purchase private assets and the Fed then purchased an equal amount of Treasury debt with newly created money, the whole operation would be the economic equivalent of direct open-market operations in private assets.
JapanThe claim that deflation can be ended by sufficiently strong action has no doubt led you to wonder, if that is the case, why has Japan not ended its deflation? The Japanese situation is a complex one that I cannot fully discuss today. I will just make two brief, general points.
First, as you know, Japan's economy faces some significant barriers to growth besides deflation, including massive financial problems in the banking and corporate sectors and a large overhang of government debt. Plausibly, private-sector financial problems have muted the effects of the monetary policies that have been tried in Japan, even as the heavy overhang of government debt has made Japanese policymakers more reluctant to use aggressive fiscal policies (for evidence see, for example, Posen, 1998). Fortunately, the U.S. economy does not share these problems, at least not to anything like the same degree, suggesting that anti-deflationary monetary and fiscal policies would be more potent here than they have been in Japan.
Second, and more important, I believe that, when all is said and done, the failure to end deflation in Japan does not necessarily reflect any technical infeasibility of achieving that goal. Rather, it is a byproduct of a longstanding political debate about how best to address Japan's overall economic problems. As the Japanese certainly realize, both restoring banks and corporations to solvency and implementing significant structural change are necessary for Japan's long-run economic health. But in the short run, comprehensive economic reform will likely impose large costs on many, for example, in the form of unemployment or bankruptcy. As a natural result, politicians, economists, businesspeople, and the general public in Japan have sharply disagreed about competing proposals for reform. In the resulting political deadlock, strong policy actions are discouraged, and cooperation among policymakers is difficult to achieve.
In short, Japan's deflation problem is real and serious; but, in my view, political constraints, rather than a lack of policy instruments, explain why its deflation has persisted for as long as it has. Thus, I do not view the Japanese experience as evidence against the general conclusion that U.S. policymakers have the tools they need to prevent, and, if necessary, to cure a deflationary recession in the United States.
ConclusionSustained deflation can be highly destructive to a modern economy and should be strongly resisted. Fortunately, for the foreseeable future, the chances of a serious deflation in the United States appear remote indeed, in large part because of our economy's underlying strengths but also because of the determination of the Federal Reserve and other U.S. policymakers to act preemptively against deflationary pressures. Moreover, as I have discussed today, a variety of policy responses are available should deflation appear to be taking hold. Because some of these alternative policy tools are relatively less familiar, they may raise practical problems of implementation and of calibration of their likely economic effects. For this reason, as I have emphasized, prevention of deflation is preferable to cure. Nevertheless, I hope to have persuaded you that the Federal Reserve and other economic policymakers would be far from helpless in the face of deflation, even should the federal funds rate hit its zero bound.19
Remarks by Governor Ben S. BernankeBefore the National Economists Club, Washington, D.C.November 21, 2002
Deflation: Making Sure "It" Doesn't Happen Here
Since World War II, inflation--the apparently inexorable rise in the prices of goods and services--has been the bane of central bankers. Economists of various stripes have argued that inflation is the inevitable result of (pick your favorite) the abandonment of metallic monetary standards, a lack of fiscal discipline, shocks to the price of oil and other commodities, struggles over the distribution of income, excessive money creation, self-confirming inflation expectations, an "inflation bias" in the policies of central banks, and still others. Despite widespread "inflation pessimism," however, during the 1980s and 1990s most industrial-country central banks were able to cage, if not entirely tame, the inflation dragon. Although a number of factors converged to make this happy outcome possible, an essential element was the heightened understanding by central bankers and, equally as important, by political leaders and the public at large of the very high costs of allowing the economy to stray too far from price stability.
With inflation rates now quite low in the United States, however, some have expressed concern that we may soon face a new problem--the danger of deflation, or falling prices. That this concern is not purely hypothetical is brought home to us whenever we read newspaper reports about Japan, where what seems to be a relatively moderate deflation--a decline in consumer prices of about 1 percent per year--has been associated with years of painfully slow growth, rising joblessness, and apparently intractable financial problems in the banking and corporate sectors. While it is difficult to sort out cause from effect, the consensus view is that deflation has been an important negative factor in the Japanese slump.
