Reviews

- by Jeremy Agar

Bollard repeatedly makes it clear that he’s an introvert, which is one reason he needs to escape those alpha males, those “emotional extroverts”, to the safety of the Cake Tin or the opera. The one get-together he enjoys, the only one it seems from which he’s not excusing himself early, is the annual Central Bankers’ pow wow at Jackson Hole, a posh US resort. We’re proffered details of them all. Here Bollard can paint and chew the fat with mates like Ben Bernanke, Greenspan’s successor. Here the governors can reinforce their mutual biases.

It’s All The Fault Of The Undeserving Poor

It might have been after he came away from Jackson Hole - though Brash was originally quick to make the same suggestion - that Bollard formed his view that the financial crisis was all the fault of Fannie Mae and Freddie Mac, American mortgage lenders. They’re fingered for lending too much money to too many poor people. “Because of their perceived implicit Government guarantees, the financial markets willingly funded them. At various times in the 1970s, and again in the 1990s, US Presidents, rather than curtailing these big institutions, used them to promote cheap home loans to Americans who had little or poor credit history”. Fannie Mae and Freddie Mac are accused of having created “incentives to shovel mortgages out the door”. Their “unrealistically low teaser rates lured householders to borrow beyond their means” and “the companies spent large amounts on lobbying in Washington to maintain close relationships with the Administration and Congress”.

No other entity receives more than a passing reference, not Lehman Brothers or Citibank or Morgan Stanley or AIG. We’re left to assume that they would never have spent large amounts on lobbying in Washington to maintain close relationships with the Administration and Congress.* And all these corporations, when they are mentioned, are discussed only as part of Bollard’s narrative of the aftermath, as victims of the incontinent Fannie Mae and Freddie Mac. The big corporates are not at all at fault. Why single out Fannie Mae and Freddie Mac? It’s because - and Bollard is quite naively explicit about this - they’re said to be Government institutions “shovelling” cash to poor people, crowding out the more legitimate interests of private lenders. Bollard claims this because it supports his assumption that the fault with the American economy was State irresponsibility, and its lack of all that fiscal rectitude stuff. Were this true, it would tend to confirm all those endless Rogernomic whines. *For a less fanciful account of US lobbying see my review of “Storms Of My Grandchildren”, in Watchdog 124, August 2010, http://www.converge.org.nz/watchdog/24/10.htm.

But it’s not true. In the boardrooms of Goldman Sachs and Merrill Lynch, on Fox TV, and on the lawns at Jackson Hole, this is standard chatter, but it is prattle that ignores the facts. As Bollard himself reminds us, Government policy to ease lower income families into housing predated the crisis by some 40 years - but without previously having been criticised on the grounds of economic heresy. Private banks had always underwritten more mortgages than Fannie Mae and Freddie Mac, but these Bollard doesn’t analyse. The giant Countrywide, for example, is mentioned only in the context of the aftershocks, as an “ailing” bank being bought by another bank. Bollard is implying that Countryside was the victim of Fannie Mae and Freddie Mac.

The truth is closer to the opposite. The Fannie Mae and Freddie Mac share of the mortgage market actually fell while the bubble grew. Moreover, progressive American observers have criticised them for not fulfilling the social function for which Bollard chastises them. In this view, Fannie Mae and Freddie Mac erred in that they were chasing profits and not serving the unprofitable poor. They were aping the admired privates, trying to catch them up. American commercial real estate, which also crashed, was not at all affected by Federal US social policy. Neither were the disaster zones which were the real estate markets of Ireland or Spain - or anywhere else around the world. All Bollard’s discussion about the real issues is like this. When, later, he mentions the Iceland “nightmare”, Charles Ferguson’s apt starting point in his movie “Inside Job” (see my review, below), Bollard offers only a vaguely blithe explanation to do with “loose monetary policy”.

At the time of the crash journalists hastened to ask Don Brash what the trouble was. Like his successor, Don blamed the “most regulated” aspects of the economy - that would be Fannie Mae and Freddie Mac. It’s right to say that they were irresponsible, but their fault was not that they had loaned too much to poor people for decades. They failed because they had not been prevented by regulators from pursuing profits at the late stages of a housing bubble. Not even the most zealous of ideologues can credibly claim that US “investment banks” should be freed from all restraint, not when it’s plain that they displayed less fiscal or fiduciary rectitude than any corporates in world history. Bollard gets around this looming contradiction by a reference to “uneven regulation” at the State level and a mention of “bad loans”. He passes on a remark from one of his American trips, that 20% of mortgage brokers in Ohio had criminal records. Shouldn’t an anecdote like that get him to reflect?

Perhaps he’s implying that those Yanks are incorrigible scoundrels, but in NZ we’re not like that. Before his gig at the Reserve Bank, Bollard had been Secretary of the Treasury, the other twin tower of neo-lib orthodoxy. In those days Treasury’s advice had been that in an ideal world sovereign national governments would be limited to stuff like law and order. Treasury’s big theme was that NZ was a small part of a global market, and that the “free markets” we keep hearing about should move capital around in the interests of capital. This is the mindset that devised derivatives, assumed to be the way to financial efficiency, but as derivatives were the real cause of the crash, Bollard refers to them as little as possible. Treasury could never have seen the bubble forming.

