Richard D. Jehn : Moving Through the End of Growth

Transformation time. Image from Fluxed Up World.
Moving through the end of growth
and the collapse of the U.S. as we know it

Welcome to the New World.

By Richard D. Jehn / The Rag Blog / January 10, 2012

Although my headline implies catastrophe, and I firmly believe that there are now factors beyond our control that strongly suggest we are in for an unprecedented hard time, this article is actually one of hope and a call to action for those who are inclined.

First I will discuss briefly those things I think are conspiring to bring on the collapse of U.S. society. I will conclude the article with things that I believe every one of us should become involved in to make the end of growth easier and the transition to a steady-state economy less painful.

It is now five years since Richard Heinberg published The Party's Over (2nd edition), a chronicle of peak oil and why there are few strategies that will help us come up with the shortage in energy as oil production truly begins to fall. He just published a more encompassing undertaking titled The End of Growth that provides some concrete evidence for things I have begun saying in the past two years.

I believe there are four prime factors which may bring us to economic and social collapse: (1) peak oil (which has just begun to have its effects; gasoline prices will never fall again); (2) climate change (which I now suspect cannot be reversed even if every nation world-wide adopted the equivalent of the Kyoto Protocol to the United Nations Framework Convention on Climate Change tomorrow); (3) the financial crisis (which is far from over; signs are that the U.S. is even closer to bankruptcy than previously believed); and (4) the crisis of industrial agriculture (which is slowly killing us off, despite its best intentions).

There are related factors which are of equal importance that I won't discuss, such as "peak water" and "peak food" (see The End of Growth).

I am not an expert on petroleum extraction or any of its related activities. Nonetheless, it is apparent from even casual reading that we have passed the point known as peak oil (where world oil production begins to decline), probably about five years ago. Alternative meaningful sources of energy have not seen the level of development that will be necessary to make a smooth transition from oil to something else (although China is pouring significant resources into the development of renewable energy).

No matter what we do in the next 20 years, peak oil will have a profound impact on everything about our present-day lives. Remember that a typical grocery store will empty within three days with no truck deliveries, 80% of our electricity is supplied by generation plants that use some form of hydrocarbons, the source of all plastic goods is oil, and a myriad of other things too numerous to list.

Global warming is now a fait accompli in the eyes of most climate scientists world-wide. The polar ice caps are melting, California, Texas, Arizona, and New Mexico are burning, storms are becoming more intense with each passing season, and we have really just begun to see the first impacts of this new climate regime.

I believe that each passing season we will witness more intense storms and greater climate chaos across the globe. I also believe that there is exactly one solution available to us: adaptation. We are no longer capable of reversing the effects of what has begun in earnest, and the impact, particularly on agriculture, will be devastating.

The financial crisis of 2008 was precipitated by a corrupt capitalist system in the U.S. driven by greed, but it was dramatically accelerated by a largely unsupervised financial sector's activities that emulated gambling. The Financial Crisis Inquiry Commission report provides a large number of reasons for what happened, but what they fail to do adequately is summarize the structural issues that remain and will likely lead to the financial collapse that I believe is imminent.

There are now numerous publications (see Reinventing Collapse, The Myth of Endless Growth: Exposing Capitalism's Insustainability, Collapse: How Societies Choose to Fail or Succeed) suggesting that capitalism is really at fault.

Do you remember the advertising from the 1950s where some fellow with a deep, resonant voice reminds us that we will achieve "Better Living Through Chemistry"? Industrial agriculture is one of the results of that perspective, as are our toxic bodies and surroundings, numerous poisons used in war, and an endless reliance on unhealthy, unnatural solutions to our problems.

Industrial agriculture is frequently touted as the solution to the imminent food shortages world-wide, but in Diet for a Hot Planet, Anna Lappé argues that industrial agriculture may not be necessary to feed a hungry world. Regardless, the use of poisonous substances on our food supply to control pests, weeds, and diseases is counterintuitive at best, sheer stupidity at worst.

In more recent years, growth hormones and antibiotics used in raising our meat have yielded horrible results -- antibiotic-resistant bacteria, MRSA in hospitals, and the proliferation of truly dangerous diseases that require ever-stronger drugs to combat.

All these negatives do not have to give us a catastrophic outcome; however, we really cannot waste time and we must personally start with concrete positive actions. What I believe has happened is that we have completely disconnected from a large number of the things that actually matter, such as ensuring we have a healthy food supply, expressing compassion for each other, cooperating to achieve common goals.

The first obvious step we all should be taking is to grow our own gardens including preserving the food produced to last the winter. We should all make every effort to reject industrial agriculture completely, refusing to purchase processed foods, rejecting fruits and vegetables that are treated with chemical herbicides and pesticides (that are mostly based on chemicals left over from previous military research efforts into nasty things like nerve gas) and fertilizers that are based on petroleum products, and also rejecting meats that contain antibiotics and other drug or chemical treatments.

Failing to do so could have quite negative impacts personally -- cancer or other diseases such as asthma related to poisons in our immediate environment, or less obvious illnesses such as chronic allergies.

The second clear step is to reduce energy usage to the greatest extent possible. This is really not a trivial proposition, since it entails eliminating car travel from your life if you mean it. There is no realistic way that North America is going to keep up its oil/car habit at present levels for very long.

The likelihood is that pricing will drive some to stop driving, but for others, it will take more to change their priorities. If you want to be realistic about what is coming, the time to do it is now -- get cars out of your life to the extent possible.

Other energy conservation steps would be to install solar panels, or a wind or water power generator for your home, eliminating the purchase of plastics, and taking daily concrete steps to eliminate your reliance on hydrocarbons.

Another necessary step is to recycle everything. In today's world, there is not much excuse for failing to recycle as much as humanly possible, and laziness does not qualify as a good reason. Especially non-renewable natural resources such as mined metals and minerals, and hydrocarbons should be maximally recycled.

Finally, get involved in the Transition movement. Taken from the Transition Whatcom website, "The goal of [...] all Transition Initiatives is to create a long term Energy Descent Action Pathway, a blueprint -- by the community, for the community -- of how to significantly reduce energy use and yet provide for our basic needs in times of energy scarcity."

There are other similar organizations that are moving toward a different world, for example Business Alliance for Local Living Economies and all its myriad local organization members such as Bellingham, Washington's Sustainable Connections. Get involved as it is very likely that you have a local organization that is doing remarkably good works to turn this planet around.

There are myriad examples of remarkable things happening around the country and around the world. For example, a New England town recently enacted "food sovereignty" legislation that rejects federal and state overview of the production and distribution of local food. In Diet for a Hot Planet, Anna Lappé relates cases of replacing industrial agriculture with sustainable organic farming with comparable yields and much higher quality produce.

We must reject the status quo capitalist approach and build a new society. Welcome to the New World.

[Richard Jehn, who lives in Bellingham, Washington, was the founder and first editor of The Rag Blog in May 2006. His work and education have been in horticulture, linguistics, and computer technologies.]

References:

Diamond, Jared. 2005, 2011. Collapse: How Societies Choose to Fail or Succeed. Penguin.
Flannery, Tim. 2010. Here on Earth: A Natural History of the Planet. Atlantic Monthly Press.
Heinberg, Richard. 2005. The Party's Over: Oil, War and the Fate of Industrial Societies, 2nd edition. New Society Publishers.
Heinberg, Richard. 2011. The End of Growth: Adapting to Our New Economic Reality. New Society Publishers.
Lappé, Anna. 2010. Diet for a Hot Planet: The climate crisis at the end of your fork and what you can do about it. Bloomsbury.
Orlov, Dmitry. 2008. Reinventing Collapse: The Soviet Example and American Prospects. New Society Publishers.
Strauss, William. 2010. The Myth of Endless Growth: Exposing Capitalism's Insustainability. Lulu Press.

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FILM / Lamar W. Hankins : 2008 Economic Crash Was an 'Inside Job'

The economic crash of 2008:
An 'Inside Job'

By Lamar W. Hankins / The Rag Blog / November 8, 2011

A fair summary of the award-winning documentary Inside Job is this: The economic crisis that culminated in bailouts in 2008 was caused by 30 years of deregulation of the financial services industry.

