Price behaviour in energy markets violate basic economic principles.

Similarly, Rolling Stone magazine’s Mike Taibbi wrote a brilliantly scathing piece about the “price engineering” manipulation of the commodities and futures Markets by Goldman Sachs — perhaps the most prominent bastion of Wall Street oligarchs.  Taibbi makes the case that it’s not just wheat futures which have been overrun by index speculation, but commodities in general and oil in particular. Indeed, Taibbi puts Goldman Sachs at the center of no fewer than four speculative bubbles, and outlines in compelling fashion how the uber-capitalist firm, using an industry strategy referred to as ‘regulatory capture’ raked in unfathomable profits as an inflator of commodity bubbles – as Exxon-Mobil did in the 2007/08 oil price spike – and using another insider strategy called arbitrage, positioned itself as a profiteer at the expense of investors in the inevitable bust. But it’s not just the hedge funds and the Lords of Finance at the white-shoe firms engaging in price manipulation and cynical, but profitable, game-theory speculation. Even small firms in the rough and tumble commodities & futures Markets in New York and Chicago have cornered the greed game. 

The largely Chicago-based commodities & futures market is an unusual lot on Wall Street, where practices that would be frowned upon at the blue chip New York-based exchanges such as the New York Mercantile Exchange (NYMEX) and the New York Stock Exchange (NYSE), are considered quite acceptable.  While less glamorous than its New York cousins, the commodities markets — trading things like oil, sugar, wheat, cattle & energy futures — are critical to most Americans, but the traders and speculators who dominate these markets are the prime drivers in setting inflated energy and commodities pricing that have nothing to do with economic fundamentals. That’s because its traders are integral in establishing the price we pay for oil at the pump each day; and the bread, coffee, sugar, beef and orange juice that we seem to pay more for from week-to-week. For instance, when Morgan Stanley, Citigroup and Royal Dutch Shell collaborated to squirreled away 80 million barrels of crude oil — nearly enough to supply the entire world for a day — in supertankers off the Gulf of Mexico last January, they too posted unseemly profits on the backs of consumers already struggling as historic prices at the pump continued to rise.  So egregious are such practices that the prestigious MIT commissioned a study to examine whether oil & energy prices were actually reflecting the economic fundamentals of supply & demand; or whether prices more accurately reflected the elasticity of price manipulation within a speculative bubble.  You can read pdf version of that study here.

Watch CBS Videos Online

Knowing that simple supply & demand price elasticity could not account for the inexplicable escalation in oil prices in 2007 and 2008, earlier this month the U.S. Senate held hearings to examine price manipulation by traders in the secretive commodities and futures markets fueled the run-up in prices, and how to prevent such manipulative behavior in the future.  The hearing also addressed what role regulatory bodies such as the Federal Energy Regulatory Commission (FERC), the Federal Trade Commission (FTC) and the Commodities & Futures Trade Commission (CFTC) can play in regulating price manipulation in the Energy Markets.  In addition, Policymakers inside the White House are also looking at ways to address this issue so that chagrined Oil industry executives – based largely in Texas & Alaska, two states President Obama failed to carry – don’t try to time high oil prices in 2012 as political a weapon against him.  Perhaps, the most egregious example of price volatility, manipulation and unethical practices in the energy markets is the Enron scandal in 2001.  However, much of the speculative and manipulation that occurs in today’s global energy markets makes Enron pale by comparison. 

Learning from the Enron Scandal

Watch CBS Videos Online

Americans for Financial Reform:  http://ourfinancialsecurity.org/

 For too long, the rules of Wall Street have been written by financial industry lobbyists and by the bankers themselves.  This year, that has to change.  Get involved to restore corporate accountability, transparency, fairness and financial security for ordinary Americans.  Yes we can!  make a difference.
 
Americans for Financial Reform is a coalition of nearly 200 national, state and local consumer, employee, investor, community and civil rights organizations that have come together to spearhead a campaign in the public’s interest for real reforming the nation’s investment, insurance, banking and financial systems.  This is a unique organization that can accommodate the aspirations of ordinary Americans to resore trust, fairness & faith in our fincial system by getting involved at the grassroots level.  More, the objectives of this consortium of organizations aligns brilliantly with many of the provisions in the Obama Administration’s ‘New Financial Foundations‘ financial reform package submitted to Congress last week.  Among their “issue areas” are:

• Systemic Risk Regulation

The most important step in addressing systemic risk is to ensure the safety and soundness, fairness, transparency, and accountability of financial markets, participants, and products.  If agencies perform those functions properly, then systemic risk will be far less of a problem.

