Bharat Rakshak

Three completely disconnected events occurred this week that will weave together the tapestry of the next decade – not including the $700 billion Wall Street bailout or the US vice presidential candidate debate.

First, Brazil on October 1 made its short list of finalists to supply it with modern jet fighters as part of a large defense modernization program. The final list included the French Dassault Rafale, the Swedish Saab Gripen NG and the American Boeing F/A-18E/F Super Hornet. By any measure, Brazil is a rapidly rising power, and this has nothing to do with the fact that it has discovered an obscene amount of oil in its offshore regions in the past year. Brazil’s traditional competitors – Argentina and Venezuela – are in the process of mismanaged economic collapse, leaving Brazil with no competitors in its neighbourhood.

Of course, it takes more than incompetent neighbours to make one a regional hegemon. And in many ways – with its ridiculous labour laws, horrible corruption, runaway crime and rampant poverty – Brazil is its own most-limiting factor.
But one of the ways in which Brazil can start acting like a real country – and thus a regional hegemon – is to develop a military with real power projection capabilities. Setting aside a few billion dollars for the purchase and integration of jet fighters is an excellent way to turn potential into reality. The Brazilian moment has not yet arrived, but it may finally be on the horizon.

More notable than what designs made Brazil’s final cut is the design that failed to: Russia’s Sukhoi Su-35.

Brazil is emerging on the world stage. The decisions it makes now will shape its policy – and thus that of the rest of the world – for decades to come. Brazil deliberately chose to go with a Western system for its airpower.

Of the potential options, the Sukhoi was the only system that would have given Brazil the option of challenging US military primacy (which is not to say that there are not solid technical and military reasons why Brazil did not choose the Russian system). The provider of a system can always choose to halt parts, supplies and support should the buyer adopt policies hostile to the supplier (ask the Venezuelans – they’ve got F-16s). American relations with France and Sweden do not need to be love-filled – and right now they are at their warmest in decades – for Washington to be able to pressure them into not supplying offensive products to a rival in it’s own backyard.

Put simply, rising Brazil has either made a conscious decision to pursue a modernisation program that will put it at American mercy or made a conscious decision to not adopt a hostile attitude toward the United States. That does not necessarily mean an alliance is inevitable or even probable, but it does mean that a potential clash of interests has moved from the possible to the rather unlikely.

The second major event occurred in Washington, where the US Senate gave final approval to a US-Indian agreement allowing full nuclear trade between the two states. Until now, India had languished under nuclear sanctions explicitly designed to retard New Delhi’s nuclear weapons and electricity programs.

India too is an emerging power, and, like Brazil, it has been its own worst enemy for decades: over-population and perhaps the world’s best government at stifling innovation and development combined with a particularly vibrant streak of anti-Americanism that, 20 years ago, stopped generating Soviet subsidies for New Delhi. The United States has always viewed India as a potential ally: it is a large market, is democratic, is a rival of China and is sufficiently hedged in by geography to never really be a long-term threat to American interests.

But there has always been the Pakistani problem. During the Cold War, the United States needed Pakistan as a means of securing China in de facto alliance against the Soviet Union. In the jihadist era, the United States needed Pakistan to help fight the Afghan war. No matter how much Washington may have wanted India as an ally for the long haul, it needed Pakistan in the short run.

Well, not anymore. Evolutions in the Afghan war are leading the United States toward considering Pakistan a lost cause – and perhaps even a state hostile to American interests. As that feeling slowly coalesces into policy, India is the natural – even greatly desired – alternative. The nuclear deal does more than simply allow for US industry to help the Indians out with their nuclear program – it is the start of a broad, deep strategic alliance based on concerns about China and Islam.

The third event happened in St. Petersburg, Russia: Germany and Russia held their bi-annual bilateral government summit.

Germany is the closest thing that Russia has to a friend in Europe these days. And considering that Chancellor Angela Merkel is openly distrustful and critical of the Russian government, that is truly saying something. Merkel certainly wants to stand up to Russia – she is from the former East Germany after all and knows full well what it means to live under Russian “influence” – but she has found herself trapped by geography and history. Her country is economically dependent on Russian energy supplies. Even if Berlin could muster the political will to challenge Moscow, and suffer through the energy dislocation and economic weakness that would come from a massive defense build-up, the thought of the Germans rearming to fend off Russian expansionism is something that sows more than a little terror among Germany’s neighbours.