I have no way of knowing how many of the Occupy Wall Street participants have seen this film, released in 2010, but after seeing it, my first reaction is that occupying Wall Street and every other financial center from Chicago to your local guilty national bank is an appropriate response to what 99% of the American people have been going through.

Inside Job was nominated for at least eight film awards; it won the Academy Award for Best Documentary Feature earlier this year, the Directors Guild of America award for Best Documentary in December 2010, and the Writers Guild of America award for Best Documentary Screenplay early in 2011.

It deserves such awards for its clarity, reasoned argument, and presentation of damning evidence that Wall Street, several Congresses, and every president from Reagan through George W. Bush share responsibility for the wreck of the economy through actions of the financial sector and inactions of the government brought about by deregulation.

Had Barack Obama been president before the bailouts began, he would be implicated as a guilty party as well. What Obama has done since taking office in 2009 is appoint many of the major players who caused the debacle to positions of power and influence over the institutions that created the devastating failure that gave us soaring unemployment, massive home foreclosures, the failure or near-failure of most of the major financial institutions in the U.S., and a stock market that for the second time in a decade robbed the savings, investments, and pension plans of America’s middle class.

Film critic Roger Ebert described Inside Job as "an angry, well-argued documentary about how the American financial industry set out deliberately to defraud the ordinary American investor." While some might take a less harsh view of the financial sector, the evidence supports Ebert’s statement.

We have known since the savings and loan debacle, junk-bond scandals, and accounting firms’ deceit in the 1980s, created largely by Reagan’s deregulation of S&L's, that without significant regulation, the greed inherent in the financial sector will disrupt, if not destroy, the economy. That debacle was followed in 1998 by the collapse of the speculative hedge fund Long-Term Capital Management.

Then came the dot-com bubble in the late 1990s, which culminated in the stock market crash of 2001, caused by the failure of Internet stocks that were falsely rated as sound investments by investment banks. In 2001, we experienced the bankruptcy of the energy and commodities company Enron. In 2006, the housing bubble peaked, and prices began dropping nationwide. Here Inside Job picks up the deregulation story.

In 2005, the chief economist of the International Monetary Fund, Raghuram Rajan, at a meeting to honor retiring chairman of the Federal Reserve, Alan Greenspan, warned of a “catastrophic meltdown” of the economy. He argued that financial sector managers were encouraged by great financial rewards to take extraordinary risks with other people’s money that could “generate severe adverse consequences,” with no penalties for the financial sector managers.

Rajan presciently described what happened during the 2007-2008 economic collapse: the failure of the massively-issued subprime mortgages, the complicated investments known as derivatives and credit derivative obligations, the leveraging of the assets of investment banks by a factor of 33 to 1, the insuring against failures of these complicated investments (which led directly to the bankruptcy of AIG), the mismanagement of the public-private housing guarantors Freddie Mac and Fannie Mae, and the catastrophic stock market decline.

Rajan was ridiculed immediately for his views by Lawrence Summers, who called Rajan a “Luddite.” Summers, an economist, had worked in the Reagan administration on the staff of the Council of Economic Advisers, as Chief Economist for the World Bank in the early 1990s, had been Secretary of the Treasury under President Clinton, and was President of Harvard from 2001 to 2006.

During this time, Summers had promoted the deregulation of the financial sector, along with other notables, including Ben Bernanke, Robert Rubin, Hank Paulson, and Timothy Geithner, all of whom have also worked in some economic capacity for the Obama administration. Yet none of these men were willing to be interviewed for Inside Job about what caused the Great Recession in which we are still mired.

Many journalists and economists have written books and articles dissecting what went wrong with the economy three years ago, but none of them have made the subject as accessible to the average non-economist as Charles Ferguson does in this documentary.

Ferguson describes the inbreeding between the financial sector and government, with major players moving from government regulatory and policy positions into the financial companies and banks and back again, often being paid huge sums for speeches ($135,000 to Lawrence Summers for a speech to Goldman Sachs, for example) and economic opinions that bolster these private investment banks as well as whole countries, such as Iceland.

None of these speeches and reports were critical of the financial practices of the companies or of the countries involved. Ferguson also criticizes the lack of accountability of academic economists to their institutions or to the public for their uncritical income-producing extra-curricular work.

Many people have placed equal blame for the failure of sub-prime mortgages, which are provided with higher interest rates and higher mortgage payments, on consumers and on the mortgage companies. But Ferguson points out that more than half of the families that received sub-prime mortgages qualified for conventional mortgages with lower interest rates and monthly payments. They weren’t told this because the bankers made more money off sub-prime mortgages than they did off conventional ones.

And some of the mortgage derivatives sold by Goldman Sachs included mortgages written, on average, at 99.3% of the value of the homes that were mortgaged. This means that there was no room for any adverse circumstance. If a family doesn’t have income for even half a month, it is unlikely that they will be able to pay the mortgage. If a house is foreclosed on, the bank can’t possibly get back anything close to the amount of money it has loaned on the house because the loan approached 100% of its value.

No one has yet been successfully prosecuted for the financial disaster of 2008, probably because the financial sector has been so thoroughly deregulated in the last 30 years that very little of its conduct is criminal. But the financial sector’s conduct has had disastrous consequences for the country.

Inside Job makes clear that if the American public is to be the rescuer of the financial sector, spending trillions of dollars to bail out the irresponsible gambling industry we call investment banking, then it needs to be re-regulated to put back in place the rational rules and practices that prevented disasters such as the ones we experienced in 2001 and 2008.

From the time of the Great Depression until the early 1980s, we averted such massive failures in the financial sector by appropriate regulation. A prudent country would protect itself against a recurrence of such financial debauchery and irresponsible behavior as was exhibited for the last 30 years by the financial sector of our economy.

Inside Job can be rented through Netflix and other sources, as well as viewed free on-line. It is worth seeing, if for no other reason than it makes understandable what Occupy Wall Street is all about.

Woody Guthrie wrote a song many years ago about an outlaw and bank robber that included this verse:

Yes, as through this world I've wandered
I've seen lots of funny men;
Some will rob you with a six-gun,
And some with a fountain pen.

Those with fountain pens have the upper hand now, and they are not being held accountable. We the people need to change that.

[Lamar W. Hankins, a former San Marcos, Texas, city attorney, is also a columnist for the San Marcos Mercury. This article © Freethought San Marcos, Lamar W. Hankins. Read more articles by Lamar W. Hankins on The Rag Blog.]

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Barbara Ehrenreich & Bill Fletcher Jr. : Reimagining Socialism

Graphic from The Yellow Brick Road.
Rising to the Occasion: Reimagining Socialism

We see a tremendous opportunity in the bleak fact that millions of Americans have been rendered redundant by the capitalist economy and are free to dedicate their considerable talents to creating a more just and sustainable alternative.

By Barbara Ehrenreich and Bill Fletcher Jr.

[This article appears in the March 13, 2009, edition of The Nation. The editors of The Nation preface it as follows: "Socialism's all the rage. 'We Are All Socialists Now,' Newsweek declares. As the right wing tells it, we're already living in the U.S.S.A. But what do self-identified socialists... have to say about the global economic crisis?]

If you haven't heard socialists doing much crowing over the fall of capitalism, it isn't just because there aren't enough of us to make an audible crowing sound. We, as much as anyone on Wall Street in, say, 2006, appreciate the resilience of American capitalism--its ability to regroup and find fresh avenues for growth, as it did after the depressions of 1877, 1893 and the 1930s. In fact, The Communist Manifesto can be read not only as an indictment of capitalism but as a breathless paean to its dynamism. And we all know the joke about the Marxist economist who successfully predicted eleven out of the last three recessions.

But this time the patient may not get up from the table, no matter how many times the electroshock paddles of "stimulus" are applied. We seem to have entered the death spiral where rising unemployment leads to reduced consumption and hence to greater unemployment. Any schadenfreude we might be tempted to feel as executives lose their corporate jets and the erstwhile Masters of the Universe wipe egg from their faces is quickly dashed by the ever more vivid suffering around us. Food pantries and shelters can no longer keep up with the demand; millions face old age without pensions and with their savings gutted; we personally are consumed with anxiety about the future that awaits our children and grandchildren.

