JANUARY 2008

 

money

UPDATED:
TIMES (UK)BUSINESS

January 21, 2008

Day of reckoning in the US glasshouse
World Economic Forum: The Davos Agenda

Joseph Stiglitz

There is a growing consensus: America is going into a marked slowdown, if
not a downright recession. There will be a large gap between potential
growth - usually estimated at 3 per cent to 4 per cent - and actual growth,
meaning lost output of hundreds of billions of dollars. America actually
faces three separate but related problems; a credit crunch, a debt crisis
and a macroeconomic problem.

A decade ago, America roundly criticised the countries of East Asia for
their lack of transparency and inadequate regulation. But, as the old
aphorism goes, people in glass houses shouldn't throw stones. Money was lent
to hundreds of thousands of Americans beyond their ability to pay. What was
called financial innovation meant that borrowers didn't even have to pay the
accrued interest; at the end of the year, they owed more than at the
beginning. Liar mortgages had been invented, requiring no evidence of income
or ability to pay.

Borrowers were told not to worry about their mounting debt. With prices
going up year after year, the more they borrowed, the more they made. What
was true was the more they borrowed, the more the mortgage brokers and the
banks made. It was, in a sense, an old-fashioned pyramid scheme: prices
simply couldn't go on rising, especially as the real income of most
Americans was actually declining. Low interest rates fed the bubble, but
that was not enough: the Chairman of the Fed actually encouraged people to
take out variable rate mortgages (where payments would go up as interest
rates increased), just when interest rates were at an all-time low. They had
only one way to go, and that was up.

Then these "toxic mortgages" were sliced and diced, bundled and rebundled,
in complex securities. The bankers seemed, for a moment at least, to believe
in financial alchemy. Take a bad mortgage, blend it with an A-rated security
and the mix got an A rating from the credit agency.

What, one has to ask, were they thinking? They were trying to defy the laws
of economics: how could individuals pay more on their mortgages than their
income? I, and others, repeatedly pointed out that this simply could not go
on. A day of reckoning had to come; it has now arrived.

For the Fed and the Bush Administration, the answer to what they were
thinking is easy: they needed the profligate borrowing to keep the economy
going, even with Bush's huge deficit spending. The game was called "kick the
ball down the road".

The hope was that, somehow, the real estate bubble would not blow up during
their watch and that somehow the others could be postponed, too. The war had
driven up the price of oil, so more of America's income was going to Saudi
Arabia and other oil producers, and less on American goods. The war
expenditures themselves stimulated the economy far less than money spent on,
say, the infrastructure (such as New Orleans's levees).

The Bush tax cuts for the rich provided little stimulation. The toxic
mortgages and the housing bubble allowed Americans to consume 100 per cent
of their income and savings dropped to zero for the first time since the
Great Depression.

The game is up. Even if the Fed were to lower interest rates, banks will not
be willing to lend and households will not be willing to borrow in the
manner they did before. House prices are falling - in some parts of the
country, they are plummeting. Some experts are predicting a pricing
correction of 50 per cent or more.

It was all fed, of course, by securitisation - the notion that somehow by
bundling bad mortgages together you get a good product. But the new religion
of securitisation ignored two elementary realities.

First, diversification only works to reduce risk if risks are not
correlated, but, when housing prices start to fall, all of the sub-prime
mortgages turned sour together. Second, securitisation creates asymmetries
of information, where those buying the securities know less than those
originating them. In the old days, when banks held the mortgages they
originated, they had an incentive to make sure that they were good loans.

But with securitisation, if you could find enough fools to take bad
mortgages, you had every incentive to lend as much as you could. What is
remarkable is how many fools (including banks with supposedly good risk
management systems) there were. That game, too, is up, at least for the
duration.

Let's be clear: this is not just an ordinary economic downturn, an inventory
cycle where firms have accumulated excess inventories. In this case, banks
have suffered a major hit to their balance sheet and, given the lack of
transparency, we don't yet know how big a hit. But we know there is some
missing matter: with more than two million anticipated foreclosures, the
losses are likely to run to much more than the banks have announced so far.

Moreover, there is a vicious circle: foreclosures drive down housing prices,
leading to more foreclosures. And as individuals find it increasingly
difficult to make mortgage payments (as interest rates get "reset"
automatically at higher rates, a built-in feature in millions of these
mortgages) and as the economy slows down, the problems will spread to other
credit markets. Indeed, this is already happening.

It is likely that America's zero savings will return to a more normal level,
5 per cent or so. This will exert an enormous drag on the economy. If it
happens rapidly, the downturn will be sharp; if it happens more slowly, the
downturn will be prolonged. Investment in real estate, too, will be
depressed for years to come. Other investment is not likely to increase
sufficiently to offset, especially with banks restoring higher lending
standards.

America has already exported some of its problems: banks around the world
bought its toxic mortgages; globalisation has meant that rising risk
premiums and the credit squeeze have had global consequences. For good
reason, confidence in America and its currency have declined; but this makes
it more difficult for Europeans to export, easier for imports to compete.
The exchange rate adjustments and the resulting reduction in America's
imports will temper its downturn but will not be sufficient to offset weak
consumption and investment.

Even the Fed is beginning to realise that, although misguided monetary
policy and inadequate financial regulation got the US into the mess,
reversing course will not get it out. (In a classic case of shutting the
barn door after the cows are out, regulations have now been tightened. It
has admitted, in effect, that it was asleep at the wheel.)

Can fiscal policy do the trick? President Bush's cureall for any of the
nation's ills - making the 2001 and 2003 tax cuts permanent - will drive up
the deficit but not the economy. In some sense, they are at the root of the
problems that have ensued. Tax rebates for lower-income Americans will have
the biggest stimulant per dollar of deficit (in the jargon, the biggest bang
for the buck). And it will be fast-acting.

But will the Bush Administration, so long focused on helping the rich, be
willing to change course? And is it wise to encourage America on its
consumption binge? What America desperately needs is more investment, in
infrastructure, in research, in education. This, too, would provide a big
bang for the buck. But while defence spending has soared, including billions
for weapons that don't work against enemies that don't exist, will it be
willing to countenance more government spending in these areas?

This is an election year and anything is possible. My betting is that the
Administration won't want to admit just how bad the economy is, and that
even if a compromise is achieved, it will be too little too late.

Joseph Stiglitz is University Professor at Columbia University. He was
chairman of the US Council of Economic Advisers and Cabinet member in the
Clinton Administration. A former chief economist of the World Bank,
1997-2000, he won the Nobel Prize for Economics for his work in information
asymmetries and is author of three global bestsellers; Globalization and its
Discontents, Making Globalization Work and The Roaring Nineties. His latest,
with Linda Bilmes, of Harvard, is on the mounting costs of the Iraq war. It
is published in late February, in commemoration of the fifth anniversary of
the war, by Penguin/Allan Lane.

COMMODITY ONLINE (INDIA)
http://www.commodityonline.com/news/topstory/newsdetails.php?id=3936
2007-11-30 19:00:00
Death of Dollar as the world currency
By Gary Dorsch

"HERE ARE TWO brother countries, united like a single fist," declared
Venezuelan kingpin Hugo Chavez after meeting Mahmoud Ahmadinejad, president
of Iran, in Tehran on Nov 19th.

"We have common viewpoints and we will stand by each other until we capture
the high peaks. God is with us and victory is awaiting us," added
Ahmadinejad, vowing to defeat US imperialism together and pointing to the
fall of the US Dollar as the prelude to the end of America\'s global
dominance.