• Policing Wall Street Practices

Financial oversight has failed to keep up with the realities of the marketplace, characterized by globalization, innovation, and the convergence of lending and investing activities.  This has allowed institutions to structure complex transactions and take on risky exposures without fulfilling the regulatory requirements Congress deemed necessary to prevent a systemic financial crisis after the Great Depression.  

“Shadow market” institutions and products must be subject to comprehensive oversight. We need to return to the broad, flexible jurisdiction originally provided in federal securities regulation, which allowed regulators to follow activities in the financial markets.  This means ensuring that all institutions that are active in the financial markets provide regular information to regulators and the public about their activities and their counterparty relationships, requiring derivatives to be traded on regulated exchanges that are transparent and impose meaningful margin requirements, and requiring money managers to provide comprehensive disclosures and to act as fiduciaries for their investors.

• Consumer Protection, Financial Security & Community Reinvestment

We need to stem the current foreclosure crisis and ensure that there is quality lending for homeownership, businesses, and economic development in all of our nations communities. 

The federal government needs a much more robust program of mortgage relief.  The goal of public policy should be to enable the maximum number of homeowners with distressed mortgages to keep their homes. Any other approach—including current policy—will permit the foreclosure crisis to drag down the value of other homes and prolong the general economic crisis through the ripple effects of millions of home foreclosures.

The Community Reinvestment Act (CRA) has been a crucial tool for building wealth and strengthening neighborhoods. It should be strengthened and expanded to non-bank financial institutions.  Financial institutions must respond to the  full range of needs in low- and moderate-income communities, financing affordable rental housing, homeownership, and small businesses. The CRA Modernization Act of 2009, HR 1479, would apply CRA requirements to all affiliates and subsidiaries of banks, independent mortgage companies, mainstream credit unions, insurance companies, and securities firms.  It would strengthen law enforcement, make an explicit goal of eliminating racial disparities, and provide increased opportunities for public comment and engagement.

Calculated Risk

Calculated Risk Blog:

Calculated Risk is global finance & economics blog written by a senior executive, retired from a public company, with a background in investing, finance and economics. This blog offers sound, precient insights largely on domestic economic issues; and maintains a strong slant toward real estate and crediot market issues.  However, the redeeming quality I like most about visiting this blog site is the rather diverse line-up of fatured hyperlinks to other equally interesting resources such as the Angry Bear, Naked Capitalism, and Abnormal Returns, among others.  There is something for everyone interested in global markets, investing and economic trends.

Traders discuss oil futures on the Shanghai Futures Exchange.

In a brazen display of what can only be described as new found confidence and global stature, the giant Chinese oil company Sinopec International Petroleum Company has made a welcomed $7 Bn takeover bid for the Canadian oil and gas exploration company, Addax Petroleum — an international leader in its space — the companies announced Wednesday. The takeover, if successful, would give Sinopec access to Addax’s stakes in oil fields off the coast of West Africa, as well as in Iraq where the hard fought and hard earned resources are controled by the U.S.  The merger could signal rising competition between the U.S. and China for global petroleum resources in Africa and the Middle East.  Such a move could place upward pressure on oil futures.

Sinopec (Ticker: SNP), formally known as China Petroleum and Chemical Corp., is offering $52.80 (CAN), or about $46.12 (US), per share for the remaining common shares of Addax (Ticker: AXC).  Sinopec already has eyes on Africa with oil interests in Gabon as well as Sudan. Its parent, Sinopec Group, is wholly owned by the Chinese government.  The Addax board has recommended that shareholders accept the agreement, and senior executives have signed onto a lock-up agreement to sell Sinopec their 38 percent stake in the company. 

Jean Claude Gandur, President & CEO of Addax, said in a statement announcing the deal that they were “pleased that Sinopec has recognized the highly attractive asset portfolio and exceptional team that we have assembled.”  In a separate statement, Sinopec called the deal a “transformational transaction” that would help it expand in West Africa and Iraq, in line with its strategic objectives. The Chinese company said that Addax’s offshore deep-water exploration projects were especially promising for its growth and development. Sinopec agreed to a break-up fee of $300 Mn (CAN) if the deal falls through. Full documentation for the bid is expected to be submitted next month, and Addax, which is based in Switzerland but has shares listed in Toronto and London, will have 35 days to accept it.  Addax shares closed at $45.65 (CAN) on Tuesday in Toronto. The Sinopec offer represents a 47 percent premium over what they were worth before the company announced it was in takeover talks early this month.  Addax is also listed in London, where its shares rose 372 pence, or about 16 percent in morning trading after the deal was announced.  In addition, China, and other U.S. competitors, will have greater access to Iraqi oil in the very near term.  The Iraqi oil minister has already announced plans to privatize the Iraqi National Oil Reserves by auctioning off production interests.  However, Iraq will maintain controlling interests in all such programs.   Read more here.

