From the World War 4 Report:

BEHIND THE ECONOCATACLYSM

http://ww4report.com/node/6097

Globalization, Oil Shock and the Iraq War

by Vilosh Vinograd, World War 4 Report

On Sept. 29—perhaps to be remembered as Black Monday—a
majority of House Republicans, and a minority of
Democrats, voted down the $700 billion bailout bill.
The stock market reacted with the first one-day
trillion-dollar loss in Wall Street history—and 8.8%
free fall, and its biggest percentage decline since
the 1987 crash. Only one stock in the index—Campbell
Soup—finished higher.

Even the supposed pillars of stability which seemed
poised to reap the gains of the recent turmoil were
not immune. JP Morgan Chase—which had already acquired
Bear Stearns investment bank and Washington Mutual
savings & loan, with US tax-payers sweetening the
deals to the tune of billions—closed $7.24 lower at
$41, down 15 percent. Citigroup—the country's largest
banking institution, with JP Morgan in the number-two
slot—was poised to acquire the banking assets of
Wachovia Corp. in the big reshuffle. Wachovia lost
more than 90% of its market value in the plunge. Bank
of America—set to acquire Merrill Lynch—announced it
was suing affiliates of the newly bankrupt Lehman
Brothers for $500 million for failure to return money
the bank provided as collateral. Global financier
George Soros says the "global capitalist system...
is...coming apart at the seams."

Up to $3 trillion in financial assets have been wiped
out in the crisis so far—and supposed free-market
principles are being abandoned in for a rapid
centralization of power in federal hands to shore up
the teetering edifice, a virtual melding of Wall
Street and Washington. The Philippine radical academic
Walden Bello writes in a primer on the crisis:

Wall Street [is] effectively nationalized, with
the Federal Reserve and the Treasury Department making
all the major strategic decisions in the financial
sector and, with the rescue of the American
International Group (AIG), the US government now runs
the world's biggest insurance company.

The bailout plan, drawn up by Treasury Secretary Hank
Paulson, is dubbed the Troubled Asset Relief Program
(TARP), and is the centerpiece of the proposed
Emergency Economic Stabilization Act. It would give
Paulson or his successor unprecedented powers. Under
the plan, any firm selling assets to the government
would have to give Washington the right to take an
ownership stake in the firm. It would give the
Treasury Secretary similar powers to cut deals with
foreign banks. The left is concerned that the bill
would bail out Wall Street but not "Main Street"—and
even Republicans have had to adopt this rhetoric. For
the right it is an embarrassment: a crash reversal of
the long-repeated mantra that the "free market" would
solve all problems. After a generation of neoliberal
dogma and corporate globalization, these supposedly
sacred principles are being abandoned by the
administration with a vertiginous rapidity.

Globalization: the God that Failed
On the surface, the crisis is the bitter fruit of
frenzied speculation and labyrinthine trickery—the
endless artifice of Wall Street whiz-kids to keep
milking profit out of bad debts. Writes Bello:

Financial speculators outsmarted themselves by
creating more and more complex financial contracts
like derivatives that would securitize and make money
from all forms of risk—including exotic futures
instruments as "credit default swaps" that enable
investors to bet on the odds that the banks' own
corporate borrowers would not be able to pay their
debts! This is the unregulated multitrillion dollar
trade that brought down AIG.

And, in what Bello portrays as a vicious cycle, the
deregulation ethic which led to the current crisis was
itself a response to the deeper underlying crisis of
capitalism:

The Wall Street meltdown is not only due to greed
and to the lack of government regulation of a
hyperactive sector. The Wall Street collapse stems
ultimately from the crisis of overproduction that has
plagued global capitalism since the mid-seventies.

Financialization of investment activity has been
one of the escape routes from stagnation, the other
two being neoliberal restructuring and globalization.
With neoliberal restructuring and globalization
providing limited relief, financialization became
attractive as a mechanism to shore up profitability.
But financialization has proven to be a dangerous
road, leading to speculative bubbles that lead to the
temporary prosperity of a few but which ultimately end
up in corporate collapse and in recession in the real
economy.

Deregulation was part of the general neoliberal
doctrine:

Neoliberal restructuring took the form of
Reaganism and Thatcherism in the North and Structural
Adjustment in the South. The aim was to invigorate
capital accumulation, and this was to be done by 1)
removing state constraints on the growth, use, and
flow of capital and wealth; and 2) redistribute income
from the poor and middle classes to the rich on the
theory that the rich would then be motivated to invest
and reignite economic growth.

The problem with this formula was that in
redistributing income to the rich, you were gutting
the incomes of the poor and middle classes, thus
restricting demand, while not necessarily inducing the
rich to invest more in production.