NZ A Branch Office Of Aussie Banks

Now, in 2010, in this public utterance anyway, Bollard isn’t so certain. Not only were the four big NZ banks foreign-owned - never previously a problem - but they were not listening to him. In branch office NZ “unfortunately the main bank chiefs were all outsiders, three of whom had recently arrived in New Zealand, and one who had just announced he was returning to Australia. They were in a difficult position - under instructions from their head offices in Sydney and Melbourne and not able to agree to any of the proposals. I think they had sorely underestimated just how angry many New Zealand corporates were about the banking scene. As I had become acutely aware, the crisis was sparking strong emotional responses from senior people whom one would normally have thought of as consistently rational”. Some bank board members, Bollard continues, held views of New Zealand which he could tell were based on media reports. The managers based in NZ knew little about the country and their head office “regulators were anxious that we not take action on a subsidiary in New Zealand if this would hurt the value of the parent in Australia”. This is a surprise?

Bollard admits that when he first heard the expression “sub-prime” he had to Google it. It’s not the only disarming admission, but it is a worrying one. In 2003, as he mentions here, he had been exposed to an alternative view. Raghuram Rajan, chief economist of the International Monetary Fund (and thus, you’d think, a safe pair of hands)* had given a talk at Jackson Hole which anticipated later events. But he was refuted by the other speaker, Alan Greenspan. Another attendee, Larry Summers, adviser to Presidents Bill Clinton and Barack Obama, dismissed Rajan as a Luddite who did not understand that a deregulated banking system encouraged productivity. Rajan made no impression on Bollard. *See the review below of “Inside Job” by Charles Ferguson. This account is taken from an article by Ferguson, “Larry Summers And The Subversion Of Economics” in the Chronicle Review, 3/10/10, http://chronicle.com/article/Larry-Summersthe/124790/.

Six years after Greenspan and Rajan spoke at Jackson Hole, Bollard was still able to denigrate “the stimulus package” as cheap politics. He doesn’t specify, but is presumably referring to the Obama and Gordon Brown policies: “The markets saw the package as motivated by certain leaders’ political and electoral ambitions”. After all the chaos the Governor is still prostrate before “the markets”. Has he learnt nothing? Those disembodied, abstracted “markets” are literally the mark of irresponsibility. Despite this, and at the same time, remembering the fraught month of May 2009, Bollard writes: “We hardly dared to speculate what it might look like. For the first time as an economist, I started seriously to wonder about just how tenuous our Western market-based world might be”. What are we left with? The markets are at once infallible founts of rectitude and frighteningly unpredictable.

Bollard’s panic was triggered by the Australian-owned banks, which were angering him - and lots of other people, including those naive businessmen - by not responding to Bollard’s reduction in the Official Cash Rate. That’s because the banks were answerable to “Australian risk committees”. They were shortsightedly motivated by “short-term rather than wider social concerns”. Yes, of course, we know that, but from the Governor these are extraordinary complaints, contradictions of Bollard’s central values, as though he’s endorsing Fannie Mae and Freddie Mac. What to do? At this point, faced by hostile foreign-owned banks, and his ideology reduced to absurdity, Bollard says that his only option would have been to deregister the banks. This, he deadpans, was not a likely course!

New Conventional Wisdom Murmured With Little Conviction

Towards the end, as we all pick up the pieces, Bollard murmurs with little conviction the new conventional wisdom. The bankers did not like “did not like what the Group of 20 (G20, the political leaders of the biggest 20 economies) proposed. The Finance Minister should lay out ways to regulate banks, funds and trading activities so that such a crisis could not happen again; to tax financial institutions to pay for the rescue packages; and - most emotionally fraught of all - to curtail the large bonuses and other incentives that had been paid to superstar financiers, even those who had manifestly failed to maintain shareholder value”.

The leaders met in Kuala Lumpur. “The general view was that the old world of benign imbalances was gone forever. That meant developed countries should expect slower growth; they needed to balance current accounts, generate private savings and rely less on foreign capital.... Overall, there would be more government regulation and more intervention. Central banks would become more innovative, and they would move closer to their treasuries as public funds were committed. And governments would take over more private sector risk.... Governments around the world have been rescuing poor private performers and bringing some of their risks on to government balance sheets. Even as governments assumed the risk, tax revenues have been falling and demand for social spending rising”. Nice. Never mind that the problem was a reliance on foreign capital and a lack of regulation (and NZ is the rich world’s starkest example of both tendencies), the solution, as always when the privateers run aground, is for taxpayers to refloat them. Yet “we all saw that the new world was going to be different. The West would have to consume less and learn how to save.... But how to get there?”.