NYPD solemn procession of slain Police Officer Omar Edwards

“What did you think of the shooting in the city the other day?” my friend on the other end of the line asked. He’s a retired NYPD lieutenant with 20 years of service.

“What shooting?” I asked - me a retired NYPD detective shot in the line of duty in a bungled buy-and-bust narcotics operation.

“Where the cop shot the other cop,” he said matter-of-factly.

“What??!!”

It was another case of white-cop-shoots-black-man - and not the first time in New York City history when the black man turned out to be another cop.

Officer Omar J. Edwards has been forever silenced. He is unable to defend himself against the unfair slights of posthumous revisionism, the blaming of the victim.

He was running with his gun drawn, the academic desk jockeys will say.

Officer Edwards had his gun drawn because he was dealing with a crackhead who had broken into his car. Sure, I know what the patrol guide says and what it doesn’t say. But no self-respecting police officer is going to see his personal effects rifled and not take immediate action. The report seems to indicate that his shield was properly displayed.

He shouldn’t have turned around when he heard someone tell him to stop and drop the gun, the cop self-defense mantra goes on.

Let’s get real. Sure, the patrol guide mandates you “remain motionless when so ordered.” But the average person is going to look to see who is giving the order.

(One night when I was on the force, I was on duty, wrestling a burglar to the ground, when an unmarked car swerved around the corner. I thought they were coming to assist me, but the two clowns who called themselves “cops” opened fire without saying a word. It was only their bad shooting and my quick response in hitting the ground, thanks to my military training, that saved my life. In the aftermath, after some clever writing and rewriting, they were promoted to detectives.)

And the question remains, was Officer Edwards given a chance to drop his gun before he was cut down in a hale of bullets?

Officer Omar J. Edward, father of two, young, proud, dedicated, still wearing his police academy tee shirt after two years on the job, lay dying on a New York City street, hands shackled behind his back. Mentally teetering between life and death, he was not consoled by his fellow officers to “Hold on, you’re gonna make it.” He was just another black “perp” victim of police indiscretion, and the higher command’s inability or smug unwillingness to properly train and assign its officers.

I was not consoled by my fellow cops either, when I lay bleeding on a filthy tenement landing. No, the assurance came from an old man of color, soothing me and encouraging me to hold on. It felt good.

By Frank Serpico, Retired NYPD detective and cop-on-cop shooting victim. From The Huffington Post, 22 June 2009.

Eclipsed by last week’s Iranian elections and the first historic BRIC nations summit was President Obama’s rollout of his administration’s proposed overhaul of the U.S. financial system and its regulatory framework — the most ambitious financial system reform since the post-Great Depression laws establishing the modern framework.  Referred to as a ‘New Financial Foundation‘ by its archtects in a recent Washington Post editorial, it was introduced in bold strokes. However, in my considered opinion as an industry professional for nearly two decades, the Obama administration’s effort, though brilliant in places, does not rise to the challenge before it.  They have, instead, taken the path of least resistance — an incremental approach that concedes and pays deference to Wall Street and the financial industry lobby at the expense of American consumers and taxpayers.  If the goal is to prevent a recurrent implosion of the global economy and to prevent future financial system crises with devastating consequences still reverberating around the world, then they have missed the mark.  It is a missed opportunity of the highest magnitude that I believe may prove to be President Obama’s Achilles heel.  He is, as one commentator pointed out in response to their effort, whistling past the graveyard of “zombie banks.”

Unlike the government’s temporary ownership stake in automakers and major financial companies, the regulatory changes set to be announced yesterday are designed to be permanent. They could result in a major realignment of power and authority among government agencies that set the rules for banking, lending and investing and touch American lives through daily transactions, from credit cards to mortgages and mutual funds.  Consider, for example, if today’s financial trading system was an athletic contest where the referees have lost their vantage point. Complex plays unfamiliar to the referee occur out of their sight and fouls go undetected (think Bernie Madoff), they lose track of fair scoring, while some referees halt play and others let it go on.  That’s basically what we have today, and even the players have had enough. Tim Ryan, president and chief executive of the Securities Industry and Financial Markets Association balked recently, “On a macro-basis, we’re very supportive of reform,”  , but “the Obama administration because they’re working in a more realistic environment are into the art of the possible,” Ryan said, instead of measuring up to the opportunity of the moment. 