Besides, it wasn't supposed to happen this way. There was supposed to be a revolution, remember? The socialist idea, prediction, faith or whatever was that capitalism would fall when people got tired of trying to live on the crumbs that fall from the chins of the rich and rose up in some fashion--preferably inclusively, democratically and nonviolently--and seized the wealth for themselves. Such a seizure would have looked nothing like "nationalization" as currently discussed, in which public wealth flows into the private sector with little or no change in the elites that control it or in the way the control is exercised. Our expectation as socialists was that the huge amount of organizing required for revolutionary change would create an infrastructure for governance, built out of--among other puzzle pieces--unions, community organizations, advocacy groups and new organizations of the unemployed and nouveau poor.

It was also supposed to be a simple matter for the masses to take over or "seize" the physical infrastructure of industrial capitalism--the "means of production"--and start putting it to work for the common good. But much of the means of production has fled overseas--to China, for example, that bastion of authoritarian capitalism. When we look around our increasingly shuttered landscape and survey the ruins of finance capitalism, we see bank upon bank, realty and mortgage companies, title companies, insurance companies, credit-rating agencies and call centers, but not enough enterprises making anything we could actually use, like food or pharmaceuticals. In recent years, capitalism has become increasingly and almost mystically abstract. Outside manufacturing and the service sector, fewer and fewer people could explain to their children what they did for a living. The brightest students went into finance, not physics. The biggest urban buildings housed cubicles and computer screens, not assembly lines, laboratories, studios or classrooms. Even our flagship industry, manufacturing autos, would require major retooling to make something we could use--not more cars, let alone more SUVs, but more windmills, buses and trains.

What is most galling, from a socialist perspective, is the dawning notion that capitalism may be leaving us with less than it found on this planet, about 400 years ago, when the capitalist mode of production began to take off. Marx imagined that industrial capitalism had potentially solved the age-old problem of scarcity and that there was plenty to go around if only it was equitably distributed. But industrial capitalism--with some help from industrial communism--has brought about a level of environmental destruction that threatens our species along with countless others. The climate is warming, the oil supply is peaking, the deserts are advancing and the seas are rising and contain fewer and fewer fish for us to eat. You don't have to be a freaky doomster to see that extinction may be what's next on the agenda.

In this situation, with both long-term biological and day-to-day economic survival in doubt, the only relevant question is: do we have a plan, people? Can we see our way out of this and into a just, democratic, sustainable (add your own favorite adjectives) future?

Let's just put it right out on the table: we don't. At least we don't have some blueprint on how to organize society ready to whip out of our pockets. Lest this sound negligent on our part, we should explain that socialism was an idea about how to rearrange ownership and distribution and, to an extent, governance. It assumed that there was a lot worth owning and distributing; it did not imagine having to come up with an entirely new and environmentally sustainable way of life. Furthermore, the history of socialism has been disfigured by too many cadres who had a perfect plan, if only they could win the next debate, carry out a coup or get enough people to fall into line behind them.

But we do understand--and this is one of the things that make us "socialists"--that the absence of a plan, or at least some sort of deliberative process for figuring out what to do, is no longer an option. The great promise of capitalism, as first suggested by Adam Smith and recently enshrined in "market fundamentalism," was that we didn't have to figure anything out, because the market would take care of everything for us. Instead of promoting self-reliance, this version of free enterprise fostered passivity in the face of that inscrutable deity, the Market. Deregulate, let wages fall to their "natural" level, turn what remains of government into an endless source of bounty for contractors--whee! Well, that hasn't worked, and the core idea of socialism still stands: that people can get together and figure out how to solve their problems, or at least a lot of their problems, collectively. That we--not the market or the capitalists or some elite group of über-planners--have to control our own destiny.

We admit: we don't even have a plan for the deliberative process that we know has to replace the anarchic madness of capitalism. Yes, we have some notion of how it should work, based on our experiences with the civil rights movement, the women's movement and the labor movement, as well as with countless cooperative enterprises. This notion centers on what we still call "participatory democracy," in which all voices are heard and all people equally respected. But we have no precise models of participatory democracy on the scale that is currently called for, involving hundreds of millions, and potentially billions, of participants at a time.

What might this look like? There are some intriguing models to study, like the Brazilian Workers Party's famous experiments in developing a participatory budget in Porto Alegre. Z Magazine founder Michael Albert developed a detailed approach to mass-based planning that he calls participatory economics, or "parecon," and one of us (Fletcher, in his book Solidarity Divided, written with Fernando Gapasin) has proposed a locally based network of people's assemblies. But all this is experimental, and we realize that any system for mass democratic planning will be messy. It will stumble; it will be wrong sometimes; and there will be a lot of running back to the drawing board.

But as socialists we know the spirit in which this great project of collective salvation must be undertaken, and that spirit is solidarity. An antique notion until very recently, it flickered into life again in the symbolism and energy of the Obama campaign. The Yes We Can! chant was the slogan of the United Farm Workers movement and went on to be adopted by various unions and community-based organizations to emphasize what large numbers of people can accomplish through collective action. Even Obama's relatively anodyne calls for a new commitment to volunteerism and community service seem to have inspired a spirit of "giving back." If the idea of democratic planning, of controlling our destiny, is the intellectual content of socialism, then solidarity is its emotional energy source--the moral understanding and the searing conviction that, however overwhelming the challenges, we are in this together.

Solidarity, though, is an empty sentiment without organization--ways of thinking and working together, and of connecting the social movements that are battling injustice every day. We see a tremendous opportunity in the bleak fact that millions of Americans have been rendered redundant by the capitalist economy and are free to dedicate their considerable talents to creating a more just and sustainable alternative. But if we are serious about collective survival in the face of our multiple crises, we have to build organizations, including explicitly socialist ones, that can mobilize this talent, develop leadership and advance local struggles. And we have to be serious, because the capitalist elites who have run things so far have forfeited all trust or even respect, and we--progressives of all stripes--are now the only grown-ups around.

[Barbara Ehrenreich is the author, most recently, of This Land Is Their Land: Reports From a Divided Nation. Bill Fletcher Jr. originated the call for founding "Progressives for Obama." He is the executive editor of Black Commentator, and founder of the Center for Labor Renewal.]

Source / The Nation

Thanks to Dorinda Moreno / The Rag Blog

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Financial Meltdown : The 12 Corrupt Deals That Caused it

Graphic from The Energy Source.

$5 billion in lobbying for 12 corrupt deals caused the multi-trillion dollar financial meltdown. It got the finance industry lucrative legislative favors that paved the way for Wall Street's devastating collapse.

By Robert Weissman / March 9, 2009

What can $5 billion buy in Washington?

Quite a lot.

Over the 1998-2008 period, the financial sector spent more than $5 billion on U.S. federal campaign contributions and lobbying expenditures.

This extraordinary investment paid off fabulously. Congress and executive agencies rolled back long-standing regulatory restraints, refused to impose new regulations on rapidly evolving and mushrooming areas of finance, and shunned calls to enforce rules still in place.

"Sold Out: How Wall Street and Washington Betrayed America," a report released by Essential Information and the Consumer Education Foundation (and which I co-authored), details a dozen crucial deregulatory moves over the last decade -- each a direct response to heavy lobbying from Wall Street and the broader financial sector, as the report details. (The report is available here.) Combined, these deregulatory moves helped pave the way for the current financial meltdown.

Here are 12 deregulatory steps to financial meltdown:

1. The repeal of Glass-Steagall

The Financial Services Modernization Act of 1999 formally repealed the Glass-Steagall Act of 1933 and related rules, which prohibited banks from offering investment, commercial banking, and insurance services. In 1998, Citibank and Travelers Group merged on the expectation that Glass-Steagall would be repealed. Then they set out, successfully, to make it so. The subsequent result was the infusion of the investment bank speculative culture into the world of commercial banking. The 1999 repeal of Glass-Steagall helped create the conditions in which banks invested monies from checking and savings accounts into creative financial instruments such as mortgage-backed securities and credit default swaps, investment gambles that led many of the banks to ruin and rocked the financial markets in 2008.

2. Off-the-books accounting for banks

Holding assets off the balance sheet generally allows companies to avoid disclosing “toxic” or money-losing assets to investors in order to make the company appear more valuable than it is. Accounting rules -- lobbied for by big banks -- permitted the accounting fictions that continue to obscure banks' actual condition.