By all the tried and untrue methods. Even as he endorses a public bailout of the corporates, Bollard recommends a double whammy attack on living standards through cuts in public spending. He justifies this because of the “highest level of gross public debt in the G7” (Group of 7, the seven richest economies) since the post-war era. Bollard says he has recently looked at a couple of biographies of 1930s and 40s’ President Franklin Roosevelt, his holiday reading, so he would not have forgotten that this debt could more usefully be called investment. It ushered in three decades of increasing wealth. He also knows that NZ’s public debt is low. It is in the frequent evasions and innuendoes of this variety that Bollard veers from a doctrinaire narrow-mindedness into dishonesty.

Faced with alternatives, he always makes the wrong choice. After his indirect criticism of Obama, he offers a specific example of American waywardness. The “healthcare bill”, he notes, commits the Government to “increasing health entitlements against demographic projections of rising dependency” In other words he wouldn’t have done it because the US will never be able to afford public health care. Are there no economists on his staff to tell Bollard that the existing private American health care system has been the most wasteful and expensive in the OECD (Organisation for Economic Cooperation and Development)? Of course there are. He knows this. Once we realise that Bollardism is not really about economics but about a regressive politics, contradiction is resolved.

Bollard’s Salary Should Be Set By Panel Of Solo Mothers

Some people can’t see the wood for the trees. Bollard can’t see the tree for the twigs. By fussing around the computer screen at the Reserve Bank, he is protected from the real world. He can pretend - to us - that the neo-liberals and the money men are contrite. He can present the promises of politicians to curb the excesses and the apologies of money traders as indications that governments will regain some control over government policies. But meanwhile his staff and his mates at the Treasury are briefing Key and English about the secret plans to go right back to speculation as usual (see my review above of “No Ordinary Deal”, an analysis of the Trans Pacific Partnership. The chapter by Bill Rosenberg deals specifically with finance and the risk that the Reserve Bank will lose its presently trivial ability to influence policy in the national interest).

With all the tools at their disposal the central bankers should be able to come up with accurate numbers about how the economy performs, but despite all the computer models and all the theoretical economists, the Reserve Bank’s projections have been consistently wrong. So from Bollard’s own telling of the story there’s no evidence that the boffins have any better idea than the rest of us about what to expect. The Reserve Bank and Treasury have been successfully mystified so that we tend to forget that they’re public employees just like all those grizzling teachers and grumbling social workers. Unlike such people, Reserve Bankers have the right to set their own salaries. On what grounds could this be allowed? What would Bollard say about moral hazard and transparency if nurses or typists could also decide how much to pay themselves? In 2009, Bollard reflects, the Group of 10 (G10, expanded from the original G7) “pledged to make a sustained effort to pull the world economy out of recession. The problem was that no one held a weapon, secret or otherwise, to guarantee that”. It might have made a better, if shorter book, to have said that at the start. Then he could have asked a panel of solo mothers to set his salary.

MAN FOR ALL SEASONS
by David Grant, Random House, Auckland, 2010

Ken Douglas, a former leader of the Council of Trade Unions (CTU), was a unionist of the old school, a fire and brimstone man who came to suspect that the old postures wouldn’t work. Grant makes the point that he would have worried about the 1951 waterfront lockout, the conventional wisdom about which being that the union leadership allowed itself to be fatally isolated from other unions and from the public. That was a generation before the key years between the 1984 Labour putsch by his namesake Roger and National’s Employment Contracts Act of 1991, but the shadow still hovered.

Douglas Reinvented Himself

Grant thinks that Jim Knox, Douglas’ immediate successor and long-time colleague, was another fire and brimstone leader, but that, unlike Douglas, Knox never saw the need to change with the times, so that he retired, bewildered by post-modernity. The implication is that Knox lacked Douglas’ intellectual resources, but Grant does concede that, in not mobilising against David Lange’s neo-liberal Finance minister, Ken was “duped” by Roger. Certainly Douglas switched styles about that time, but Grant’s assessment as to his motive and success, while charitable, will do little to settle the debates that have raged ever since. Douglas is often seen as a traitor to the cause or, alternatively, as a wily mover in hard times, and this biography won’t change opinions. Yet it’s hard to imagine that readers of any inclination will regard Douglas’ latter-day bromides about “change” and all that malarkey as either inspiring or smart.

Grant points out that a photo of Knox in a hug with Ron Trotter, the employers’ man from the Roundtable, has served as an emblem of the failed “partnership”. The union leadership was making eyes at the bosses; the bosses saw that as confirmation they could ask for more. That much seemed obvious at the time, and still seems obvious, but between the leadership of a Knox and a Douglas there was little to choose. For all the traditional rhetoric, both were moderates.

Tactically it might have been a good thing to ease the image, because if you posture as if you might man the barricades you have to be able to back it up. Any sign of weakness and governments will run over an opponent they can portray as a paper tiger, and will take the public with them. The waterfront lockout was a crisis point, but another parallel that Grant might have discussed in more detail was the contemporary Thatcher government’s assault on the UK miners union in the 1980s. Rightwing unionists like to suggest that setbacks like these are inevitable, and in the 21st Century an accommodating policy can be plausibly argued to a depoliticised public. The trouble is that conservatives have always said it’s not the time for strong action, and they have always said that the world has changed. Militancy, to them, is a permanent past tense because they want it to be.