Chair Bair

Here’s The Baseline Scenario, and my biggest issue with the President’s financial reform plan is that the drivers of the administration’s policy lack credibility as true reformers because of their cozy relationships, background and interests as members of the Wall Street Oligarchy.  The President and other role players like Geithner and Summers have been out saying all the right things in public about financial reform, scolding Wall Street’s oligarchs and the Lords of Finance about their risky behavior, etc.  But I’m worried more about the inside game: about all those enamored former Wall Street and Banking industry staffers inside the administration responsible for crafting policy. People like Geithner — a scion of former Treasury Secretary Robert Rubin who was steered into his previous position as New York Federal Reserve Bank President — a position historically appointed to Wall Street insiders because of the power, structure and centrality of banking & finance in New York, the perceived financial capitol of the world.  Some would argue, myself included, that having twice failrd the test of “self-regulatory” risk management and financial accountability the industry has little credible standing to dictate the terms by which they will be regulated going forward.  Wall Street ruined capitalism.  It should be up to a new robust regulatory framework to restore faith and trust in financial markets; not the foxes guarding the hen house. 

 See Matt Taibbi of Rolling Stone magazine discuss this issue.

Top COP

Secondly, the true reformers in the administration who have very credible positions, ideas and proposals are being blocked-out by the industry-friendly Geithner-Summers axis.  People like Sheila Bair, the present FDIC Chair; and Elizabeth Warren, Harvard corporate law professor and Chair of the Congressional Oversight Panel (COP) on financial reform, as well as Dem black sheeps like former  New York Governor, Eliot Spitzer – who as the state’s AG, led a brilliant, but at-the-time unpopular, effort to reform many of the industry practices that are now at the very center of the financial system meltdown.  In addition, Eliot Spitzer – with a stellar track-record as a truly bold, independent reformer – would, in my considered opinion, be a brilliant replacement for Tim Geithner as U.S. Treasury Secretary.

Rearranging the deck chairs does not fundamentally alter the fact that the regulators had the power over the past few years — Spitzer on financial reform 

Third, internally, the administration has vacillated over whether to streamline the vast array of regulatory agencies. At one point, Treasury and White House officials floated the idea of a single financial services regulator to oversee banks and certain insurers. But it didn’t get a warm reception from the chairman of the Senate Banking, Housing and Urban Affairs Committee or the chairman of the House Financial Services Committee, so the administration timidly backed away from the idea.

As the Senate began deliberations on the financial reform plan, President Barack Obama’s plan to increase oversight of banks and other financial institutions ran into skepticism last week on Capitol Hill where senators sharply questioned whether it was enough to prevent another economic meltdown.  Kudos to the Senate for lambasting the plan for precisely what many have criticized the administration about.  Namely, this plan is a needlessly industry-friendly piece of legislation that doesn’t go sufficiently far enough to prevent similar financial industry practices in the future; and that Geithner and Summers relied too heavily on its cozy industry relationship and influences in drafting a plan that decidedly does not hold accountable the very people who jeopardized American capitalism.  The lack of a ringing endorsement in many quarters suggests the proposal was headed for rejection or a major revision by a Congress sensitive to voter anger frustration over Wall Street’s wreckage of the economy, and the wholesale failure by regulators of properly regulating Wall Street in the public interest.  In addition, so tepid is the Obama plan that last week Senator Chuck Schumer of New York, a key player in financial issues, called on Treasury Secretary Tim Geithner to include a single banking regulator in the administration’s overhaul plan.  Even House Republicans — the party of “No” — are calling for regulatory  streamlining, too, but their plan would cynically take power away from the Federal Reserve and the FDIC. Not a good idea in my opinion, when Sheila Bair, FDIC Chair, is truly the only financial industry regulator who seems consistently willing to hold the culprits of the financial debacle accountable.

The administration also considered, then backpedaled, merging the Securities and Exchange Commission (SEC), the primary stock market regulator, and the Commodities Futures Trading Commission (CFTC), which oversees the more complex financial products, commodity futures and some options markets. On its face a terrific, reasonable idea, but lacking boldness in their plan caved because the move would have meant Congressional and regulatory turf battles.  This is why some believe the President is squandering a lot of political capital — contrary to his bold statements about “the urgency of now.”  The chinks in the armor are beginning to break, and I hope the people managing the President pay heed to Frank Rich’s op-ed piece in last Sunday’s New York Times.

Finally, the President’s financial reform plan lacks boldness, and squanders the political capital of a historic moment.  And for whatever bite the President’s plan lacks, the GOP plan is, well, non-existant or plainly lacks any credibility. Republicans prefer that companies be restructured or liquidated in via bankruptcy — yet another cynical prescription whose real intent is to protect the interests of institutional stakeholders, rather than employee retirement plans, consumers or common stock investors like you and I.