"Don\'t you see how the Dollar has been in free-fall without a parachute?
The US prints Dollar bills with no real economic foundation. Soon we will
not talk about dollars, because the empire of the Dollar is crashing. The
day will arrive not only in OPEC, but also in Latin America, when we will be
liberated from the Dollar.

"With the fall of the US Dollar, US imperialism will fall as soon as
possible," Chavez declared.

Why are Ahmadinejad and Chavez laughing? Oil prices are up 56% this year
after nearly reaching $100 per barrel. At the same time, the US Dollar is
mired at a 20-year low, with the US economy teetering on the verge of a
recession.

The US Dollar has fallen over 50% versus the Euro since 2002, and oil prices
are nearly five times higher over the same time period. Increasingly, the US
dollar\'s reserve currency status is looking very fragile. Perhaps, all
that\'s left supporting the greenback is America\'s military might.

"They get our oil and give us a worthless piece of paper," Ahmadinejad told
OPEC ministers in the Saudi capital of Riyadh, insulting the US Dollar. But
the more the US Dollar slides, the less foreign investments in the US
capital markets are worth, and the more likely that foreigners could
withdraw en masse.

If that were to happen, the greenback would collapse.

"The Dollar is losing its status as the world currency," warned Chinese
central bank director Xu Jian on Nov 7th. "We will favor stronger currencies
over weaker ones, and will readjust accordingly," added Cheng Siwei, vice
chairman of China\'s National People\'s Congress, signaling plans to
diversify Beijing\'s $1.43 trillion of foreign exchange reserves.

Over the past six months, China, Japan, South Korea, and Taiwan have been
net sellers of $65 billion of US Treasuries. However, the Arab Oil kingdoms
have picked up the slack, boosting their holdings of US Treasuries through
their agents in London and providing the Dollar with vital life support.

Holdings of US Treasuries from the United Kingdom have soared by $205
billion from a year ago, allowing Asian central banks to scale down their
exposure to US bonds in an orderly fashion.

The Arab Oil kingdoms are plowing petro-dollars into US Treasuries, but they
are also facing the same quagmire that\'s entrapping China - an inevitable
devaluation of their pegged currencies alongside the US Dollar.

Earlier this week, the Dubai-based Arabian Business magazine fed speculation
of a UAE dirham revaluation of 3-5% as early as this weekend, pushing the
Saudi Riyal to a 21-year high and the Qatar Riyal to a five-year high
against the dollar, on ideas of a coordinated currency shift.

Now Washington is asking the Saudi king for more big favors: Maintain the
Saudi Riyal peg to the Dollar at all costs, and start pumping more oil this
winter, to keep prices from climbing above $100 per barrel.

But keeping the Dollar peg intact threatens the Saudi kingdom with hyper
inflation and social unrest. Pumping more oil endangers budding relations
with Iran, and could trigger a sharp downturn in the Saudi stock market,
which is just starting to recover from a brutal 60% correction.

Iranian president Ahmadinejad would love to see Saudi king Abdullah bin
Abdulaziz Al Saud pull the plug on the 21-year old US-Dollar peg to the
Saudi Riyal. Tehran has cut all ties with the Dollar when it comes to oil
transactions.

"This is an economic decision and we\'ve been proven right. Over time the
Dollar has got weaker and weaker," explains Hojjatollah Ghanimifard,
director of the National Iranian Oil Company.

"Less than 20% of Iran\'s oil export earnings are in Yen and the rest in
Euros," he said. Tehran is fetching $90 a barrel on oil sales of 2.4 million
barrels per day.

Such a stunning move by King Abdullah to price Saudi oil in Euros or a
basket of foreign currencies would knock the US Dollar into a tailspin.
"There will be journalists who will seize on this point and we don\'t want
the Dollar to collapse instead of doing something good for OPEC," whispered
Saudi Prince Faisal al-Saud, during a key closed meeting, when microphones
were not cut off.

The Fed Monetizes Record High Oil Prices

Ahamdinejad's assertion that foreign central banks are printing worthless
paper currency in exchange for OPEC\'s oil was fully understood by those
political leaders.

Between them they control 75% of the world\'s proven oil reserves.

The Federal Reserve has allowed the MZM money supply to expand by $850
billion this year, up 13% from a year ago. The broader US M3 money supply is
15.8% higher, its fastest rate in history, monetizing the surge in crude oil
and the Gold Price, key hedges against inflation.

Explaining the Fed\'s disregard for sharply higher food and energy prices on
October 20th, Federal Reserve governor Frederic Mishkin said, "Changes in
price indexes without food and energy provide a clearer picture of
underlying inflation pressures. If the monetary authorities react to
headline inflation numbers, they run the risk of responding to merely
temporary fluctuations."

At the same time, Mishkin said it was the Fed\'s job to "counteract negative
shocks to the economy" from high oil prices, suggesting a further expansion
of the money supply.

"Our emphasis over the years has been more on core inflation, which strips
out food and energy, because we think that\'s a better predictor of future
total inflation than today\'s total inflation has been," said Fed governor
Donald Kohn on Nov 28th.

Traders interpreted Kohn\'s disregard for commodity inflation, as a signal
that the Fed would continue to lower the fed funds rate next month to bail
out Wall Street bankers and brokers, and to cushion the housing market.

But on Nov 16th, the United Nations Food and Agricultural Organization (FAO)
reported that at $100 a barrel, the price of oil has sent the cost of food
imports skyrocketing this year.

What\'s more, worldwide food reserves are at their lowest in 35-years, so
prices are likely to stay high for the foreseeable future.

"Past shocks have quickly dissipated, but that\'s not likely to be the case
this time. Supply and demand have become unbalanced, and can\'t be fixed
quickly," said FAO analyst Ali Ghurkan.

The world\'s food import bill will rise 21% to $745 billion in 2007. In
developing countries, costs will go up by 25% to nearly $233 billion, due to
stronger demand for bio-fuel crops, extreme weather and growing demand from
countries like India and China.

As the famous economist John Maynard Keynes used to say, "By a continuing
process of inflation, governments can confiscate, secretly and unobserved,
an important part of the wealth of their citizens. There is no subtler, no
surer means of overturning the existing basis of society than to debase the
currency.

"The process engages all the hidden forces of economic law on the side of
destruction, and does it in a manner which not one man in a million is able
to diagnose."

ECB Also Fuels High Oil Prices

The European Central Bank has also been a big contributor to the global
inflation problem, by clandestinely monetizing the price of crude oil to
record highs.

Under Jean "Tricky" Trichet, the ECB has expanded the Euro M3 money supply
at a 12.3% annualized rate, far above the central bank\'s original target of
4.5% growth, while giving empty lip service to "vigilance" against
inflation.

But now the ECB\'s strategy is backfiring. Food-price inflation in the
13-nation Euro region accelerated to +3.8% in October, the highest rate
since March 2002. Fuel was +9% higher in the past year. It\'s easy to see
how far EuroStat has to doctor the Eurozone\'s inflation rate.

Crude oil has risen 60% in the last 12-months and the price of wheat has
increased 43% this year. The cost of shipping dry goods across the sea, as
measured by the Baltic Dry Index is up 150% from a year ago.

But on Nov 15th, with crude oil bumping up against $100 per barrel, Bank of
Spain chief Miguel Angel Fernandez Ordonez broke ranks with Trichet and his
fiery band of inflationists.