The easy critics from the Left tend to overlook context. The wharfies went out at the height of the Cold War, in the year that the McCarthyism* hysteria peaked in the US and the Korean War was reaching a climax. It was such a boom year for NZ’s wool exports that the country’s ranking as a rich one reached a height from which the last half century has been a long slide down. The union faced a united domestic opponent that picked a fight it was confident it could win. *US Senator Joe McCarthy, with his inquisitions and deranged accusations, became synonymous with the anti-Communist witchhunts and hysteria in the 1950s. Ed.

In 2010 Warner Brothers bosses were chauffeured to the Prime Minister’s house amid a torrent of abuse aimed at local actors. In 1951 the belligerent US Secretary of State, John Foster Dulles, sat beside the then PM, Syd Holland, at a similarly decisive meeting of the NZ Cabinet. In 1951, the Opposition Labour leader notoriously declared himself to be neither for nor against the watersiders - which left them without much chance. And few observers will be convinced that the present Labour Opposition’s October 2010 critique of the Key Government’s emergency labour law reform (for the benefit of Warner Brothers keeping the filming of Peter Jackson’s “The Hobbit” in NZ) was more than a one day bit of posturing.

Grant, a good labour historian, does not delve into wider topics. That’s fair enough - his interest here is biographical, and his research into Douglas’ life has been exhaustive. Indeed, some might find parts of the personal story, especially a long introductory account of the family tree, to be unnecessarily detailed. Grant is as fair - or as tactful - to other characters in the story as he is to Douglas. Some of the other leaders of the CTU, the “modern” ones who were never guilty of fiery rhetoric, are portrayed as businesslike or “flexible”. He’s too kind. Bureaucracies are full of functionaries who know which way the wind is blowing, and it’s all too easy for them to make a few of the right noises.

In 1951 certain union officials, anonymous even then and long forgotten, were sweet-talked by the Holland government into scabbing against their beleaguered mates. Inevitably, despicably, they called themselves a “new” union. Had they been around a bit later they would have been as delighted as were the Lange-Bolger era union bureaucrats to call themselves “change agents”. Grant reminds us that in 1949, its last year in office, the Fraser Government deregistered the Carpenters Union. In fact it is not easy to recall any Labour government having decisively sided with employees. His supporters might argue that in reinventing himself Douglas was only discarding a tired myth.

From the days of national wage awards, Grant sees the 1968 “nil wage order” as a seminal moment. The judge who issued it admitted that a hefty general increase was justified, but claimed that farmers and manufacturers were finding life tough. So, for the good of the country, wages and salaries had to be frozen. In an inflationary context, this was effectively a wage cut. Grant covers the resulting fightback in some detail. The judge’s bias was so overt that for a while workers enjoyed public sympathy. As with all his scene-setting, Grant’s account is authoritative. The nil wage order was significant in that it hastened the demise of the Arbitration Court. At the time Douglas wrote: “The role of the Arbitration Court is to act as a buffer between the workers and their quest for higher wages to offset the rising cost of living, and their employing interests in their drive for greater exploitation of the working people to achieve greater profit”.

Employment Contracts Act

The 1991 Employment Contracts Act (ECA) followed in this tradition, and Grant’s coverage of it is aptly the centre of his biography. It was Douglas’ acceptance of the ECA that has caused most of the controversy over his career. The mitigating circumstance of course is the spirit of the age, which is sceptical and individualist. And spare a thought for the traditionalists. They’ll always be derided by the trendy image conscious middle classes. But when the “change agents” are changing in order to erode your influence it’s not smart to echo their language.

Look at where the “partnership” talk has got us (check the review above of “No Ordinary Deal”). It was a major misjudgement to suppose that corporate NZ ever meant to partner its workers. This is not the wisdom of hindsight. On the contrary, it was evident at the time that the rhetoric was introduced as part of the neo-liberal assault on living standards. Douglas saw no part of what was coming. But neither did the people around him, some of whom were its agents.

As far as the employers and union leaders like Fintan Patrick Walsh were concerned, the one big fact about Douglas was that he was a Communist, a functionary of the pro-Moscow Socialist Unity Party. Grant’s explication of this theme is insightful. Marxist circles often seemed to like nothing more than a good fret over doctrinal detail and a good purge, expressed in a language that the rest of the country didn’t speak. That wasn’t Douglas. Grant shows us a man who was not ideological in that caricatured sense. He supposes that an early impulse was the Communist influence in the “No Maoris No Tour” movement (in the decades of NZ’s sporting contacts with apartheid South Africa, the latter added insult to injury by insisting that no Maori players be included in visiting All Black teams. Ed.). Douglas seems to have seen Communism as a way for democratic interests to act in unity.