It could be far easier for the Germans to cut a deal with the Russians to share influence in the regions that lie between them. This has happened before – and has been known to lead to a world war. The winds of history are blowing through Merkel’s window, and it would be truly odd for her to not have felt a bitter chill.

And, with that, the broad lines of the next decade have already been sketched. Brazil and India are both emerging as major powers, and doing so in a way that will not challenge – and may well dovetail with – American power. Germany faces a truly agonizing choice: a confrontation that will make it suffer greatly, or a conciliation that will make its neighbours suffer even more.

Putin: Ukraine gave military aid to Georgia in war with Russia
The Russian prime minister called Ukraine's involvement a 'crime,' but still agrees to a gas contract with Kiev.
By Arthur Bright

from the October 4, 2008 edition
Russian Prime Minister Vladimir Putin charged Ukraine with supplying arms and manpower to Georgia during its recent war with Russia, and said if Ukraine's involvement was proven, it would be a "crime."

Russian news and information agency RIA Novosti reports that Mr. Putin made the accusation Thursday during a meeting with Ukrainian Prime Minister Yulia Tymoshenko to sign a new contract on Russian natural gas exports to Ukraine.

"I don't think there is a graver crime than supplying arms to a conflict zone," Putin told his Ukrainian counterpart, Yulia Tymoshenko, during their meeting at the Russian premier's residence near Moscow.

He also said that he regretted "that Ukraine thought it acceptable to supply weapons to the conflict zone."

Putin also said Moscow had evidence proving that Ukrainian military experts were present in the conflict zone during the five-day war that began when Georgian forces attacked breakaway South Ossetia.

The BBC writes that Ms. Tymoshenko said she was confident that Ukraine's involvement in the war in Georgia would not be confirmed. The BBC adds that Putin's accusation "amounted to an attack on [Tymoshenko's] political rival, [Ukrainian] President Viktor Yushchenko," who sets Ukraine's defense policy.

Reuters reports that despite Putin's accusation, he and Tymoshenko agreed to a new deal to gradually increase Ukraine's payments for Russian gas over the next three years. Kiev, which has been paying Russia roughly $180 per 1,000 cubic meters of gas, had been concerned that Russia would require it to immediately start paying market prices, which are more than $500 per 1,000 cubic meters.

The Times of London reports that the Kiev-Moscow talks come amid a power struggle in Ukraine between Tymoshenko and Mr. Yuschenko. The two came to power during Ukraine's 2004 "Orange Revolution," but the government, a coalition of their two parties, has been wracked by infighting ever since. The Times writes that just before the talks, Tymoshenko accused Yuschenko of commandeering her plane to stymie her negotiations with Putin, highlighting one of the key disputes between the two: Ukraine's relationship with Russia.

sanjaykumar wrote:India cannot afford to be the second best IOR naval power.

Indeed one would establish suzerainity by challenging the dominant navy in the IOR not by chasing pirates.

Soon enough, America's financial crisis will wind down -- maybe in a month, maybe in a year. Yet regardless of when, this crisis marks the beginning of a new era for the U.S. For more than six decades, from the end of World War II in 1945 until now, the U.S. was the hub of global capital and capitalism. In the years to come, it will remain a vital center, but not the center.
In 1945, after an exhausting three decades of exertion against Germany, the United Kingdom emerged militarily victorious only to see itself economically exhausted. A year later, it was bankrupt, unable to find capital and on the verge of collapse. It had nowhere to turn but the U.S., which then dictated terms that amounted to a withdrawal of Great Britain from the world stage. The U.S. is not yet in the position of Great Britain, and our creditors in China are not yet as we were then. But absent a more humble and realistic attitude toward capital in Washington, that is the path we're headed down.

What is happening to finance today is similar to what happened to manufacturing beginning in the 1970s. Until then, U.S. manufacturing accounted for as much as half of all global output. By the 1970s, Germany and Japan began to exert themselves as manufacturing titans. So did Taiwan, Singapore, Korea and others that had benefited from American aid. The globalization of manufacturing continued, and was accelerated by the information technology revolution of the 1990s. While the U.S. today continues to produce a decent share of global manufactured goods, it is one among many and employs only 13 million people (10% of the workforce) in a sector that in the middle of the 20th century accounted for a third of all jobs. The same thing is now happening with finance.