Alabama Rep. Spencer Bachus, the top Republican on the House Financial Services Committee, urged lawmakers to reject a regulatory system “that depends on the infallibility of the government regulators, who have so far shown themselves unable to anticipate crisis, let alone prevent them.” But in last week to the Council on Foreign Relations, Summers offered the administration’s counterpoint: “Any financial institution that is big enough, interconnected enough or risky enough that its distress necessitates government writing substantial checks, is big enough, risky enough or interconnected enough that it should be some part of the government’s responsibility to supervise it on a comprehensive basis.”

___

Internet Resources:

The Financial Reform Proposal

Federal Reserve: http://www.federalreserve.gov

Securities and Exchange Commission: http://www.sec.gov

Federal Deposit Insurance Corp.: http://www.fdic.gov

Congressional Oversight Panel: http://cop.senate.gov/

Treasury Department: http://www.ustreas.gov

• Barack Obama
• Economy
• Financial Crisis
• Ben Bernanke

Around the Web:

The ‘New Financial Foundations’ Plan, Geithner & Summers on WaPo

Geithner previews Obama’s Wall Street reform plan - MarketWatch

One Math Geek’s Plan to Reform Wall Street | Newsweek Business …

Obama urges quick action on Wall Street reform | Reuters

Jill Schlesinger: Wall Street Reform: Regulators and Lawmakers …

The Rising Influence of BRIC Emerging Markets

The most interesting development in world affairs this week is not the election outcome in Iran; nor is it President Obama’s National healthcare plan, and neither is it N. Korea’s saber-rattling hyjinx.  It is the first Economic Summit meeting of the so-called BRIC group of Emerging Market nations — Brazil, Russia, India and China — and it is intended to underscore the rising economic,  political and military might of these four major developing countries and their rising chorus demanding a greater voice in global matters.  

The four BRIC nations — which account for 15 percent of the $60.7 trillion global economy — will focus on ways to reshape the global financial system after the economic crisis. 

BRIC by BRIC

Nothing in this development necessarily poses a threat to U.S. financial, economic, nor military dominance.  But it does portend a certain future where American influence is diminished, or at least checked by the rise of highly influential regional powers who, like teenagers seeking to define their roles in the world, no longer look, nor want, the paternalism of American leadership. 

And, perhaps most importantly, these four nations alone own about 40 percent of global currency reserves.  Brazil, India and China have also admirably weathered the current global financial crisis substantially better than any of the major developed economies, and better than the world as a whole.  While they are far from a monolithic group, they are generally united in their frustration with the dollar’s status as the world’s reserve currency, which gives the U.S. a central role in the global economy, and enables Washington to run budget deficits without fears of facing the kind of budgetary day-of-reckoning that other countries might risk.  All four countries have expressed varying degrees of discomfort with Washington’s financial stewardship, and are particularly concerned about the value of the dollar at a time of rapidly mounting indebtedness in the United States.

When the leaders of Brazil, Russia, India and China gather for their first full-fledged BRIC Summit,  they will be closely watched by Global Markets players for signs of policy shifts that could affect the global role and the declining strength of the Greenback (i.e., U.S. dollar). During the Tuesday 16 June summit in the Ural Mountain city of Yekaterinburg, Russian President Dmitry Medvedev is likely to reprise Russia’s call for a new global reserve currency to augment the dollar. The Russian proposal reflects both the Kremlin’s push for greater international clout and a concern shared by other BRIC markets that soaring U.S. budget deficits could spur inflation and weaken the dollar. Russia, China and Brazil recently announced their intention to invest in International Monetary Fund bonds to diversify their dollar-heavy currency reserves. IMF bonds are denominated in Special Drawing Rights (SDRs), an artificial currency used by the IMF. While this has raised fears that the greenback could be further weakened, analysts say BRIC nations can offer no viable alternative to the dollar — although the China’s finance minister has recently expressed “concerns” about their reserves denominated in U.S Treasury bonds, and have suggested a basket of international currencies as an alternative to the greenback as the global currency of choice. 

BRIC Summit Leaders

Still, some economists say the BRIC countries can do little to change the current architecture of the global financial system, and that the outcome of this meeting will be largely symbolic.  Before the leaders of Brazil, Russia, India and China meet, a summit of the Shanghai Cooperation Organization (SCO) of Central Asian powers will also underline the growing international stature of China and Russia — an alliance, some say, was driven together as a consequence of some of the more alarming aspects of U.S. foreign policy under former President George Bush.