"The persistence of energy and food price increases entails the serious risk
that inflation expectations could become unhinged. As a result, our
credibility as central bankers could be significantly damaged," he warned.

Saudi Money Supply Out of Control

The Fed\'s daily money injections and expectations of more rate cuts, are
threatening to transmit hyper-inflation to the Saudi kingdom.

The Bernanke Fed is expanding the US M3 money supply so fast, it\'s inviting
speculators to sell the Dollar for Saudi Riyals. To counter the Dollar\'s
weakness, the Saudi Arabian Monetary Authority (SAMA) is expanding the Saudi
M3 money supply at a 19.5% annual growth rate, engaging in a round of
competitive currency devaluations with the Fed to keep the 21-year old
Dollar peg intact.

Last week, the Saudi Arabian Monetary Agency (SAMA), reduced its reverse
repo rate by 50 basis points to 4.25%, and the UAE\'s central bank cut rates
by as much as 20 basis points to relieve pressure on the weak Dollar.

But the Fed\'s Daily Injections of Liquidity into the banking system are
threatening the Saudi kingdom. With consumer inflation raging ahead at 5%, a
10-year high, an easing of SAMA policy could be a catalyst for
hyper-inflation and social unrest within the kingdom.

And because the Saudi Riyal is pegged to the US Dollar, the Euro is 50%
higher from five years ago to a record 5.5 Saudi Riyals, increasing the
costs of import prices from Europe. More Federal Reserve rate cuts designed
to inflate the US money supply could put unbearable pressure on the Gulf
currency pegs.

Despite the enormous pressure to ditch the Dollar peg, King Abdullah is
sticking with the greenback. The Saudi royal family has a secret agreement
with Washington, dating back to the early days of Saudi oil, which barters
US military protection for the desert kingdom in exchange for the Saudis
making sure that crude oil stays priced in US Dollars.

The US military umbrella also extends to the tiny Persian Gulf satellites.
That forces oil importers to buy roughly $1.5 billion per day of US Dollars
in exchange for the oil that OPEC sells on world markets.

Behind the smiles and handshakes in Riyadh last week, Saudi king Abdullah is
very worried about Iran\'s growing military might. He fears Tehran could
stir up the kingdom\'s own Shiite minority, suspected as a fifth column by
Saudi leaders.

Saudi Shiites represent 15% of the population and live in the oil-rich
Eastern Province, adjacent to Kuwait and Bahrain, which both have sizable
Shiite populations.

The Saudi royal family is also worried about Iran\'s drive for nuclear
invincibility. On Nov 15th, the UN\'s nuclear watchdog confirmed that Iran
has 3,000 working centrifuges in its nuclear facilities, a ten-fold increase
from just a year ago.

If those 3,000 centrifuges can be made to work efficiently, Iran could
manufacture a nuclear bomb in 12-18 months. Iran said on Nov 27th it has a
new missile, named Ashoura, with a range of 1,250 miles. It will enable Iran
to aim at targets in Europe.

Will Venezuela\'s Chavez Dump the Dollar?

On Nov 27th, Venezuela Energy Minister Rafael Ramirez stepped up his call
for OPEC member states to bill their oil sales in currencies other than the
weak US Dollar.

"The oil price is at $100 a barrel, but what Dollar are we talking about?
It\'s a Dollar that makes you laugh. The Dollar has devalued and it is
distorting the oil market because there is a financial crisis knocking on
the US door," Ramirez said. He also pointed to US economic sanctions on Iran
that helped push crude toward $100 a barrel.

Until now, Chavez\'s outlandish comments have been brushed off as the
ranting of a raving madman, or a tin-horn crack-pot.

But Chavez is one of the most powerful political figures in the world today.
He controls the Orinoco oil fields, recognized as the world\'s single
largest known oil deposits, and with the proper development could help
Venezuela surpass Saudi Arabia with the most oil reserves. Last June, Chavez
ousted US oil giants Exxon Mobil and Conoco Phillips from the Orinoco Belt
to consolidate his control.

If Chavez gathers the courage to demand non-Dollar payments for Venezuelan
oil, he could knock the Dollar sharply lower, overriding Riyadh\'s
artificial support. Venezuela exports 1.5 million barrels per day (bpd) to
the United States. Its total exports are nearer 2.6 million bpd, fetching
close to $7 billion per month.

"We better understand the vulnerabilities to our economy and our lives, when
we\'re dependent on Iranian mullahs and whackos in Venezuela," warned
Arizona Senator John McCain on January 22, 2007.

State-run Petroleos de Venezuela is sending more tankers of oil and fuel to
India and China this year, buyers who are up to seven times more distant
than the US, to reduce Chavez\'s dependence on his US export market.

"The US depends on us, not we on them," Chavez said on May 16th when he
predicted oil prices would soar to $100 a barrel if he chose to send its oil
to China, Europe and other countries instead of the US.

Chavez has boosted oil sales to China and India to 360,000 bpd this year,
and is shouldering the higher tanker carrier rates.

Global tanker rates to transport crude oil were stuck at four-year lows this
past summer, but have now doubled in the past two weeks. That could cost
Chavez an extra $6 per barrel to ship his oil to the Far East. So far,
however, soaring global oil prices have made up for lost revenue.

So what\'s preventing Chavez from switching to non-Dollar currencies for
Venezuelan oil right now? The maverick Venezuelan leader has often accused
President Bush of plotting to invade his oil-rich country to bring down his
regime. Switching oil sales away from the Dollar could mean Chavez would
suffer the same fate as the late Saddam Hussein.

Last year, Chavez signed a $1 billion arms deal with Russian kingpin
Vladimir Putin, but 30 Russian fighter jets and a few hundred thousand
rifles are not enough to wage a war against the world\'s leading military
power.

Focus Turns to OPEC Meeting in Abu Dhabi on Dec 5th

Already the Western media is fanning speculation of a boost to Saudi oil
output at the upcoming OPEC meeting in Abu Dhabi, to placate its military
patron in Washington and cool oil prices.

Within OPEC, Saudi Arabia is the only producer with any capacity to pump
more oil. Saudi oil chief Ali al-Naimi indicated the kingdom had spare oil
capacity of 2.3 million bpd. Total OPEC spare capacity is 3 million bpd.

On Nov 21st, former Saudi oil minister Ahmed Zaki Yamani engaged in
psychological warfare with crude oil traders, attempting to "jawbone" oil
prices lower.

"If there are no disasters, then oil prices could fall to $75 per barrel
after the winter," he said. Already, crude oil has tumbled to $91.50 per
barrel on expectations that Riyadh will boost its oil output by 500,000 bpd.
(How myopic have equity traders become, now that $91 for oil is considered
cheap, after seeing $99 last week?)

"We observe with great concern the recent escalation of oil prices. But we
believe that the world market is well supplied and petroleum inventories are
comfortable," said Saudi oil minister Ali al-Naimi on Nov 28th. Asked if
OPEC would agree to a second output increase on Dec 5, Naimi was
non-committal:

"We need to look at the data, at the information, and then we will decide."

But on Nov 27th, Qatar\'s oil minister Abdullah al-Attiyah downplayed
speculation of a boost in OPEC oil output next month. "My personal belief is
that for the moment there is no need to increase production. The market is
saturated," he said.

Qatar is one of OPEC\'s smallest producers with oil output of around 830,000
bpd, but its final decisions are usually closely aligned with Saudi Arabia.
And "please don\'t blame us for $93 oil," said Qatari Oil minister Abdullah
al-Attiyah on Oct 30th.