In the past five years, there has been a transfer of wealth from the U.S. and Europe to Asia, the Middle East and Russia of trillions of dollars for oil and raw materials as well as inexpensive manufactured goods. Whether or not that transfer has been positive or negative for the U.S. economy writ large -- and there is considerable debate on that subject -- the outflow of wealth is a fact.

You can argue that the transfer of dollars to goods-producing countries, China above all, has provided American consumers with products that might otherwise be unaffordable but has had a negative effect on the U.S. labor force. The transfer of wealth to oil-producing states and countries rich in base metals has been an economic drain, especially as the price has spiked and the cost has risen.

That wealth transfer occurred just as the U.S. financial system began to expand its exposure to the housing market. The movement of capital away from the U.S. was one reason hungry banks turned to more absurd forms of leverage. That disguised the erosion of real capital.

Even as that was happening, however, American financial institutions still wore the mantle of global leadership. As China, the Gulf region, India, Brazil and other parts of the world have increased in affluence, they relied on the expertise, acumen and advice of Wall Street. Go to any region of the world and you will find central banks and investment banks staffed by people educated at U.S. business schools and graced with resumes that include time at the formerly premier institutions of Wall Street. Few major deals were brokered without involvement from a U.S. bank or access to Wall Street financing. That is now at an end.

It is at an end for two reasons. One is structural. There are now vibrant economies that don't depend on the U.S., are not heavily levered, and have a burgeoning, confident and ambitious middle class. But it is also at an end because those newly affluent regions of the world do not find the U.S. a welcoming home for capital.

There is no small irony in the fact that state-driven capitalism, which is the norm in the Persian Gulf and China, finds the U.S. too restrictive. Sovereign wealth funds, with enough cash on hand to bail out Wall Street and the U.S. housing market many times over, invested billions a year ago but are now saying no.

Uncertain growth for the United States is one reason. But the nature of the American regulatory regime is also to blame. Sarbanes-Oxley and the Patriot Act -- whose anti-money-laundering provisions had the unintended consequence of repelling legitimate investors -- combined with a tax code that places a heavy burden on corporations doing business in the U.S. has meant that, as the wealth transfer has happened, there is less and less inclination for global institutions to place that capital in the U.S.

This is a fact regardless of whether you believe that a high corporate tax rate is morally and fiscally correct. In truth, because of the differentials between high U.S. corporate taxes and the rates in Europe (lower) and Asia (in places nonexistent), even U.S.-listed companies that operate globally keep their profits outside the U.S., and thereby avoid those high taxes altogether.

In addition, the regulatory requirements of listing a company in the U.S. have led many companies to look to other markets and other exchanges for financing, hence the boom of financial centers such as Hong Kong, Dubai and even London.

This should not be a partisan argument. It is perfectly fair to argue that wealthy corporations should pay a greater share of the tax base than struggling middle-class Americans. Fair, but not realistic. The U.S. government can no longer dictate to global capital. Once, when the U.S. was the engine of global growth, when the world needed Wall Street for funding, capital could be taxed and controlled by the fiat of the U.S. government. No longer. The U.S. may have the will; it does not have the power.

The current debate in Washington gives no indication that this reality is understood. Both sides of the aisle are susceptible to a false sense of American economic sovereignty. Companies and countries flush with cash increasingly view U.S. laws, regulations and attitudes as undue burdens. As consumer activity accelerates outside the U.S. and Europe, and as financial centers spring up elsewhere, there is increasingly less inclination and less need for the world to go either to Wall Street or to Main Street.

For now, even with the breakdown of Wall Street, the U.S. remains vital to the global economy. It is the largest market, with a dynamic consumer culture, innovative companies, and is deeply enmeshed in the international system. But it is not the alpha and the omega; it is not the center; and the crisis hitting Wall Street is leading the rest of the world to form bonds that bypass the U.S.

Not all of this need be an absolute negative. In a truly interconnected world, more affluence and activity globally can be a universal benefit. U.S. companies operating outside the United States and Europe have already been reaping the rewards. But failure to accept the new reality will lead to the worst of all worlds.

As the U.S. government plunges into the markets, we must understand that this is the end of an era, and that attempts to unilaterally force capital to stay here will only lead to its continued flight. We are now one market among many, a huge and affluent one to be sure, but a wise nation recognizes both its strengths and its limitations. A more secure domestic capital base depends on the U.S. being seen as a desirable place for investment, and not as King Lear raging against the storm, alone, deluded and abandoned.