In terms of U.S. Economic Foreign Policy, there is much to be concerned about in this development. This Summit and its resulting priorities for the BRIC markets may pose a direct competitive challenge to the greenback.  In addition, as both an economic center of influence made presciently clear in the April 2009 London G-20 conference; as well as potentially as a BRIC military alliance, the relative global power and influence of these nations are quickly rising. India, and to a lesser degree, Russia, continue to be anchored economically to the major western economies.  However, China and Brazil are second only to the U.S. in negotiating bilateral trade agreements in far-flung regions that promise to increase their global economic clout.  Along with the emergence of an Arab Central Bank currently underway that will also establish the Arab Middle East as a central G-20 economic power, these are developments that promise to pose new challenges — as well as new opportunities — for U.S. economic interests around the globe.  

Dead Bull

 We’ve given it polite names like ‘Systemic Risk’,  ‘Global Financial Crisis’ or ‘Moral Hazard’ but the plain truth is Wall Street’s culture of cowboy capitalism – unchecked and unfettered risk-taking driven by greed, short-term profitability, unseemly ‘executive compensation’ schemes and the requisite economic fundamentalism pushed by Republicans, conservatives and monetarists  – have destroyed our brand of free-market or ‘Laissez-faire’ capitalism.  Capitalism is fatally flawed.  And we are witnessing ‘The End of Wall Street’ as we know it.  So thorough has been its destruction, that the financial capitol of the world has shifted from New York to Washington, D.C. and the Titans of Wall Street and Lords of Finance now grudgingly concede that capitalism as we knew it until now is in the process of being re-built with a regulatory framework much closer to the ‘managed’ economies we find in Europe and China. What’s about to take its place – not only in the U.S., but also in Europe, Asia and increasingly in Latin America and other quarters of western capitalism – is a “kinder, gentler” brand of capitalism. A form of capitalism whose primary dictum is to protect the public against the poorly managed – yet over-compensated executives of companies whose risk-taking propensities create economic shocks and volatility that wrecks whole economies and leave the burdens of rescue on the backs of tax-payers — not to mention the families and lives it leaves in its wake.  The difference, now, is that it’s happening to us, and not to Japan, Russia, Thailand, Iceland or France.   In that context, I found Nobel prize-winning economist, Joseph Stieglitz’s article in next weeks issue of Vanity Fair especially poignant and interesting. Among other things, he notes:

Every crisis comes to an end—and, bleak as things seem now, the current economic crisis too shall pass. But no crisis, especially one of this severity, recedes without leaving a legacy. And among this one’s legacies will be a worldwide battle over ideas—over what kind of economic system is likely to deliver the greatest benefit to the most people. Nowhere is that battle raging more hotly than in the Third World, among the 80 percent of the world’s population that lives in Asia, Latin America, and Africa, 1.4 billion of whom subsist on less than $1.25 a day. In America, calling someone a socialist may be nothing more than a cheap shot. In much of the world, however, the battle between capitalism and socialism—or at least something that many Americans would label as socialism—still rages. While there may be no winners in the current economic crisis, there are losers, and among the big losers is support for American-style capitalism. This has consequences we’ll be living with for a long time to come.

The fall of the Berlin Wall, in 1989, marked the end of Communism as a viable idea. Yes, the problems with Communism had been manifest for decades. But after 1989 it was hard for anyone to say a word in its defense. For a while, it seemed that the defeat of Communism meant the sure victory of capitalism, particularly in its American form. Francis Fukuyama went as far as to proclaim “the end of history,” defining democratic market capitalism as the final stage of social development, and declaring that all humanity was now heading in this direction. In truth, historians will mark the 20 years since 1989 as the short period of American triumphalism. With the collapse of great banks and financial houses, and the ensuing economic turmoil and chaotic attempts at rescue, that period is over. So, too, is the debate over “market fundamentalism,” the notion that unfettered markets, all by themselves, can ensure economic prosperity and growth. Today only the deluded would argue that markets are self-correcting or that we can rely on the self-interested behavior of market participants to guarantee that everything works honestly and properly.

Colonialism left a mixed legacy in the developing world—but one clear result was the view among people there that they had been cruelly exploited. Among many emerging leaders, Marxist theory provided an interpretation of their experience; it suggested that exploitation was in fact the underpinning of the capitalist system. The political independence that came to scores of colonies after World War II did not put an end to economic colonialism. In some regions, such as Africa, the exploitation—the extraction of natural resources and the rape of the environment, all in return for a pittance—was obvious. Elsewhere it was more subtle. In many parts of the world, global institutions such as the International Monetary Fund and the World Bank came to be seen as instruments of post-colonial control. These institutions pushed market fundamentalism (”neoliberalism,” it was often called), a notion idealized by Americans as “free and unfettered markets.” They pressed for financial-sector deregulation, privatization, and trade liberalization.