"The market is increasingly driven by forces beyond OPEC\'s control, by
geopolitical events and the growing influence of financial investors,"
agreed UAE oil chief Mohammed bin Dhaen al-Hamli.

In other words, OPEC blames foreign central banks for printing too much
money, which in turn, encourages speculation in the oil market.

Riyadh\'s ability to keep the crude oil market under wraps by pumping more
oil might draw to an end by late 2008. The International Energy Agency is
forecasting that global demand will climb by 2.1 million bpd to 88 million
bpd next year. Global supply however, is forecast to rise a scant 200,000
bpd to 85.6 million bpd, leaving a growing shortfall that would exhaust all
of Saudi\'s spare capacity.

In the short term, the direction of oil prices - just like Gold Prices -
might depend upon the Federal Reserve.

"Nobody should ask OPEC to do something to lower oil prices, because even if
OPEC introduces another 500,000 barrels of oil next month, the price is not
going to change unless the Dollar corrects itself," said Iranian Oil Company
chief Hojatollah Ghanimifard.

"The US Treasury should take measures to strengthen its currency if it
doesn\'t want oil prices to continue rising."

No matter how high commodities zoom upward, however, the European Central
Bank is also expected to continue its super-easy money policy, now fueling
Eurozone inflation.

To brainwash the public, the ECB\'s Vitor Constancio described the historic
rise in food and energy prices as "A temporary phenomena that will dissipate
in March next year. We cannot interpret this inflation rise as something
permanent.

"We are not faced with a situation where the process of inflation is out of
control in Europe."

Clearly, European central bankers and the US Treasury expect the Saudi royal
family to cap global oil prices by boosting output next month. That would
allow the ECB to avoid a rate hike to control inflation, and would permit
the Fed to continue to inject more dollars into the hands of Wall Street
dealers. But a move by the Saudis to knock oil prices lower could also
inflict damage on its own shaky stock market, whose spirits have been
energized by higher oil prices.

On Sept 25th, Saudi Arabia lifted remaining restrictions on citizens from
Kuwait, the United Arab Emirates, Qatar, Oman and Bahrain, for trading in
the biggest Arab stock exchange, unleashing the Saudi All Share Index from
its two year slump. But the rally could fizzle out, if King Abdullah knocks
oil prices sharply lower.

Since an estimated 7,000 princes in Saudi Arabia own 70% of the stock
market, there\'s a good chance that King Abdullah won\'t hurt the royal
family.

Whether the historic rise in crude oil towards $100 per barrel heralds the
arrival of "Peak Oil" or is just a speculative bubble that will deflate are
just some of the tough questions in today\'s brave new world of investing.

Courtesy: www.bullionvault.com

A Market Without Parachutes

By MIKE WHITNEY

America is finished, washed up, kaput. Foreign investors and central banks around the world have lost confidence in US markets and are headed for the exits. The dollar is sinking, the country is insolvent, and its leaders are barking mad. That's bad for business. Investors are voting with their feet. They've had enough. Capital is flowing to China and the Far East in a torrent. It's "sayonara" downtown Manhattan and"Hello" Tiananmen Square.

The dollar fell another 2 per cent last night, gold soared to $840 per ounce, oil topped $98 per barrel, General Motors reported a $39 billion loss after the market closed on Tuesday, the real estate market continued its downward slide, and the major investment banks are marching in lock-step towards bankruptcy.

The news is all bad. The nation's economic foundation is in shambles. US credibility is shot. Bush and Greenspan have put us on the road to ruin. Now their work is done. We're flat broke.

The catalogue of fiscal ailments now facing the country is too long to list. We'd need a ledger the size of a small encyclopedia. There's been a stampede away from the dollar even though it's already lost over 60 per cent of its value since Bush took office and even though central banks around the world will lose their shirts if it collapses. They don't care. They're getting out while they can.

Cheng Siwei, the vice chairman of China's National People's Congress, announced yesterday that China would continue to diversify its $1.4 trillion reserves away from the dollar to "stronger currencies" like the euro. "Strong currencies"; isn't that Paulson's line? Siwei's comments ignited a firestorm in the currency markets triggering a big blow-off of the greenback. The poor dollar has no place to go now but down, and it's on a greased pole to the bottom. With consumer spending paralyzed by the decline in home equity and frozen wages, and the banks "stuffed to the gills" with over a trillion dollars of mortgage-backed sludge; the prognosis for the hobbled dollar is looking grimmer by the day. The bulging trade deficits and dwindling foreign inflows haven't helped either. The greenback has suddenly become the global pariah; all it needs is a leper's rattle and a tin cup.

The news is no better in the real estate industry either, where the nation's biggest builders are reporting record losses and inventory is backed-up 11 months. Sales are off 22per cent in one year alone. Foreclosures are skyrocketing, jumbo loans (over $417,000) are impossible to get regardless of one's credit history, 40 per cent of all mortgages (subprime, Alt-A, piggyback, reverse amortization, interest-only) have been eliminated, and entire projects in Florida, Arizona, Las Vegas, and California's Central Valley have stopped building altogether. Tens of thousands of unoccupied homes across the Southwest have been reduced to ghost towns. Nothing is selling. The building boom, that began when Alan Greenspan ginned-up the Fed's printing presses in 2002, has turned into the biggest housing bust in American history.

On top of that, the banks are tightening lending standards and shunning potential buyers just when the economy needs a boost in demand. Loan originations are down and bankers are spooked by the gathering storm in the credit markets. That means that home sales will continue to be sluggish, prices will correct more quickly, and the anticipated "soft landing" will turn into a full-blown crash.

New home construction has accounted for 2 out of every 5 new jobs created in the last 5 years. Most of those workers are either delivering pizzas, cleaning bed pans or are lining up at the soup kitchen. The BLS's numbers on employment are bogus. It's just more government bunkum. They're predicated on a "birth-death" model that creates millions of fictitious jobs out of whole cloth. In truth, unemployment is soaring and the most vulnerable and impoverished among us are taking a beating from housing debacle.

According to the Mortgage Bankers Association of Washington, the total of mortgage loans outstanding in 2006 was $10.9 trillion; $6 trillion of which were transformed into securities. (CDOs, MBSs) About $1.5 trillion of those securities are subprime; another $1 trillion Alt-A (nearly as risky) and at least another $1.5 trillion in adjustable rate mortgages (ARMs) At least 20 per cent of these shaky liabilities/securities will default, and yet, no one really knows who is holding them on their books. All of the major financial institutions-the insurance companies, foreign banks, hedge funds, investment banks---have purchased these CDO "roadside bombs" and mixed them in with their other performing loans and hard assets. The projected explosions have already begun to take their toll on the financial giants---Citigroup and Merrill Lynch are just the latest victims; others will follow. The problem can't be fixed with Bernanke's low interest rates. The bad debts are everywhere and must accounted for and written down. That puts us on the threshold of a jarring market-downturn triggered by an unprecedented number of defaults that will rumble through the entire system. Bankruptcies will pop up everywhere at random. It is a blueprint for economic chaos. And it is unavoidable.

The global markets have never seen a financial typhoon of this magnitude before. Mortgage lenders, homeowners, banks, hedge funds, bond insurers, etc. will all either go under or feel the sting of a slumping market.

