“Soft despotism is a term coined by Alexis de Tocqueville describing the state into which a country overrun by "a network of small complicated rules" might degrade. Soft despotism is different from despotism (also called 'hard despotism') in the sense that it is not obvious to the people."

Sunday, September 21, 2008

American Created the Financial Problem and Only America Can Fix It

Financial Crisis: America rises to the occasion as storm heads towards brittle Europe
By Ambrose Evans-Pritchard Telegraph
Last Updated: 9:35pm BST 21/09/2008

An almighty crash has been averted, very narrowly. There is no guarantee that the revolutionary actions of the US government will prevent a full-fledged global slump, but at least we now have a fighting chance.

By taking the colossal wreckage of the credit bubble onto its own books in a $700bn (£382bn) taxpayer sink, Washington has forestalled a run on the world banking system, and may hopefully have saved the viable core of modern capitalism.

Hank Paulson's "Super Sink" is the "game changer" we have all been waiting for in this interminable crisis. It puts a floor under the toxic debt that is bleeding the banking system to death, and ends the downward spiral of CDOs, CLOs, HELOCs, and such instruments of leveraged excess that lie at root of the credit terror. No doubt the Fed, the Treasury, and Congress have made a string of mistakes but they are now rising to the occasion - the reflexes of a wounded but still formidable superpower. The US has shown time and again that it has the institutions and flair to pull itself out of disaster.

We will find out soon enough whether the rest of the world can respond with such dispatch as the hurricane smashes into them. As of today, the core risk is no longer in the US. It has rotated to the weaker and more brittle polities of Europe, Latin America, and Asia - especially China.

Europe has embedded paralysis in its treaty law. Maastricht prohibits a Keynesian blitz. Budget deficits above 3pc of GDP are not allowed until an EU country is already in dire straits, and even then approval requires a committee vote by 27 states. So Ireland, Italy and France must now tighten fiscal policy into the downturn. There is no EU Treasury to back the euro, and therefore no Euro-Paulson with the powers and legitimacy to take sweeping steps in an emergency. By extension, there is no clear-cut lender of last resort either. Each country is on its own, yet none have the instruments of monetary policy to carry out a Paulson-type rescue with credible punch.

The European Central Bank stands aloof with Teutonic severity, as hawkish as the old Bundesbank - or the Reichsbank in 1931. It too is a prisoner of a rigid treaty mandate. There was a mad Wagnerian feel to its July rate rise. We now know that Euroland was already slipping into recession when it acted. Do the hawks mean to unleash Götterdämmerung on the peoples of Spain, Ireland, Italy, Portugal, and Greece, with all the dangers that must accompany a disintegration of EMU?

It is incessantly repeated - often by people with an animus against the US - that "dead-beat America" cannot afford these serial bail-outs. Perhaps, but compared with whom, and to what?

The US government debt (owed to the public, using the IMF measure) is just 48pc of GDP, one of the lowest of the G7 industrial powers. This compares with 57pc for Germany, 94pc for Japan, and 100pc for Italy. After the Second World War, the US debt touched 120pc of GDP. As the Habsburgs liked to say, today's drama is desperate but not serious.

Note too that the US is the only power (bar India) with a birth rate high enough to meet its future pension costs. Japan is already shrinking; China faces the start of workforce implosion within seven years; Russia is a demographic basket case.

Mr Paulson's Super Sink is modelled on the Resolution Trust Corporation, which cleaned up the Savings & Loan mess in the early 1990s. The RTC added no debt and made a profit in the end.

The Paulson plan will not prevent a deep US recession, but as the spearhead of a policy crafted to keep Americans in their homes, it will slow the avalanche of foreclosures and change the profile of future mortgage defaults. House prices may not, after all, drop by 34pc as now priced by the futures market. That is a reprieve for hundreds of regional lenders on death row.

Call it moral hazard if you want, but as President Bush said: "There will be ample opportunity to debate the origins of this problem. Now is the time to solve it."

The game was up in any case on Wednesday when yields on three-month Treasury notes fell to zero in a panic flight to safety, and investors began mass withdrawals from America's $3.5 trillion money market funds.

After the trauma of the last week - the Lehman bankruptcy, the state seizure of AIG, the Morgan Stanley scare, the heart attack in the market for credit derivatives, and the monoline debacle at AMBAC - it should be clear to everybody that rigorous debt liquidation would be viciously destructive.

The world has seen nothing like this (in peacetime) since President Franklin Roosevelt shut the banking system and confiscated gold in March 1933, though his words were more memorable than last week's Bushisms.

"The rulers of the exchange of mankind's goods have failed, through their own stubbornness and their own incompetence. They know only the rules of a generation of self-seekers.

"The money changers have fled from their high seats in the temple of our civilisation. We may now restore that temple to the ancient truths," he told the nation.

Will we hear such language before long from President Obama, addressing the most radical House and Senate in living memory? Probably. From moral hazard to moral rebirth.


  1. Obama could ruin the fix by taxing the economy to death.--

    The Wall Street mess now takes center stage in the presidential race. With company after company biting the dust, can John McCain survive as the representative of the incumbent party?

    So far, McCain has focused on a populist criticism of Wall Street and its irresponsibility, firing away at corporate greed and lending practices.

    But he has to fuse the issues of the economy and taxes — to show how Barack Obama’s tax proposals would lead to a catastrophic implosion of the nation’s capital base.

    With the top Wall Street houses crashing for a want of capital, how can Obama justify an increase, and perhaps a doubling, of the capital-gains tax?

    Obama has already said he might drop his tax hikes if the economy weakens. After noting that it’s pretty sad when your best idea for how to help the economy is to abandon your own proposals, McCain should call on Obama to give up on those new taxes right now.