Next was the move to open new markets and resources in
the process to become known as globalization:

The second escape route global capital took to
counter stagnation was "extensive accumulation" or
globalization, or the rapid integration of
semi-capitalist, non-capitalist, or precapitalist
areas into the global market economy. Rosa Luxemburg,
the famous German revolutionary economist, saw this
long ago as necessary to shore up the rate of profit
in the metropolitan economies. How? By gaining access
to cheap labor, by gaining new, albeit limited,
markets, by gaining new sources of cheap agricultural
and raw material products, and by bringing into being
new areas for investment in infrastructure.
Integration is accomplished via trade liberalization,
removing barriers to the mobility of global capital,
and abolishing barriers to foreign investment.

China is, of course, the most prominent case of a
non-capitalist area to be integrated into the global
capitalist economy over the last 25 years.

To counter their declining profits, a sizable
number of the Fortune 500 corporations have moved a
significant part of their operations to China to take
advantage of the so-called "China Price"—the cost
advantage deriving from China's seemingly
inexhaustible cheap labor. By the middle of the first
decade of the 21st century, roughly 40 to 50 per cent
of the profits of US corporations were derived from
their operations and sales abroad, especially China.

One ironic fruit of this strategy is the emergence of
Asia and particularly China in a position of (limited)
power over the US. Writes Bello in an analysis of
Asia's role in the current crisis:

Trillions of dollars of Asian public and private
money are invested in US firms and property, with the
five biggest Asian holders accounting for over half of
all foreign investment in US government debt
instruments. Funds from Asia have become a key prop of
US government spending and the middle-class
consumption that have become the driver of the
American economy.

Singapore's Temasek pumped over $4 billion into
Merrill Lynch a few months ago—after driving a hard
bargain. The China Investment Corporation (CIC)
invested $5 billion in Morgan Stanley last December,
but refused the crippled investment bank's desperate
plea to increase its share of the firm. The Korean
Development Bank turned down the overtures of Lehman
Brothers a week before the latter's historic collapse
into bankruptcy.

China is not likely to call in the chips any time
soon:

With so much of Asia's wealth relying on the
stability of the US economy, there is not likely to be
any precipitate move to abandon Wall Street securities
and US Treasury bills.

Nonetheless, faced with this vulnerability vis-a-vis
Asia and especially China, the US under George Bush
embarked on reckless gambit to shore up unrivaled
global hegemony—using its still unparalleled military
supremacy to acquire strategic control of the world's
most critical oil reserves in the Persian Gulf.

Over the Edge: It's the War, Stupid!
The financial crisis was brewing anyway, but the Iraq
war and resultant oil shock helped preciptate it.
Writing in The Guardian earlier this year, Nobel-prize
winning economist Joseph Stiglitz found:

Underlying the US's financial woes are three
distinct but related problems. First, a debt crisis,
exemplified by sub-prime mortgages, with millions of
Americans with mortgages greater than the value of
their house.

Second, with so many bad debts, and such
uncertainty about their magnitude, there is a credit
crunch. Banks don't even know the extent of their own
problems; how then can they have much confidence in
lending to others?...

The third problem is macro-economic. The US has
been sustained by a housing bubble, leading to a
consumer binge. Household savings rates have fallen to
zero. The Iraq war—and the soaring oil prices
accompanying it—has depressed the economy. Money spent
on oil or on Nepalese contractors in Iraq is money
that isn't being spent at home; these dollars don't
provide much stimulation for the economy.

Writing with Harvard's Linda J. Bilmes in the
Washington Post in March, Stiglitz sounded a similar
warning:

There is no such thing as a free lunch, and there
is no such thing as a free war. The Iraq adventure has
seriously weakened the US economy, whose woes now go
far beyond loose mortgage lending. You can't spend $3
trillion—yes, $3 trillion—on a failed war abroad and
not feel the pain at home.

Some people will scoff at that number, but we've
done the math. Senior Bush administration aides
certainly pooh-poohed worrisome estimates in the
run-up to the war. Former White House economic adviser
Lawrence Lindsey reckoned that the conflict would cost
$100 billion to $200 billion; Defense Secretary Donald
H. Rumsfeld later called his estimate "baloney."
Administration officials insisted that the costs would
be more like $50 billion to $60 billion. In April
2003, Andrew S. Natsios, the thoughtful head of the US
Agency for International Development, said on
Nightline that reconstructing Iraq would cost the
American taxpayer just $1.7 billion. Ted Koppel, in
disbelief, pressed Natsios on the question, but
Natsios stuck to his guns. Others in the
administration, such as Deputy Defense Secretary Paul
D. Wolfowitz, hoped that US partners would chip in, as
they had in the 1991 Persian Gulf War, or that Iraq's
oil would pay for the damages.

The end result of all this wishful thinking? As we
approach the fifth anniversary of the invasion, Iraq
is not only the second longest war in US history
(after Vietnam), it is also the second most
costly—surpassed only by World War II.

