Friday, May 22, 2009

The Collapse of the Neoliberal Model

The Collapse of the Neoliberal Model
Where Russia Went Wrong


Last week Izvestiya published an interview with former Premier Yevgeny Primakov, now president of the Chamber of Commerce and Industry. (Johnson’s Russia List published a translation on May 8). The discussion centered on a universal problem – what China and other Asian countries, as well as OPEC and Europe should do with the export surpluses and proceeds mounting up in their central banks from mortgaging or selling off their real estate and industry. Or to put matters in retrospect, what should they have done to avoid the neoliberal monetarist ideology that governments should do nothing at all with these surpluses, not even use them to fuel economic growth.

If U.S. diplomats had their way, countries would simply let their foreign exchange reserves accumulate in the form of loans to the United States, in the form of Treasury bonds and other securities. Mr. Primakov has long opposed what his interviewer called “the fetishization of the Stabilization Fund – our beloved ‘piggy bank.’” Urging that it be spent on “primary needs,” to buy tangible capital goods, undertake infrastructure investment and finance imports to rebuild Russia’s dismantled manufacturing sector, he explained, “I was always opposed to having the Stabilization Fund considered something saved for an emergency. Money needs to be spent inside the country. Naturally not all of it. Some part should certainly be kept as a reserve.” But it was Vladimir Putin’s own “initiative to divide the Stabilization Fund into the Reserve Fund and the Fund for Well-Being. The latter was to be used to develop the economy and for social needs. It is too bad that they did not get to it in time.”

Ever since the Asian financial crisis of 1997, countries that have built up foreign exchange reserves have found themselves targets of global raiders. The tactic has been to sell a currency short, that is, to promise to deliver a few hundred million (or nowadays a few billion dollars) of it to a buyer (usually the central bank) near the current price, and then drive down the exchange rate by selling. The central bank tries in vain to absorb the selling wave, until finally its reserves are exhausted and the currency depreciates. This is how George Soros broke the Bank of England – and what he denies having done in Malaysia during the 1997 crisis.

Under Prime Minister Dr. Mahathir Mohammed, Malaysia protected itself by not making its currency available for foreign speculators to buy and cover their short-sale position. But most other countries have passively built up reserves in an attempt to outspend potential raiders. Today, however, underlying trends are using up these reserves. The global financial crisis has ended the real estate bubble that enabled many countries to cover their trade deficits by selling off their real estate or simply taking out foreign-currency mortgages against it. The Baltics and other post-Soviet countries in particular have been financing their trade deficits by fostering a property bubble that has led real estate owners to borrow mortgage credit from Western banks. In the absence of putting in place a viable domestic banking system, Scandinavian, Austrian and other Western banks are the only institutions able to create credit. Now that the global real estate bubble has burst, this foreign exchange credit is no longer forthcoming. The financial End Time has arrived. Rather than facing the new state of affairs – chronic trade deficits are now over-layered with heavy foreign-debt service. Countries that have built up foreign reserves are running them down.

Many countries are trying to delay the Day of Judgment by borrowing from the IMF, dissipating the proceeds by subsidizing capital flight by investors and speculators who can see that exchange rates for chronic trade-deficit countries are about to plunge steeply. Russia has joined in expending its foreign-exchange reserves to stabilize the ruble in the face of capital flight and foreign speculative selling.

In retrospect this appears to have been inevitable, and indeed was widely foreseen by critics of the neoliberal Washington Consensus. The reserves built up during the oil-price run-up last year and the recent boom in minerals prices are being spent without having used the proceeds to develop its industry so as to replace imports and develop export markets for what used to be a high-technology economy prior to the Yeltsin “reforms” (that is, dismantling of industry). Russia continued to rely almost exclusively on raw materials and oil exports. “In our country,” explained Mr. Primakov, “40% of GDP was created and is created through raw material exports. The share of industrial enterprises engaged in development and introduction of new technologies barely comes to 10%.” The problem is that having given away its mineral resources and other public enterprises to insiders and their cronies, Russia has relied on what they choose to leave in the country from their exports and sale of shares in their companies. “The prolonged refusal to inject the capital being built up into the real economy and its direct investment in American treasury securities instead of its use inside the country to diversify the economy. … As a result, Russia will most likely come out of the recession in the second echelon – after the developed countries.”

The alternative, Mr. Primakov said, would have been to use the Stabilization Fund “to switch the economy to the innovation track and for its restructuring. ‘Patching the holes does not help for long.’” But he the then-minister of economics, German Gref, fought off attempts “to cannibalize the Stabilization Fund.” Under the kleptocracy the money was left to be stolen.

The problem is where to go from here. Neoliberal “monetarist” ideology conjures up the threat of inflation to deter public spending. This IMF and World Bank propaganda blocked Russia from investing in industry during the Yeltsin disaster of the mid-1990s. “Fear of inflation,” Mr. Primakov explained, “was named as the main reason that huge amounts of money lay idle. They said that inflation would soar if what had been built up began to be spent. At one of the representative conferences, I asked: ‘What kind of inflation can there be in building roads? The work would just spur on production of concrete, cement, and metal ...’ But our financial experts have a monetarist view of inflation. They are afraid of releasing an additional money supply into circulation. But in reality inflation rises much more strongly from that fact that we have colossal monopolization.” Trade dependency leads the ruble’s exchange rate to weaken, raising the price of imports and thus aggravating the inflation – precisely the opposite of what Washington Consensus orthodoxy insists.

I myself have heard Scandinavian and other European officials make this argument in almost the same words, and it has persuaded many Third World governments to do nothing with their raw-materials export proceeds but “save for a rainy day,” not promote domestic self-sufficiency in food and consumer goods. The argument seems maddeningly stupid, because it pretends that all government spending is inherently inflationary, adding to the spending stream without producing any production to absorb it. The practical effect is to block countries from growing in the way that the United States and other developed nations have done – by investing in infrastructure and other capital formation, with the government providing basic infrastructure at cost or even freely (as in the case of roads) so as to minimize the cost of living and doing business. Instead of having investment in place to show for the foreign exchange earned by exporting raw materials (and selling off ownership of national assets), countries that follow this policy are now seeing their reserves drained rapidly. And as far as government spending is concerned, the economic collapse is increasing public budget deficits after all!

Contrast this behavior with Pres. Obama’s February 17 economic stimulus plan for the United States. When the Izvestiya interviewer asked Mr. Primakov what he thought about it, he noted that: “In America investments in ‘intellect’ have been increased – in science, progressive technologies, and education, and expenditures for medicine are rising. ... Doesn’t it seem to you that our package of anti-crisis measures is less ambitious? … This law should be considered a plan of investment related to the American economy and society entering the 21st century and a new technological platform of competitiveness. That is why expenditures for science have been increased. The same thing, undoubtedly, with human capital.”

But that is not the Russian strategy today, Mr. Primakov complained. Russia has been living in the short run. “The TPP (Chamber of Commerce and Industry) conducted a poll in 720 firms. Only a third of the managers said that they associate getting out of the crisis with producing new output. The rest are counting on staff cutbacks. If the ministries are given the assignment of reducing expenditures at their discretion, the first thing they sacrifice is scientific research and experimental design development. However, research and development should be classified as protected articles of any budget.”

So much for the free-market policy of automatic stabilizers and do-nothing government policy, leaving choice in the hands of the nation’s financial oligarchs. The situation calls for structural change, coordinated by the government. “If a plane is having trouble, the autopilot cannot handle an unusual situation. Only the personal skills of the pilot can save the ship. It is similar with the economy. Autopilot does not work in extreme conditions. … Self-regulation of the economy disappears as a factor.”