Many of the major investment banks are already broke; it's clear from their own reporting. Charles Hugh Smith sums it up like this in his recent article "Empire of Debt: The Great Unraveling":

"If their bad bets were marked to market, Citicorp and Merrill Lynch would be declared insolvent. Why? Because they are insolvent--right now. The meaning of insolvency is straightforward: their losses exceed their capital. Recall that these firms list assets of $100 billion (or whatever) but their actual net capital is on the order of 2.5 per cent to 5 per cent---a mere sliver of their stated assets. In other words: a 5 per cent loss of their stated assets wipes them out..The game is now over, and the players shuffling losses can only last a few more days or weeks."

Up to this point, the banks have been able to place a sizeable portion of their "hard-to-value" assets in a Level 3 grab bag, which allowed company accountants to assign a value to those assets according to their own judgment. No more. The new FASB 157 regulation will force the banks to use "market prices" to determine the true value of their holdings. Some analysts believe that these new disclosure rules may result in $200 billion write-downs on assets and require that the over-leveraged banks to increase their capital reserves. That will slow down lending and put a wrinkle in the banks' bottom line. In any event, once the law is enacted; we'll see who's "faking" the value of their assets or as Warren Buffet says, "Who's swimming with their clothes off.

Professor Nouriel Roubinisummed it up like this:

"The amount of losses that financial institutions have already recognized - $20 billion--is just the very tip of the iceberg of much larger losses that will end up in the hundreds of billions of dollars.Calling this crisis a sub-prime meltdown is ludicrous as by now the contagion has seriously spread to near prime and prime mortgagesAnd it is spreading to every corner of the securitized financial system that is either frozen or on the way to freeze.The reality is that most financial institutions have barely started to recognize the lower "fair value" of their impaired securities.The credit crunch is getting worse and its financial and real fallout will be severe." (Nouriel Roubini blog.)

The constant drumbeat of bad news is having a numbing affect on Wall Street. Traders' are tight-lipped and downcast. Spirits are sagging. No one likes loosing money, and yet, the credit storm shows no signs of letting up anytime soon. Yesterday, the Dow Jones Industrial's took another 360-point pounding before the bell rang.Another day, another bloodbath. The subprime virus has now infected the broader markets leaving the once-brawny financial giants bruised and reeling like Joe Frazier in the Thrilla in Manila. A few more down-days like yesterday and they'll be carrying out hedge funds feet first.

The stock market is looking more and more like a glass pitcher propped up on the edge of a bookshelf. One little bump, and down she goes.

Mike Whitney lives in Washington state. He can be reached at: fergiewhitney@msn.com

MONEY ! iNTERVIEW WITH aLAN GREENSPAN

As the credit crisis continues to grow and the US dollar hits a new low, we turn today to the former Chairman of the Federal Reserve Alan Greenspan. Greenspan headed the central bank in the United States for almost two decades. He was first appointed to this position in 1987 by President Ronald Reagan. Greenspan retired in January 2006 after deciding the fate of national interest rates under four different Presidents. Dubbed “The Maestro,” he was widely regarded as one of the world’s most influential economic policymakers.

He has just written a new 500-page memoir. It’s called “The Age of Turbulence: Adventures in a New World.” Alan Greenspan joins us on the telephone. And we are joined in studio by journalist Naomi Klein, author of “The Shock Doctrine.”

• Alan Greenspan, Chairman of the Federal Reserve from 1987 to 2006. His new memoir is “The Age of Turbulence: Adventures in a New World.”
• Naomi Klein, award-winning investigative journalist, the bestselling author of “No Logo” and the co-director of “The Take.” Her latest book is called “The Shock Doctrine: The Rise of Disaster Capitalism.”

Rush Transcript

This transcript is available free of charge. However, donations help us provide closed captioning for the deaf and hard of hearing on our TV broadcast. Thank you for your generous contribution.
Donate - $25, $50, $100, More...

AMY GOODMAN: As the credit crisis continues to grow and the US dollar hits a new low, we turn today to the former Chair of the Federal Reserve, Alan Greenspan. Alan Greenspan headed the central bank in the United States for almost two decades. He was first appointed to this position in 1987 by President Ronald Reagan. Greenspan retired in January 2006, after deciding the fate of national interest rates under four different presidents. Dubbed “the Maestro,” he was widely regarded as one of the world’s most influential economic policymakers. He has just written a new 500-page memoir; it’s called The Age of Turbulence: Adventures in a New World.

Alan Greenspan joins us now on the phone. And in our studio we’re joined again by journalist Naomi Klein, author of The Shock Doctrine. We welcome you both to Democracy Now! Welcome, Alan Greenspan.

ALAN GREENSPAN: Thank you very much. I’m delighted.

AMY GOODMAN: It’s good to have you with us. You worked with six presidents, with President Reagan, with both President Bushes. You worked with President Ford, and you worked with Bill Clinton, who you have called a Republican president; why?

ALAN GREENSPAN: That was supposed to be a quasi-joke.

AMY GOODMAN: Talk about it.

ALAN GREENSPAN: Well, Clinton?

AMY GOODMAN: Yes.

ALAN GREENSPAN: Well, I stated that I’m a libertarian Republican, which means I believe in a series of issues, such as smaller government, constraint on budget deficits, free markets, globalization, and a whole series of other things, including welfare reform. And as you may remember, Bill Clinton was pretty much in the same—was doing much that same agenda. And so, I got to consider him as someone—as he described it, we were both an odd couple, because he is a centrist Democrat. And that’s not all that far from libertarian Republicanism.

AMY GOODMAN: About how much would you say you agreed with him?

ALAN GREENSPAN: On economic issues, I would say probably 80%.

AMY GOODMAN: And what about President Bush?

ALAN GREENSPAN: President Bush had the wonderful characteristic of knowing that it was not to his advantage or to ours to interfere with the actions of the Federal Reserve. And I must say, through all of his years, he never once second-guessed what the Fed was doing. And that was very important to us, and we’ve been very much appreciative of that.

But, as I say in the book, he did not clamp down, as I thought was necessary, on what was a wayward Republican-controlled Congress, which I thought lost its way and started to spend and create all sorts of fiscal imbalances. And, essentially, what I hold—where I thought the administration could have done far better is if the veto were employed. And as you may remember, he did not use the veto at all. And that, what I thought, would have created a much more balanced procedure in the Congress. So it’s a mixed case in this regard.

AMY GOODMAN: Alan Greenspan, let’s talk about the war in Iraq. You said what for many in your circles is the unspeakable, that the war in Iraq was for oil. Can you explain?

ALAN GREENSPAN: Yes. The point I was making was that if there were no oil under the sands of Iraq, Saddam Hussein would have never been able to accumulate the resources which enabled him to threaten his neighbors, Iran, Kuwait, Saudi Arabia. And having watched him for thirty years, I was very fearful that he, if he ever achieved—and I thought he might very well be able to buy one—an atomic device, he would have essentially endeavored and perhaps succeeded in controlling the flow of oil through the Straits of Hormuz, which is the channel through which eighteen or nineteen million barrels a day of the world eighty-five million barrel crude oil production flows. Had he decided to shut down, say, seven million barrels a day, which he could have done if he controlled, he could have essentially also shut down a significant part of economic activity throughout the world.

The size of the threat that he posed, as I saw it emerging, I thought was scary. And so, getting him out of office or getting him out of the control position he was in, I thought, was essential. And whether that be done by one means or another was not as important, but it’s clear to me that were there not the oil resources in Iraq, the whole picture of how that part of the Middle East developed would have been different.