3. CFTC blocked from regulating derivatives

Financial derivatives are unregulated. By all accounts this has been a disaster, as Warren Buffett's warning that they represent "weapons of mass financial destruction" has proven prescient -- they have amplified the financial crisis far beyond the unavoidable troubles connected to the popping of the housing bubble. During the Clinton administration, the Commodity Futures Trading Commission (CFTC) sought to exert regulatory control over financial derivatives, but the agency was quashed by opposition from Robert Rubin and Fed Chair Alan Greenspan.

4. Formal financial derivative deregulation: the Commodities Futures Modernization Act

The deregulation -- or non-regulation -- of financial derivatives was sealed in 2000, with the Commodities Futures Modernization Act. Its passage orchestrated by the industry-friendly Senator Phil Gramm, the Act prohibits the CFTC from regulating financial derivatives.

5. SEC removes capital limits on investment banks and the voluntary regulation regime

In 1975, the Securities and Exchange Commission (SEC) promulgated a rule requiring investment banks to maintain a debt to-net capital ratio of less than 15 to 1. In simpler terms, this limited the amount of borrowed money the investment banks could use. In 2004, however, the SEC succumbed to a push from the big investment banks -- led by Goldman Sachs, and its then-chair, Henry Paulson -- and authorized investment banks to develop net capital requirements based on their own risk assessment models. With this new freedom, investment banks pushed ratios to as high as 40 to 1. This super-leverage not only made the investment banks more vulnerable when the housing bubble popped, it enabled the banks to create a more tangled mess of derivative investments -- so that their individual failures, or the potential of failure, became systemic crises.

6. Basel II weakening of capital reserve requirements for banks

Rules adopted by global bank regulators -- known as Basel II, and heavily influenced by the banks themselves -- would let commercial banks rely on their own internal risk-assessment models (exactly the same approach as the SEC took for investment banks). Luckily, technical challenges and intra-industry disputes about Basel II have delayed implementation -- hopefully permanently -- of the regulatory scheme.

7. No predatory lending enforcement

Even in a deregulated environment, the banking regulators retained authority to crack down on predatory lending abuses. Such enforcement activity would have protected homeowners, and lessened though not prevented the current financial crisis. But the regulators sat on their hands. The Federal Reserve took three formal actions against subprime lenders from 2002 to 2007. The Office of Comptroller of the Currency, which has authority over almost 1,800 banks, took three consumer-protection enforcement actions from 2004 to 2006.

8. Federal preemption of state enforcement against predatory lending

When the states sought to fill the vacuum created by federal non-enforcement of consumer protection laws against predatory lenders, the Feds -- responding to commercial bank petitions -- jumped to attention to stop them. The Office of the Comptroller of the Currency and the Office of Thrift Supervision each prohibited states from enforcing consumer protection rules against nationally chartered banks.

9. Blocking the courthouse doors: Assignee Liability Escape

Under the doctrine of “assignee liability,” anyone profiting from predatory lending practices should be held financially accountable, including Wall Street investors who bought bundles of mortgages (even if the investors had no role in abuses committed by mortgage originators). With some limited exceptions, however, assignee liability does not apply to mortgage loans, however. Representative Bob Ney -- a great friend of financial interests, and who subsequently went to prison in connection with the Abramoff scandal -- worked hard, and successfully, to ensure this effective immunity was maintained.

10. Fannie and Freddie enter subprime

At the peak of the housing boom, Fannie Mae and Freddie Mac were dominant purchasers in the subprime secondary market. The Government-Sponsored Enterprises were followers, not leaders, but they did end up taking on substantial subprime assets -- at least $57 billion. The purchase of subprime assets was a break from prior practice, justified by theories of expanded access to homeownership for low-income families and rationalized by mathematical models allegedly able to identify and assess risk to newer levels of precision. In fact, the motivation was the for-profit nature of the institutions and their particular executive incentive schemes. Massive lobbying -- including especially but not only of Democratic friends of the institutions -- enabled them to divert from their traditional exclusive focus on prime loans.

Fannie and Freddie are not responsible for the financial crisis. They are responsible for their own demise, and the resultant massive taxpayer liability.

11. Merger mania

The effective abandonment of antitrust and related regulatory principles over the last two decades has enabled a remarkable concentration in the banking sector, even in advance of recent moves to combine firms as a means to preserve the functioning of the financial system. The megabanks achieved too-big-to-fail status. While this should have meant they be treated as public utilities requiring heightened regulation and risk control, other deregulatory maneuvers (including repeal of Glass-Steagall) enabled them to combine size, explicit and implicit federal guarantees, and reckless high-risk investments.

12. Credit rating agency failure

With Wall Street packaging mortgage loans into pools of securitized assets and then slicing them into tranches, the resultant financial instruments were attractive to many buyers because they promised high returns. But pension funds and other investors could only enter the game if the securities were highly rated.

The credit rating agencies enabled these investors to enter the game, by attaching high ratings to securities that actually were high risk -- as subsequent events have revealed. The credit rating agencies have a bias to offering favorable ratings to new instruments because of their complex relationships with issuers, and their desire to maintain and obtain other business dealings with issuers.

This institutional failure and conflict of interest might and should have been forestalled by the SEC, but the Credit Rating Agencies Reform Act of 2006 gave the SEC insufficient oversight authority. In fact, the SEC must give an approval rating to credit ratings agencies if they are adhering to their own standards -- even if the SEC knows those standards to be flawed.

From a financial regulatory standpoint, what should be done going forward? The first step is certainly to undo what Wall Street has wrought. More in future columns on an affirmative agenda to restrain the financial sector.

None of this will be easy, however. Wall Street may be disgraced, but it is not prostrate. Financial sector lobbyists continue to roam the halls of Congress, former Wall Street executives have high positions in the Obama administration, and financial sector propagandists continue to warn of the dangers of interfering with "financial innovation."

Source / Multinational Monitor / AlterNet

Thanks to David Hamilton / The Rag Blog

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Loving: She'll Be Comin' 'Round the Mountain

Cartoon by Charlie Loving / The Rag Blog

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Roger Baker on the Economy : Sick and Getting Sicker

Image: 1929 Rollin Kirby cartoon on Stock Market Crash, courtesy of Kiko's House.
'At this point, even megadoses of federal stimulation are having little effect in restoring confidence and reflating the collapsing bubble of US capital investment.'
By Roger Baker / The Rag Blog / December 24, 2008

This will clue you in about how sick the economy really is. The current economic contraction was initiated by a loss of confidence in the sub-prime mortgage loans that were bundled and issued as international securities by the deregulated US investment banks. From there, things started to unravel.

At this point, even megadoses of federal stimulation are having little effect in restoring confidence and reflating the collapsing bubble of US capital investment. In fact the bank bailouts are likely making things worse by papering over massive amounts of bad loans, keeping the toxic debt on the books at an inflated price. Bailing out the banks didn't work, and dropping interest rates to zero didn't work, so now the feds are about to see if injection large amounts of federal Keynesian stimulation via grassroots spending will finally restimulate spending without igniting uncontrollable inflation. The restimulation effort is comparable trying to drive a car that has a steering wheel with a lot of play; you don't know when your efforts will take hold or which way you will be headed when they do.

As the global economy contracts in a chain reaction of deflation, even what were previously seen as sound long term capital investments now look shaky. All production aimed at discretionary consumer spending is in question as the global economy restructures and accommodates to slower growth, less energy, and more essential needs.

The economic contraction is global whereas the fed's injections of cash liquidity are primarily national. Therein lies an obvious policy mismatch. We are addicted to foreign credit and Chinese manufactured goods and imported oil. Our economic crisis and its solution are, and must be, international.

The following snips are extracted from the first part of Doug Noland's much longer and generally excellent weekly economic analysis.

"...To this point, a barrage of unprecedented monetary and fiscal policy responses has restrained the forces of systemic collapse...

With private sector credit growth now struggling mightily, public finance was forced to really take up the slack. Federal government debt expanded at a 39.2% pace, playing a decisive role in generating sufficient system-wide credit expansion...

With even an unsustainable $2.0 trillion annual pace of federal borrowings failing to reverse the downward economic spiral, the
Federal Reserve last week was compelled to signal in no uncertain terms that policymakers "will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability."...