    People will sit on their capital rather than invest it if their gains are to be taxed at twice the current rate. And raising taxes on a troubled economy is akin to bleeding a sick patient — mideival "medicine" that does more to kill than to cure.

    McCain needs to force Obama to choose between his leftist commitment to income redistribution and the common-sense point that higher taxes on investors and "the rich" would merely deepen the economic mess.

    If Obama refuses to abandon his tax hikes, he’ll be seen as putting his ideology ahead of the nation’s needs. If he does the reverse, he’ll be admitting that his tax program has been a mistake — and, by recanting, show how unsteady his hand would be on the tiller.

    Hiking taxes at the outset of a slowdown has always made things worse. McCain need point no further back than the first President George Bush, whose tax increase hit just as the economy was slowing from the Reagan expansion — triggering a recession that let Bill Clinton win the White House.

    As the financial failures spread, voters will focus on the bad news and be inclined to hand the White House to the party that’s out of power. But if they focus focus on the cure Obama proposes, the bad economy could work to McCain’s benefit.

    Dick Morris

  2. Pelosi

    In a statement Sunday, the House Speaker says the Bush administration’s proposed financial package “does not include the necessary safeguards.”

    “Democrats believe a responsible solution should include independent oversight, protections for homeowners and constraints on excessive executive compensation.”

    “We will not simply hand over a $700 billion blank check to Wall Street and hope for a better outcome.”

    They'll sign. What else can they do.

  3. The RTC was directly linked to real assets.

    In this case, some are real, some are not, some are unknowable.

    But, fear not:

    Big John says he may send COUMO to save us!

    ...replacing that Evil Pub,
    Chris Cox!

  4. Totally Wrong?

    Now the French military and NATO claim that the Globe and Mail article is wrong. The headline over The Associated Press story reprinted in the International Herald Tribune reads:
    “France denies troops ill-equipped in Afghanistan.”
    "The French military would be well advised to use circumspection before making such comments. And NATO’s statement that there is no formal ISAF or NATO report of which they are aware, sounds like a classic non-denial denial, leaving them plenty of room to re-explain themselves when presented with additional evidence. If NATO and the French persist in making these claims, the secret report, written by American Special Forces who were present, could find itself on the internet. Certain embargoed details in the report are even more troubling than the facts that were published in the Globe and Mail article.

    The loss of ten French soldiers is bad enough. Let’s not make it worse with cover-up. Truth leaks faster than helium. It happened with the mythologized death of Pat Tillman. And it will happen in this case."

    - Yon

  5. See also: McCain would limit exec pay

    Sen. John McCain (R-Ariz.) said Sunday that bank executives who take the mortgage bailout should have an annual salary limit of $400,000, a substantial pay cut that could dramatically reduce participation in the program.
    I think we oughta limit the number of Horses Arizona Residents can own.

    Probly oughta limit the Gab on this here blog, too.

    ...and maybe mandatory "tip" Jar.


  6. Dr. Bill is reminding us that government help is not alwasys all wrong: helping Chrysler actually ended up making a 2 1/2 times gain for the government, he says.

  7. I think one of Bob's ZEBRA electrics passed me in traffic last week. I couldn't catch it. Figured he was in a hurry to get home to his outlet. So many stickers on the back end that I couldn't find a logo.

  8. Did it have black and white stripes?

    I'm gonna piss all the libs in Moscow off, I've got my McCain sticker, looking for a 'Save The Planet' sticker to put next to it.

  9. This comment has been removed by the author.

  10. Are you going to drive to Ohio?
    Through Nebraska?

  11. I think so, but not sure which way. Got to go soon if we're going.

  12. That ZAP three wheeler looks to be a great rig for the back mountain roads around here. :( Looks like it would tip in the first 15 minutes.

  13. If you like tractors, think about stopping by Pioneer Village in Minden, NE. It's just a few miles off I-80 as I recall. So many tractors and old farm equipment that they have a separate hanger sized building for each mfr. Farmalls, John Deeres, AC, Ford, Masseys, Case, etc. Some are two floors.

  14. Pelosi and company may screw around with this bailout bill to the point where the whole crash and burn scenario becomes possible again.

    I'll make a note of that. She insists I see Mt. Rushmore one of these times.

  15. Leaving Mt Rushmore you can angle down into NE and see Car Henge as you drive on through the sand hills toward Minden. From Minden, you can jump onto I-80.

    I'll look up Car Henge for you.

  16. She also wants to take me to Mall of America :) which is in Minneapolis I think. I'm resisting that.

  17. CarHenge

    Alliance, NE


  18. CarHenge

    And just think, this magnificent art was created by some Nebraska farmboys with too much beer and nothing else to do. Go Nebraska! Go Big Red!


    As we were leaving, I found a roll of baler twine. It’s waxed, triple stranded, stout hard-cotton string, and the best damned household twine you can lay your hands on. Buy it if you can find it at a farm supply outfit in your neighborhood. I’ve still got half that roll. Gotta save the good stuff, ya know.

  19. :) Definitely looks like a good spot to celebrate a fertility rite, and sacrifice a sausage or two. Are the tail fins on the Cad lined up for the summer solstice?

    I got to get up early. Night, and thanks.

  20. You can exercise the art of compromise. Tell her you'll take her to Cross Roads Mall, out on the west side of Omaha.

    Crossroads Mall (Omaha)

    Tell her Crossroads is the model they used for Mall of America.

  21. Back in Iraq, Jarred by the Calm
    In Baghdad, a war reporter rediscovers a social fabric he thought was lost forever.

    When I left Baghdad two years ago, the nation’s social fabric seemed too shredded to ever come together again. The very worst had lost its power to shock.

    To return now is to be jarred in the oddest way possible: by the normal, by the pleasant, even by hope.