China cuts military ties with the US
http://www.telegraph.co.uk/news/worldne ... he-US.html

"SARS a biological warfare project of the mainland"

The US Congress’ passage of a slightly modified form of the Bush Administration’s financial bailout plan on the week of October 3 has opened up the spectre for the first time of a 1931-style domino wave of worldwide bank failures. That process is already underway across the US banking sector with the failure, nationalization or forced liquidation in the past weeks of Fannie Mae and Freddie Mac, of the giant Washington Mutual mortgage lender, and the rapid collapse of the nation’s fourth largest deposit bank, Wachovia. That was on top of a wave of smaller bank failures that began with IndyMac in the spring.

The new act has been described as the financial equivalent of the US Patriot Act, the law that gave the Bush Administration powers in violation of Constitutional safeguards under the climate of the September 11, 2001 attacks.

The treasury will have almost unlimited discretionary powers to price and buy distressed mortgage securities, or any other type of securities - including even car loans and student loans - which it considers important. Treasury can buy from any institution of its choice, through a process of its own design, which is as yet unknown and at a pace which the treasury deems appropriate. Moreover, the Paulson Treasury will ‘outsource’ most of the management of the $700 billion purchases to the very financial institutions responsible for creating the crisis. The treasury is reportedly planning to use up to 10 private asset managers to manage the assets purchased under the plan. Big players like PIMCO, Black Rock and Legg Mason are reported likely to be chosen for what will be some of the world's biggest asset management accounts. Heavy private sector involvement from the same community of investment bankers who are perceived to be the villains in this crisis, will make political management of the plan all the more difficult.

Former US Treasury Secretary Paul O’Neill in an interview has called the Paulson plan ‘crazy.’ O’Neill points out as this author and many other economists have, that the new plan does nothing to assure an end to the banking crisis. It merely rewards many of Paulson’s friends on Wall Street at US taxpayer expense. Were the moral backbone of the Democratic Congress at all strong, there would be calls for indictment of Paulson and others in the Bush Administration for criminal misconduct in the most brazen financial swindle in the scandal-ridden American finance history.

As the details of the present crisis reveal, there are huge ideological fault lines making for chaos and a potential meltdown of the Laissez Faire financial system. That present system, which was built on the back of Wall Street financial and banking deregulation since 1987 when Alan Greenspan, a devout follower and close friend of radical individualist Ayn Rand, became Wall Street’s man at the Federal Reserve for almost 19 years, is over now with the failure of the Henry Paulson $700 billion bailout scheme. Governments worldwide now face no alternative but to begin the painful process of putting the financial genie back in the bottle and re-regulating an out-of-control financial system. The failure of the UK Government and the US Government to address that fundamental issue is behind the present crisis of confidence.

A brief look at history

The Great Depression in Germany in 1931 began with a seemingly minor event—the collapse of a bank in Vienna, Creditanstalt, that May. For readers interested in more on the remarkable parallels between that crisis and that of today, I recommend the treatment in my earlier volume, Stoljece Rata.

That Vienna bank collapse in turn was triggered by a political decision in Paris to sabotage an emerging German-Austrian economic cooperation agreement by pulling down the weakest link of the post-Versailles system, the Vienna Creditanstalt. In the process, Paris triggered a series of tragic events that led to the failure of the German banking system over a period of several weeks. The post-1919 Versailles System, much like the post-1999 US Securitization System, was built on a house of cards with no foundation. When one card was removed, the entire international financial edifice crumbled.

Then, in 1931, there was an inept Brüning government in Germany, which believed severe austerity was the only solution, merely feeding unemployment lines to pay the Young Plan German reparations to the new Bank for International Settlements in Basle.

Then, in 1931 George Harrison, a Germano-phobe, was the inexperienced Governor of the powerful New York Federal Reserve. Harrison was a member of the anglophile Skull & Bones, the elite Yale University secret society which also included George H.W. Bush and George W. Bush as initiates. Harrison, who went on to coordinate the secret Manhattan Project on the development of the Atomic bomb under fellow Skull & Bones member, War Secretary Henry Stimson, believed the crisis had started not from abroad but with German bankers trying to make a profit at the expense of others.