So, is deflation a threat to the economic health of the United States? Not to leave you in suspense, I believe that the chance of significant deflation in the United States in the foreseeable future is extremely small, for two principal reasons. The first is the resilience and structural stability of the U.S. economy itself. Over the years, the U.S. economy has shown a remarkable ability to absorb shocks of all kinds, to recover, and to continue to grow. Flexible and efficient markets for labor and capital, an entrepreneurial tradition, and a general willingness to tolerate and even embrace technological and economic change all contribute to this resiliency. A particularly important protective factor in the current environment is the strength of our financial system: Despite the adverse shocks of the past year, our banking system remains healthy and well-regulated, and firm and household balance sheets are for the most part in good shape. Also helpful is that inflation has recently been not only low but quite stable, with one result being that inflation expectations seem well anchored. For example, according to the University of Michigan survey that underlies the index of consumer sentiment, the median expected rate of inflation during the next five to ten years among those interviewed was 2.9 percent in October 2002, as compared with 2.7 percent a year earlier and 3.0 percent two years earlier--a stable record indeed.
The second bulwark against deflation in the United States, and the one that will be the focus of my remarks today, is the Federal Reserve System itself. The Congress has given the Fed the responsibility of preserving price stability (among other objectives), which most definitely implies avoiding deflation as well as inflation. I am confident that the Fed would take whatever means necessary to prevent significant deflation in the United States and, moreover, that the U.S. central bank, in cooperation with other parts of the government as needed, has sufficient policy instruments to ensure that any deflation that might occur would be both mild and brief.
Of course, we must take care lest confidence become over-confidence. Deflationary episodes are rare, and generalization about them is difficult. Indeed, a recent Federal Reserve study of the Japanese experience concluded that the deflation there was almost entirely unexpected, by both foreign and Japanese observers alike (Ahearne et al., 2002). So, having said that deflation in the United States is highly unlikely, I would be imprudent to rule out the possibility altogether. Accordingly, I want to turn to a further exploration of the causes of deflation, its economic effects, and the policy instruments that can be deployed against it. Before going further I should say that my comments today reflect my own views only and are not necessarily those of my colleagues on the Board of Governors or the Federal Open Market Committee.
Deflation: Its Causes and Effects Deflation is defined as a general decline in prices, with emphasis on the word "general." At any given time, especially in a low-inflation economy like that of our recent experience, prices of some goods and services will be falling. Price declines in a specific sector may occur because productivity is rising and costs are falling more quickly in that sector than elsewhere or because the demand for the output of that sector is weak relative to the demand for other goods and services. Sector-specific price declines, uncomfortable as they may be for producers in that sector, are generally not a problem for the economy as a whole and do not constitute deflation. Deflation per se occurs only when price declines are so widespread that broad-based indexes of prices, such as the consumer price index, register ongoing declines.
The sources of deflation are not a mystery. Deflation is in almost all cases a side effect of a collapse of aggregate demand--a drop in spending so severe that producers must cut prices on an ongoing basis in order to find buyers.1 Likewise, the economic effects of a deflationary episode, for the most part, are similar to those of any other sharp decline in aggregate spending--namely, recession, rising unemployment, and financial stress.
However, a deflationary recession may differ in one respect from "normal" recessions in which the inflation rate is at least modestly positive: Deflation of sufficient magnitude may result in the nominal interest rate declining to zero or very close to zero.2 Once the nominal interest rate is at zero, no further downward adjustment in the rate can occur, since lenders generally will not accept a negative nominal interest rate when it is possible instead to hold cash. At this point, the nominal interest rate is said to have hit the "zero bound."
Deflation great enough to bring the nominal interest rate close to zero poses special problems for the economy and for policy. First, when the nominal interest rate has been reduced to zero, the real interest rate paid by borrowers equals the expected rate of deflation, however large that may be.3 To take what might seem like an extreme example (though in fact it occurred in the United States in the early 1930s), suppose that deflation is proceeding at a clip of 10 percent per year. Then someone who borrows for a year at a nominal interest rate of zero actually faces a 10 percent real cost of funds, as the loan must be repaid in dollars whose purchasing power is 10 percent greater than that of the dollars borrowed originally. In a period of sufficiently severe deflation, the real cost of borrowing becomes prohibitive. Capital investment, purchases of new homes, and other types of spending decline accordingly, worsening the economic downturn.