AMY GOODMAN: We’re also joined in studio by Naomi Klein, author of the book The Shock Doctrine: The Rise of Disaster Capitalism. Your response to that, Naomi Klein?

NAOMI KLEIN: Well, I’m just wondering if it troubles Mr. Greenspan at all that wars over resources in other countries are actually illegal. Mr. Greenspan has praised the rule of law, the importance of the rule of law, in his book. But in his statements about the reasons why this has not been publicly discussed, he has said that it’s not politically expedient at this moment. But it’s not just that it’s not politically expedient, Mr. Greenspan. Are you aware that, according to the Hague Regulations and the Geneva Conventions, it is illegal for one country to invade another over its natural resources?

ALAN GREENSPAN: No. What I was saying is that the issue which, as you know, most people who were pressing for the war were concerned with were weapons of mass destruction. I personally believed that Saddam was behaving in a way that he probably very well had, almost certainly had, weapons of mass destruction. I was surprised, as most, that he didn’t. But what I was saying is that my reason for being pleased to see Saddam out of office had nothing to do with the weapons of mass destruction. It had to do with the potential threat that he could create to the rest of the world.

NAOMI KLEIN: Yes, I realize that, but he was not simply deposed. The US invaded Iraq, occupied it and took control over its resources. And under international law, that it is illegal to wage wars to gain access to other countries’, sovereign countries’, natural resources.

ALAN GREENSPAN: Yes. No, I’m fully aware of the fact that that is a highly, terribly important issue. And as I said in other commentaries, I have always thought the issue of what essentially amounts to what is often called pre-emptive, preventive action on the part of some countries to secure resources or something else like that, it’s an issue that goes back to the Cold War, when we had the very difficult moral dilemma of what do you do when you think a missile is coming in our direction and you’re not sure whether it’s an accident or not an accident. And that is a problem which I think is a deep moral problem in civilized society. And the issue is one which I don’t think we’re going to resolve very easily. And as you point out, yes, I am a believer in the rule of law, and I think it is a critical issue, not only for domestic economies, but for the world economy as a whole.

AMY GOODMAN: Naomi Klein?

NAOMI KLEIN: You have also advocated economic shock therapy and supported IMF programs that have transformed economies very, very quickly. And then, you say that you are in support of the rule of law. But I’m just wondering how, in a country like Russia, there could be rule of law when it’s being transformed in fast-forward in that way.

ALAN GREENSPAN: Well, remember that you don’t get a market economy merely by eliminating central planning. And remember, when the Berlin Wall came down and the Soviet Union disintegrated, you didn’t have a market economy. What you basically had was a black market economy. And they tried to develop the institutions of the democratic society, and it’s not something which they have had back for generations. And as you can see now, there’s an increasing authoritarianism. It’s a very—it’s a society which has very different trends at different levels of that society. And I don’t know exactly where they’re coming up, but I don’t like the direction it’s been going in in recent years.

AMY GOODMAN: I wanted to go back to Iraq and ask you about, well, a piece by Jim Steele and Don Barlett that came out in Vanity Fair, where they’re talking about the billions lost in Iraq. And they begin their piece by saying, “Between April 2003 and June 2004, [$12 billion] in US currency—much of it belonging to the Iraqi people—was shipped from the Federal Reserve to Baghdad, where it was dispensed by the Coalition Provisional Authority. Some of the cash went to pay for projects and keep ministries afloat, but, incredibly, at least $9 billion has gone missing, unaccounted for, in a frenzy of mismanagement and greed.”

Alan Greenspan, when you were head of the Federal Reserve, how much knowledge do you have of this? And did you investigate this? Were you aware of this at the time?

ALAN GREENSPAN: Well, let me say that what we were involved in was essentially endeavoring to create a viable currency for the central bank of Iraq. And what we did do was—I think very successfully—create what is a viable financial system, even under the circumstances that currently exist. There was, as far as I can judge, a huge drain of the resources into areas which nobody to this day can understand or follow. It had nothing to do with the central bank. In our relationships with them, we were merely acting as an intermediary to assist them in creating a system, which they now have, which is working reasonably well, despite all of the problems that are going on. The issue which you are referring to had nothing to do with the Federal Reserve in any of our relationships with the central bank.

AMY GOODMAN: Well, they are talking about, in one day, for example, the East Rutherford operation center of the Federal Reserve Bank of New York, 100 Orchard Street in East Rutherford, a tractor-trailer truck pulling up, and though accustomed to receiving and shipping large quantities of cash, the vault had never before processed a single order of this magnitude: $2.4 billion in $100 bills. But ultimately, again, $9 billion of $12 billion gone missing in Iraq.

ALAN GREENSPAN: I am not familiar with any such evidence. And it was certainly not brought to my attention. I, frankly, find it very unlikely that those orders of magnitude were involved in any of the numbers that we were dealing with. You have to make certain that—there’s been a lot of confusion about losses, and people have used the dinar, the basic currency unit of Iraq, and assumed they were American dollars. And, of course, that gives you a highly distorted view. There’s been, I’ve seen, several reports fairly recently in which that sort of mistake was being made. But what I can tell you is that no such numbers of any order of magnitude of the type you are discussing came to the attention of the Federal Reserve.

AMY GOODMAN: This is based on that award-winning article in Vanity Fair, or the team who have won—

ALAN GREENSPAN: Let me put it this way, award-winning doesn’t necessarily—

AMY GOODMAN: Well, no, no. I mean Don Barlett and Jim Steele, Pulitzer Prize-winning journalists. I’m sure you know their work. But Naomi Klein?

NAOMI KLEIN: Well, I would just add that it’s quite surprising, actually, that Mr. Greenspan is unaware of this scandal around Iraq’s missing billions, because Paul Bremer had to testify before Congress and was asked directly about those missing billions. It’s been the subject of very high-level investigations. There is a huge paper trail around it. So this is hardly a secret, and it’s hardly just a matter that’s confined to Vanity Fair. This is—

ALAN GREENSPAN: Oh, I’m not saying that the losses are not real. I think they are, because, obviously, we can’t account for all the oil revenues. I’m just merely saying it’s not something which was directly related to any of the actions which the Federal Reserve Bank of New York, to which we were referring, was involved, as far as I know.

AMY GOODMAN: Alan Greenspan, we have to break for sixty seconds, but we’ll be back with you. Alan Greenspan, the former Chair of the Federal Reserve from 1987 to 2006. His memoir is out now; it’s called The Age of Turbulence: Adventures in a New World. We’ll be back with him in one minute. Stay with us.

[break]

AMY GOODMAN: Our guests are Naomi Klein, author of The Shock Doctrine, and Alan Greenspan, the former head, Chair, of the Federal Reserve, his book, The Age of Turbulence: Adventures in a New World. In fact, you were a classical and jazz musician, weren’t you, Alan Greenspan, before you went into economics?

ALAN GREENSPAN: Well, I studied at Julliard, which means you’ve become a classical musician. And, indeed, that is still my fundamental interest in music. But I went on as a teenager to play in a dance band and spent a year and a half traveling around the country as a jazz musician.

AMY GOODMAN: Well, I wanted to move forward to your work as head of the Fed, as head of the Federal Reserve Bank, and ask you about that piece by Paul Krugman called “Sad Alan’s Lament,” that goes to that issue of supporting President Bush’s tax cuts. In his piece, Paul Krugman says, "Mr. Greenspan has just published a book in which he castigates the Bush administration for its fiscal irresponsibility.