Within weeks of rumor and jitters, the New York Bankers Trust, ironically today a part of Deutsche Bank, announced it would be forced to cut the credit line to Deutsche Bank and by July 1931 began to pull its deposits from all big Berlin banks. Harrison insisted the Reichsbank dramatically raise interest rates to stabilize things, only turning bad into worse as a credit crisis across the German economy ensued.

The Bank of England Governor, Montagu Norman, while somewhat more supportive of Luther argued that his friend Hjalmar Schacht was better suited to manage the crisis. On July 13, 1931, a major German bank, Darmstädter-und Nationalbank (Danat) failed. That triggered a general a depositors’ run on all German banks. The Brüning government merged the Danat with a weakly capitalized Dresdner Bank, and made large state guarantees in an effort to calm matters. It didn’t.

New York Fed governor, Harrison, who was personally convinced it was a ‘German’ problem, barked orders to Reichsbank chief Hans Luther on how to manage the crisis according to archival accounts. A foreign drain on Reichsbank gold reserves ensued.

The rest is history, the tragic history of the greatest most destructive war of the 20th Century, with all the suffering that ensued. At that time in history, the American banking elite saw itself, despite a stock market crash and Great Depression in America, as standing at the dawn of a new American Century.

The decline of the American Century

Today, in 2008, some 77 years later, a German Finance Minister stands before the Bundestag announcing the end of that American Century. Today the German government encourages a fusion of Dresdner with Commerzbank. Today Deutsche Bank, which some years ago acquired Bankers Trust in New York in a merger wave, appears to be in a stronger position than its American counterparts as Wall Street investment banks, some more than 150 years old as the venerable Lehman Bros., simply vanish in a matter of days. The American financial Superpower crumbles before our eyes.

In March 2008 there were five giant Wall Street investment banks, banks which underwrote Mortgage-Backed Securities (MBS), corporate bonds, corporate stock issues. They were not deposit banks like Citibank or Bank of America; they were known as investment banks—Morgan Stanley, Merrill Lynch, Goldman Sachs, Lehman Brothers, Bear Stearns.

The business of taking deposits and lending by banks had been split during the Great Depression from the business of underwriting and selling stocks and bonds—investment banking—by an act of Congress, the Glass-Steagall Act of 1933. The law was passed amid the collapse of the banking system in the United States following the bursting of the Wall Street stock market bubble in October 1929.

That Glass-Steagall act was a prudent attempt by Congress to end the uncontrolled speculative excesses of the Roaring Twenties by New York finance. It established the Federal Deposit Insurance Corporation to guarantee personal bank deposits to a fixed sum that restored consumer confidence and ended the panic runs on bank deposits.

In November 1999, after millions spent lobbying Congress, the New York banks and Wall Street investment banks and insurance companies won a staggering victory. The US Congress voted to repeal that 1933 Glass-Steagall Act. President Bill Clinton proudly signed the repeal act with Sandford Weill, the chairman of Citigroup.

The man whose name is on that repeal bill was Texas Senator Phil Gramm, a devout advocate of ideological free market finance, finance free from any Government fetters. The major US banks had been seeking the repeal of Glass-Steagall since the 1980s. In 1987 the Congressional Research Service prepared a report which argued the case for preserving Glass-Steagall. The new Federal Reserve chairman, Alan Greenspan, just fresh from J.P. Morgan bank on Wall Street, in one of his first speeches to Congress in 1987 argued for repeal of Glass-Steagall.

The repeal allowed commercial banks such as Citigroup, then the largest US bank, to underwrite and trade new financial instruments such as Mortgage-Backed Securities (MBS) and Collateralized Debt Obligations (CDOs) and establish so-called structured investment vehicles, or SIVs, that bought those securities. Repeal of Glass-Steagall after 1999, in short, enabled the Securitization revolution so openly praised by Greenspan as the “revolution in finance.” That revolution is today devouring its young.

That securitization process is at the heart of the present Financial Tsunami that is destroying the American credit structure. Citigroup played a major part in the repeal of Glass–Steagall in 1999. Citicorp had merged with Travelers Insurance company the year before, using a loophole in Glass-Steagall that allowed for temporary exemption. Alan Greenspan gave his personal blessing to the Citibank merger.