Although deflation and the zero bound on nominal interest rates create a significant problem for those seeking to borrow, they impose an even greater burden on households and firms that had accumulated substantial debt before the onset of the deflation. This burden arises because, even if debtors are able to refinance their existing obligations at low nominal interest rates, with prices falling they must still repay the principal in dollars of increasing (perhaps rapidly increasing) real value. When William Jennings Bryan made his famous "cross of gold" speech in his 1896 presidential campaign, he was speaking on behalf of heavily mortgaged farmers whose debt burdens were growing ever larger in real terms, the result of a sustained deflation that followed America's post-Civil-War return to the gold standard.4 The financial distress of debtors can, in turn, increase the fragility of the nation's financial system--for example, by leading to a rapid increase in the share of bank loans that are delinquent or in default. Japan in recent years has certainly faced the problem of "debt-deflation"--the deflation-induced, ever-increasing real value of debts. Closer to home, massive financial problems, including defaults, bankruptcies, and bank failures, were endemic in America's worst encounter with deflation, in the years 1930-33--a period in which (as I mentioned) the U.S. price level fell about 10 percent per year.
Beyond its adverse effects in financial markets and on borrowers, the zero bound on the nominal interest rate raises another concern--the limitation that it places on conventional monetary policy. Under normal conditions, the Fed and most other central banks implement policy by setting a target for a short-term interest rate--the overnight federal funds rate in the United States--and enforcing that target by buying and selling securities in open capital markets. When the short-term interest rate hits zero, the central bank can no longer ease policy by lowering its usual interest-rate target.5
Because central banks conventionally conduct monetary policy by manipulating the short-term nominal interest rate, some observers have concluded that when that key rate stands at or near zero, the central bank has "run out of ammunition"--that is, it no longer has the power to expand aggregate demand and hence economic activity. It is true that once the policy rate has been driven down to zero, a central bank can no longer use its traditional means of stimulating aggregate demand and thus will be operating in less familiar territory. The central bank's inability to use its traditional methods may complicate the policymaking process and introduce uncertainty in the size and timing of the economy's response to policy actions. Hence I agree that the situation is one to be avoided if possible.
However, a principal message of my talk today is that a central bank whose accustomed policy rate has been forced down to zero has most definitely not run out of ammunition. As I will discuss, a central bank, either alone or in cooperation with other parts of the government, retains considerable power to expand aggregate demand and economic activity even when its accustomed policy rate is at zero. In the remainder of my talk, I will first discuss measures for preventing deflation--the preferable option if feasible. I will then turn to policy measures that the Fed and other government authorities can take if prevention efforts fail and deflation appears to be gaining a foothold in the economy.
Preventing DeflationAs I have already emphasized, deflation is generally the result of low and falling aggregate demand. The basic prescription for preventing deflation is therefore straightforward, at least in principle: Use monetary and fiscal policy as needed to support aggregate spending, in a manner as nearly consistent as possible with full utilization of economic resources and low and stable inflation. In other words, the best way to get out of trouble is not to get into it in the first place. Beyond this commonsense injunction, however, there are several measures that the Fed (or any central bank) can take to reduce the risk of falling into deflation.
First, the Fed should try to preserve a buffer zone for the inflation rate, that is, during normal times it should not try to push inflation down all the way to zero.6 Most central banks seem to understand the need for a buffer zone. For example, central banks with explicit inflation targets almost invariably set their target for inflation above zero, generally between 1 and 3 percent per year. Maintaining an inflation buffer zone reduces the risk that a large, unanticipated drop in aggregate demand will drive the economy far enough into deflationary territory to lower the nominal interest rate to zero. Of course, this benefit of having a buffer zone for inflation must be weighed against the costs associated with allowing a higher inflation rate in normal times.
Second, the Fed should take most seriously--as of course it does--its responsibility to ensure financial stability in the economy. Irving Fisher (1933) was perhaps the first economist to emphasize the potential connections between violent financial crises, which lead to "fire sales" of assets and falling asset prices, with general declines in aggregate demand and the price level. A healthy, well capitalized banking system and smoothly functioning capital markets are an important line of defense against deflationary shocks. The Fed should and does use its regulatory and supervisory powers to ensure that the financial system will remain resilient if financial conditions change rapidly. And at times of extreme threat to financial stability, the Federal Reserve stands ready to use the discount window and other tools to protect the financial system, as it did during the 1987 stock market crash and the September 11, 2001, terrorist attacks.