Why doesn't the public understand the staggering
scale of our expenditures? In part because the
administration talks only about the upfront costs,
which are mostly handled by emergency appropriations.
(Iraq funding is apparently still an emergency five
years after the war began.) These costs, by our
calculations, are now running at $12 billion a
month—$16 billion if you include Afghanistan. By the
time you add in the costs hidden in the defense
budget, the money we'll have to spend to help future
veterans, and money to refurbish a military whose
equipment and materiel have been greatly depleted, the
total tab to the federal government will almost surely
exceed $1.5 trillion.

But the costs to our society and economy are far
greater. When a young soldier is killed in Iraq or
Afghanistan, his or her family will receive a US
government check for just $500,000 (combining life
insurance with a "death gratuity")—far less than the
typical amount paid by insurance companies for the
death of a young person in a car accident. The stark
"budgetary cost" of $500,000 is clearly only a
fraction of the total cost society pays for the loss
of life—and no one can ever really compensate the
families. Moreover, disability pay seldom provides
adequate compensation for wounded troops or their
families. Indeed, in one out of five cases of
seriously injured soldiers, someone in their family
has to give up a job to take care of them.

But beyond this is the cost to the already
sputtering US economy. All told, the bill for the Iraq
war is likely to top $3 trillion. And that's a
conservative estimate.

And all of this has been exacerbated by the oil shock,
which is in large part also a fruit of the war:

Another worry: This war has been particularly hard
on the economy because it led to a spike in oil
prices. Before the 2003 invasion, oil cost less than
$25 a barrel, and futures markets expected it to
remain around there. (Yes, China and India were
growing by leaps and bounds, but cheap supplies from
the Middle East were expected to meet their demands.)
The war changed that equation, and oil prices recently
topped $100 per barrel.

While Washington has been spending well beyond its
means, others have been saving—including the oil-rich
countries that, like the oil companies, have been
among the few winners of this war. No wonder, then,
that China, Singapore and many Persian Gulf emirates
have become lenders of last resort for troubled Wall
Street banks, plowing in billions of dollars to shore
up Citigroup, Merrill Lynch and other firms that
burned their fingers on subprime mortgages. How long
will it be before the huge sovereign wealth funds
controlled by these countries begin buying up large
shares of other US assets?

The Bush team, then, is not merely handing over
the war to the next administration; it is also
bequeathing deep economic problems that have been
seriously exacerbated by reckless war financing. We
face an economic downturn that's likely to be the
worst in more than a quarter-century.

In a classic case of imperial overstretch, the
stratagem to extend global supremacy may prove to have
backfired horribly.

John McCain: Bogus Populist
Both Republican presidential candidate John McCain and
his Democratic challenger Barack Obama loaned what the
Washington Post called "cautious support" for the
TARP. But McCain, sensing he is weak on the suddenly
critical issue (having notoriously stated as recently
as Aug. 20 that the "fundamentals of the economy are
strong"), made a show of getting involved in the
bailout negotiations. But his abrupt conversion from
the deregulation dogma strikes many as hollow. Writing
in Newsweek, Daniel Gross argues that "The Republicans
killed the bailout bill—and McCain's chances." He
mocks:

Sen. John McCain, who interrupted his campaign to
deal with the crisis, claimed—via his surrogates—that
he wielded great influence in improving the deal and
making it palatable. Then he left town as it
collapsed.

More scathing still is Rosa Brooks in the Washington
Post, who points out that McCain connived with
(illegal) financial shenanigans:

Once upon a time, a politician took campaign
contributions and favors from a friendly constituent
who happened to run a savings and loan association.
The contributions were generous: They came to about
$200,000 in today's dollars, and on top of that there
were several free vacations for the politician and his
family, along with private jet trips and other perks.
The politician voted repeatedly against congressional
efforts to tighten regulation of S&Ls, and in 1987,
when he learned that his constituent's S&L was the
target of a federal investigation, he met with
regulators in an effort to get them to back off.

That politician was John McCain, and his generous
friend was Charles Keating, head of Lincoln Savings &
Loan. While he was courting McCain and other senators
and urging them to oppose tougher regulation of S&Ls,
Keating was also investing his depositors' federally
insured savings in risky ventures. When those lost
money, Keating tried to hide the losses from
regulators by inducing his customers to switch from
insured accounts to uninsured (and worthless) bonds
issued by Lincoln's near-bankrupt parent company. In
1989, it went belly up—and more than 20,000 Lincoln
customers saw their savings vanish.

Keating went to prison, and McCain's Senate career
almost ended. Together with the rest of the so-called
Keating Five—Sens. Alan Cranston (D-Calif.), John
Glenn (D-Ohio), Don Riegle (D-Mich.) and Dennis
DeConcini (D-Ariz.), all of whom had also accepted
large donations from Keating and intervened on his
behalf—McCain was investigated by the Senate Ethics
Committee and ultimately reprimanded for "poor
judgment."

