Can Aussie miners & China’s farmers save Bureau-Kapitalism?
In July 2007, from Australia I observed “Black Swans over the Horizon”, as China looked like rivalling the “$ole $uperpower”: whose ‘soft’ expansionism, a.k.a. globalisation or the “Washington Consensus” had “galvanised the world economic and financial system into a Frankenstein no Power can control”. (Published on WSN, with different headline, 30 August. 2007).
As those swans now swoop, the world’s politicians, bureaucrats and Keynesian economists frantically intervene to stiffen the system melted down by decades of too easy money and awash with household debt – by “injecting liquidity”, i.e. even easier (Monopoly?) money.
Some call for a New New Deal and others for a “second Bretton Woods”. Are they too young to know what those deals were really about? Historical research (Google upper case titles) shows evidence that:-
“New Deal” = false dawn?
1.the New Deal of the 1930s was more of a raw deal than is now genrally believed. It did not cure, but so deepened and prolonged the Post World War I Great Depression as to distort markets and prices and leave worms in the apple of the US economy, (references below) while
2. the Bretton Woods deal of 1944 established the post-WWII international financial system as in effect the economic counterpart of NATO and other US-led cold war alliances. It globalised a pseudo-capitalist paper pyramid built on the US dollar - a fiat currency, intrinsically worthless after 1971. (STRATFOR 20 October 2008).
President Hoover’s drastic and contradictory interventions of the 1920s, (e.g. home loan bank discounts, huge tax hikes and revival of wartime excises), turned the crisis which followed the booms into the Recession and crash of 1929. (see “AMERICA’S GREAT DEPRESSION”, Rothbard M.N, 1963/1972…). After which democracy was threatened by ex-service and elite groups seeking some ‘steady hand’ to take over. In Australia, General Monash would not play, but Germans elected “Frontsoldat Hitler”, Russians got Lenin and Stalin and British opinion put “Democracy in the Dock” (Nelson, London 1939)
The other “death of Capitalism” - 1929
The roots of the trouble actually went back to 1913, when the messianic “REAL PRESIDENT WILSON”, (Carroll J.R, 2000) brought in the Federal Reserve banking system and federal income tax. Elected as the “peace candidate’, in 1916 he led the US into war. Then by his influence on the Peace of Versailles, instead of becoming President of a new world order (as he dreamed, according to the memoirs of Henry Cabot Lodge), Wilson contributed to the rise of Nazism in Germany, Soviet power in Russia and Fascism in Italy. (It is a measure of the similarity of today’s crisis with that of the 1930s, that open nostalgia for Mu s solini is there on parade)
President Roosevelt astutely surfed the anti-democratic zeitgeist and plotting, to carry on where Wilson left off. He undertook to impose ‘dictatorship’ himself, sweep aside the Constitution and legality to enforce ‘control from the top’ - as advocated by Stuart Chase in his book “A NEW DEAL” (Macmillan, NY, 1932), inspired by the example of the “central planning” he found so exciting in the USSR. “A better economic order is worth a little bloodshed”, he enthused, and “Why should Russians have all the fun remaking the world? “ (Chase, p. 115)
Chase envisioned a “Peace Industry Board” centrally running the whole economy as it was in wartime and with a Soviet-type Ten Year Plan. In the event FDR’s alphabet soup of emergency measures imposed by Executive Orders (Nos. 6073-9508!) and Proclamations implemented an agenda best exemplified by the Tennessee Valley Authority (TVA) . The USSR sloganised “Electrification and Soviet Power”; FDR in the USA put David Eli Lilienthal, a “labor lawyer/regulatory activist” of Czech parentage, in charge of a project, the TVA, you could sum up as “electrification and loan-fuelled (Labour Unionist) purchasing power”.
The dawn of mass debt/energy-fuelled consumerism
Federal loans to consumers through the Electric Home and Farm Authority encouraged them to buy appliances and hence electricity from the TVA, as Lilienthal’s litigation put private suppliers out of business. (See Best G.D,“PEDDLING PANACEAS…”, Transaction Publishers 2005 and Field G.B. POLICIAL CURRENTS, DAVID LILENTHAL AND THE MODERN AMERICAN STATE,[email protected] Amherst, 1994) . It set the ongoing pattern for America’s mass-consumerist debtor economy - domestic and then international, thanks to the “Great Chinese Walmart” lending the dollars to buy its gadgets. Until now…
Fast forward to the recent decades, during which “monetary policy as practiced by the US Federal Reserve [was] but a form of financial St alinism, forcing ridiculously low or negative real interest rates, with catastrophic results that are now plaguing the world “ (ASIA TIMES 11 October 2008)
In spite of all the populist pulpitry against “greed”, bankers and Bush, it was under Jimmy Carter that the Community Investment Act was passed in 1977. With subsequent tinkering under Clinton, such legislation steered banks into making (sub-prime) loans to would-be home owners most unlikely to repay (Economist, 18 Oct 08). In the 1990s, the two Federally sponsored mortgage institutions, “Freddie Mac and Fannie Mae,” incidentally active contributors both lawmakers’ political parties, were also politically pushed to back more sorts of loans in the 1990s.