“Well, I’m sorry,” says Paul Krugman, “but that criticism comes six years late and a trillion dollars short.”

He says that "Mr. Greenspan now says that he didn’t mean to give the Bush tax cuts a green light, [and] that he was surprised at the political reaction to his remarks. "

He goes on to say the first big chance you had to clarify yourself came a few weeks after your initial testimony in 2001, when you appeared before the Senate Committee on Banking, Housing and Urban Affairs.

He says that, again and again you were offered the opportunity to say something that would help rein in runaway tax-cutting; each time evading the question, often replying by reading from your own previous testimony.

He said, “If anyone had doubts about Mr. Greenspan’s determination not to inconvenience the Bush administration, those doubts were resolved two years later, when the administration proposed another round of tax cuts, even though the budget was now deep in deficit. And guess what? The former high priest of fiscal responsibility did not object.”

And he goes on from there. He says in 2004, you “expressed support for making the Bush tax cuts permanent—remember, these are the tax cuts he now says he didn’t endorse—and argued that the budget should be balanced with cuts in entitlement spending, including Social Security benefits, instead. Of course, back in 2001 he specifically assured Congress that cutting taxes would not threaten Social Security.”

Your response, Alan Greenspan?

ALAN GREENSPAN: Well, I find it very unfortunate. Paul is a good economist. I have known him for years. He is wrong as fundamentally in many of the facts—in fact probably all of the ones you’ve just cited.

First of all, I was in favor of tax cuts of any type when it looked as though, according to all the technical experts, we were confronted with very large potential increases in surpluses. If we allowed those surpluses to run when the debt of the United States essentially went to zero, we would find that the federal government was beginning to accumulate huge amounts of assets of corporate business. There was to be no alternative to that. And if you look at the possibilities of what Lyndon Johnson or Richard Nixon would have done under those circumstances, it becomes extremely scary. It was only when it appeared that the forecasts were false, that, indeed, we were not running in—or not likely to run into these large surpluses, and, indeed, they disappeared.

At that point, I reverted to my older position: namely, I was in favor of tax cuts, but only if they are matched by cuts in spending. And I, therefore, reverted to that position in congressional testimony in 2002 and 2003, in fact, to the point where I recall a number of congressmen asked me, “Do I understand you correctly? You’re saying that you are in favor of the tax cuts, but only if spending is cut. If spending is not cut, were we to read from you that you are not supporting the tax cuts?” And I said, ‘That is correct." So Paul Krugman’s view that somehow I didn’t change my mind until after I got out of office is factually false. And, indeed, I did change my mind. I changed my mind in 2002 and 2003, largely because the whole notion of which fundamentally got me in favor of significant tax cuts without offsetting expenditures was a very special event which probably had not occurred in the United States for 150 years—namely, division of our total federal debt effectively going to zero.

AMY GOODMAN: Naomi Klein?

NAOMI KLEIN: Just another piece of the puzzle here that I think is important to remember is that, Alan Greenspan, in your book, you make it clear that you are ideologically very much a supporter of the principle of privatizing Social Security and, in fact, were very disappointed that the Bush administration did not pick this up after the elections in 2000. Even though they hadn’t campaigned on privatization of Social Security, you felt that they should have pushed this forward. So doesn’t creating a shortfall because of tax cuts bolster the case for privatization of Social Security that you have written you are an ideological supporter of?

ALAN GREENSPAN: Well, first of all, ideology is not what I hold. I try to learn what are the facts, and I let my opinions, judged on the facts, not by some preconception, which I regret is what ideology as a notion means.

First of all, let me just suggest something to you. Social Security, as it now exists and is now currently funded, will be a very small part of overall retirement income in the years ahead. There is no—in fact, no alternative, as things now stand, that a very substantial part of the so-called replacement of income that one talks about when one retires is going to have to come from the private sector. And so, no matter what is done with federal Social Security, the average person is going to have to rely ever more increasingly on private sources of income, whether it’s private savings or working or whatever. But if you look at the future of Social Security and the demographics we’re now dealing with, the extent to which it replaces lost income when you retire is decreasing.

AMY GOODMAN: Alan Greenspan, the issue of whether we have enough money in this country, do you think that that also calls into question the war in Iraq, how the US can afford to continue this war?

ALAN GREENSPAN: Well, the issue is, basically, the question of the commitments of Social Security, relative—and Medicare, I might add—relative to the costs of the war. There is no question that a significant amount of money is being wasted in war. That is what happens in war. And that’s—clearly we’re talking hundreds of billions. The issue here is that—

AMY GOODMAN: I believe the figure is in the trillions.

ALAN GREENSPAN:—even if the war spending were not there, we would have these problems. So it’s true that there’s a good deal of waste going on. But the problems to which I’m referring to existed before the war and will continue after the war.

AMY GOODMAN: The sub-prime crisis that we are seeing today, many saying that you seriously contributed to this, laid the foundation with keeping the interest rates low.

ALAN GREENSPAN: Well, the sub-prime crisis did occur as a result of lower interest rates. The lower interest rates, however, are, if one takes a look at the whole context of rising home prices throughout the world, is clearly a global issue. It is the result of fundamental changes that occurred as a consequence of the end of the Cold War, and that housing bubbles appear in more than two dozen countries around the world, which screams for an explanation that is global, not individual. So we in the United States—

AMY GOODMAN: I know that you’re going to have to leave soon.

ALAN GREENSPAN: May I just finish?

AMY GOODMAN: Yes. Go ahead.

ALAN GREENSPAN: We in the United States basically try to get mortgage interest rates up and slow the bubble. And remember, it’s the bubble which created a goodly part of the problem which we have had in the sub-prime market. And we failed. And that tells us, basically, that it’s the global forces that are at play here.

But just going—taking a step back, I think it would be a terrible mistake if we look at the sub-prime market and decide it should be eliminated, because I think it’s been a very successful market to allow many people in this country to have homes, which wouldn’t otherwise be able to have them. The sub-prime market has a lot of technical problems wrong with it, and there are many issues that are involved with financial securitization alike, which created difficulties. I hope in the process we don’t eliminate the sub-prime market.

AMY GOODMAN: Alan Greenspan, you write in the end of your book, “A Federal Reserve System that will be confronted with the challenge of inflation pressure and populist politics that have been relatively quiescent in recent years” is something that is very significant. You say the year—the United States in 2030 is likely to be characterized by populist politics that have been relatively quiescent in recent years. How important is populist politics, and what do you envision those to look like?

ALAN GREENSPAN: Well, remember what populist politics is. It’s a very special brand of short-term focus, which invariably creates very difficult long-term problems. A goodly part of the book, as you know, is written about how populism has gripped, say, many Latin American countries to their detriment. And the term “populist politics” is essentially another way of saying short term versus longer term. And people who emphasize short-term benefits for long-term costs end up with very little in the way of economic growth and prosperity.

AMY GOODMAN: Naomi Klein?

NAOMI KLEIN: Mr. Greenspan, I’m wondering whether you feel that you share any responsibility in the rise of this economic populism, because, of course, you took over the Federal Reserve during the Reagan administration, and when Reagan took office, CEOs earned forty-three times more than their workers, and when you left the Federal Reserve, they made more than 400 times more than their workers. So the policies that you pursued—deregulation, privatization, free trade—have contributed to this extraordinary division of income that is really the fuel for this economic populism that you’re now denouncing. So aren’t you the one that has caused this crisis of faith in capitalism? Or, at least, don’t you share some of that responsibility?