When asked about the oligarchs keeping their funds abroad rather than investing them in domestic industry, Mr. Primakov replied that Russian officials did not “take into account that banks’ interests do not coincide with the interests of the real sector of the economy. … It should have been explained that after receiving state support, in using it banks no longer [should] act as commercial structures but as agents of the state. It should have been watched to make sure that the state capital was not commingled with the banks’ other assets in common accounts but was marked off with a red line. But that was not done. Probably some people were lobbying for the banks’ interests at that point. And the bankers hurriedly began to convert the rubles into hard currency and export it abroad and build up their capitalization” instead of “extend[ing] credit to the real sector of the economy.” Oversight was done poorly, and Russia did not even use its public funds to finance capital investment. But when it comes to what to do at this late point, Mr. Primakov acknowledged, “Punishing the banks for what happened means destroying them.”

The problem is how to restructure the financial system to make it serve the objectives of industrial growth rather than merely facilitating capital flight. Throughout the world financial interests have taken control of government and used neoliberal policies to promote their own gain-seeking – financial gains without industrialization or agricultural self-sufficiency. Betting against one’s own currency is more remunerative than making the effort to invest in capital equipment and develop markets for new output. So unemployment and domestic budget deficits are soaring. The neoliberal failure to distinguish between productive and merely extractive or speculative forms of gain seeking has created a travesty of the kind of wealth creation that Adam Smith described in The Wealth of Nations. The financialization of economies has been decoupled from tangible capital investment to expand employment and productive powers.

Central to any discussion of financialization is the fact that credit creation has been monopolized in the United States and Britain for their own national gain. What makes this interview so relevant is that Mr. Primakov is speaking as head of Russia’s shrunken manufacturing sector. Russia “practically pushes big business outside our borders,” Mr. Primakov noted, “to borrow money from banks there in places where the interest rates are incomparably lower.” Just as the nation was becoming underdeveloped industrially, so it and other post-Soviet economies have failed to create domestic financial institutions to provide the credit that is needed to finance circulation between producers and consumers. As a result, these countries are simply fooling themselves to imagine “that credit can continue to be borrowed abroad ‘for the crisis.’ It is not out of the question that for the first time in 10 years, the state itself will even go begging for a loan again.” So a byproduct of today’s crisis will be to put the world outside of the creditor nations on rations, as it were.

Mr. Primakov was asked what he thought of Moscow Mayor Yuri Luzhkov’s tracing “the sources of the present Russian crisis [to] the 1990s, when the liberal government permitted the ‘stealing, squandering, and distribution of natural resources and the largest sectors of industry to those who could not support their development.’” He replied that there were many smart managers among the oligarchy’s ranks, but acknowledged that “It is a different question that in buying up enterprises (mainly raw material ones) for a song and obtaining mega-profits, many from the beginning preferred not to raise the efficiency of production, but to skim off the cream. … Why think about some processing of raw materials if they bring in big money anyway in natural form? The state should have entered that niche long ago. To have done everything to make certain that some of the petrodollars were pumped into science-intensive industry.”

Contrasting Russia’s failure to industrialize with that of China and its anticipated 8% economic growth in 2009, Mr. Primakov noted: “China exports ready-made products, while in our country a strong raw material flow was traditional.” Now that Western economies are shrinking, China is “moving a large part of the ready-made goods to the domestic market. At the same time, they are trying to raise the population's solvent demand. On this basis the plants and factories will continue to operate and the economy will work. We cannot do that. If raw materials are moved to the domestic market, consumers of such vast volumes will not be found.” Increasing domestic purchasing power will “merely step up imports.” That is the price that Russia is now paying for having failed to sponsor “structural changes in the economy.”

I have cited these long quotations because they have been made by a man who once had a chance to steer Russia along different lines than the economically suicidal death trap promoted by the Harvard Boys and their Washington Consensus. It is the trap into which the Baltics and other countries have fallen. A decade ago Mr. Primakov proposed an alternative, based on a resource-rent tax to finance Russia’s re-industrialization. The government would have collected the “free lunch” of its raw materials sales proceeds in excess of their low costs of production. Instead of retaining the revenue in the public domain from the decades of capital investment that the Soviet government had made to develop its mineral, oil and gas resources, instead of using it to finance economic modernization, Russia simply gave it away to political insiders and let them sell off shares in these resources to foreign buyers on the cheap. Anatoly Chubais and his Western “free-market” backers promised that giving property to individuals in this way would transform them into forward-looking Western-style industrialists. Instead, it turned them into Westernized finance capitalists.

Wednesday, May 20, 2009

The Latest in Junk Economics

The Latest in Junk Economics: Marginalist Panaceas to Today's Structural Problems

by Michael Hudson

It looks like bookstores are about to be swamped this summer and fall by a forest of advice for which publishers gave respectable advances a year ago as the economy was going off the rails. Seeking to minimize the risk of cognitive dissonance, the marketing strategy seems to be to offer advice by well-placed or celebrity insiders on how to recover the kind of free lunch that American pension plans ­ and popular hopes for easy wealth ­have long assumed to be part of the natural law of economic growth, if only it can be better managed. The fantasy that people want to buy is that the happy 1981-2007 era of debt-leveraged price gains for real estate, stocks and bonds can be brought back. But the Bubble Economy was so debt-leveraged that it cannot reasonably be restored. This means that publishers have achieved the marketer¹s dream of planned obsolescence: Readers a year or so from now will have to buy a new slew of books as they feel hungry again from the lack of intellectual protein.

For the time being we are being fed Wall Street defenses of the Bush-Obama (Paulson-Geithner) attempt to re-inflate the bubble by a bailout giveaway that has tripled America's national debt in the hope of getting bank credit (that is, more debt) growing again. The problem is that debt leveraging is what caused our economic collapse. A third of U.S. real estate is now estimated to be in negative equity, with foreclosure rates still rising. So publishers have only a short time frame to sell the current spate of books before people wake up to the fact that attempts to renew the Bubble Economy will make the financial overhead heavier.

In the face of this stultifying financial trend, the book-buying public is being fed appetizers pretending that economic recovery simply requires more 'incentives' (a euphemism for special tax breaks for the rich) to encourage more 'saving,' as if savings automatically finance new capital investment and hiring rather than what really happens: Money is being lent out to create yet more debt owed by the bottom 90 percent to the economy's top 10 percent. Publishers evidently believe that the way to attract readers ­ and certainly to get reviews in t emajor mediam­ is to propose easy
solutions. The theme of most of this year¹s bubble books therefore is how we could have avoided the bubble 'if only's' If only there had been better regulation, for instance.

But to what aim? After blaming Alan Greenspan for playing the role of 'useful idiot' by promoting deregulation and blocking prosecution of financial fraud, most writers trot out the approved panaceas: federal regulation of derivatives (or even banning them altogether), a Tobin tax on securities transactions, closure of offshore banking centers and ending their tax-avoidance stratagems. But no one is going so far as to suggest going to the root of the financial problem by removing the general tax
deductibility of interest that has subsidized debt leveraging, taxing 'capital' gains at the same rate as wages and profits, or closing the notorious tax loopholes for the finance, insurance and real estate (FIRE) sectors.

Right-wing publishers are re-warming the usual panaceas such as giving more tax incentives to 'savers' (another euphemism for more giveaways to high finance) and a re-balanced federal budget to avoid 'crowding out' private finance. Wall Street's dream is to privatize Social Security to create yet a new bubble to feed off of. (Fortunately, such proposals failed during the Republican-controlled Bush administration as a result of a reality check in the form of taxpayer outrage after the bubble burst in 2000.)