 

The World Bank and the I.M.F. said they were doing all this for the benefit of the developing world. They were backed up by teams of free-market economists, many from that cathedral of free-market economics, the University of Chicago. In the end, the programs of “the Chicago boys” didn’t bring the promised results. Incomes stagnated. Where there was growth, the wealth went to those at the top. Economic crises in individual countries became ever more frequent—there have been more than a hundred severe ones in the past 30 years alone.

Free-market ideology turned out to be an excuse for new forms of exploitation. “Privatization” meant that foreigners could buy mines and oil fields in developing countries at low prices. It meant they could reap large profits from monopolies and quasi-monopolies, such as in telecommunications. “Liberalization” meant that they could get high returns on their loans—and when loans went bad, the I.M.F. forced the socialization of the losses, meaning that the screws were put on entire populations to pay the banks back. It meant, too, that foreign firms could wipe out nascent industries, suppressing the development of entrepreneurial talent. While capital flowed freely, labor did not—except in the case of the most talented individuals, who found good jobs in a global marketplace.

The economic debate takes on particular potency in the developing world. Although we in the West tend to forget, 190 years ago one-third of the world’s gross domestic product was in China. But then, rather suddenly, colonial exploitation and unfair trade agreements, combined with a technological revolution in Europe and America, left the developing countries far behind, to the point where, by 1950, China’s economy constituted less than 5 percent of the world’s G.D.P. In the mid–19th century the United Kingdom and France actually waged a war to open China to global trade. This was the Second Opium War, so named because the West had little of value to sell to China other than drugs, which it had been dumping into Chinese markets, with the collateral effect of causing widespread addiction. It was an early attempt by the West to correct a balance-of-payments problem. Not surprisingly, people in developing countries became less and less convinced that Western help was motivated by altruism. They suspected that the free-market rhetoric—”the Washington consensus,” as it is known in shorthand—was just a cover for the old commercial interests. Suspicions were reinforced by the West’s own hypocrisy. Europe and America didn’t open up their own markets to the agricultural produce of the Third World, which was often all these poor countries had to offer. They forced developing countries to eliminate subsidies aimed at creating new industries, even as they provided massive subsidies to their own farmers.

Continue reading more from July 2009 Vanity Fair here.

Read more recent commentary from Joseph E. Stiglitz on the economic crisis below:

Capitalist Fools, January 2009

Reversal of Fortune, November 2008

The $3 Trillion War, April 2008 (with Linda J. Bilmes)

The Economic Consequences of Mr. Bush, December 2007

Re-making Financial Regulatory Infrastructure

Wed Jun 3, 2009 7:34pm EDT

WASHINGTON (Reuters) - The Obama administration plans to unveil on June 17 its sweeping plan to overhaul financial regulation, according to a source familiar with thinking at the U.S. Treasury Department.

The proposal will serve as a framework for lawmakers as they embark on the thorny task of restructuring how banks, hedge funds, derivatives, and other financial firms and securities are policed. The plan reflects the global consensus arrived at by world leaders on the heels of the London G-20 Summit in April.

Re-shaping

Treasury Secretary Timothy Geithner is scheduled to testify on June 18 before the House Financial Services Committee on the proposed changes, the source said, speaking anonymously because the administration has not formally announced the dates. 

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Geithner at U.S. - China Treasury Summit

Do you know what China’s currency, the Yuan (Renmenbi) looks like..??  If not, you’d better find out (see below); it’s going to matter a lot more in the years ahead as China flexes its global economic might.  Further, sometime in the next few years there’s a pretty good chance you might need or want to have some in your savings and retirement account.  But more about the Yuan later.  Let’s put into context the economic self-interests of both nations to see why this trip was necessary.

U.S. Treasury Secretary, Timothy Geithner  arrived in Beijing, China last Sunday touting what appeared as a relatively more pragmatic approach to America’s economic foreign policy engagement with China than had been the case by the tougher ‘Economic Hawks’ in the Obama administration such as Lawrence Summers, and including President Obama himself.

Geithner has used the trip to urge Chinese leaders to maintain their stimulus spending on big infrastructure projects, as well as to find new ways to entice their consumers into spending more of the nation’s high personal savings rate — Chinese consumers save on average almost 12% of discretionary family income; that equates to $1.7Tr (US) or about $1,200(US) per capita — to boost global demand.  Asian countries led by China and Japan, are confronted with the reality that high savings and an over-dependence on exports to the US and the European Union, makes their economies very vulnerable.

