Friday, March 21, 2008

Spitzer, the Sub-prime Mess, and China

New York State Governor Eliot Spitzer's spectacular fall from power because of a cheesy sex scandal is cast in an entirely new light in a new Brasscheck TV posting that's definitely worth a look:

Brasscheck TV is alleging that Spitzer did not merely trip on his own dick but was taken down because of an article he had in the Washington Post on 14 February, accusing the Bush administration of being a "partner in crime" in the sub-prime mortgage crisis. Spitzer said that the Justice Department had prevented action by the legal authorities of 50 states to curb predatory mortgage lending. It had invoked an 1863 banking law to nullify state laws and law suits to protect consumers.

Brasscheck TV concluded its report by saying that the White House had colluded with greedy and corrupt bankers in search of a quick buck; the implication was that the motivation was essentially financial. But could it be more? Could there be political method in the madness of the sub-prime mortgage crisis?

The answer is Yes. In fact, since Alan Greenspan began lowering interest rates to get the US economy out of the post 9/11 recession, there has been a descent into economic madness that can only be explained as politically motivated. The sub-prime mortgage mess has two elements: one is that people with little capacity to repay were given mortgages; the other is that the mortgages were then packaged into investment grade securities. That in itself can be explained away as greed overwhelming reason. But how was it that financial maestros in the United States and Europe invested so massively in those securities? Surely, greed is constrained by the foundation it is built on, self-preservation?

There is much evidence that bankers with the most sophisticated capacity for economic prognostication were the ones who plunged most deeply into the sub-prime mess. Stories about the extent to which major banks, insurance companies and hedge funds are burdened with bad debt invite disbelief. The New York Times reports on an arcane form of risk insurance in the bond market has led to an inverted pyramid of obligations amounting to $16 trillion. Another piece of punditry ricocheting around the the Internet notes that the funds available to the FDIC, which guarantees individual bank deposits, are only about a quarter of what would be needed in case of a general financial collapse.
The ratio of American personal debt to GDP is reported to be the highest it has ever been, standing now at some $3 trillion; if mortgage debt is included, personal debt is over $13 trillion, almost as much as the $14 trillion GDP. The entire international financial system seems more and more like a ponce scheme ripe for collapse.

How is this political?

To understand how, we have to look to Asia.

I am among the many who do not believe that the United States invaded Iraq in 2003 in an idealistic neocon attempt to bring democracy to the Arab world. Nor do I believe that the mess created under American auspices in Iraq is the result of ignorance and miscalculation. To me the bloody dismantling of the country seems coldly calculated. "Stuff happens," as Donald Rumsfeld put it, but for it to happen so consistently, and not just in Iraq, points to deliberate intent. The saber rattling over Iran and persistent talk of attacking its nuclear installations, the worsening situation in Afghanistan, the traumatized state of Pakistan reeling from terrorist attacks and political assassinations, the political fragility of Nepal in the aftermath of a brutal civil conflict, the insurgencies perking away in parts of India rich in resources or strategically important, and now the insurrection in Tibet, all seem to support the thesis that Asia is being destabilized.

To what end?

It might be to pull the rug out from under the totalitarian regime in China.

In a stable world economy, with peace in Asia, China would grow into a formidable and dangerous power. If the world economy tanked and there was general turmoil in Asia, Beijing would have little room for maneuver; key decisions on investments and exports are now made in the board rooms of foreign corporations. If the Chinese boom turned rapidly to bust, if there was massive unemployment accompanied by inflation or deflation (both possible under different scenarios), Hu Jintao and his party could lose the "mandate of heaven" in very short order.

How events will actually play out depends crucially on the responses of Asia's ruling elites. A firm commitment to avoid violence, to seek dialogue and compromise internally and externally, could lay the basis for a regional capacity for independent economic growth. This is especially true of China. If the regime there moves towards democracy in orderly fashion -- Tibet would be a good place to start -- the consequence would be enormously positive. If it tries to maintain itself with violence, we could be looking at a period of chaos, not just in China, but in the region as a whole. A global economic downturn and the major dislocation of China would seriously threaten the stability of South East Asia and India. Much of the Muslim world is already in turmoil, and things could get rapidly worse amidst growing regional distress.

In the scenario described above the United States and Europe would also be profoundly affected, but for them there would be an upside: the economic and political challenge of Asia would be laid to rest for the foreseeable future. It is possible that slowing economic growth and depression-level unemployment could cause upheavals in Europe too. The Kosovars, the Chechens, the Serbs, Croats and other volatile people in the European mosaic might feel the need for cathartic violence in the "Clash of Peoples" scenario outlined in the most recent issue of Foreign Affairs (see post of 2-25-08). Social unrest is possible in the United States too, but if things tend that way the Patriot Act provides the means to maintain order.

Those who want peace, civil rights and democracy better start organizing right away (see my post of 2-20-08).

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