What is not heard is a call to finance Social Security and Medicare out of the general budget instead of keeping their funding as a special regressive tax on labor and its employers, available for plunder by Congress to finance tax cuts for the upper wealth brackets. Yet how can America achieve industrial competitiveness in global markets with this pre-saving retirement tax and privatized health insurance, debt-leveraged
housing costs and related personal and corporate debt overhead? The rest of the world provides much lower-cost housing, health care and related costs of employee budgets ­ or simply keeps labor near subsistence levels. This is a major problem with today¹s dreams of a renewed Bubble Economy: They leave out the international dimension.

The latest panacea being offered is to rebuild America's depleted infrastructure. Alas, Wall Street plans to do this Tony Blair-style, by public-private partnerships that incorporate enormous flows of interest payments into the price structure while providing underwriting and management fees to Wall Street. Falling employment and property prices have squeezed public finances so that new infrastructure investment will take the form of installing privatized tollbooths over the economy's most critical access points such as roads and other hitherto public transportation, communications and clean water.

Surprisingly, one does not hear even an echo of calls to restore state and local property taxes to their Progressive Era levels so as to collect the 'free lunch' of land rent and use its gains over time as the main fiscal base. This would hold down land prices (and hence, mortgage debt) by preventing rising location values from being capitalized and paid out as interest to the banks. It would have the additional advantage of shifting the fiscal burden off income and sales (a policy that raises the
price of labor, goods and services). Instead, most reforms today call for
further cutting property taxes to promote more 'wealth creation' in the form of higher debt-leveraged property price inflation. The idea is to leave more rental income to be capitalized into yet larger mortgages and paid out as interest to the financial sector. Instead of housing prices falling and income and sales taxes being reduced, rising site values merely will be paid to the banks, not to the local tax authorities. The latter are forced to shift the fiscal burden onto consumers and business.

The problem is that this new wave of reformist books advocates merely marginal changes to deep structural problems. There are the usual pro forma calls to re-industrialize America, but not to address the financial debt dynamic that has undercut industrial capitalism in this country and abroad. How will these timid 'reforms' look in retrospect a decade from now? The Bush-Obama bailout pretends that banks 'too-big-to-fail' only face a liquidity problem, not a bad debt problem in the face of the economy's widening inability to pay. The reason why past bubbles cannot be recovered is that they have reached their debt limit, not only domestically, but also
the international political limit of global Dollar Hegemony.

What needs to be written about is what the marginalists leave out of account and what academic jargon calls ³exogenous² considerations, which turn out to be what economics really is all about: the debt overhead; financial fraud and crime in general (one of the economy's highest-paying sectors); military spending (a key to the U.S. balance-of-payments deficit and hence to the buildup of central bank dollar reserves throughout the world); the proliferation of unearned income and insider political dealing.

These are the core phenomena that 'free market' idea strippers have relegated to the 'institutionalist' basement of the academic economics curriculum.

For example, the press keeps on parroting the Washington line that Asians 'save' too much, causing them to lend their money to America. But the 'Asians' saving these dollars are the central banks. Individuals and companies save in yuan and yen, not dollars. It is not these domestic savings that China and Japan have placed in U.S. Treasury securities to the tune of $3 trillion. It is America's own spending ­ the trillions of dollars its payments deficit is pumping abroad, in excess of foreign demand for U.S. exports and purchases of U.S. companies, stocks and real estate. This
payments deficit is not the result of U.S. consumers maxing out on their credit cards. What is being downplayed is the military spending that has underlain the U.S. balance-of-payments deficit ever since the Korean War. It is a trend that cannot continue much longer, now that foreign countries are starting to push back.

Inasmuch as China's central bank is now the largest holder of U.S. Government and other dollar securities, it has become the main subsidizer of the U.S. payments deficit ­ and also the domestic U.S. federal budget deficit. Half of the federal budget's discretionary spending is military in character. This places China in the uncomfortable position of being the largest financier of U.S. military adventurism, including U.S. attempts to encircle China and Russia militarily to block their development as rivals over the past fifty years. That is not what China intended, but it is the effect of global dollar hegemony.

Another trend that cannot continue is 'the miracle of compound interest.' It is called a 'miracle' because it seems too good to be true, and it is ­ it cannot really go on for long. Heavily leveraged debts go bad in the end, because they accrue interest charges faster than the economy's ability to pay. Basing national policy on dreams of paying the interest by borrowing money against steadily inflated asset prices has been a nightmare for homebuyers and consumers, as well as for companies targeted by financial raiders who use debt leverage to strip assets for themselves. This policy is
now being applied to public infrastructure into the hands of absentee owners, who will build interest charges into the new service prices they charge, and be allowed to treat these charges as a tax-deductible expense. Banking lobbyists have shaped the tax system in a way that steers new absentee investment into debt rather than equity financing.

The irresponsible cheerleaders applauding a bubble economy as 'wealth creation' (to use one of Alan Greenspan's favorite phrases) would like us, their audience, to believe that they knew that there was a problem all along, but simply could not restrain the economy's 'irrational exuberance' and 'animal spirits.' The idea is to blame the victims ­homeowners forced into debt to afford access to housing, pension-fund savers forced to consign their wage set-asides to money managers for the large Wall Street firms, and companies seeking to stave off corporate raiders by taking 'poison pills' in the form of debts large enough to block their being taken
over. One looks in vain for an honest acknowledgement of how the financial sector turned into a Mafia-style gang more akin to post-Soviet kleptocrat insiders than to Schumpeterian innovators.

The cursorily reformist gaggle of post-bubble tomes assumes that we have reached 'the end of history' as far as big problems are concerned. What is missing is a critique of the big picture­ how Wall Street has financialized the public domain to inaugurate a neo-feudal toll booth economy while privatizing the government itself, headed by the Treasury and Federal Reserve. Left untouched is the story how industrial capitalism has succumbed to an insatiable and unsustainable finance capitalism, whose newest 'final stage' seems to be a zero-sum game of casino capitalism based on derivative
swaps and kindred hedge fund gambling innovations.

What have been lost are the Progressive Era's two great reforms. First, minimizing the economy¹s free lunch of unearned income (e.g., monopolistic privilege and privatization of the public domain in contrast to one's own labor and enterprise) by taxing absentee property rent and asset-price ('capital') gains, keeping natural monopolies in the public domain, and anti-trust regulation. The aim of progressive economic justice was to prevent exploitation ­ e.g., charging more than the technologically necessary costs of production and reasonable profits warranted. This aim had a fortuitous byproduct that made the Progressive Era reforms seem likely to
conquer the world in a Darwinian evolutionary manner: Minimization of the
free lunch enabled economies such as the United States to out-compete others
that didn't enact progressive fiscal and financial policy.

A second Progressive Era aim was to steer the financial sector so as to fund capital formation. Industrial credit was best achieved in Germany and Central Europe in the decades prior to World War I. But the Allied victory led to the dominance of Anglo-American banking practice based on loans against property or income streams already in place. Today's bank credit has become decoupled from capital formation, taking the form mainly of mortgage credit (80%), and loans secured by corporate stock (for mergers, acquisitions and corporate raids) as well as for speculation. The effect is to spur asset-price inflation on credit, in ways that benefit the few at the
expense of the economy at large.