Geithner will also seek to assuage China’s concerns about soft U.S. finances and regulatory reforms in a country that has become the single largest holder of U.S. government debt.  However, Geithner is expected to refrain from making any provocative statements on the single thorniest economic issue between the two powers — namely, China’s notorious currency manipulation in order to generate high levels of foreign demand for Chinese products, and to maintain high levels of Chinese exports.  How des China’s currency fit into all this..??   

Yuan

The yuan – or renminbi – is the currency of China. As China rises to become one of the giants of the world economy – likely to overtake Japan to become number two in the next couple of years – it is inevitable that the Yuan currency, not the Euro, is going to challenge the greenback. It looks to me as though China is preparing the ground for the yuan to be used more freely, like the U.S. dollar, in the global economy.  

Just before the London G20 Summit in April, Zhou Xiaochuan, the governor of the Chinese central bank of the People’s Bank of China, released a fascinating paper. In it, he suggested there was a need for the Special Drawing Right (SDR) to become the world’s key currency. In terms of its timing and the context the paper is possibly the most interesting monetary policy comment I’ve read anywhere in the world this year.   

Governor Zhou Xiaochuan is a very worldly person. He knows that the SDR has been around since floating exchange rates came into existence and, despite repeated concerns about the dollar’s role since the world was forced off the fixed dollar exchange rate system in the late 1970s, the SDR is not really desired by anyone yet. In the past couple of years, as the world plunged into crisis, and even as we try to emerge from it, there are plenty of questions to be asked about the dollar, the yen, the euro, of course the much-maligned pound, and even the Swiss franc. Do investors want to hold the SDR (which is a basket of most of these currencies) instead? No, it appears they want to hold gold. Investors, including Mr Zhou’s colleagues at SAFE – the State Administration Foreign Exchange – who manage China’s foreign exchange reserves, have flocked to gold.

So what does Mr Zhou mean? Before I answer, consider this story from late last week. “Brazil to propose dropping dollar in China trade” ran the headline. It came from an interview in the Bejing-based Caijing Magazine in which Brazilian President Lula da Silva appears to have suggested that China should invoice Brazil for its trade with China in yuan, not dollars. Apart from the fact that Mr Lula has, in my judgment, been the most successful leader of this decade in terms of improving a major economy’s fortunes, latest Brazilian trade data shows China is now its number one export market. This also follows steps announced a few weeks ago for the yuan to begin being used for trade in Taiwan. Last year, Vladimir Putin called for greater use of the yuan.

Future Global Currency..??

Returning to the question posed above, I’ve concluded that Mr Zhou is telling us that China is closer than many think to letting the yuan become part of the SDR. To do that, he needs to allow greater commerciality of the Chinese currency, i.e. let people use it inside and outside China. He knows that, without that, it couldn’t become part of the SDR. I suggest he questions, just as I do, whether anyone will want to use it unless the SDR becomes something different. 

Here’s another fact. Every five years the SDR is “updated” – its weights are changed to reflect economic reality. Currently the SDR consists of the dollar, yen, pound and euro. The next five-year re-weighting is due next year. It is probably a bit soon to include the yuan, but in another five years it is very likely. Is this what China really wants?

On one level, it is tough to see Chinese leaders allowing all of us to choose to buy and sell their currency when they won’t openly allow their own citizens to choose how many children they want. But think it through. We all learn from the past and the Chinese leadership strikes me as understanding plenty about the challenges the world faces.

Fixing the yuan so closely to the dollar has greatly contributed to China building its foreign currency reserves to two trillion dollars. Do they want that pile to rise to four trillion? Almost definitely not, as they now realise how tough it is to have the value of their foreign currency investments staying so high in yuan terms. In any case, luckily, because of the crisis and the related adjustment to US consumption, Chinese surpluses that generated the reserves are on their way down. Indeed, as each week passes, there is more evidence that this crisis is good for China, and certainly China’s role in the world economy. Since last October, China has announced massive fiscal and monetary stimulus and started on the path to social security reform. It has already announced its intention to introduce basic medical insurance by 2011.

On the back of those initiatives, and especially the boom in financial conditions, four weeks ago Goldman Sachs raised their Chinese GDP forecasts, forecasting a +8.3% for this year, and +10.9% for next. Not bad for a global financial crisis, huh..??  It is sound as though Chinese policy-makers are getting more confident and are thinking about life without the need for the dollar. Welcome to the core part of my evolving thesis on the next phase — post-Laissez faire — of the global economy.

This article is based on Goldman Sachs Global Economic Research by Jim O’Neill.