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Has Deregulation Sired Fascism?

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Remember the good old days when the economic threat was mere recession?  The Federal Reserve would encourage the economy with low interest rates until the economy overheated.  Prices would rise, and unions would strike for higher benefits.  Then the Fed would put on the brakes by raising interest rates.  Money supply growth would fall.  Inventories would grow, and layoffs would result.  When the economy cooled down, the cycle would start over.

The nice thing about 20th century recessions was that the jobs returned when the Federal Reserve lowered interest rates and consumer demand increased.  In the 21st century, the jobs that have been moved offshore do not come back.  More than three million U.S. manufacturing jobs have been lost while Bush was in the White House.  Those jobs represent  consumer income and career opportunities that America will never see again.

In the 21st century the US economy has produced net new jobs only in low paid domestic services, such as waitresses, bartenders, hospital orderlies, and retail clerks.  The kind of jobs that provided ladders of upward mobility into the middle class are being exported abroad or filled by foreigners brought in on work visas.  Today when you purchase an American name brand, you are supporting economic growth and consumer incomes in China and Indonesia, not in Detroit and Cincinnati.

In the 20th century, economic growth resulted from improved technologies, new investment, and increases in labor productivity, which raised consumers' incomes and purchasing power.  In contrast, in the 21st century, economic growth has resulted from debt expansion.

Most Americans have experienced little, if any, income growth in the 21st century. Instead, consumers have kept the economy going by maxing out their credit cards and refinancing their mortgages in order to consume the equity in their homes.

The income gains of the 21st century have gone to corporate chief executives, shareholders of offshoring corporations, and financial corporations.

By replacing $20 an hour U.S. labor with $1 an hour Chinese labor, the profits of U.S. offshoring corporations have boomed, thus driving up share prices and "performance" bonuses for corporate CEOs. With Bush/Cheney, the Republicans have resurrected their policy of favoring the rich over the poor.  John McCain captured today's high income class with his quip that you are middle class if you have an annual income less than $5 million.

Financial companies have made enormous profits by securitizing income flows from unknown risks and selling asset backed securities to pension funds and investors at home and abroad.

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Today recession is only a small part of the threat that we face.  Financial deregulation, Alan Greenspan's low interest rates, and the belief that the market was the best regulator of risks, have created a highly leveraged pyramid of risk without adequate capital or collateral to back the risk.  Consequently, a wide variety of financial institutions are threatened with insolvency, threatening a collapse comparable to the bank failures that shrank the supply of money and credit and produced the Great Depression.

Washington has been slow to recognize the current problem.  A millstone around the neck of every financial institution is the mark-to-market rule, an ill-advised "reform" from a previous crisis that was blamed on fraudulent accounting that over-valued assets on the books.   As a result, today institutions have to value their assets at current market value.

In the current crisis the rule has turned out to be a curse.  Asset backed securities, such as collateralized mortgage obligations, faced their first market pricing in panicked circumstances. The owner of a bond backed by 1,000 mortgages doesn't know how many of the mortgages are good and how many are bad.  The uncertainty erodes the value of the bond.

If significant amounts of such untested securities are on the balance sheet, insolvency rears its ugly head.  The bonds get dumped in order to realize some part of their value.  Merrill Lynch sold its asset backed securities for twenty cents on the dollar, although it is
unlikely that 80 percent of the instruments were worthless.

The mark to market rule, together with the suspect values of the asset backed securities and collateral debt obligations and swaps, allowed short sellers to make fortunes by driving down the share prices of the investment banks, thus worsening the crisis.  With their capitalization shrinking, the investment banks could no longer borrow.  The authorities took their time in halting short-selling, and short-selling is set to resume on October 3 or thereabout.

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If the mark to market rule had been suspended and short-selling prohibited, the crisis would have been mitigated.  Instead, the crisis intensified, provoking  the US Treasury to propose to take responsibility for $700 billion more in troubled financial instruments in addition to the Fannie Mae, Freddie Mac, and AIG bailouts.  Treasury guarantees are also apparently being extended to money market funds.

All of this makes sense at a certain level.  But what if the $700 billion doesn't stem the tide and another $700 billion is needed?  At what point does the Treasury's assumption of liabilities erode its own credit standing?

This crisis comes at the worst possible time.  Gratuitous wars and military spending in pursuit of US world hegemony have inflated the federal budget deficit, which recession is further enlarging. Massive trade deficits, magnified by the offshoring of goods and services, cannot be eliminated by US export capability.

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Dr. Roberts was Assistant Secretary of the US Treasury for Economic Policy in the Reagan Administration. He was associate editor and columnist with the Wall Street Journal, columnist for Business Week and the Scripps Howard News Service. He is a contributing editor to Gerald Celente's Trends Journal. He has had numerous university appointments. His book, The Failure of Laissez Faire Capitalism and Economic Dissolution of the West is available here. His latest book,  How America Was Lost, has just been released and can be ordered here.

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Amy Goodman's report on the military - active unit... by Cheryl Abraham on Tuesday, Sep 23, 2008 at 9:46:00 PM
I'm probably on a "list" somewhere.... by daveys on Tuesday, Sep 23, 2008 at 10:05:00 PM
They'll be called "Freedom Facilities&quo... by Cheryl Abraham on Tuesday, Sep 23, 2008 at 10:56:24 PM
FEMA coffins eliminate the need for concentration ... by pft on Wednesday, Sep 24, 2008 at 3:58:18 AM
"Freedom Facilities". They are the ... by E. Nelson on Wednesday, Sep 24, 2008 at 11:29:36 AM
Orwellian euphemisms are the proper terminology I ... by Frank J. Ranelli on Tuesday, Oct 7, 2008 at 2:47:24 AM
Every time I read an article by Paul Craig Roberts... by Charlie L on Wednesday, Sep 24, 2008 at 1:13:57 AM
The news media confuses people by claiming that so... by Mark Whittington on Wednesday, Sep 24, 2008 at 1:32:09 AM
It's the fascists that have promoted deregulat... by Jim Eldon on Wednesday, Sep 24, 2008 at 11:49:42 AM
Fascism is already here.... by Dave Berman on Wednesday, Sep 24, 2008 at 4:22:21 PM
has at least been telling it like it is for a few ... by JimZ on Wednesday, Sep 24, 2008 at 7:09:15 PM
Fascism also has a religious component that won't ... by nightgaunt on Thursday, Sep 25, 2008 at 1:42:22 PM