Douglas was a pragmatist who got into a pattern of responding to a series of crises and surprises. He was not reflective by nature, nor was he supported by reliable colleagues. In the circumstances of Muldoonist and Rogernomic New Zealand Ken’s nominal affiliations weren’t a guide to his inconsistency or confusion. However, for Robert Muldoon (Prime Minister from 1975 to 1984) Douglas’ politics were a most useful guide, providing him with a pretext for whipping up resentments. Douglas, the PM hectored, was a “sinister figure” for promoting Maori causes. He was a favoured scapegoat. Muldoon brought in legislation to allow the Security Intelligence Service to commit “any reasonable act” in the interests of national security. Under the law, information passed on about any of these “reasonable acts”, like burglary or threats, was itself potentially cause for going to jail. It was an attempt to return NZ to the repressions of 1951. Grant’s account of the period is informative.

Grant’s title is problematic. In a play by the same name, Sir Thomas More (1478-1535), an English cleric, is so-called because he was a man of conscience who wouldn’t bow to the expediencies of power. More was martyred by Henry VIII. If this is the inference Grant intends for Douglas, the title is a misnomer. Is it good or bad to be a man for all seasons? A negative connotation could be that Douglas was a weathervane, an opportunist, a verdict that is not Grant’s. A positive take would be that Douglas was versatile, with accomplishments other than those he is known for. But although Grant provides a thorough and sympathetic account of Douglas’ other activities, they remain unremarkable.

INSIDE JOB
A Film By Charles Ferguson

Frederic Mishkin is a professor at America’s prestigious Columbia Business School. Between 2006 and 2008, when the financial bubble was building and bursting, he was a member of the Federal Reserve Board, the financial [de]regulator. On the side he had a gig for the Icelandic Chamber of Commerce. They needed someone to tell them they were doing a great job, so Mishkin was commissioned to write a paper praising the Icelandic regulatory and banking systems. For this he pocketed $US124,000. That was just two of Mishkin’s income sources. His 2006 federal financial disclosure form listed his net worth as around $US17million. Two years later the Icelandic banks' Ponzi* scheme collapsed, causing $US100billion in losses.*A pyramid scheme whereby original investors are paid beguiling dividends from new advances. Bernie Madoff is the most high profile recent perpetrator. These scams are still called Ponzi schemes, after Charles Ponzi, who provoked the 1925 Florida real estate bubble. Ed.

This vignette is from Charles Ferguson, the maker of “Inside Job”, an incisive expose of the financial crash. It’s a typically relevant detail. Ferguson knows the people and what they’re like. How much more useful is this than the tired and evasive generalisations of an Alan Bollard (Charles Ferguson, “Larry Summers And The Subversion Of Economics”, Chronicle Review, 3/10/10, http://chronicle.com/article/Larry-Summersthe/124790/). A Berkeley professor, one of several others Ferguson discusses, picked up $US350, 000 a year from Morgan Stanley. Bollard’s version of the crisis, in which blame attaches only to social welfare bureaucrats and lobbyists, is detailed in my above review of his book “Crisis”).

Ferguson, a PhD in political science, built a software company, which he sold for lots. A member of the Brookings Institute, an influential, though moderate, thinktank, he is a man of considerable talents. He’s also versatile, having now made this brilliant film about the American finance industry. His is an inside story, though, not because he himself has worked in it; it’s because he has been accepted by the Mishkins of the world as a safe sort of chap. Had it not been for the bursting bubble Ferguson undoubtedly would have been rich and successful, but globally anonymous. He tells an interviewer that “I haven’t become more radicalised. People have changed. Something has happened to us and I hope we can unhappen it”. That something was the banking bubble.

Bubbles Always Burst

Ferguson refers to another insider, Andrew Haldane from the Bank of England, who has pointed out that since 1900 finance stocks averaged a return of 2% a year, whereas from 1986 to 2006, the years when Mishkin was raking in his big bucks, they averaged 16%. Their 80% crash returned them to about the long term rate, where they had to be. As with the dot com bubble, the speculators and their mouthpieces had convinced the neo-liberal professors and the money market dealers that the real economy had changed, but of course it hadn’t. All bubbles burst. They always will.

Derivatives, the instruments touted by US Federal Reserve Bank Chairman Alan Greenspan and his gang as harbingers of a new productivity, hid the basic facts of production and exchange so that no one knew who was doing what or what an investment was worth. In the end, as leading players have subsequently admitted, they literally didn’t know what they were doing. The banks’ role was to encourage borrowing. The more leverage, the greater the profit. At its dizzy peak leverage reached the preposterous ratio of 33:1. That is, for one dollar a speculator put up, he could borrow 33. If profits look as if they’ll keep inflating, you might as borrow someone else’s money to increase your take - especially if he doesn’t know.

The banks operating in NZ are routinely praised for their sobriety, but it is comparative*. From 1995 to 2009 their total assets quadrupled and profits tripled, while Gross Domestic Product (GDP) only doubled. The debt was borrowed from overseas, a lot of it to blow up a housing bubble. In the other big sector, agriculture, borrowing doubled over the last five years, and farm debt is 25% of GDP. An average dairy farm price blew up from $1.7 million in 2003 to $4.5 million in 2008. *For a closer look at the banks, see my review above of Jane Kelsey’s “No Ordinary Deal”.