The dilemma for the Fed (and markets) is that while such an enormous amount of credit would do little more than somewhat steady our maladjusted bubble economy, it would at the same time perpetuate the massive flow of dollar finance out to the global financial system. In short, the Fed's determination to reflate ensures continued monetary disorder. And I would further argue that ongoing monetary disorder - and associated corruption to various market pricing mechanisms – will impede system adjustment and extend the lengths of US and global downturns and restructuring periods...

Factoring in other financial outflows, the rest of world would be called upon to purchase another trillion or so of our financial claims next year - and for years on end...

At the end of the day, I expect the dollar to suffer from its relative dismal position with respect to both financial flows and our economy's deep structural maladjustment. Years of egregious credit and spending excesses have left an economic structure uniquely dependent upon, on the one hand, huge ongoing public sector credit injunctions and, on the other, huge unending imports. This is a terrible predicament for a currency..."

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Our Economic Trainwreck : Trying to Get Back on Track

The Wrecked Economy: What has Been Done to Address It
By Sherman DeBrosse / The Rag Blog / December 17, 2008

[This is the second of a three-part series on the economy by The Rag Blog's Sherman DeBrosse.]

When Secretary of the Treasury Henry Paulson asked for $700 billion in emergency spending authority, he said it was to be spent on bad mortgage-backed securities. His original plan was to buy mortgage-based debt at near par, which probably would not have stopped the slide in values. Then he reversed course and spent very little on these mortgage based securities. The sudden reversal was a signal to insiders that the situation was far worse than most had imagined. They decided to sit on new investments and buy up bargains on the market.

Paulson probably backed off his plan to rescue mortgages because he came to realize there was a great deal more bad debt in the financial sector than anyone had imagined. Treasury started investing heavily in financial houses, insurance companies, and big banks; and it acknowledges having only purchased “a small fraction of the ‘troubled’ assets.” Often there were too few strings attached, and government often did not demand any share in ownership. There were no built-in mechanism to assure that recipient institutions would start lending again. Spreading around all that money did not free-up credit. Some of the rescued institutions used the new money to issue cash dividends, pay bonuses, and buy other banks. Institutions are sitting on the money suspecting potential borrowers—especially other institutions and big borrowers—have more liabilities than can be seen. They also are worried about their own viability.

Now Treasury is holding onto $350,000,000,000 to cover more disasters in the great banking casino Secretary Paulson says the remaining $350 billion from the original package is intended for use by the Obama administration to continue shoring up financial institutions. It is estimated that the financial institutions have at least $2 trillion more of bad debt to deal with.

To deal with the mortgage crisis, the Federal Reserve began purchasing $600 billion in mortgages and securities based on mortgages from Federal Home Loan Banks, Ginnie Mae, Fannie Mae, and Freddie Mac. Remember that the two former institutions had already received massive infusions of cash.

The Fed has also set aside $200 billion to cover questionable credit card debt, auto loans, and student loans. In addition, the Fed started in October to assist money market funds by buying up private business loans and certificates of deposits with a fund set at $540 billion. Recently government regulators made available $4 billion to the credit unions.

The beginning of runs on weak banks forced the FDIC to temporarily raise insurance on accounts from $100,000 to $250,000. People with deposits in excess of $250,000 are still making withdrawals, which partly accounts for why banks are reluctant to make loans. The larger reasons is that so many of them are leveraged over 100% due to excessively speculative investment policies.

The FED and Treasury has pumped hundreds of billions into the financial institutions and credit has not eased up and more jobs are being lost. The longer credit is frozen, the more businesses will fail or at least lay off workers. Housing values continue to plummet and foreclosures are increasing. A public perception is that a great deal is being done for Wall Street but too little is being done for Main Street Something new must be tried.

[Sherman DeBrosse, the pseudonym for a retired history professor, is a contributor to The Rag Blog and also blogs at Sherm Says and on DailyKos.]

Please see Part I of this series: Sherman DeBrosse : Our Economic Trainwreck by Sherman DeBrosse / The Rag Blog / Dec. 12, 2008

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US Household Worth Takes a Nosedive : How Do We Get Out of This Mess?

Updated December 17, 2008


Americans strapped for cash so they're not spending; How will the government pay back all the cash it's creating?
By Roger Baker / The Rag Blog / December 16, 2008

See 'Household Net Worth in U.S. Declines Most on Record' by Shobhana Chandra, Below.

Average Americans are strapped for cash, so they are holding back spending and causing the stock market to crash. Meanwhile the banks are soaking up free taxpayer bailout cash, but since they may be secretly broke (we're not allowed to know the details), and since the banks know that the economy is tanking, they are afraid to lend. So nothing is trickling down to homeowners or car buyers. You would have to be pretty stupid to risk buying a car from a company on federal life support, right?

One problem is that the massive amounts of bailout cash now being created and printed to try to re-stimulate the US economy eventually have to be paid back by the government. How do you suppose the US government (broke as always) will end up paying back all this newly generated public debt, which they have used to buy up bad bank debt and to try to restore confidence to credit market lenders and thus stimulate the US economy (even though the problem affecting the US is global)?

Do you think the feds will end up paying back its treasury note lenders with big healthy dollars that will still buy a lot of stuff like they used to do?

Or do you think the the feds will pay it back with little bitty deflated dollars that have shrunken in value because they must ultimately depend on US wealth and taxpayer affluence as the long-range source of their value?

Household Net Worth in U.S. Declines Most on Record
By Shobhana Chandra / December 11, 2008

U.S. household wealth fell in the third quarter by the most on record as property values and stock prices tumbled, highlighting the tattered state of consumer finances even before the most recent slump in lending.

Net worth for households and non-profit groups decreased by $2.81 trillion, the most since records began in 1952, according to the Federal Reserve’s Flow of Funds report issued today in Washington. Real-estate-related assets declined by $646.9 billion, three times the prior quarter’s drop.

Combined with the loss of 1.9 million jobs so far this year, almost half of which occurred in the last two months, and the slump in bank financing since the credit crisis intensified, the figures darken an already gloomy outlook for consumer spending. President-elect Barack Obama has called for a stimulus package of unprecedented size as the economy slides toward the longest postwar recession.

“This is not pretty,” said Michael Feroli, an economist at JPMorgan Chase & Co. in New York. “It’s going to take a long time to repair balance sheets that are being severely impaired.” Feroli estimated wealth will drop by about another $4 trillion this quarter if stocks stabilize at current levels and home prices decline at the same pace as in the third quarter.

Household net worth dropped to $56.5 trillion, the lowest level since the last three months of 2006, from $59.4 trillion in the second quarter. The decline over the 12 months ended in September, at 11 percent, is the biggest year-over-year drop since records began, exceeding the slump caused by the bursting of the bubble in technology stocks in 2001.

Consumer Slump

Consumer spending will probably decline 1 percent in 2009, making it the biggest drop since 1942, according to the median forecast of economists surveyed by Bloomberg News this month. The economy is projected to shrink for four straight quarters, the longest contraction since quarterly records began in 1947.
The Fed switched home-price measures to better reflect the slump in property values and revised its calculations to 2000.

The central bank adopted figures supplied by LoanPerformance, a unit of Santa Ana, California-based First American Corp., that track a wider range of properties, including those financed by subprime and jumbo loans. Previously the Fed used a price gauge provided by the Federal Housing Finance Agency that excludes those homes.

Owners’ equity as a share of their total real-estate holdings dropped to a record-low 44.7 percent last quarter, from 46 percent in the second quarter.

Mortgage borrowing by households fell at a 2.4 percent annual pace, after decreasing at a 0.1 percent rate in the prior quarter, the Fed said.

Government Borrowing

Total borrowing by consumers, businesses and government agencies increased at an annual rate of 7.2 percent last quarter compared with a 3.1 percent gain the prior quarter. The increase was led by a jump in government borrowing.

Total borrowing by households fell at a 0.8 percent pace after rising 0.6 percent in the second quarter. Business borrowing climbed at an annual pace of 2.9 percent after rising 5.6 percent the prior quarter.

Borrowing by state and local governments increased at a 2.9 percent rate, the Fed said.

Federal government borrowing surged at an annual rate of 39 percent, more than six times as much as the prior quarter’s pace.

Job losses are making consumers more strapped for cash, and worsening the slowdown in consumer spending, which accounts for two-thirds of the economy.