The problem of debt-leveraged asset-price inflation is clearest in the post-Soviet 'Baltic syndrome,' to which Britain's economy is now succumbing. Debts are run up in foreign currency (real estate mortgages in the Baltics, tax-avoidance funds and flight capital in Britain), without exports having any prospect of covering their carrying charges as far as the eye can see. The result is a debt trap ­ chronic austerity for the domestic market, causing lower capital investment and living standards without hope of recovery.

These problems illustrate the extent to which the world economy as a whole has pursued the wrong course since World War I. This long detour has been facilitated by the failure of socialism to provide a viable alternative. Although Russia's bureaucratic Stalinism got rid of the post-feudal free lunch of land rent, monopoly rent, interest and financial or property-price gains, its bureaucratic overhead overpowered the economy in the end. Russia fell. The question is whether the Anglo-American brand of
finance capitalism will follow suit from its own internal contradictions.

The flaws in the U.S. economy are tragic because they are so intractable, embedded as they are in the very core of post-feudal Western economies. This is what Greek tragedy is about: a tragic flaw that dooms the hero from the outset. The main flaw embedded in our own economy is rising debt in excess of the ability to pay is part of a larger flaw: the financial free lunch that property and financial claims extract in excess of a corresponding cost as measured in labor effort or an equitably shared tax burden (the classical theory of economic rent). Like land seizure and insider privatization deals, such wealth increasingly can be inherited, stolen or obtained by political corruption. Wealth and revenue extracted via today¹s finance capitalism avoids taxation, thereby receiving an actual fiscal subsidy as compared to tangible industrial investment and operating profit. Yet academics and the popular media treat these core flaws as 'exogenous,' that is, outside the realm of economics analysis.

Unfortunately for us ­ and for reformers trying to rescue our post-bubble economy the history of economic thought has been suppressed to give an impression that today¹s stripped-down, largely trivialized junk economics is the apex of Western social history. One would not realize from the present discussion that for the past few centuries a different canon of logic existed. Classical economists distinguished between earned income (wages and profits) and unearned income (land rent, monopoly rent and interest). The effect was to distinguish between wealth earned through
capital and enterprise that reflects labor effort, and unearned wealth from
appropriation of land and other natural resources, monopoly privileges
(including banking and money management) and inflationary asset-price 'capital' gains. But even the Progressive Era did not go much beyond seeking to purify industrial capitalism from the carry-overs of feudalism: land rent and monopoly rent stemming from military conquest, and financial exploitation by banks and (in America) Wall Street as the 'mother of trusts.'

What makes today's bubble different from previous ones is that instead of being organized by governments as a stratagem to dispose of their public debt by creating or privatizing monopolies to sell off for payment in government bonds, the United States and other nations today are going deeply into debt simply to pay bankers for bad loans. The economy is being sacrificed to reward finance, instead of finance subordinating and channeling finance to promote economic growth and lower the economy-wide cost structure to remain viable. Interest-bearing debt is weighing down the economy and causing debt deflation by diverting saving into debt payments
instead of capital investment. Under this condition 'saving' is not the solution to today's economic shrinkage; it is part of the problem. In contrast to the personal hoarding of Keynes's day, the problem is the financial sector's extractive power as creditor instead of clear the slate by wiping out the economy's bad-debt overhang in the historically normal way, by a wave of bankruptcy.

Today, the financial sector is translating its affluence (at taxpayer expense), into the political power to pry yet more public infrastructure away from state and local communities and from the public domain at the national level, Thatcher- and Blair-style as it is sold off to absentee buyers-on-credit to pay off public debt (while cutting taxes on wealth yet further). No one remembers the cry for what Keynes called 'euthanasia of the rentier.' We have entered the most oppressive rentier epoch since feudal European times. Instead of providing basic infrastructure services at cost or subsidized rates to lower the national cost structure and thus make it more affordable ­ and internationally competitiv ­ the economy is being turned into a collection of tollbooths How strange that this year's transitory wave of post-bubble books fails to place the financialization of the U.S. and global economies in this long-term context.

Tuesday, May 12, 2009

Make Iceland Pay for Incompetent British Bank Deregulation!

Gordon Brown Spills the Beans on the IMF


Last month the G-20 authorized the International Monetary Fund to increase its loan resources to $1 trillion. It’s not hard to see why. Weakening currencies in the post-Soviet states threaten to raise default rates on foreign-currency mortgages as collapse of the Baltic real estate bubble drags down Swedish banks, while the Hungarian property plunge threatens Austrian banks. It seems reasonable to infer that creditor-nation banks hope to be bailed out. The IMF is expected to lend the Baltic, central European and other debtor-country governments money to pay them. These hapless debtor economies are then to follow IMF “conditionalities” to squeeze enough money out of their populations to pay foreign creditors – and repay the Fund by imposing yet more onerous taxes on their labor and industry, making them even more high-cost and therefore pushing them even further into trade and credit dependency. This is why there have been so many riots recently in Latvia, Lithuania, Estonia and Ukraine, as was the case for so many decades throughout the Latin American countries that introduced the term “IMF riot” to the global vocabulary.

For fifty years the IMF has organized such payouts to creditor nations. Loans are made to debtor-country governments to “promote exchange-rate and price stability.” In practice this means pouring tens of billions of dollars into currency markets to make bad gambles against raiders. This is supposed to avert the beggar-my-neighbor nationalism and financial protectionism that aggravated depression in the 1930s. But the practical effect of IMF lending is to demand that debtor countries impose onerous IMF “conditionalities” that stifle their domestic markets. This is why the IMF was left with almost no customers until last year’s debt crisis deranged the world’s foreign exchange markets.

It is supposed to be merely incidental that the largest IMF shareholders, the United States and Britain, happen to be the major creditor nations and their banks the main beneficiaries of IMF loans. But in a Parliamentary question-and-answer session on May 6, Britain’s Prime Minister Gordon Brown spilled the beans. Under pressure for his notorious “light-touch regulation” as Chancellor of the Exchequer (1997-2007), he undid half a century of rhetorical pretense by announcing that he was pressuring the IMF to bail out Britain in its nasty dispute with the Icelandic owners of a British bank that went under. He was in a position to know the nitty-gritty of who owed what and which nation’s monetary authorities were responsible for which banks. So when he said that he was strong-arming the IMF and other organizations to force Iceland’s government to pay for his own government’s mistakes, he must have known this was breaking the unwritten law of pretending that the IMF is not the servant of creditor nations in bilateral disputes with smaller economies.

Here’s the background. Mr. Brown and his New Labour predecessor Tony Blair have saddled British taxpayers with a generation of payments to pay for their decade of deregulating London’s financial sector. Bad mortgage lending led to the failure first of Northern Rock and then the Royal Bank of Scotland, whose ambitious junk-mortgage program had made it the world’s largest bank. At $3.8 trillion before it collapsed, it was nearly twice the size of Britain’s $2.1 trillion gross domestic product (GDP). (For a review of New Labour’s deregulatory policies see Philip Augar, Chasing Alpha: How Reckless Growth and Unchecked Ambition Ruined the City's Golden Decade [2009].) So one can understand why Mr. Brown was flailing around to blame someone for New Labour’s “Don’t see, don’t ask” policy.

Last autumn one of Iceland’s most reckless banks, Landsbanki, announced that it had made so many bad gambles that its loans and investments could not cover what it owed its depositors. It had drawn many deposits from abroad by setting up foreign branches, including Icesave in Britain. And in a striking variation from normal practice, these branches were not incorporated as separate affiliates, which would have led them to be regulated by local British authorities. As branches of the Icelandic head office, Icesave was regulated only by Icelandic authorities – which were as thoroughly neoliberalized as those of Britain, and didn’t really have a clue as to what was going on.

