US PRESIDENTIAL ELECTION SPECIAL DOSSIER: PAGES 11-14 Price: £3

OCTOBER 2008

SAVING WALL STREET FROM ITSELF

Welcome to the USA
The $700bn rescue package proposed over-quickly by the US Treasury and Federal Reserve was rejected by one tier of US government and – with horse-traded amendments – accepted by the other. In an uncertain future, it is already clear that 30 years of US financial policy, and Wall Street as we know it, are over
SUSIE HAMILTON – ‘Sunset Cowboy’ (1997)

BY FRÉDÉRIC LORDON

How the West could be won
BY SERGE HALIMI
ow could the Republicans boast about their liberal values and their record in government when public funds are currently being used to fill the black hole created by US banks? Most Americans are in sour mood, as rising energy prices reduce their purchasing power, already affected by the credit crunch and the wage freeze. So the Republicans have decided to change the subject and talk about patriotism, authenticity and attachment to “traditional values”. Faced with Barack Obama’s life story and the prospect of a historic breakthrough, they came up with their own stories: Sarah Palin, mother of five, governor of Alaska, wife of a champion snow-machine racer; and John McCain, American hero, who bombed Vietnam and spent five years in captivity there. And a new slogan, “Country first”. (Does that mean the Democrats put country last?) Four years ago, despite a poor economic and diplomatic performance (a recession and the disastrous war in Iraq), President Bush won a second term stressing his religious faith and playing on fears of terrorism, abortion and homosexual marriage. And he could always rely on the abiding – and frequently justified – public resentment of the intellectual, artistic and technocratic elite who generally support the Democrats. This year, McCain may be acting the gentleman but his supporters on the National Review added an old spice to the Republican recipe which, they hope, has lost none of its sting: “After college, Obama has an affluent white girlfriend who loves and wants to marry him. She brings him to visit her family, who warmly accepts him. Obama is

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attached to the girl and respects the family’s deep cultural heritage, but he eventually dumps her because she is not black. He feels that if he marries her he will ultimately be assimilated into a foreign white culture, a fate that is unacceptable to him” (1). Such a ploy may work, even at a time of economic meltdown. Speaking about Obama at the Democratic convention in Denver in August, the AFL-CIO secretary-treasurer confessed to delegates from Michigan: “A lot of white voters… and quite frankly a lot of union voters believe he’s the wrong race” (2). The senator for Illinois is said to be too cold, too intellectual, too foreign (and too popular with foreigners), too leftwing, too inexperienced, too black. Asked by a journalist why he isn’t further ahead in the polls given the unpopularity of Bush and his party, Obama responded: “The Republicans don’t govern very well but sure know how to campaign” (3). He seems to have decided not to complain but fight back. The financial crisis offers a good line of attack: McCain openly supports deregulation and just a short while ago the Republicans advocated that federal pension schemes should be privatised and quoted on the stock exchange. The Democratic response is more tactical, more carefully targeted. The presidential election is being won state by state. Many, including some key states – California, New York, Illinois, Texas, etc – are already in one camp or the other. But the Republican West seems to be wavering. That is where Obama has chosen to fight. Continued on page 12

INSIDE THIS ISSUE
How global finances are lurching from crisis to crisis page 3 Spotlight on the neo-Taliban’s sophisticated strategy page 4 Why South Africa isn’t working page 5 The madness and misery of Palestine’s dual regime page 6 Front Line special report: human rights under fire in Honduras page 8 TV soap’s transforming impact page 16