A Labor Department report today showed the number of Americans filing first-time claims for unemployment benefits surged to 573,000 last week, a 26-year high, and the number of workers receiving benefits also jumped to the highest level since 1982.

Source / Bloomberg

Also see New Poll Shows 63% Are Already Hurt by Downturn by Michael A. Fletcher and Jon Cohen / Washington Post / Dec. 17, 2008

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Sherman DeBrosse : Our Economic Trainwreck

'The financial crisis involves a great deal more than shaky home mortgagers. The key problem is that our financial markets have been deregulated and, lacking policing, have engaged in a massive speculative binge.'

By Sherman DeBrosse / The Rag Blog / December 12, 2008

[This is the first of a three-part series on the economy by The Rag Blog's Sherman DeBrosse.]

Almost 70 years ago, the Great Depression began after the stock market collapsed. This time, a recession came first in December, 2007. Then a mortgage crisis in 2008 triggered a meltdown of the financial system. After the collapse of Lehman Brothers on Sept. 15, the markets entered uncharted territory, and it soon became clear that financial houses held trillions in worthless paper. Moreover, bad paper from America had poisoned markets abroad.

Overwhelmed by their own debts and bad assets, banks and financial houses protectively dried up all credit. This development deepened the recession. At this juncture, a third blow to the domestic economy looms large and could push the economy into a deep pit. It depends on how many more bankruptcies there are and whether the Big Three automakers are allowed to go under.

We were months into the economic collapse of 2008, and we still do not quite know what has hit us. Four years ago, Paul Krugman warned that the housing bubble carried with it the seeds of disaster. There were bad sub-prime loans and home owners refinanced their homes to get extra cash to spend. The sub-prime market fell apart in the summer of 2007, and the larger mortgage market collapsed this year.

This is clearly the worst financial crisis since 1929, there are more safety nets in place now than in 1929, so it is unlikely that the current bad times will match the Great Depression. Cushions are in place such as Social Security and insured savings. Another difference is that even conservatives know that the people expect government to act to improve conditions. Had the GOP had another ten years to stamp out the New Deal heritage, this public expectation might have been considerably diminished.

It is difficult to determine how many people have lost or will lose their jobs as a result of the economic melt-down. So far, more than 2 million have lost their jobs this year. Productivity dropped to a 26 year level. We cannot trust our unemployment figures because we only include in the work force those officially looking for work. If unemployment benefits are not extended, those whose benefits have run out simply disappear from the equation. The Bureau of Labor Statistics recognizes this and generates another estimate of real unemployment, which stood at 9.2 % in April, and must be much higher now.

We are told that as many as 3 million home mortgages are in danger of forfeiture. Assume that each has lost $100,000 in value, and we would have about $300,000,000, 000 in lost value. Even if my estimate of loss per home is wrong by half, we would still be looking at a mortgage bail-out of $600,000,000. The fact is that much more is involved than mortgage defaults.

The problem is that in the financial casino, it is possible to take $600 of bad mortgages and create trillions of bad assets. Of course, traders also have used other bad assets to create still other bad securities. Wall Street had built an elaborate and very fragile house of cards built on speculation which was made far less stable when the mortgage crisis occurred.

The mortgages were bundled and turned into collateralized debt obligations (CDOs); they were securitized, and sold as investments. Then other instruments, that derived their worth from the CDOs, were created and traded. These securities that derive their value from other securities are called derivatives, and, at first, they were designed to spread risk. They could be stacked on top of one another. Soon, ways were found to use them for gambling. This is how bubbles are created, and soon, a mortgage based bubble was created. A huge housing bubble was created; then it burst. Now 12 million home owners have mortgages valued at more than their home were worth. Only the people who created it, profited. It could be that they did nothing illegal due to legislation passed in 1999 and 2000. Lax enforcement of whatever regulatory legislation there was added to the problem.

One kind of transaction called credit default swaps was intended to protect against default on the bundled mortgages. The amount of value assigned to these swaps, before they began to come apart, was $62 trillion. Swaps also involve other securities, and are essentially bets on whether the issuers can make good on their obligations. Warren Buffett called the swaps and similar instruments “financial Weapons of mass destruction.”

A very serious problem with securitizing these mortgages and other loans occurs at the local level, where it becomes difficult for people to renegotiate their mortgages when they are held by some far distant bank. Often in the past, a motel owner or gas station proprietor could go to the local bank to renegotiate the terms of his mortgage in rough times. The same is true of commercial paper, which also gets securitized. This time around, these people will have great problems keeping their businesses open by renegotiating the terms of their loans. Focusing mainly on Wall Street problems will not address these Main Street problems and will eventually increase the former.

When the crisis came, many Republicans blamed it on Jimmy Carter and the Democrats who wanted to help minorities own their own homes. The idea was that 1977 legislation against blue-lining somehow forced bankers to make bad loans. No sensible person can believe that the largest part of bad home loan debt was incurred by blacks and Hispanics. That’s a very powerful argument for people who don’t like Blacks and Hispanics. Most of these folks will not look into the problem any further, even if they lost half their stocks and bonds portfolio.

The financial crisis involves a great deal more than shaky home mortgagers. The key problem is that our financial markets have been deregulated and, lacking policing, have engaged in a massive speculative binge. Now the taxpayer is being asked to pay for the damages. We have spent more than two trillion dollars patching up the financial system, and the government is said to be potentially liable for from $7.76 to 8.5 trillion, according to Bloomberg. That includes what has already been provided. CitiBank alone was just given a second loan and the promise to guarantee $300 billion of its questionable debt. There is no guarantee that the liability for casino capitalism will be capped at between $7.76 billion and 8.5 trillion. Most of this debt came not from sub-prime borrowing or other weak mortgage. It is a product of casino capitalism.

[Sherman DeBrosse, the pseudonym for a retired history professor, is a contributor to The Rag Blog and also blogs at Sherm Says and on DailyKos.]

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Housing Crisis: 8 Million Foreclosures in 4 Years

Foreclosures could top 8 million: Credit Suisse
By MarketWatch / December 9, 2008

BOSTON -- More than 8 million mortgages could go into foreclosure in coming years in the wake of the credit meltdown as the economy worsens and the U.S. suffers more job losses, according to a recent report.

Credit Suisse's fixed-income research team forecast that 8.1 million mortgages will be in foreclosure over the next four years, representing 16% of all mortgages. In a recent research note, Credit Suisse lifted its earlier forecast from April when it predicted 6.5 million foreclosures, or 13% of all mortgages.

"Despite some initial signs that subprime foreclosures were near a plateau, the combination of severe weakening in the economy, continued decline in home prices, steady increase in delinquencies, particularly in the prime mortgage space, ensure that foreclosure numbers, absent more dramatic intervention, will march steadily higher," Credit Suisse wrote.

Federal officials are struggling to find ways to restructure home loans to ease foreclosures as home prices continue to fall around the country. However, regulators are finding it difficult to modify mortgages because many were packaged up into complex credit vehicles and sold to large investors around the globe.

Earlier this week, Office of the Comptroller of the Currency director John Dugan released statistics showing a high re-default rate on mortgages that have been modified in the first two quarters of 2008.

"The results were surprising, and not in a good way," Dugan told a gathering in Washington at the Office of Thrift Supervision's annual conference.

According to the OCC statistics, which looked at loans modified in the first quarter and second quarter of 2008, 36% of borrowers had re-defaulted by being more than 30 days past due and after six months the rate was roughly 56%.

After eight months, 58% of borrowers had re-defaulted. The OCC tracked the number of borrowers that re-defaulted on their mortgages after the modification was completed.

Dugan acknowledged that not all re-defaulted mortgages go to foreclosure, but he argued that the number was very high. He said he was not sure why there was such a high level of re-default, pointing out that it may be because the modifications were not low enough to be affordable.

Additionally, Office of Thrift Supervision director John Reich on Monday said rather than modifying mortgages, focusing on job creation might be a better use of federal dollars. Reich's statement clashed with Federal Deposit Insurance Corporation Chairwoman Sheila Bair over the best way to use government funds to end the financial crisis. Read more on the failure of many mortgage modifications.

Meanwhile, Credit Suisse said that if home prices continue to spiral down, more and more mainstream borrowers could end up walking away from their homes, especially if the mortgage is worth more than the value of the house.