So Wall Streeters milked the unregulated market of bundled dud mortgages, CDOs , credit default swaps etc.etc. It had to stop.
But the initial cause of the resulting meltdown was not so much deregulation, “extreme capitalism” (K.Rudd) or “Laissez Faire” (N. Sarkozy) as extreme politics spawning BAD regulation, or rather extreme populism; if you like, irresponsible democracy - in the old-fashioned sense of what the Founding Fathers designed the Constitution of the US as “A Republic” precisely to avoid.
What is to be done?
Whatever, says President Bush, we must save “democratic capitalism”. But his hapless henchmen at Treasury and the Fed didn’t know how. In Europe, media rebadged hapless ditherer Gordon Brown as world saviour as other “leaders” copied his rescue plan, while “omni-President” Sarkozy of the EU changed into a Superman cloak with “socialist” spots to sell his plan.
But it was in Australia that the Reserve Bank acted decisively and ahead of the pack, with a 1% cut in interest rates; Mandarin-speaking Prime Minister Rudd followed up by spending about half of the surplus inherited from his cnservative predecessor on measures to stimulate the economy, including a AUD 10.4bn. Christmas handout, to get p ensioners and low-income voters spending before the effect of the rate cut kicks in.
Then he got on the phone to his Beijing counterpart, Wen Jia-bao, to confirm that Australia’s luck with ore and coal export-based prosperity would not altogether run out - in spite of talk about dropping demand from Chinese steelworks and some miners like Rio Tinto. (No doubt they had in mind as well as current gloomy reports, the negotiations on next year’s prices, due in April, and the prospects of Rio’s complex merger with mega-miner BHP).
China does face a downturn and burst housing bubble, due to the delayed effect of Beijing’s own measures to fight inflation as much as some ‘coupling’ with the plunging overseas markets. But the Central Committee of the Communist Party on 12October 2008 promised a “new upsurge” in rural reform. En clair, measures to double by 2020 the purchasing power of the farmers – nearing that of the city-dwellers; and between the lines, hopefully to let peasants own and trade in the land they now have to lease from “collectives”, too often run by local bosses whose land-grabbing yearly provokes tens of thousands of violent incidents.
To the extent that Beijing’s decrees are not flouted at the paddy roots, the looming political danger and the economic downturn will be handled by one stroke with domestic replacing export demand, and mid-2009 should see an upturn. More likely now that Beijing has announced a stimulus package of AUD855 billion, 7% of GDP. (Australian 11 Nov 08)
PM Rudd put down political smoke by ludicrously blaming greedy bankers and CEOs for the crisis, while at the same time giving the banks a blanket three-year guarantee on deposits. Rightly pointing to Australia’s sound regulatory regime, banking system and management of relations with China, some local media report him haranguing Bush and every other leader of the G20 due to meet in Washington 15 November, presenting it as an ambitious “template” to solve their problem s. His formula: “act early, act hard, act on households, then act also on the long term through infrastructure investment”. Come in, spinner!
It is a fact that thanks to eventually ‘upsurging’ domestic demand in China (and the rest of Asia?) Australia will be well positioned to save an exemplary democratic but regulated, mixed private and State capitalist economy. A real new deal. Making law urgently enough to stop panic and head off a bank run was right, even if it was on the principle I saw once on a newsroom wall in London: don’t get it right, get it written!
But in such cases, the Law of Unintended Consequences comes into play. Investors thought they would not be able to access some AUD 14 billion tied up in “non-bank” mortgage funds not guaranteed by the Government; so there was a run on them. The funds were told to turn into banks; no way, they said…
The new President of the United States is seen to be “man of the Left like FDR”. Any racists still unwashed after the baptismal rites of the election might badmouth the so far unknown quantity as a “coconut”, (white inside). More fairly, some may say he looks black, talks white and thinks pink - thanks to Dad, an ethnic Luo economics student from Kenya, non-black anthropologist Mom, Grandma and Harvard, and the Chicago school of hard knocks. Spellbinding oratory over, he would now be well advised to consider not any remedies for the crisis suggested by European or Aussie allies, but rather listen to Paul Volcker, Warren Buffett et al. explaining the unintended fallout from past US Government interventions in the markets to “help the farmers” and “spread home ownership” – notably in the much-misunderstood and mythologized original New Deal. Does his reported idea of a “civilian” security outfit to counterbalance the Armed Forces remind you of anything?