ALAN GREENSPAN: Well, look, the whole issue of what has happened in this country with respect to the increasing inequality of income is an issue I address and abhor in the book, and I point out that what is causing it to a very significant extent is the fact that skilled labor is under extraordinary demand as the technologies increase, and we’ve had a dysfunctional education system in this country, both in primary and secondary schools, which is showing up in all of the studies, which indicate that while our children in the fourth grade are doing fairly well relative to international comparisons, by the end of high school, they are in terrible shape. And as a consequence of that, we are not putting the proper number of people into the education cycle to get them up to skill levels, which creates much less, or would create a good deal less, in the way of income inequality.

And I also argue in the book that we ought to be opening up our borders to skilled labor from all sorts of—from all parts of the world, because if we were to do that, we would increase the supply of skilled workers, which our schools have been unable to create, and as a consequence of that, we would lower the average wage of skills and reduce the degree of income inequality in this country. It’s a very important issue, and it’s a very important issue which I raise in my book. And we have to confront this both at the education level and on the immigration level.

And it’s not anything to do with what I am proposing. And just remember that the type of globalized economy that I support has taken hundreds of millions of people out of poverty. It’s created a standard of living throughout the world which is unprecedented in history. And to assume that that is something we should be apologizing for, I find, is wholly inappropriate.

AMY GOODMAN: Naomi Klein?

NAOMI KLEIN: Well, you mentioned Latin America, and, of course, there is a rise in leftwing political parties and movements in Latin America. But this is after decades of adherence to IMF structural adjustment policies, and it’s precisely because those policies failed to lift people out of poverty in countries like Bolivia that you have this rise of what you’re calling economic populism. It’s because trickle-down economics was seen to have failed. But you also mentioned economic populism in Latin America in your book, and you blame it for inflation episodes and the collapse of regimes and the toppling of governments, and one of your examples was Chile in the 1970s. Was Chile—was Salvador Allende’s regime toppled because of inflation, or didn’t the CIA have something to do with that?

ALAN GREENSPAN: Well, look, let’s—I’m using Latin America as an example. The key question is not Latin America. Let’s get back to the United States. Let’s get back to the world at large and face the issue of populism here. Remember, the populist issue in Latin America goes back to the roots of Spanish and Portuguese colonization.

NAOMI KLEIN: I’m aware of that, Mr. Greenspan, but there are many developmentalist policies that were trying to address those colonial disparities. They were called it import substitutions. And those leaders were systematically eliminated in a series of coups.

ALAN GREENSPAN: Well, let me ask you a question, which—you are just taking the capitalist system, to state it very bluntly, and say it’s deficient here, it’s deficient there, it’s deficient every other place. The capitalist system has created more economic wealth in the last seven or eight years around the world. And as I said before, it’s had huge effects in the developing world. Hundreds of millions of people have come out of poverty. And as a consequence of this, not on the basis of populist policies, but on the basis of policies which relate to markets, it strikes me that—you know, you can say all of the problems that exist in market economies—and in my book, you will find, I am very much aware of all of them in great detail.

The question you have to answer, however, is: what system works better? And I think the evidence going back to the Enlightenment of the early part of the eighteenth century and all of the events that occurred with respect to what’s happened to the world since then has demonstrated that this system is the only one that seems to work well. I mean, all forms of socialist structure, which you seem to be implicitly in favor of, have failed. So the question is—

AMY GOODMAN: Naomi Klein?

NAOMI KLEIN: Actually, I am referring to mixed economies here. I’m not—

ALAN GREENSPAN:—what is [inaudible] issue here?

NAOMI KLEIN: Actually, I’m referring to mixed economies here. I’m not referring to state socialism.

ALAN GREENSPAN: Well, the question is, when you begin to talk in terms of changing what you’re implicitly saying—and I’ve heard this story before—you have to say, what are you changing in favor of? And we’ve had regrettable problems throughout the world every time we’ve moved in the direction you’re implying. The poverty level has gone up, not down.

NAOMI KLEIN: Well, Mr. Greenspan, I think it’s worth remembering that the word “populist” simply means popular. So, obviously, a lot of people disagree with your assessment of the benefits of—

ALAN GREENSPAN: A lot of people disagree with my assessment, a lot of people disagree with yours.

NAOMI KLEIN: And are interested in another economic model.

ALAN GREENSPAN: That’s what makes democracy work.

NAOMI KLEIN: There is something that I was quite interested in in your book, which was your definition of corruption and crony capitalism. You said, “When a government’s leaders or businesses routinely seek out private sector individuals or businesses and, in exchange for political support, bestow favors on them, the society is said to be in the grip of crony capitalism.” You say, “The favors generally take the form of monopoly access to certain markets, preferred access to sales of government assets, and special access to those in power.” I kept thinking about Halliburton, Blackwater, Lockheed and Boeing. You were referring to Indonesia at the time, but I’m wondering, according to your definition—and we’re seeing these extraordinary—we’re seeing contracting emerging, as in the words of the New York Times, a fourth arm of government. Front page of the New York Times talks about $6 billion being investigated for criminal activity in contract allocation in Iraq. I’m wondering whether you think the United States is a crony capitalist economy, according to your definition?

ALAN GREENSPAN: Every economy exists, no matter what the level of democracy, has elements of crony capitalism. It’s—given human nature and given the democratic structures, which we all, I assume, adhere to, that is an inevitable consequence. The major issue is, is it the dominant force within an economy? It was the dominant force under Suharto. It is not the dominant force in this country.

NAOMI KLEIN: Well, how about this: in 2003, when you were head of the Federal Reserve, the US government handed out 3,500 contracts to companies to perform security functions. In 2006, the year that you left the Federal Reserve, they handed out 115,000 such contracts. It seems to me that it is becoming a dominant force.

ALAN GREENSPAN: Are you talking about the contracts that the Federal Reserve put out?

NAOMI KLEIN: I’m talking about the crony capitalist system of a Republican government handing out an extraordinary level of contracts to private companies, who then support these politicians with the political favors that you’re describing in your book, in your definition of crony capitalism.

ALAN GREENSPAN: [inaudible] Federal Reserve is doing this or the government?

NAOMI KLEIN: You’ve overseen an explosion of the contract economy.

AMY GOODMAN: Final word, Alan Greenspan.

ALAN GREENSPAN: I’m sorry. I misunderstand what you’re saying. Are you saying the Federal Reserve is doing that or the government is doing it?

NAOMI KLEIN: I’m saying that the US government is doing it.

ALAN GREENSPAN: Well, the US government has to purchase equipment from the private sector. It doesn’t produce it itself. And you may characterize it in many different ways. And, obviously, I’m not going to deny that there’s all sorts of corruption, which goes on in every country. The problem, essentially, for a democratic society is to maintain the civil liberties of the society and suppress that. Corruption, embezzlement, fraud, these are all characteristics which exist everywhere. It is regrettably the way human nature functions, whether we like it or not. What successful economies do is keep it to a minimum. No one has ever eliminated any of that stuff.

AMY GOODMAN: Well, on that note, we’ll have to wrap up this discussion, because I know you, Alan Greenspan, have to go. But I hope this is just part one of this discussion. Alan Greenspan’s new book is called The Age of Turbulence: Adventures in a New World. Naomi Klein, award-winning investigative journalist, is author of The Shock Doctrine: The Rise of Disaster Capitalism. I want to thank you both for being with us today.

ALAN GREENSPAN: You’re welcome.

AMY GOODMAN: Thank you.