Third, as suggested by a number of studies, when inflation is already low and the fundamentals of the economy suddenly deteriorate, the central bank should act more preemptively and more aggressively than usual in cutting rates (Orphanides and Wieland, 2000; Reifschneider and Williams, 2000; Ahearne et al., 2002). By moving decisively and early, the Fed may be able to prevent the economy from slipping into deflation, with the special problems that entails.
As I have indicated, I believe that the combination of strong economic fundamentals and policymakers that are attentive to downside as well as upside risks to inflation make significant deflation in the United States in the foreseeable future quite unlikely. But suppose that, despite all precautions, deflation were to take hold in the U.S. economy and, moreover, that the Fed's policy instrument--the federal funds rate--were to fall to zero. What then? In the remainder of my talk I will discuss some possible options for stopping a deflation once it has gotten under way. I should emphasize that my comments on this topic are necessarily speculative, as the modern Federal Reserve has never faced this situation nor has it pre-committed itself formally to any specific course of action should deflation arise. Furthermore, the specific responses the Fed would undertake would presumably depend on a number of factors, including its assessment of the whole range of risks to the economy and any complementary policies being undertaken by other parts of the U.S. government.7
Curing DeflationLet me start with some general observations about monetary policy at the zero bound, sweeping under the rug for the moment some technical and operational issues.
As I have mentioned, some observers have concluded that when the central bank's policy rate falls to zero--its practical minimum--monetary policy loses its ability to further stimulate aggregate demand and the economy. At a broad conceptual level, and in my view in practice as well, this conclusion is clearly mistaken. Indeed, under a fiat (that is, paper) money system, a government (in practice, the central bank in cooperation with other agencies) should always be able to generate increased nominal spending and inflation, even when the short-term nominal interest rate is at zero.
The conclusion that deflation is always reversible under a fiat money system follows from basic economic reasoning. A little parable may prove useful: Today an ounce of gold sells for $300, more or less. Now suppose that a modern alchemist solves his subject's oldest problem by finding a way to produce unlimited amounts of new gold at essentially no cost. Moreover, his invention is widely publicized and scientifically verified, and he announces his intention to begin massive production of gold within days. What would happen to the price of gold? Presumably, the potentially unlimited supply of cheap gold would cause the market price of gold to plummet. Indeed, if the market for gold is to any degree efficient, the price of gold would collapse immediately after the announcement of the invention, before the alchemist had produced and marketed a single ounce of yellow metal.
What has this got to do with monetary policy? Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.
Of course, the U.S. government is not going to print money and distribute it willy-nilly (although as we will see later, there are practical policies that approximate this behavior).8 Normally, money is injected into the economy through asset purchases by the Federal Reserve. To stimulate aggregate spending when short-term interest rates have reached zero, the Fed must expand the scale of its asset purchases or, possibly, expand the menu of assets that it buys. Alternatively, the Fed could find other ways of injecting money into the system--for example, by making low-interest-rate loans to banks or cooperating with the fiscal authorities. Each method of adding money to the economy has advantages and drawbacks, both technical and economic. One important concern in practice is that calibrating the economic effects of nonstandard means of injecting money may be difficult, given our relative lack of experience with such policies. Thus, as I have stressed already, prevention of deflation remains preferable to having to cure it. If we do fall into deflation, however, we can take comfort that the logic of the printing press example must assert itself, and sufficient injections of money will ultimately always reverse a deflation.
So what then might the Fed do if its target interest rate, the overnight federal funds rate, fell to zero? One relatively straightforward extension of current procedures would be to try to stimulate spending by lowering rates further out along the Treasury term structure--that is, rates on government bonds of longer maturities.9 There are at least two ways of bringing down longer-term rates, which are complementary and could be employed separately or in combination. One approach, similar to an action taken in the past couple of years by the Bank of Japan, would be for the Fed to commit to holding the overnight rate at zero for some specified period. Because long-term interest rates represent averages of current and expected future short-term rates, plus a term premium, a commitment to keep short-term rates at zero for some time--if it were credible--would induce a decline in longer-term rates. A more direct method, which I personally prefer, would be for the Fed to begin announcing explicit ceilings for yields on longer-maturity Treasury debt (say, bonds maturing within the next two years). The Fed could enforce these interest-rate ceilings by committing to make unlimited purchases of securities up to two years from maturity at prices consistent with the targeted yields. If this program were successful, not only would yields on medium-term Treasury securities fall, but (because of links operating through expectations of future interest rates) yields on longer-term public and private debt (such as mortgages) would likely fall as well.