nly a child could fail to be amused by the steely response of the US authorities to the collapse of Lehman Brothers, and the speed with which the futility of that response became apparent. The decision to let the struggling investment bank go under was a risky gamble – and useless if it was supposed to signal a change of strategy. Each in the series of critical developments was hailed as the crisis point, before the next broke, yet more serious and more spectacular. Hardly surprising that this should have plunged the regulators into confusion and bewilderment. The weekend emergencies exploded one after another, faster and faster: 16 March, the investment bank Bear Stearns; 12 July, mortgage giants Fannie Mae and Freddie Mac part one; 6 September, Fannie and Freddie part two (see Ibrahim Warde, page three); 13 September, Lehman Brothers and the financial services company Merrill Lynch; 16 September (less than a week later), the insurance group AIG (American International Group). Each time the Federal Reserve and the Treasury Department believed they had surpassed themselves, they quickly realised that nothing was working and they would have to go through it all again. Their achievements were not enough to halt the collapse of the US financial system. And the cost wasn’t merely financial: neither Fed chairman Ben Bernanke nor Henry Paulson (former boss of Goldman Sachs, the flagship of uncompromising capitalism, and now Treasury Secretary in a rightwing administration) could ever have imagined that they would find themselves facing accusations of socialism each time they were forced to use state money to rescue private finance. That sad paradox must have been one factor determining the decision they took as they staggered away from the rescue of Fannie and Freddie into the crisis at Lehman; they refused to intervene – a signal that the financial community would have to handle this one on its own. Personal humiliations apart, the Fed-Treasury position was understandable. The authorities were worried that each new intervention set a precedent, and were nervous that private bankers might dash happily to the brink of bankruptcy convinced that at the last moment they too, like Bear Stearns, Fannie and Freddie, would have to be saved. Such nonchalance was an affront; it was difficult to ignore the way in which arrogant financial institutions lined their pockets during the good times, then fled, screaming for protection and special treatment, to a state that they had previously dismissed as a quasi-Soviet absurdity. There is always a danger that moral indignation will preempt analysis. Anger is legitimate, a necessary spur to gathering the political resources necessary for an eventual, vigorous reaction. But, analytically, clarity is essential. The immediate issue

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is systemic risk: the danger that, given the complexity of inter-bank commitments, the collapse of a single institution might generate shock waves leading to a cascade of collateral failures. Let me remind any liberals who are slow on the uptake that systemic risk means what it says: the entire system is at risk, any and all institutions of private finance are now the potential victims of a global collapse. The destruction of the system of finance, of credit, would mean the end of all economic activity. It is important to be clear about the enormity of the consequences. Once a financial bubble has burst and the genie of systemic risk has been released, central banks lose any room for manoeuvre. Private finance can take the rest of the economy hostage, fatally tying the economy’s fate to its own. Since the collapse of one entails the collapse of the other, the state has no choice except to come to the rescue. This lies at the heart of the crisis. Financial re-regulation is pointless unless it is carried out with the strategic objective of preventing bubbles from reappearing. Once systemic risk reconstitutes and reactivates itself the battle is lost, so the only solution is to eradicate it. The Fed may demonstrate no serious will to do this, but it is at least aware of the degree to which it is strategically outmatched in its campaign against the crisis in private finance (which is all the stronger for being moribund). So the Fed has submitted hopelessly to calls to bail out tottering banks, terrified that a refusal could precipitate an irreparable catastrophe. In March 2008 Bear Stearns threatened to default on $13.4 trillion in credit derivatives transactions (1), ten times more than Long Term Capital Management, which almost brought the US financial system down in 1998. In July Fannie and Freddie threatened to default on their $1.5 trillion debt. Leading financial institutions had invested in these securities: pension funds representing the retired, mutual funds holding the savings of ordinary people, and even foreign central banks. Such a catastrophe threatened the survival of the US financial system. At the Treasury, Paulson didn’t hesitate: on 12 July he made $25bn of public money available as lines of credit and to start recapitalisation. On 6 September it emerged that the sum required was more like $200bn, which taxpayers duly stumped up. “I didn’t want to have to do that,” said Paulson, horrified by the socialist future before him. But he did it all the same, because he had no choice. That Lehman was a smaller fish meant that the Fed and Treasury did have a choice. Determined to send the right signal, they decided to make Lehman pay for the sins of its brethren. But although Lehman afforded an excellent excuse to vent their Continued on page 2