When Icesave went broke in October, British monetary authorities panicked. Mr. Brown sought above all to prevent its owner, Landsbanki, from doing what Lehman Brothers had just done on Sept. 14 when its New York office emptied out the funds in the account of its London affiliate just before the U.S. firm declared bankruptcy. Trying to grab whatever Icelandic assets he could, Mr. Brown overreacted (hardly a new experience for him). Responding far beyond Icesave itself, he resorted to anti-terrorist legislation passed in 2001 in the wake of the 9/11 attack on New York’s World Trade Center to freeze Icesave’s accounts – and also those of other banks in Britain owned by Iceland. Evidently he thought that classifying his peaceful NATO partner as a terrorist economy would panic its government into paying. But the effect was to cause a run on Iceland’s currency, making payment impossible. The króna entered a period of freefall on foreign exchange markets.

Mr. Brown’s bellicose behavior escalated as Britain’s own currency sank. This set the stage for his explosion last Wednesday when he explained how he intended to make Iceland pay, not only for Icesave but also for Kaupthing S&F, for which the British authorities were responsible in the case of depositors who had lost money. Unlike the unfortunate IceSave (administered as a branch of Iceland’s Landsbanki and hence subject to Icelandic regulatory authority), Kaupthing S&F is incorporated as a distinct British affiliate, and regulated and insured as such. The UK authorities accordingly have not claimed that Iceland’s government has any obligations to reimburse British depositors who have lost money. Yet when asked about the “£6 million that the Christie hospital [in Manchester] stands to lose in the Icelandic bank Kaupthing,” central banker Brown pretended that Kaupthing was not a British bank overseen by domestic deposit insurance authorities. “The fact is that we are not the regulatory authority and that many, many more people had finances in institutions regulated by the Icelandic authorities,” he insisted before Parliament. “The first responsibility is for the Icelandic authorities to pay up, which is why we are in negotiations with the International Monetary Fund and other organisations about the rate at which Iceland can repay the losses that they are responsible for.”

This naturally has prompted Icelanders to ask British authorities just which “other institutions” they may be talking to, and what they may be hoping to gain. The IMF’s representative in Iceland, Franek Rozwadowski, was quick to explain to the Icelandic newspaper Fréttablaðið that it was not the IMF’s role to intervene in “a bilateral matter that needs to be resolved bilaterally.” But fears remain that Iceland’s government will be pressured to squeeze out money from the economy to reimburse foreign speculators on the winning end of the many bad gambles that Iceland’s banks made before being de-privatized.

Such fears are aggravated by the worry that Mr. Brown may have found help from a fifth column within Iceland itself. After the bank crisis last autumn, the Independence Party fell, and its coalition partner for the last six years, the Social Democrats, took charge of the administration. The government divided the failed Icelandic banks into “good” and “bad” parts so as to save what could be salvaged for Icelandic depositors to back their deposits (the “good” bank). The government then commissioned two British accounting firms to survey the loan portfolios of Landsbanki and Kaupthing to evaluate their assets at “fair value.” But much as the U.S. stress test surrendered to the banking system’s insistence on blue-sky optimism regarding what will be left over on high-risk loans and gambles, so the Icelandic contract defined “fair value” as it would exist if the global financial collapse was completely reversed and everything went back to normal as if nothing had happened. Under this assumption the good and bad bank assets would be worth much more than is the case under today’s real-world conditions. This dangerously over-states the net worth of Iceland’s failed banks.

It was dangerous to retain firms closely associated with major clients – and hence, their source of future business – that include the parties with whom Iceland’s government stands in a potential adversarial relationship. Another problem is political pressure for a cover-up on the part of the vested Icelandic interests that had engaged in reckless behavior, and perhaps crooked self-dealing via foreign transactions.

In any event, the report was not made public on its scheduled date in mid-April, which was supposed to be just prior to the national elections on April 25. When a report on major bankruptcy by political insiders is not released on the promised date before a major election, one naturally suspects political pressure at work. Yet despite the financial crisis that plunged most Icelanders into a debt-strapped condition, the election turned mainly on political factors. The Social Democrats advocated joining the European Union and adopting the euro, hoping that this in itself may lead to domestic economic reform. The Left-Green coalition opposed giving up Icelandic political and economic sovereignty and pressed for domestic reform, as did the centrist Progressive Party. As for the Independence Party, it was swamped by one scandal after another concerning election financing, insider crony dealing and the usual array of dirty neoliberal political practices.

All this occurred in an economy structured to be a creditor paradise – that is, a debtor’s hell. On top of normal mortgage interest, Icelandic personal and real estate debts are subject to indexation of the principal to reflect the consumer price index – which in turn mirrors the fall in the króna’s exchange rate, about 20% over the past year. This means that if someone bought a house for the equivalent of $100,000 a year ago with a 100% mortgage, the debt would now have risen to $120,000. But the collapse of Iceland’s economy has sent unemployment soaring and business crashing, so real estate prices have fallen by about 25%. The former $100,000 house would now have a market value of only $75,000 – just 62% of its re-indexed $120,000 mortgage, some $45,000 in negative equity.

The situation actually is about to get much worse in the near future. The US$ is currently at 125 krónur (IKR), down from 62 at yearend-2007 – a 100% increase. (For the euro, the increase over the same period is 85%.) Iceland’s banks have linked many business loans, as well as auto loans and other debts to a market basket of foreign currencies, on the logic that they themselves have had to obtain money by borrowing yen, euros, sterling or dollars. Although these loans are denominated in krónur, their payment is indexed, so the effect is similar to denominating loans in foreign currency. Many loans are still benefiting from the moratorium placed on re-indexing the principal when the crisis hit last autumn, but many loans are about to be reset. Icelandic debtors who borrowed in the belief that the IKR was as stable as the dollar are now paying the price for their optimism – an optimism fed by the banks’ marketing departments, which depicted these indexing arrangements simply as an accounting formality! Business debts are especially at risk.

This shows how urgently Iceland needs to straighten out its banking mess and restructure the economy to free the population from the unique debt squeeze its laws and a decade of neoliberal mismanagement have created. Now that the banks have been de-privatized and taken back into the public domain, credit needs to be turned back into what it was before – a public utility. But this cannot be organized without knowing how much can be recovered from the failed banks to back domestic depositors. And the reports from the British accounting consultancy firms still have not been made public. Only the major creditors have received copies!

Remarkably, the government said last week that they might not be released at all. The inference is that the crooked dealing has been so damning to vested Icelandic interests that it would cause a new political crisis to resolve the deepening economic crisis. The fear is that a sweetheart deal has been made with the kleptocrats whose reckless behavior (and it seems probable, illegitimate bank maneuverings with offshore accounts) plunged the economy into negative equity in the first place. The better the financial health of the failed banks appears on paper, the more presumably will be left over to pay foreigners – including the offshore accounts of the banks’ former owners in their own dealings with the banks. So from the vantage point of Icelandic depositors and debtors to these banks, a realistic pessimistic estimate of the banks’ position would protect them, while an unrealistic optimism would enable foreigners to siphon off much more money, leaving less for Iceland.

In fact, the IMF has failed to oblige Iceland’s government to conform to the Letter of Intent it signed on November 15, 2008. This letter obliged Iceland to “bring loan values in line with expected market values” (#4), and to “include an assessment of whether or not managers and major shareholders have mismanaged or abused the banks” (#6). No such assessment has been made, and as described above, loan values are exceeding market values by a rising degree as property, businesses and households fall into negative equity status.