Lower rates over the maturity spectrum of public and private securities should strengthen aggregate demand in the usual ways and thus help to end deflation. Of course, if operating in relatively short-dated Treasury debt proved insufficient, the Fed could also attempt to cap yields of Treasury securities at still longer maturities, say three to six years. Yet another option would be for the Fed to use its existing authority to operate in the markets for agency debt (for example, mortgage-backed securities issued by Ginnie Mae, the Government National Mortgage Association).
Historical experience tends to support the proposition that a sufficiently determined Fed can peg or cap Treasury bond prices and yields at other than the shortest maturities. The most striking episode of bond-price pegging occurred during the years before the Federal Reserve-Treasury Accord of 1951.10 Prior to that agreement, which freed the Fed from its responsibility to fix yields on government debt, the Fed maintained a ceiling of 2-1/2 percent on long-term Treasury bonds for nearly a decade. Moreover, it simultaneously established a ceiling on the twelve-month Treasury certificate of between 7/8 percent to 1-1/4 percent and, during the first half of that period, a rate of 3/8 percent on the 90-day Treasury bill. The Fed was able to achieve these low interest rates despite a level of outstanding government debt (relative to GDP) significantly greater than we have today, as well as inflation rates substantially more variable. At times, in order to enforce these low rates, the Fed had actually to purchase the bulk of outstanding 90-day bills. Interestingly, though, the Fed enforced the 2-1/2 percent ceiling on long-term bond yields for nearly a decade without ever holding a substantial share of long-maturity bonds outstanding.11 For example, the Fed held 7.0 percent of outstanding Treasury securities in 1945 and 9.2 percent in 1951 (the year of the Accord), almost entirely in the form of 90-day bills. For comparison, in 2001 the Fed held 9.7 percent of the stock of outstanding Treasury debt.
To repeat, I suspect that operating on rates on longer-term Treasuries would provide sufficient leverage for the Fed to achieve its goals in most plausible scenarios. If lowering yields on longer-dated Treasury securities proved insufficient to restart spending, however, the Fed might next consider attempting to influence directly the yields on privately issued securities. Unlike some central banks, and barring changes to current law, the Fed is relatively restricted in its ability to buy private securities directly.12 However, the Fed does have broad powers to lend to the private sector indirectly via banks, through the discount window.13 Therefore a second policy option, complementary to operating in the markets for Treasury and agency debt, would be for the Fed to offer fixed-term loans to banks at low or zero interest, with a wide range of private assets (including, among others, corporate bonds, commercial paper, bank loans, and mortgages) deemed eligible as collateral.14 For example, the Fed might make 90-day or 180-day zero-interest loans to banks, taking corporate commercial paper of the same maturity as collateral. Pursued aggressively, such a program could significantly reduce liquidity and term premiums on the assets used as collateral. Reductions in these premiums would lower the cost of capital both to banks and the nonbank private sector, over and above the beneficial effect already conferred by lower interest rates on government securities.15
The Fed can inject money into the economy in still other ways. For example, the Fed has the authority to buy foreign government debt, as well as domestic government debt. Potentially, this class of assets offers huge scope for Fed operations, as the quantity of foreign assets eligible for purchase by the Fed is several times the stock of U.S. government debt.16
I need to tread carefully here. Because the economy is a complex and interconnected system, Fed purchases of the liabilities of foreign governments have the potential to affect a number of financial markets, including the market for foreign exchange. In the United States, the Department of the Treasury, not the Federal Reserve, is the lead agency for making international economic policy, including policy toward the dollar; and the Secretary of the Treasury has expressed the view that the determination of the value of the U.S. dollar should be left to free market forces. Moreover, since the United States is a large, relatively closed economy, manipulating the exchange value of the dollar would not be a particularly desirable way to fight domestic deflation, particularly given the range of other options available. Thus, I want to be absolutely clear that I am today neither forecasting nor recommending any attempt by U.S. policymakers to target the international value of the dollar.