Phil Gramm, the original sponsor of the Glass-Steagall repeal bill that bears his name, went on to become the chief economic adviser to John McCain. Gramm also went on to become Vice Chairman of a sizeable Swiss bank, UBS Investment Bank, in the USA, a bank which has had no small share of troubles in the current Tsunami crisis.

Gramm as Senator in 2000 was one of five co-sponsors of the Commodity Futures Modernization Act of 2000. A provision of the bill was referred to as the ‘Enron loophole’ because the it was later applied to Enron to allow them unregulated speculation in energy futures, a key factor in the Enron scandal and collapse. The Commodity Futures Modernization Act, as I described in my earlier piece in May, Perhaps 60% of Today’s Oil Price is Pure Speculation, allowed investment bank Goldman Sachs (coincidentally the former bank of Treasury Secretary Paulson), to make a literal killing in manipulating oil futures prices up to $147 a barrel this summer.

Paulson’s impressive interest conflicts

The actions of Treasury Secretary Paulson since the first outbreak of the Financial Tsunami in August of 2007 have been directed with one apparent guiding aim—to save the obscene gains of his Wall Street and banking cronies. In the process he has taken steps which suggest more than a mild possible conflict of interest. Paulson, who had been chairman of Goldman Sachs from the time of the 1999 Glass-Steagall repeal to his appointment in 2006 as Treasury head, had been one of the most involved Wall Street players in the new securitization revolution of Greenspan.

Under Paulson, according to City of London financial sources familiar with it, Goldman Sachs drove the securitization revolution with an endless rollout of new products. As one London banker put it in an off-record remark to this author, “Paulson’s really the guilty one in this securitization mess but no one brings it up because of the extraordinary influence Goldmans seems to have, a bit like the Knights Templar order of old.’ Naming Goldman chairman Henry Paulson to head the Government agency now responsible for cleaning up the mess left by Wall Street greed and stupidity was tantamount to putting the wolf in charge of guarding the hen house as some see it.

Paulson showed where his interests lay. He is by law is the chairman of something called the President's Working Group on Financial Markets, the Government’s financial crisis management group that also includes Fed Chairman Bernanke, the Securities & Exchange Commission head, and the head of the Commodity Futures Exchange Commission (CFTC). That is the reason Paulson, the ex-Wall Street Goldman Sachs banker, is always the person announcing new emergency decisions since last August.

Two weeks ago, for example, Paulson announced the Government would make an unprecedented $85 billion nationalization rescue of an insurance group, AIG. True AIG is the world’s largest insurer and has a huge global involvement in financial markets.

AIG’s former Chairman, Hank Greenberg—a close friend of Henry Kissinger, a former Director of the New York Fed, former Vice Chairman of the elite New York Council on Foreign Relations and of David Rockefeller’s select Trilateral Commission, Trustee Emeritus of Rockefeller University—was for more than forty years Chairman of AIG. His AIG career ended in March 2005 when AIG's board forced Greenberg to resign from his post as Chairman and CEO under the shadow of criticism and legal action for cooking the books, in a prosecution brought by Eliot Spitzer, then Attorney General of New York State.[1]

In mid September, in between other dramatic failures including Lehman Bros., and the bailout of Fannie Mae and Freddie Mac, Paulson announced that the US Treasury, as agent for the United States Government, was to bailout the troubled AIG with a staggering $85 billion. The announcement came a day after Paulson announced the Government would let the 150-year old investment bank, Lehman Brothers, fail without Government aid. Why AIG and not Lehman?

What has since emerged are details of a meeting at the New York Federal Reserve bank chaired by Paulson, to discuss the risk of letting AIG fail. There was only one active Wall Street banker present at the meeting—Lloyd Blankfein, chairman of Paulson’s old firm, Goldman Sachs.

Blankfein later claimed he was present at the fateful meeting not to protect his firm’s interests but to ‘safeguard the entire financial system.’ His claim was put in doubt when it later emerged that Blankfein’s Goldman Sachs was AIG’s largest trading partner and stood to lose $20 billion in a bankruptcy of AIG. [2] Were Goldman Sachs to go down with AIG, Secretary Paulson would have reportedly lost $700 million in Goldman Sachs stock options he had, an interesting fact to put it mildly if true.

That is a tiny glimpse into the man who crafted the largest bailout in US or world financial history some days ago.