"Thus far, the population of subprime borrowers in the U.S. is relatively small," the analysts wrote. "However, the severe recession that appears more and more likely, coupled with the collapse of confidence in housing and resultant foreclosures and the impact on credit scores, risks transforming the U.S. into a subprime society."

Adding to the headwinds, a deteriorating labor market will put more pressure on foreclosures, they said.

Source / MarketWatch

Thanks to Diane Stirling-Stevens / The Rag Blog

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Roger Baker : Getting a Read on this Economy Business

'We can now observe that the creation of unlimited credit by unregulated investment banks, together with peak/near peak oil causing a steep oil price rise, is together enough to trigger a panicky deflationary spiral that has its own complex dynamics.'

By Roger Baker / The Rag Blog / November 10, 2008

See 'Beijing holds key to prosperity' by Henry C K Liu, Below.

Fossil fuel limits are an important key to insight, but are not sufficient for understanding the current world economic crisis.

Future oil production can be calculated almost with the precision of the laws of physics. The world is now about to decline in the production of the vital fluid that powers almost all world transportation, with no viable replacement available any time soon.

This predictable causal factor is in sharp contrast to its consequences; the impact of fossil fuels limitation in affecting the global economy. Here more traditional economic thinking can still be helpful in filling out the details of how events are likely to play out.

I will list some examples of sources that are both conscious and unconscious of peak oil, but all of which are useful, in my opinion.

We can now observe that the creation of unlimited credit by unregulated investment banks, together with peak/near peak oil causing a steep oil price rise, is together enough to trigger a panicky deflationary spiral (read run on the world's banks) that has its own complex dynamics. The economic results are partly due to mass psychology and are accordingly hard to predict.

A useful source of economic insight from a social impact perspective is Loretta Napoleoni's "Rogue Economics,” which anticipates and documents a global rebirth of decentralized grassroots tribalism as a result of the current unregulated and rapacious corporatism. She may be right, and this is an important concept linking economics, politics and sociology.

One clearly observable economic pattern is that oil now acts as an economic limit to the expansion of the global economy. If and when the global economy recovers, oil prices will soon rise enough to restrain the recovery, much like the automatic governing mechanism of a classic steam engine, when it is set so as to increasingly restrain its top speed.

Wrote Tom Whipple:

...In the three-way struggle among worldwide oil depletion, new oil production projects, and the global recession, we have a pretty good handle on depletion and new projects, but appreciation of the depth and length of the recession is not well understood. What was widely believed last year to be a couple of weak quarters is now generally acknowledged to be the worst economic slump since World War II. Optimists, especially on Wall Street and in Detroit, are saying that by 2010, or 2011, or 2012, the recession should be over and economic growth will return. There is great faith that the world's governments can manage a recovery by lowering interest rates, pumping trillions of government money into the financial system, loaning money to failing corporations, and instituting massive stimulus packages. Some are not so sure...

There are many good economic analysts on the internet, and a growing minority now see the big picture in a way that incorporates peak oil. The Post Carbon Institute is a leader in providing good big picture information.

Check out their "Reality Reports" and the splendid economic lecture series by Chris Martenson. Here is one interview with Martenson.

Check out ASPO-USA . And also the Oil Drum and Energy Bulletin.

Here are a few other fossil-fuel-conscious sources I like: Matt Simmons; Jim Paplava, et al of Financial Sense; and James Howard Kunstler .

That said, it is also important to understand the valid conclusions of the best economists who do not focus much on the economics of peak oil. Some of the best independent reporting and geopolitical and economic analysis is to be found on the Asia Times Online website. It is the first place I turn for good independent reporting on affairs in Asia and the Mideast, although its writers are not always in agreement:

Here for example is a piece explaining the poor ability of classic Keynesian economic stimulation (like that now being advocated by Paul Krugman) to revive the US economy. The economic crisis is global in nature, so US-based remedies are not a good match, but there are other problems. See this and other stuff by David Goldman on the ATO blog.

To my way of thinking, Henry C. K. Liu is one of the keenest economic observers anywhere. Asia Times Online archives much of Liu's writing.

Below Liu says that China and its acceptance of non-market based economics is the key to any potential global economic recovery. To save the global economy and to keep it from getting dragged down into the unregulated quagmire the investment banks have generated, the Chinese will have to dump market capitalism. Here are some details, by Henry C.K. Liu, from the last part of a much longer two part article, typified in its thinking by this snip:

…China's ability to rescue the stalled global economy through reform in trade is extremely limited. The best way for China to contribute to stabilizing the world economy is to develop the country's domestic market and to increase the purchasing power of the population through a progressive income policy with full employment. It fact, China needs to adopt a bottom-up development strategy of direct assistance to people, the opposite of the US top-down development strategy of
assistance to institutions…

China and the Global Crisis:
Beijing holds key to prosperity
By Henry C K Liu / December 6, 2008

[….]

...China needs to recognize that market capitalism with central banking is not the most effective or efficient system to achieve full employment with rising wages. China needs to adopt a full employment policy as a national objective. A socialist system must provide every able citizen who wants to work opportunity for work. China is still grossly underdeveloped economically. With so much to do to bring China into a modern nation, it is hard to imagine a country like China not having a labor shortage. China must create an economic system that puts full employment as a top priority, not allow itself to be trapped by neo-liberal market fundamentalism of using unemployment to keep wages low to protect the value of money.

What China must do

With recurring capitalistic market crashes, the world is beginning to realize that market capitalism can destroy wealth as fast as it can create wealth. While keeping markets as an auxiliary mechanism for efficient allocation of resources, China must rely on central planning to direct investment in an orderly manner in sectors need for national development, such as modernization of food production and distribution. It must rely on planning to direct investment towards physical and social infrastructure, in universal education and universal health care. These investments must be increased and accelerated with much higher targets for each five-year plan.

To do this, China must develop more respect for and reliance on domestic indigenous talent and make more opportunities available to young people. Brain drain is the greatest loss China has suffered in the past century. In recent years, a massive loss to other countries of well-educated people has blighted the Chinese finance sector. Chinamust develop policies to stop further brain drain and to revert the flow of human resources back into China.

China must invest more on domestic development than on exports, particularly on rural development. It must not look for growth through cross-border wage arbitrage by foreign capital. Wage income is the only reliable index of growth for any economy. Export-led growth is unsustainable for meeting the needs of an economy that comprises one fifth of the world's population, particularly when export earning is denominated in fiat dollars that cannot be spent in China domestically.

Modernization is not merely blindly copying the advanced economies. China must avoid excessive faith in market forces while taking care not to ignore them. It must set a framework in which market forces that create benefits for the community are encouraged and those that create costs to community are penalized.

At its root, China is an agricultural economy. Chinese leaders have depicted the new socialist countryside program as having higher productivity, improved livelihood of farming families, a higher-degree civilization with greater socialist ethics, a clean environment and democratic management in the 11th Five-Year Program (2006-2010) period, showing the resolve of China's leadership to spread the fruits of reform to its rural areas, especially poor regions.

The central government allocated 13 billion yuan in 2007 to its poverty reduction program, 13 times that in 1980 and 37.2% of which was earmarked for the autonomous regions of Inner Mongolia, Xinjiang, Ningxia, Guanxi and Tibet, and provinces with large ethnic populations, such as Guishou, Yunan and Qinghai.

While this a good start, it is woefully inadequate. What is needed is 100 times the amount ($160 billion) every year until these regions reach self-sustaining prosperity. After all, a nation that holds close to $2 trillion in foreign exchange reserves, should not tolerate poverty anywhere within its borders.

After more than 30 years of economic reform, the poverty rate in rural areas has dropped to less than 3%. But that still leaves 40 million poor due to China's big (1.3 billion) population. China also has 26 million people who live at subsistence level beyond the reach of the poverty reduction program. The Chinese government has turned more attention on its rural poor by reducing various taxes and promoting free universal compulsory education. The agricultural tax, which has had a history of 2,600 years, was rescinded completely in 2006 and an increasing number of children in rural areas gained access to free compulsory education.

China also has begun to lower the price of medical services by reinstituting a rural cooperative medical service system. Still such a timid anti-poverty program for the world's largest creditor nation is a glaring contradiction. Yet this program is too timid in allowing poverty to continue to be a drag on economic growth.