That was nothing compared to Mishkin’s Iceland, where Ferguson’s film starts. Opening shots of volcanoes set the scene (which thankfully isn’t NZ) of the fiasco. We hear about deregulated mining in spectacular mountains (still not yet NZ) and about privatised banks which borrowed amounts equivalent to ten times the country’s GDP. It got farcical. According to Ferguson, a boffins’ report was to be titled “Financial Stability In Iceland”. The crash intervened. The same report was released, but now as “Financial Instability In Iceland”.

Iceland might have been one of the clearest examples of the banking follies, but it is when he looks at his native land that Ferguson’s contempt is sharpest. When the huge Citibank put its depositors and the national economy at risk by merging its banking and speculation roles, it was breaking a law designed to prevent the very collapse that eventuated. “They always give preposterous names to their manipulations. Bill Clinton’s 1999 one was the Financial Services Modernization Act. It’s commonly known as the Citigroup Relief Act”. An amusing interlude is provided by a Wall Street madam, who tells Ferguson that of her 10,000 clients, half hailed from finance. She was breaking the law, but Ferguson points out that finance too is “an industry that has a very high level of criminality. It has become, I personally think, a criminal industry”.

As the exemplar of the sickness, Ferguson offers Larry Summers, a leading member of the Clinton and Obama Administrations, a man whom Ferguson links to all the disastrous reforms. Between 2001 and his entry into the Obama Administration, Ferguson says, Summers made more than $US20 million from the financial services industry, and, at $US17 million to $US39 million, his 2009 listed net worth outpaced even Professor Mishkin’s. An acerbic Ferguson notes that Robert Rubin, another key federal placeman, got $US124 million from Citbank.

Financial Deregulation = Financial Crises

In his October 2010 Chronicle Review article, Ferguson warms to his theme: “Summers lost his job as President of Harvard after suggesting that women might be innately inferior to men at scientific work. In another part of the same speech, he had used laissez faire economic theory to argue that discrimination was unlikely to be a major cause of women's under-representation in either science or business. After all, he argued, if discrimination existed, then others, seeking a competitive advantage, would have access to a superior work force, causing those who discriminate to fail in the marketplace. It appeared that Summers had denied even the possibility of decades, indeed centuries, of racial, gender, and other discrimination in America and other societies.

“Starting in the 1980s, and heavily influenced by laissez faire economics, the United States began deregulating financial services. Shortly thereafter, America began to experience financial crises for the first time since the Great Depression. The first one arose from the savings and loan and junk bond scandals of the 1980s; then came the dot com bubble of the late 1990s, the Asian financial crisis; the collapse of Long Term Capital Management, in 1998; Enron; and then the housing bubble, which led to the global financial crisis. Yet through the entire period, the US financial sector grew larger, more powerful, and enormously more profitable. By 2006, financial services accounted for 40% of total American corporate profits. In large part, this was because the financial sector was corrupting the political system. But it was also subverting economics”.

This is Ferguson discussing his film. Significantly, “Inside Job” has garnered almost universal praise. Not only is it focussed, intelligent and informed; it’s entertaining. Unlike Michael Moore, who must ambush his quarry, Ferguson entices them. Thinking he’s an OK guy, the heads of finance agree to be interviewed. Then, when the questions show that Ferguson knows his topic, they get increasingly uneasy, until, trapped by his own lies, one looks around, despairing, hoping his usual aides will step in and shut down the camera. If you want to understand the culture of high finance and how it despises us, see this one.

THE GLOBAL ECONOMIC CRISIS
edited by Michel Chossudovsky and Andrew Gavin Marshall,
Global Research, Montreal, 2010

BEYOND THE PROFITS SYSTEM
by Harry Shutt, Zed Books, London, 2010

The notorious Alan Greenspan, the former US Federal Reserve chief, declared in 2004: “Not only have individual financial institutions become less vulnerable to shocks from underlying risk factors, but also the financial system as a whole has become more resilient”. And the next year, as the sub-prime bubble inflated, Ben Bernanke, Greenspan’s successor, commented on the housing market. Bullish prices, he soothed, “reflect[ed] strong economic fundamentals, including robust growth in jobs and incomes”.

Bernanke is routinely touted as a scholar of the Great Depression, yet he and Greenspan were as wrong as it’s possible to be. The great student of history even echoed the very phrase - to do with “strong fundamentals” - that their bumbling predecessors had mouthed as markets crashed. To literate economists, the assertion that the economy is fundamentally strong, when it’s systemically collapsing, has become a sort of Homer Simpson-style joke (for some recent examples see my review of JK Galbraith’s “The Great Crash” in Watchdog 120, May 2009, http://www.converge.org.nz/watchdog/20/08.htm. Note also my reviews above of “Inside Job”, and “Crisis”, Alan Bollard’s recording of his own resolute ability to see no evil, hear no evil). These writers are among the few (regular Watchdog contributors of course excepted) who can legitimately claim to be unsurprised. Michel Chossudovsky and Andrew Gavin Marshall are Canadian economists; Harry Shutt is a British economist. The perspective of the books is similar. Both provide a reliable summary of what went wrong with the global economy and why. For a general survey you could pick either.