As respected economist, Nouriel Roubini pointed out, in almost every case of recent banking crises in which emergency action was needed to save the financial system, the most economical (to taxpayers) method was to have the Government, as in Sweden or Finland in the early 1990’s, nationalize the troubled banks, take over their management and assets, and inject public capital to recapitalize the banks to allow them to continue doing business, lending to normal clients. In the Swedish case, the Government held the assets, mostly real estate, for several years until the economy again improved at which point they could sell them onto the market and the banks could gradually buy the state ownership shares back into private hands. In the Swedish case the end cost to taxpayers was estimated to have been almost nil. The state never did as Paulson proposed, to buy the toxic waste of the banks, leaving them to get off free from their follies of securitization and speculation abuses.[3]

Paulson’s plan, the one essentially rejected on September 29 by the House of Representatives, would have done nothing to recapitalize the troubled banks. That recapitalization could cost an added hundreds of billions on top of the $700 billion toxic waste disposal.

Serious bankers I know who went through the Scandinavian crisis of the 1990’s are scratching their head trying to imagine how crass the Paulson TARP scheme is. That politically obvious bailout of Wall Street by the taxpayers, what some refer to as ‘Bankers’ Socialism—socialize the costs of failure onto the public, and privatize the profits to the bankers—is a major factor behind the defeat of the TARP compromise version. Under Paulson’s scheme, which seems likely to get very little alteration by Congress in coming days, the Treasury Secretary, initially Paulson, would have sole discretion, with minimal oversight, to use a $700 billion check book, courtesy of taxpayer generosity, to buy various Asset Backed Securities held not only by Federal Reserve regulated banks like JP Morgan Chase or Citicorp, or Goldman Sachs, but also by hedge funds, by insurance companies and whomever he decides needs a boost.

‘The Paulson plan is unworkable,’ noted Stephen Lewis, chief economist with the London-based Monument Securities. ‘No one has an idea how to set a price on these toxic securities held by the banks, and in the present market a lot of them likely would be marked to zero.’ Lewis like many others who have examined the example of the temporary Swedish bank nationalization, called Securum, during their real estate collapse in the early 1990’s, stresses that ultimately only a similar solution would be able to resolve the crisis with a minimum of taxpayer cost. ‘The US authorities know very well the Swedish model, but it seems in the US nationalization is a dirty word.’

But there is an added element. John McCain decided to boost his flagging Presidential campaign by trying to profile himself as a ‘political Maverick’ one who opposes the powerful Washington vested interests. He flew into Washington days before the Paulson Plan was to be approved by a panicked Congress and conspired with a handful of influential Republican Senate friends, including Banking Committee ranking member, Senator Shelby, to oppose the Paulson plan. What emerged, with McCain’s backing, was a political power play that may well have brought the United States financial system to its knees, and McCain’s Presidential hopes with it.

Power and greed are the only visible juice driving the decision-makers in Washington today. Acting in the long-range US national interest seems to have gotten lost in the scramble. As I wrote last November in my Financial Tsunami five part series on the background to today’s crisis, all this could be foreseen. It is what happens when elected Governments abandon their public trust or responsibility to a cabal of private financial interests. It will be interesting to see if anyone in Washington realizes that lesson.

Whatever next comes out of Washington, however, one thing is clear, as reflected in what German Finance Minister Peer Steinbrück told the Bundestag. This is the end of the world as we knew it. The American financial Superpower is gone. The only important question will be what and how will the alternative be.

[1] Associated Press, Two charges against ...

Enraged by the USD 6.5 billion American arms sales package to Taiwan, China today cancelled its planned military and diplomatic contacts with the United States, accusing the Bush administration of "poisoning" the atmosphere which led to the latest stand-off.

Reuters
Bush calls for calm amid global stock market panic
Friday October 10, 12:40 pm ET

By Jeremy Pelofsky and Daniel Trotta

WASHINGTON/NEW YORK (Reuters) - Warning that "anxiety can feed anxiety," U.S. President George W. Bush implored Americans to remain confident on Friday and promised to restore stability in the face of a global stock market panic.

Bush spoke ahead of a gathering of leaders of the world's major economies in Washington where they will confront the frozen credit markets and recessionary signals underlying the worst financial crisis since the Great Depression.

"This uncertainty has led to anxiety among our people. And that is understandable, that anxiety can feed anxiety, and that can make it hard to see all that is being done to solve the problem," Bush said in a televised address.