But the savings and loan crisis mushroomed.
Eventually, the government spent about $125 billion in
taxpayer dollars to bail out hundreds of failed S&Ls
that, like Keating's, fell victim to a combination of
private-sector greed and the "poor judgment" of
politicians like McCain.

Barack Obama: the Post-Petrol FDR?
Obama has been quick to play Franklin Delano Roosevelt
to Bush/McCain's Herbert Hoover. As the House rejected
the TARP on Sept. 29, he told supporters in Colorado
that McCain has "fought against commonsense
regulations for decades, he's called for less
regulation 20 times just this year, and he said in a
recent interview that he thought deregulation has
actually helped grow our economy."

"Senator, what economy are you talking about?" Obama
asked.

That same day he told a rally in downtown Detroit:
"You can't make up for 26 years in 26 days. For most
of the 26 years, he's been against the common-sense
rules and regulations that could have stopped this
problem."

Daniel Gross in Newsweek concludes:

In general, I've found a lot of the analogies
between the present situation and the Great Depression
to be way off. But there's one area in which the
analogy might hold true. Just as happened in 1932,
it's possible that the Republicans' incompetence and
bullheadedness in managing a financial crisis could
lead to Democrats controlling both the White House and
Congress.

But after nearly a generation of bipartisan consensus
on deregulation and "free markets," it remains to be
seen if Obama and the Democrats will rise to the
mandate of history as FDR did—in the face of
relentless opposition from conservatives—even if they
make it into office. And while FDR inherited an
isolationist America wary of foreign entanglements,
Obama will find himself at the reins of a global
military leviathan with tentacles hopelessly entangled
in Iraq and Afghanistan. Cutting down the
leviathan—anathema to the long-reigning bipartisan
consensus on global empire—could be his greatest
challenge, and one with a vital and little-appreciated
link to staving off the impending financial collapse.
The resources and human energy that FDR finally
marshaled for the war effort, Obama will have to
marshal for a crash conversion from the oil economy
and a return to self-sufficiency, localization and the
human scale. With luck, we will soon see whether or
not the Democratic party is capable of breaking
with—and standing up to—corporate power on the
fundamental contradictions that underlie the current
crisis.

----

RESOURCES

"Paulson Will Have No Peer" Peter G. Gosselin, Los
Angeles Times, Sept. 29
http://www.truthout.org/092908S

"The $700 Billion Bailout's Fine Print" by Nomi Prins,
Mother Jones, Sept. 24
http://www.truthout.org/092308A

"Washington to Wall Street: Drop Dead" by Daniel
Gross, Newsweek, Sept. 29
http://www.newsweek.com/id/161529

"Obama and McCain Express Cautious Support for
Bailout" by Michael Shear,
Washington Post, Sept. 29
http://www.washingtonpost.com/wp-dyn/content/article/2008/09/28/AR2008092802212.\
html?hpid=topnews

"A Primer on the Wall Street Meltdown" by Walden Bello
Focus on the Global South, Sept. 25
http://focusweb.org/a-primer-on-the-wall-street-meltdown.html?Itemid=1

"The Wall Street Meltdown: the View from Asia" by
Walden Bello
Focus on the Global South, Sept. 24
http://focusweb.org/the-wall-street-meltdown-the-view-from-asia.html?Itemid=1

"A Deficit of Leadership" by Joseph Stiglitz, The
Guardian, April 8
http://www.guardian.co.uk/commentisfree/2008/apr/08/thefinancialcrisisbeingfel

"The Iraq War Will Cost Us $3 Trillion, and Much More"
by Linda J. Bilmes and Joseph Stiglitz
The Washington Post, March 9
http://www.washingtonpost.com/wp-dyn/content/article/2008/03/07/AR2008030702846_\
pf.html

"Iraq war 'caused slowdown in the US'" by Peter
Wilson, The Austrlian, Feb. 28
http://www.theaustralian.news.com.au/story/0,25197,23286149-2703,00.html

"Keating 5 ring a bell?" by Rosa Brooks, Los Angeles
Times, Sept. 25
http://www.latimes.com/news/columnists/la-oe-brooks25-2008sep25,0,1039504.column

See also:

OIL SHOCK REDUX
Is OPEC the Real Cartel —or the Transnationals?
by Vilosh Vinograd, WW4 Report
http://www.ww4report.com/node/5024

From our Daily Report:

Latin America: markets react to financial crisis
WW4 Report, Sept. 25, 2008
http://ww4report.com/node/6070

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Special to World War 4 Report, Sept. 1, 2008
Reprinting permissible with attribution