The “Global Economic Crisis” is a collection of essays, with the usual advantages and disadvantages of this format. The contributors are working within their specialties, but the result allows for some repetition and inconsistency. The essays trace the economy - essentially the US one - from the post-1945 boom, explaining why standards of living grew for the following three decades, up to the 1970s, and why they fell for the next three decades. A notable detail, a marker of the growing inequality and exploitation of working people, is the analysis of wages as a percentage of Gross Domestic Product (GDP). Wages peaked in 1972 and have fallen ever since, from 53% in 1970 to a recent 46%, with big losses occurring during the Nixon, Reagan and Bush the Younger presidencies. Two wage families have become the norm, enabling payments to be kept up, at the cost of longer hours and rising debt.

US Debt Is A Telling Statistic

Since 1970, as GDP has grown from $US1 trillion to $US13.8 trillion, total debt has risen by the dangerously larger rate, from $US1.5 trillion to $US47.7 trillion. And the numbers will probably look a lot worse soon. With Washington now balanced between Obama’s Administration and an extremist new wave of Republicans it wouldn’t be surprising if another lurch downward, particularly for wage earners, was in store. By providing background context, “The Global Economic Crisis” is able to put the 2008 collapse into perspective, something the possum in the headlights crowd can’t. They tell us they didn’t see it coming. Doh. They caused it. Unlike the Canadians, Harry Shutt is not an academic. He’s more of an activist. His book is shorter and more conversational in tone. Another attractive feature is his discussion about alternatives, ways in which our economies can be converted to more democratic uses.

WORLD INVESTMENT REPORT 2010
UNCTAD, Geneva and New York

The annual report from UNCTAD, the United Nations Committee for Trade And Development, always has a subtitle to indicate that year’s theme. This time it’s “investing in a low carbon economy”, the UN’s response to climate change. Global trade in a low carbon economy takes three forms - renewables, recycling and low carbon manufacturing. In 2009 its value was $US90 billion. Foreign Direct Investment (FDI) was down 15% in 2008. In 2009 it was down a further 37%. This was not at all a sign that the world has rejected the folly of neo-liberalism. The downturn reflected the global financial crisis, and in fact the proportion of world business conducted by transnational corporations keeps on growing. Even in a slow year there were literally thousands of deals.

Need To Read Between The Lines

UNCTAD Reports sometimes give the impression that they need to be read between the lines, as though the researchers would like to break loose from all the bureaucratese. This time, amid all the usual cautious generalisations, we get flashes of reality. We read that because profits are easiest where governments are poor and standards are loose, there is a “dire need for a rigorous mechanism” to restrain big business. However, the chapter continues, sobering up, this might not be possible because any restraints would probably be against World Trade Organisation (WTO) rules. The Kyoto Agreement established “common but differentiated responsibilities and capabilities”. Translation: there are no binding targets on developing countries. This boosts the “catch up” needs of the poorer regions - and the bottom lines of the transnational corporations.

The UN’s best estimate of what to expect if global producers make no significant commitment to clean up is that, by 2030, greenhouse gas emissions will go up (from 2005 levels) by 55%. This assumes a continuation of the existing trend of a modest decrease in carbon content of 1.2% a year. So the estimate is not alarmist, as denialists will charge. But it is alarming. One important sector is electricity. A chart displays the top 20 corporate investors in renewable energy. All are in Europe. Are they the only ones trying? When American companies make the list, we might start to breathe easier.

The world’s powerhouse economy, China, is a big polluter as it tries to begin to catch up with the West’s much higher living standards. It’s also making a reasonably serious attempt to clean up its air. The way it proposes to resolve this contradiction is by setting itself the target of reducing the level of emissions (as at 2005) per unit of Gross Domestic Product (GDP) by 40% over ten years. That can be seen as either a major commitment to reduce emissions or as an indication that the smoke will keep right on belching.

There tend to be two views about China. One is that it has every right to do what it can to enjoy the amenities that Europeans and Americans enjoy. The other view is that, if it were to try to “catch up” by using the technologies of the last 200 years, the world would be stuffed long before it got there. Both views are right. How places like China and India deal with this dilemma will possibly determine the future health - and peace - of us all. The numbers don’t add up. If Chinese GDP keeps growing at a rate of around 8% a year - and who’s to say it won’t - then even if it realises its cleaner targets, China will end up dirtier than it already is. In this context it seems self-evident that the BRICs (the financial world’s shorthand for the big, fast growing countries like Brazil, Russia, India and China) merit international support.

Harnessing Markets Needs A Whip

The need for global cooperation having become pressing, it’s some solace to see that the force of public opinion is acknowledged. UNCTAD tells us that what it calls CSOs (civil society organisations) have forced two big polluters to clean up - a little bit. Shareholders of the Royal Bank of Scotland and BP - as it turned out after publication, this latter was a sadly amusing choice - rebelled against some gross practices in the Canadian oil sands and Greenpeace mobilised successfully against the excesses involved in oil palm plantations in Indonesia. These are rich world, rich people initiatives, but there’s no reason to think they aren’t sincere or effective. UNCTAD points out that Western pension funds, which control huge amounts of money on behalf of millions of people, are increasingly likely to insist on ethical investing - which is typically seen as green investing.