"We know what the problems are. We have the tools to fix them. And we're working swiftly to do so," Bush said in a national address after Wall Street opened with an 8 percent slide, soon pared its losses but extended the damage from a seven-session losing streak.

Finance ministers and central bankers from the Group of Seven faced mounting pressure to repair the system after joint interest-rate cuts, individual liquidity injections, a $700 billion U.S. bailout and government plans to take equity stakes in banks failed to restore investor confidence.

French President Nicolas Sarkozy may launch a new European Union plan to try to deal with the crisis, a French government official said.

The Dow Jones Industrial Average lost nearly 700 points and fell more than 8 percent in the opening minutes of trading, then turned positive half an hour after the opening bell before resuming its slide.

Like the S&P 500 and the Nasdaq, the Dow was down more than 2 percent after Bush spoke.

That drop came after the Dow fell 679 points, or 7.3 percent, on Thursday, extending its losses over six trading sessions to 20 percent.

The fall was part of a global evisceration of wealth that has affected investment bankers and retirees alike. Going into the trading day, stocks on the benchmark MSCI main worldwide index had lost $14.3 trillion of value since October 31, 2007, leaving the global equity benchmark worth less than $20 trillion for the first time in four years.

The MSCI has lost nearly $4.6 trillion in value in the previous seven days alone.

Underlying the stock market sell-off were the paralyzed credit markets. International Monetary Fund chief Dominic Strauss-Kahn called for a temporary guarantee of all interbank deposits.

Japan's Nikkei sank 9.6 percent, while in Europe major indexes traded down more than 6 percent.

Bourses in Iceland, Russia, Austria, Indonesia, Romania and Ukraine all closed as a result of the share price falls.

"There's no confidence -- there's an atom or two of confidence returning," said market strategist Steve Goldman at Weeden & Co in Greenwich, Connecticut.

Many investors have been looking for global leadership, but Bush is a lame duck ahead of the November 4 presidential election with the two men competing to succeed him, Republican John McCain and Democrat Barack Obama, arguing over how to resurrect the economy.

One strategist said he feared a political vacuum with weak governments in Europe and North America.

"Sarkozy has been the EU president and is doing what people regard as a good job, but his wife is more popular than he is. That leaves Italy then as a bastion of political stability," said Marc Chandler, global head of currency strategy at Brown Brothers Harriman.

"It scares me that there's a vacuum of strong political leaders right now. It's not like we have a Franklin Roosevelt and a Churchill," he said.

The larger Group of 20, which includes 19 of the world's largest economies plus the European Union, the International Monetary Fund and the World Bank also were due for weekend meetings amid the thirst for leadership.

Morgan Stanley entered the spotlight after investors appeared unconvinced about its deal with Japan's Mitsubishi UFJ Financial Group Inc. Morgan Stanley shares have lost nearly half their value in the last three days on worries Mitsubishi UFJ might back out of a deal to inject much-needed capital.

The stock was down 35 percent.

In a bid to unfreeze bank lending, the U.S. government is weighing guaranteeing billions of dollars of bank debt and temporarily insuring all U.S. bank deposits, The Wall Street Journal reported on Friday.

The U.S. Treasury plans to start injecting capital into U.S. banks as soon as this month, according to a financial policy source familiar with Treasury Secretary Henry Paulson's thinking.

U.S. policy had focused on a plan to buy banks' distressed assets under the $700 billion rescue plan. Many analysts say a move to shore up banks' capital would be a more direct way to break a logjam in credit markets that has closed off new borrowing for consumers and businesses.

British Prime Minister Gordon Brown said other governments should follow Britain in putting money into struggling banks and offering guarantees worth hundreds of billions to persuade banks to start lending to each other.

The International Monetary Fund said on Thursday it was ready to lend to countries hit by the credit crunch and activated an emergency financing mechanism first used in the 1990s Asian crisis.

(Additional reporting by Reuters bureaus around the world; Editing by Brian Moss and Steve Orlofsky)

ramana wrote:Driving to work and hearing Bush I was thinking that there is a big political vacuum and could lead to chaos and military strikes.

The Lehman Bros and Merril Lynch going down was the 911 for Wall street. As the US wants a gloablized world it can dominate it needs to introspect whether it has the responsibility that comed with power. They cant allow financial mess like Great Depression and the current one and still want ledership.