China has since unveiled ambitious plans to help the 800 million people living in the countryside catch up economically with city dwellers. More rural investment and agricultural subsidies and improved social services are the main planks of a policy to create a "new socialist countryside," which President Hu has declared as a national priority.

The new policy regards constructing a new socialist countryside an important historic task in the process of China's modernization. "The only way to ensure sustainable development of the national economy and continuous expansion of domestic demand is to develop the rural economy and help farmers to become more affluent," the policy asserts. It aims to modernize the countryside, which has fallen behind in China's development in recent decades.

From 2006 until 2010, the government promises sustained increases in farmers' incomes, more industrial support for agriculture and fasterdevelopment of public services. Yet current plans remain timid in relation to the size of the problem and must be redoubled to prevent rural poverty from emerging as a drag on national economic development.

Local governments have been warned that they will be held to account for ineffective administration and misallocation of precious resources on false symbol of prosperity. The new measures promise greater protection and improved democracy in rural areas, and local government bureaucracies will be streamlined to increase cost effectiveness. Instead of gauging progress by GDP growth, attention should be paid to income growth, particularly farm income growth. Income is all; without income, all else is mirage.

In part, the new socialist countryside policy is driven by concerns about China's ability to sustain food self-sufficiency going forward as a global crisis of food is fast building. The past 25 years of rapid urbanization have seen much farmland turned into urbanized development zones, and more than 200 million farmers have migrated to the cities to serve export sector needs.

The new food policy proposes that China should remain "basically self-sufficient" in grain. It promises increased subsidies for farmers growing grain, as well as continued revenue "bonuses" for local governments in the grain belt, and says the government will continue setting minimum prices for grain purchases.

With 800 million people living in the countryside, the only way to ensure sustainable development of the national economy and continuous expansion of domestic demand is to develop the rural economy and help farmers to become more affluent than city dwellers to reverse the migration trend. The program also stressed that construction of the new countryside should focus on practical development and involve democratic consultations. Most of all, ample farm credit must be provided by the central government to help poor rural region to kick start development.

Chinese agriculture is at a crossroads as the benefits of the agricultural changes first ushered in late 1978 have lost momentum. Grain production, which reached record levels in 1984, dropped suddenly in 1985 and is only now beginning to push above 1984 levels. The area under cultivation, already small compared with the population, is steadily declining as new housing, schools, factories and roads nibble away at rice paddies and wheat fields. State investment in agriculture has dropped precipitously over the past two decades.

China's exposure to the international financial crisis is primarily a result of its high dependency on exports, which in turn is the result of high dependency on financial market forces to allocate the use of capital, particularly foreign capital.

Markets seldom direct resources where they are needed, only to where profit is easiest and highest. Market forces when unregulated and undirected always lead to uneven and sometime undesirable development. Much of China's economic dilemma today is the result of blind acceptance of the Hayekian efficacy of market forces. The reliance of a labor market to direct economic development is counterproductive. China needs to understand that labor is not a commodity but a national resource. The value of labor should not be allowed to be set by supply and demand in a labor market. It should be set by national policy around which markets are organized to fulfill it. This is the fundamental flaw of China economic reform for the past three decades.

China's ability to rescue the stalled global economy through reform in trade is extremely limited. The best way for China to contribute to stabilizing the world economy is to develop the country's domestic market and to increase the purchasing power of the population through a progressive income policy with full employment. It fact, China needs to adopt a bottom-up development strategy of direct assistance to people, the opposite of the US top-down development strategy of assistance to institutions.

This means a strategy to set the increase of personal income and social benefits as a goal around which the economic system is organized, rather than letting personal income and social benefits be the outcome of imported dysfunctional economic systems such as predatory neo-liberal cowboy market capitalism.

[Henry C K Liu is chairman of a New York-based private investment group. His website is at http://www.henryckliu.com/.]

Source / Asia Times Online

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Robert Jensen : Real Hope: Facing Difficult Truths About an Uncertain Future

Photo: 'Contemplating an Uncertain Future' by Phil Bebbington.
'If there is to be a decent future for humanity -- indeed, any future at all -- we must face painful realities with intellectual honesty and moral strength.'
By Robert Jensen / The Rag Blog / November 18, 2008

Expressions of hope are only as truly hopeful as the honesty of the assessment of reality from which they emerge. Conjuring up hope rooted in a denial of reality can only deepen despair in the long run.

That’s why much of the political rhetoric of the past two years may prove not only illusory but counterproductive. So, with much talk of change and hope in the air, now is the time to articulate an authentic sense of hope, one that is realistic. If there is to be a decent future for humanity -- indeed, any future at all -- we must face painful realities with intellectual honesty and moral strength. We can celebrate the victories we achieve along the way but it’s just as crucial that we stay focused on what remains to be understood and accomplished.

In that hopeful spirit I offer these observations with the goal of generating productive discussion among organizers and activists who oppose the hierarchy and injustice inherent in patriarchy, white supremacy, imperial nationalism, and an increasingly predatory capitalism, and who are concerned about the fragile state of an ecosystem that has been seriously compromised by human action.

--Within my lifetime (the next 25 years or so), we will see dramatic changes in this country and the world that likely are the beginning of a systemic collapse, economically and ecologically. This collapse is already underway in some parts of the world, producing suffering beyond description for the most vulnerable on the planet. But we can expect this eventually to extend in more dramatic fashion to the entire planet, probably within the lifetime of our children (the next 50 to 75 years). Definitive predictions are impossible, but it is reasonable to assume that the destructive forces set in motion by the hierarchal systems that define our world are close to, or perhaps already beyond, the point of no return.

--This country’s political and cultural institutions are not equipped to deal with this coming collapse, and there is very little chance that political organizing rooted in the necessary radical analysis, in the time available, can alter that to any significant degree. We are not prepared for the coming shift out of the current high-energy/high-technology phase, and nothing in recent institutional responses (or non-responses) to the clear signs of this suggests we will be prepared in time.

--These claims often are, and will continue to be, dismissed by many as doomsday thinking, which should not surprise us; it is painful to face these realities. But we cannot expect to prosper by ignoring reality. While there is much grief in confronting this, any hope we have for that decent future demands that we face the grief.

--Given this likely trajectory of the coming decades, more of our political organizing should focus on what comes after this collapse (recognizing that a “collapse” will not be a neatly defined process that unfolds in a clear and bounded time frame). What are the ways of thinking and the social organizations we will need? What sense of self-and-others will help us cope with a dramatically different world? For most people, nothing in our everyday lives is preparing us for this different reality, and it’s long past time we started thinking collectively about this. What ideas and skills -- what conception of what it means to be a person, what practical knowledge for living -- will be necessary?

--Focusing on these questions doesn’t mean we should abandon work on existing campaigns that address war, poverty, sexual violence, racism, or any of the other existing inequalities and injuries that rightly demand our attention. To give up on those projects in the face of widespread suffering in the here-and-now would be to abandon our humanity. But all of those activities should be planned and executed with this larger framework and longer trajectory in mind. The ongoing social-justice work will inform our thinking on these questions, but significant energy should be shifted to long-term projects.

--None of this should be confused with the apocalyptic thinking that posits, or even celebrates, the end of the world. Instead, these questions are central to the careful planning we will need if there is to be hope for that decent future. Such a future is not guaranteed, and we have to face the possibility that humans may not have the capacity to create it. But we define ourselves by our commitment to the work that makes it possible to imagine that future.

All of this is in flux and open to constant rethinking. Like most of the important choices we must make, we are working not from definitive data but from our best guesses, hunches, informed speculation. While we can’t predict the future with certainty, we still must choose. To assume existing high-energy/high-technology systems will continue indefinitely, simply because many of us in the First World have become accustomed to material comfort and would like this to continue, is delusional.

We can make this work joyful, as long as we are willing to face the grief. It is possible to face harsh realities and remain hopeful. Indeed, embracing the joy fully requires that we face the grief, just as embracing hope requires that we face reality.

Robert Jensen is a journalism professor at the University of Texas at Austin and board member of the Third Coast Activist Resource Center. His latest book, All My Bones Shake, will be published in 2009 by Soft Skull Press. Jensen can be reached at rjensen@uts.cc.utexas.edu and his articles can be found online here. This article was also posted at Blog for Our Future.

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