The Icelandic government’s agreement with the IMF promised to make the bank assessments public upon their completion “by end-march 2009” (#10). This has not been done – perhaps (one worries) because the next sentence says that the government “will discuss in advance with IMF staff any changes to the adopted strategy.” In view of the secrecy that now shrouds the events that pushed the banks under, one can only wonder at what developments have prompted the government and IMF to change strategy.

What the IMF did demand – as it always does – is that once the government bails out the bankers for their bad loans, the whole privatization process is to start all over again, paving the groundwork for yet new rip-offs. In view of the fact that “the banking crisis will significantly constrain the public sector and burden the public for years to come” as the government pays off bad loans (#12), the agreement pledges (#14) that “A significant reduction in government debt through the sale of the government’s stake in the new banks could help reduce the needed fiscal adjustment over the medium term.”

Belatedly, the population is now up in arms – two weeks after the election! To stabilize the currency, Iceland has agreed to IMF conditionalities that prevent the government from pursuing the counter-cyclical Keynesian fiscal policy that Mr. Obama is leading in the United States. Unless the debt pressure is alleviated, Icelandic homeowners and businesses will be obliged to run down their savings each month until they are depleted – at which time they will lose their homes and forfeit their businesses to foreclosing creditors.

So on Saturday afternoon, May 9, a “pots and pans” protest was conducted outside of Iceland’s Parliament in Reykjavik. The scenario is much like that of the color revolutions staged by U.S. neoliberals throughout the post-Soviet states. But Iceland’s kitchen-utensil revolution is organized as a protest against neoliberal policies. The protesters have picked up the thread where it left off last October a similar set of protests dislodged the Independence Party from power. The National Labor Association has broken from the new Social Democratic coalition government, reflecting the growing anger among Icelanders at their debt squeeze.

Mr. Brown’s statement that he intends to use IMF leverage to deepen Iceland’s debt position by forcing its government to bail out British depositors has rubbed salt in this wound – precisely by demanding for his country what Icelanders are not receiving from their government! Its citizens want to know what pressure the country is responding to if it intends to put the interest of foreigners before their own. This double standard has motivated the population to act in a more confrontational way than would have occurred had the problem been merely domestic. Icelanders want to be told the magnitude of the financial problem – and apparent dishonesty and crony dealings – that the government is keeping secret. The answer may at long last move Iceland out of its post-feudal oligarchy. Its neoliberal privatizations and pro-financial policies may turn out not to be as entrenched and irreversible as the kleptocrats had hoped would be the case.

Monday, May 11, 2009

More boat people on the way

Pakistan faces biggest refugee crisis since 1947:

Aid groups have warned of a human tide of up to 500,000 people fleeing their homes. The UN said an estimated 200,000 have fled the Swat valley and its main town, Mingora, in the past few days alone, while another 300,000 are poised to flee if they get the chance. This would create a total of one million people forced from their homes by fighting in the past 12 months. It represents the biggest internal displacement of people in Pakistan since independence more than 60 years ago.

In addition to the refugees primarily from the ruined countries of Iraq and Afghanistan that have made the desperate journey by boat to our shores in recent years, it seems likely there will now be a bunch more.

If Howard were still in power we know what to expect: the ugly and racist demonization of regugees as terrorists, sleepers, child-drowners leading to the cruel abandonment at sea or imprisonment in concentration camps. With Rudd it is slightly more civilized, Rudd will only blame it on people-smugglers.

But Rudd just like Howard cannot dare speak the awful truth: that the direct cause of the massive refugee crises in Iraq, Afghanistan and Pakistan is the Whitepowers' military assault on those countries, an aggression in which Australia has shamefully taken and is taking a direct part.

Saturday, May 09, 2009

Zionism is dying a rapid and bitter death


Richard Witty comes out with one of the old arguments in favour of Zionism:

Shirin, Do you think that Jews are a people? And, as a people, should have the right to self-govern?

Shirin replies:

You are asking the wrong, and an irrelevant, question. The question is whether or not "the Jews" or any other self-defined, or other-defined human group has a right to lay claim on any basis at all (historical, mythical, legendary, or some combination of all three) to land inhabited by others, and turn it into an ethnocratic state for themselves in which they have superior rights and claims, and in which they must establish and maintain by any means necessary an overwhelming majority. The answer to that question is obvious, particularly in the 20th and 21st centuries, which is why you and other Zionists always ask the other question instead of the truly relevant one....

The early Zionists, after some discussion, agreed that they had to define The Jews as a nation. They determined that the colonial powers were unlikely to see the creation of a Jewish state as justified unless the Jewish people were a nation.

Of course, the utterly silly and completely impractical logical extension of Witty's standard-issue Zionist argument is that every single group that can manage to define itself as a "people" or a "nation" is entitled to self-rule. Witty and his fellow nice, liberal Zionists do not specify, of course, whether every "people" or "nation" is entitled to ethnically cleanse the location of their choice, and treat any leftover residents from he "wrong people" or "nation" as second-class citizens. Nor do they explain whether every "people or "nation" is entitled to take whatever means necessary to maintain "demographic balance, or whether every "people" or "nation" is entitled to expand their territory at will by whatever means they choose....

The kind of state formation you are advocating is typically called 'volkish nationalism' in English (or organic, total, ethnic, etc.), a short-lived ideology I thought died an unmourned death in 1945. Of course, nationalism (of all kinds) is a pretty recent invention, but the volkish kind even more so, being the invention of a number of Central Europeans who got rather carried away in the midst of the final, intense period of colonialism, racial science, the attempted revolts of the working classes, popular democracy, etc. Wilsonian national self-determination is less than a century old (and Zionism predates it).

Classical, liberal nationalism was essentially geographic, coupled with a touch of Rousseau's social contract: for the French revolutionaries, the French people were the people living in France, and those related geographic areas who assented to the ideals of the new French state. Naturally, this kind of nationalism resulted in the emancipation of the Jews.

In order to construct a Jewish 'nation' (rather than religious group) a narrower kind of nationalism was necessary - and was provided by Herder, who started getting ideas about there being some kind of deeper connection between the people of the same country. That idea first proposed, intellectuals could start fashioning 'national' histories, all of them, unsurprisingly, being quite similar: once upon a time we were big and mighty, then something bad happened, but onwards and forwards to the future, we'll be great again, etc.

Thus, Zionism could be born: one had a national Jewish narrative, racial science could substitute for religion, European imperialism provided the real possibility for taking over Palestine and provided the framework that didn't 'see' the native, and Blut-und-Boden nationalism provided the ideology of an organic and authentic connection to the land, which the Jews had, but the uncivilised natives were incapable of establishing. It is often asserted that Herzl's Zionism was nationalism of the liberal kind ,but recent research has shown that his nationalism was mainly inspired by the extreme Prussian Aryan groupings, and that he was fully aware that what he was advocating was settler-colonialism of the most extreme kind.

Thus, Zionism was never a national liberation movement in the positive sense, but a settler-colonial project legitimising itself by reference to volkish-national ideology. One can add that the manner in which the Yishuv and the state of israel treated Sephardi/Mizrachi Jews - and to a lesser degree German Jews and Holocaust survivors - illustrate the fact that the Yishuv's quest was not for a nation-state of the conventional kind, but rather a racially purified one of the kind now universally repudiated [yes, there is constant talk in Yishuv papers of 'two races' of Jews, 'bad human material', etc., etc.]