Although a policy of intervening to affect the exchange value of the dollar is nowhere on the horizon today, it's worth noting that there have been times when exchange rate policy has been an effective weapon against deflation. A striking example from U.S. history is Franklin Roosevelt's 40 percent devaluation of the dollar against gold in 1933-34, enforced by a program of gold purchases and domestic money creation. The devaluation and the rapid increase in money supply it permitted ended the U.S. deflation remarkably quickly. Indeed, consumer price inflation in the United States, year on year, went from -10.3 percent in 1932 to -5.1 percent in 1933 to 3.4 percent in 1934.17 The economy grew strongly, and by the way, 1934 was one of the best years of the century for the stock market. If nothing else, the episode illustrates that monetary actions can have powerful effects on the economy, even when the nominal interest rate is at or near zero, as was the case at the time of Roosevelt's devaluation.
Fiscal PolicyEach of the policy options I have discussed so far involves the Fed's acting on its own. In practice, the effectiveness of anti-deflation policy could be significantly enhanced by cooperation between the monetary and fiscal authorities. A broad-based tax cut, for example, accommodated by a program of open-market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices. Even if households decided not to increase consumption but instead re-balanced their portfolios by using their extra cash to acquire real and financial assets, the resulting increase in asset values would lower the cost of capital and improve the balance sheet positions of potential borrowers. A money-financed tax cut is essentially equivalent to Milton Friedman's famous "helicopter drop" of money.18
Of course, in lieu of tax cuts or increases in transfers the government could increase spending on current goods and services or even acquire existing real or financial assets. If the Treasury issued debt to purchase private assets and the Fed then purchased an equal amount of Treasury debt with newly created money, the whole operation would be the economic equivalent of direct open-market operations in private assets.
JapanThe claim that deflation can be ended by sufficiently strong action has no doubt led you to wonder, if that is the case, why has Japan not ended its deflation? The Japanese situation is a complex one that I cannot fully discuss today. I will just make two brief, general points.
First, as you know, Japan's economy faces some significant barriers to growth besides deflation, including massive financial problems in the banking and corporate sectors and a large overhang of government debt. Plausibly, private-sector financial problems have muted the effects of the monetary policies that have been tried in Japan, even as the heavy overhang of government debt has made Japanese policymakers more reluctant to use aggressive fiscal policies (for evidence see, for example, Posen, 1998). Fortunately, the U.S. economy does not share these problems, at least not to anything like the same degree, suggesting that anti-deflationary monetary and fiscal policies would be more potent here than they have been in Japan.
Second, and more important, I believe that, when all is said and done, the failure to end deflation in Japan does not necessarily reflect any technical infeasibility of achieving that goal. Rather, it is a byproduct of a longstanding political debate about how best to address Japan's overall economic problems. As the Japanese certainly realize, both restoring banks and corporations to solvency and implementing significant structural change are necessary for Japan's long-run economic health. But in the short run, comprehensive economic reform will likely impose large costs on many, for example, in the form of unemployment or bankruptcy. As a natural result, politicians, economists, businesspeople, and the general public in Japan have sharply disagreed about competing proposals for reform. In the resulting political deadlock, strong policy actions are discouraged, and cooperation among policymakers is difficult to achieve.
In short, Japan's deflation problem is real and serious; but, in my view, political constraints, rather than a lack of policy instruments, explain why its deflation has persisted for as long as it has. Thus, I do not view the Japanese experience as evidence against the general conclusion that U.S. policymakers have the tools they need to prevent, and, if necessary, to cure a deflationary recession in the United States.
ConclusionSustained deflation can be highly destructive to a modern economy and should be strongly resisted. Fortunately, for the foreseeable future, the chances of a serious deflation in the United States appear remote indeed, in large part because of our economy's underlying strengths but also because of the determination of the Federal Reserve and other U.S. policymakers to act preemptively against deflationary pressures. Moreover, as I have discussed today, a variety of policy responses are available should deflation appear to be taking hold. Because some of these alternative policy tools are relatively less familiar, they may raise practical problems of implementation and of calibration of their likely economic effects. For this reason, as I have emphasized, prevention of deflation is preferable to cure. Nevertheless, I hope to have persuaded you that the Federal Reserve and other economic policymakers would be far from helpless in the face of deflation, even should the federal funds rate hit its zero bound.19
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