The Palestinian claim, on the other hand, does not rest on any intrinsic Palestinian identity or peoplehood, but on the simple facts that they (or their recent ancestors) either live there or were illegally expelled, and that they have relatively representative organisations that demand that they be recognised as a sovereign state on the land they inhabit and which belong them under international law.

A couple more years like this and there will be absolutely nothing left. It lasted a bit longer than Apartheid South Africa but it was doomed from the start as a racist, colonialist, militarist, imperialist, settler ideology was hopelessly anachronistic in the post-Hitler period.

Tuesday, May 05, 2009

Main Elements of International Law

"International Law" is not very effective, and not perfect in its formulation, but it nevertheless represents in many ways an enshrinement of sound and admirable principles, no doubt more honoured in the breach than the observance. As such it is a standard that we can point to, and that we can use to criticize the performance of our own and other governments.

The foundation of International Law would most likely be the Charter of the United Nations, and the supporting covenants and treaties that have been agreed to by the United Nations and most of the world's countries. I'll attempt to compile a list of these worthy documents:

Charter of the United Nations (pdf version)

Universal Declaration of Human Rights

Nuclear Non Proliferation Treaty

Convention against Torture and Other Cruel, Inhuman or Degrading Treatment or Punishment (html) (pdf)

Some thoughts about torture. And Mr. Obama. - by William Blum

The Anti-Empire Report

May 4th, 2009
by William Blum

Okay, at least some things are settled. When George W. Bush said "The United States does not torture", everyone now knows it was crapaganda. And when Barack Obama, a month into his presidency, said "The United States does not torture"1, it likewise had all the credibility of a 19th century treaty between the US government and the American Indians.

When Obama and his followers say, as they do repeatedly, that he has "banned torture", this is a statement they have no right to make. The executive orders concerning torture leave loopholes, such as being applicable only "in any armed conflict"2 What about in a "counter-terrorism" environment? And the new administration has not categorically banned the outsourcing of torture, such as renditions, the sole purpose of which is to kidnap people and send them to a country to be tortured. Moreover, what do we know of all the CIA secret prisons, the gulag extending from Poland to the island of Diego Garcia? How many of them are still open and abusing and torturing prisoners, keeping them in total isolation and in indefinite detention? Total isolation by itself is torture; not knowing when, if ever, you will be released is torture. And the non-secret prisons? Has Guantanamo ended all its forms of torture? There's reason to doubt that.3 And what do we know of what's happening now in Abu Ghraib and Bagram?

And when Obama says "I don't believe that anybody is above the law", and then acts in precisely the opposite fashion, despite overwhelming evidence of criminal torture — such as the recently leaked report of the International Committee of the Red Cross and the Bush Justice Department "torture memos" — it's enough to break the heart of any of his fans who possess more than a minimum of intellect and conscience. It should be noted that a Gallup Poll of April 24/25 showed that 66% of Democrats favored an "investigation into harsh interrogation techniques on terrorism suspects". If the word "torture" had been used in the question, the figure would undoubtedly have been higher.

Following the US invasion of Iraq in March 2003, President Bush went on TV to warn the people of Iraq: "War crimes will be prosecuted. War criminals will be punished. And it will be no defense to say, I was just following orders."4

"Objectively, the American public is much more responsible for the crimes committed in its name than were the people of Germany for the horrors of the Third Reich. We have far more knowledge, and far greater freedom and opportunity to stop our government's criminal behavior," observed James Brooks in the Online Journal in 2007.

On February 10, the Obama Justice Department used the Bush administration's much-reviled "state secrets" tactic in a move to have a lawsuit dismissed — filed by five detainees against a subsidiary of Boeing aircraft company for arranging rendition flights which led to their torture. "It was as if last month's inauguration had never occurred", observed the New York Times.5

And when Obama says, as he does repeatedly, "We need to look forward as opposed to looking backwards", why is it that no one in the media asks him what he thinks of the Nuremberg Tribunal looking backwards in 1946? Or the Church Committee of the US Senate doing the same in 1975 and producing numerous revelations about the criminality of the CIA, FBI, and other government agencies that shocked and opened the eyes of the American people and the world?

We're now told that Obama and his advisers had recently been fiercely debating the question of what to do about the Bush war criminals, with Obama going one way and then another and then back again, both in private and in his public stands. One might say that he was "tortured". But civilized societies do not debate torture. Why didn't the president just do the obvious? The simplest? The right thing? Or at least do what he really believes.

The problem, I'm increasingly afraid, is that the man doesn't really believe strongly in anything, certainly not in controversial areas. He learned a long time ago how to take positions that avoid controversy, how to express opinions without clearly and firmly taking sides, how to talk eloquently without actually saying anything, how to leave his listeners' heads filled with stirring clichés, platitudes, and slogans. And it worked. Oh how it worked! What could happen now, as President of the United States, to induce him to change his style?

The president and the Director of the CIA both insist that no one at the CIA who was relying on the Justice Department's written legal justification of methods of "enhanced interrogation" should be punished. But the first such approval was dated August 1, 2002, while many young men were arrested in Afghanistan and Pakistan during the previous nine months and subjected to "enhanced interrogation". Many were sent to Guantanamo as early as January 2002. And many others were kidnaped and sent to Egypt, Jordan, Morocco and other secret prisons to be tortured beginning in late 2001. So, at least for some months, the torturers were not acting under any formal approval of their methods. But they still will not be punished.

I love that expression "enhanced interrogation". How did our glorious leaders overlook calling the atomic bombs dropped on Hiroshima and Nagasaki "enhanced explosive devices"?

Lord High Dungeon Master Richard Cheney is upset about the recent release of torture memos. He keeps saying that the Obama administration is suppressing documents that show a more positive picture of the effectiveness of interrogation techniques, which he claims produced very valuable information, prevented certain acts of terrorism, and saved American lives. Hmmm, why am I skeptical of this? Oh, I know, because if this is what actually happened and there are documents which genuinely and unambiguously showed such results, the beleaguered Bush administration would have leaked them years ago with great fanfare, and the CIA would not have destroyed numerous videos of the torture sessions.

But in any event, that still wouldn't justify torture. Humankind has aspired for centuries to tame its worst behaviors; ridding itself of the affliction of torture has been high on that list. There is more than one United States law now prohibiting torture, including a 1994 law making it a crime for US citizens to commit torture overseas. This was recently invoked to convict the son of former Liberian dictator Charles Taylor. There is also the Geneva Convention Relative to the Treatment of Prisoners of War, ratified in 1949, which states in Article 17:

No physical or mental torture, nor any other form of coercion may be inflicted on prisoners of war to secure from them information of any kind whatever. Prisoners of war who refuse to answer may not be threatened, insulted, or exposed to any unpleasant or disadvantageous treatment of any kind.

Thus it was that the United States has not called the prisoners of its War on Terror "prisoners of war". But in 1984, another historic step was taken, by the United Nations, with the drafting of the "Convention Against Torture and Other Cruel, Inhuman or Degrading Treatment or Punishment" (came into force in 1987, ratified by the United States in 1994). Article 2, section 2 of the Convention states:

No exceptional circumstances whatsoever, whether a state of war or a threat of war, internal political instability or any other public emergency, may be invoked as a justification of torture.

Such marvelously clear, unequivocal, and principled language, to set a single standard for a world that makes it increasingly difficult for one to feel proud of humanity. We cannot slide back. If today it's deemed acceptable to torture the person who supposedly has the vital "ticking-bomb" information needed to save lives, tomorrow it will be acceptable to torture him to learn the identities of his alleged co-conspirators. Would we allow slavery to resume for just a short while to serve some "national emergency" or some other "higher purpose"?

If you open the window of torture, even just a crack, the cold air of the Dark Ages will fill the whole room.

"I would personally rather die than have anyone tortured to save my life." - Craig Murray, former British Ambassador to Uzbekistan, who lost his job after he publicly condemned the Uzbek regime in 2003 for its systematic use of torture.6

With all the reports concerning torture under the recent Bush administration, some people may be inclined to think that prior to Bush the United States had very little connection to this awful practice. However, in the period of the 1950s through the 1980s, while the CIA did not usually push the button, turn the switch, or pour the water, the Agency ...

* encouraged its clients in the Third World to use torture;
* provided the host country the names of the people who wound up as torture victims, in places as bad as Guantanamo, Abu Ghraib and Bagram;
* supplied torture equipment;
* conducted classes in torture;
* distributed torture manuals — how-to books;
* was present when torture was taking place, to observe and evaluate how well its students were doing.7

I could really feel sorry for Barack Obama — for his administration is plagued and handicapped by a major recession not of his making — if he had a vision that was thus being thwarted. But he has no vision — not any kind of systemic remaking of the economy, producing a more equitable and more honest society; nor a world at peace, beginning with ending America's perennial wars; no vision of the fantastic things that could be done with the trillions of dollars that would be saved by putting an end to war without end; nor a vision of a world totally rid of torture; nor an America with national health insurance; nor an environment free of capitalist subversion; nor a campaign to control world population ... he just looks for what will offend the fewest people. He's a "whatever works" kind of guy. And he wants to be president. But what we need and crave is a leader of vision.

Another jewel in the crown, Miss Hillary

During the presidential campaign much was made of Obama's stated promises to engage in direct talks with Iran, as opposed to the Bush administration's refusal to speak to the Iranians and threatening to attack them and bomb their nuclear facilities. This was one more example of the much-vaunted "change" that Obama was going to bring. But, in actuality, it wouldn't be much of a change. Mid-level American officials did in fact occasionally meet with Iranian officials, most notably after the September 11 attacks in 2001 and in mid-2003 after the US invasion of Iraq. These meeting were always in secret.8 There were also at least three publicly-announced meetings between the US and Iran in 2007, primarily dealing with the fighting in Iraq. And now that Obama is in power, what do we find? We find his Secretary of State, Hillary Clinton, testifying April 22 before the House Foreign Affairs Committee and stating:

"We actually believe that by following the diplomatic path we are on [speaking to Iran], we gain credibility and influence with a number of nations who would have to participate in order to make the sanctions regime as tight and as crippling as we would want it to be."

Would it be unfair to say that she's implying that a reason for talks with Iran is that the US could get more international support when it decides to cripple that country? Is crippling a country the United States is at peace with supposed to be part of the "change" in US foreign policy? Is Iran expected to be enthusiastic about such talks? If the talks collapse, will the United States use that as an excuse for bombing Iran? Or will Israel be given the honor?

Later in the hearing, Clinton declared: "We are deploying new approaches to the threat posed by Iran."

I would love to have been a member of the House committee so I could have had the following exchange with the Secretary of State:

Cong. Blum: Do we plan to impose sanctions on France?

Sec. Clinton: I don't understand, Congressman. Why would we impose sanctions on France?

Cong. Blum: Well, if we impose sanctions on Iran on the mere suspicion of them planning to build nuclear weapons, it seems to me we'd want to impose even stricter sanctions on a country which already possesses such weapons.

Sec. Clinton: But France is an ally.

Cong. Blum: So let's make Iran an ally. We can start with ending our many sanctions against them and calling off our Israeli attack dogs.

Sec. Clinton: But Congressman, Iran is a threat. Surely you don't see France as a threat? What reason would France have to use nuclear weapons against the United States?

Cong. Blum: What reason would Iran have to use nuclear weapons against the United States? Other than an irresistible desire for mass national suicide.

If Congressman Blum had pursued this line of questioning, it might well have culminated in some Orwellian remark by dear Hillary, such as the one she treated us to a few days later when speaking to reporters in Iraq. As the Washington Post reported it: "Clinton played down the latest burst of violence, telling reporters she saw 'no sign' it would reignite the sectarian warfare that ravaged the country in recent years. She said that the Iraqi government had 'come a long, long way' and that the bombings were 'a signal that the rejectionists fear Iraq is going in the right direction'."9

So ... the eruption of violence is a sign of success. In October 2003, President George W. Bush, speaking after many resistance attacks in Iraq had occurred, said: "The more successful we are on the ground, the more these killers will react."10

And here is Gen. Richard B. Myers, chairman of the Joint Chiefs of Staff, speaking in April 2004 about a rise in insurrection and fighting in Iraq over nearly a two-week period: "'I would characterize what we're seeing right now as a — as more a symptom of the success that we're having here in Iraq,' he said ... explaining that the violence indicated there was something to fight against — American progress in building up Iraq."11

War is Peace ... Freedom is Slavery ... Ignorance is Strength. I distinctly remember when I first read "1984" thinking that it was very well done but of course a great exaggeration, sort of like science fiction.

Clinton was equally profound on May 1, speaking to an assemblage of State Department employees. Discussing Venezuela and Bolivia, she said that the Bush administration "tried to isolate them, tried to support opposition to them, tried to turn them into international pariahs. It didn't work. We are going to see what other approaches might work." Oh ... uh ... how about NOT trying to isolate them, NOT supporting their opposition, NOT trying to turn them into international pariahs? How about the National Endowment for Democracy, the Agency for International Development, and the US Embassy NOT trying to subvert their revolutions? And when she says "It didn't work", one must ask: Work to what end? To return the two countries to their previous condition of client-states? Perhaps like with Nicaragua, about whom the Secretary of State said improving relations was important to counter Iran's growing influence. She noted that "the Iranians are building a huge embassy in Managua. You can only imagine what it's for."12 I can only imagine what Ms. Clinton imagines it's for. What is the new American Embassy in Iraq — the biggest embassy in the entire history of the world, in the entire universe — What is that for? Another example of Obamachange that means no change. What is it with American officials? Why are they so insufferably arrogant and hypocritical?


1. Washington Post, February 24, 2009 ↩
2. See, for example, "Executive Order – Ensuring Lawful Interrogations", January 22, 2009 ↩
3. See The Observer (London), February 8, 2009 for an account of how conditions were still very awful at Guantanamo as of that date. ↩
4. Video of Bush ↩
5. New York Times, February 10, 2009, plus their editorial of the next day. In April, a federal appeals court ruled that the detainees' lawsuit could proceed. ↩
6. Testimony before the International Commission of Inquiry On Crimes Against Humanity Committed by the Bush Administration, session of January 21, 2006, New York City ↩
7. See William Blum, "Rogue State: A Guide to the World's Only Superpower", chapter 5. ↩
8. The Independent (London), May 27, 2007 ↩
9. Washington Post, April 26, 2009 ↩
10. Washington Post, October 28, 2003 ↩
11. New York Times, April 16, 2003 ↩
12. Associated Press, May 1, 2009 ↩

William Blum is the author of:

* Killing Hope: US Military and CIA Interventions Since World War 2
* Rogue State: A Guide to the World's Only Superpower
* West-Bloc Dissident: A Cold War Memoir
* Freeing the World to Death: Essays on the American Empire

Portions of the books can be read, and signed copies purchased, at

Previous Anti-Empire Reports can be read at this website.

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