UNCTAD reports that there are now Green Special Economic Zones (SEZ) in China, India and South Korea. It’s hard not to be sceptical about this as SEZs came into existence as poor world sweatshops, exempted from normal restraints. As UNCTAD otherwise complains, what we need is the opposite of a SEZ. The world lacks what the private sector needs most to reorient its strategies - a “loud, long and legal” international and national commitment by governments’ to clean up their acts (this argument backs the analysis made by Raj Patel in “The Value Of Nothing”, which I reviewed in Watchdog 124, August, 2010, http://www.converge.org.nz/watchdog/24/10.htm. See especially the discussion of Thomas Hobbes and the “tragedy of the commons”).

UNCTAD makes the point that among the many and obvious reasons poor countries might keep polluting is that they’re not likely to rush to adopt clean technologies, which will initially at least be expensive and sophisticated. Of course not, especially not in a typical SEZ. But isn’t this an obvious way for all that FDI to take a greener tinge? In past reports UNCTAD has been paralysed by the onrush of neo-liberalism. But now, post-crash, “multiple global crises (e.g. financial, food, energy, climate change) have reinforced calls for better regulation of the economy - including foreign investment”.

That’s well said. Modern world history, UNCTAD continues, is entering a third phase. 1950-80 was marked by “State-led” investment. A second phase, between 1980 and 2010, was “market-led”. Beginning in 2010 we can expect “market-harnessing development”. Which is? At this point the analysis drifts into vagueness. UNCTAD acknowledges that the “market-led” way has led us astray. Their next step should be to set out the means by which global regulation becomes more than a wish and a platitude. If the markets are to be harnessed, there has to be a rider in the saddle, holding a whip.

In November 2010 UNCTAD Secretary General Supachai Panitchpakdi (who succeeded Mike Moore as World Trade Organisation Director a decade ago), visited NZ. He told the New Zealand Herald (22/11/10) that he is having second thoughts about unfettered neo-liberalism and criticised NZ's fire sales of State property. "If you allow asset stripping you are not going to privatise in a way that you can stabilise your own economy so I was surprised that it happened”. Ed.

THE CARBON CHALLENGE:
New Zealand’s Emissions Trading Scheme
by Geoff Bertram and Simon Terry, Bridget Williams Books, Wellington, 2010

Geoff Bertram and Simon Terry are Wellington-based specialists in resource economics and climate change, so their expertise is closely focussed on the topic, which is New Zealand’s policy on carbon emissions. This study is excellent: it’s concise, detailed and closely researched. We’ve become accustomed to the new language to do with cap and trade, but just what’s involved is hard to grasp. The public has been subjected to a bewildering array of dates and numbers, and it would take a patient and committed layperson to get to grips with all the claim and counterclaim. This analysis penetrates the obscurity. Unfortunately the message it conveys is disquieting.

“Cap And Trade” Is Empty Rhetoric

Officialdom’s words are false. The cap of the “cap and trade” in fact is not a cap, and the “trade” is not a trade. The vaunted “market mechanism”, so close to the hearts of governments these days, is “empty rhetoric”, there being no market or market signals to respond to. Some policy designers would prefer to emphasise a carbon tax, but there’s no carbon tax in the offing. The general idea, accepted around the world, has been to deter pollution by measuring it. One way is to set a limit to emissions and then a market for carbon credits. This would establish a price and create an incentive to clean up. Or polluters could be taxed. But in the NZ scheme the “price signal is unclear, being set by the vagaries of supply and demand in a highly imperfect market. Hence it gives an uncertain incentive to reduce emissions, while the money does not go to the Government as revenue”.

New Zealand’s proposal was devised by a Government in thrall to vested interests and run by Ministers who often give the impression of being climate change deniers. We’ve witnessed a temporising and rationalising withdrawal from commitments. We’ve heard Government leaders whine that they need do nothing much. There have been a series of excuses: no one else is doing anything; we’re too small to have an effect; we’ll ruin the economy. None of the whinging has been convincing, but, while this book’s conclusion is not unexpected, it is important to record that it has been reached through impeccable scholarship. It has little in common with the emotive rhetoric from Gerry Brownlee or Federated Farmers.

The authors show that the money concerned will go not to the Government but to the seller of carbon credits. It’s not a tax, so the revenue can’t be used to research or subsidise clean technologies. The policy, which displaces responsibility from polluters to taxpayers, is driven by politics, not economics: “The public will pay the de facto tax, but the Government will evade the responsibility for how the funds are used. This sort of accounting device, developed to a high art in the USA in order to avoid regulatory responsibility, was epitomised by Enron in the 1990s and featured in the Lehman Bros collapse of 2008”.

Both the 2008 Labour and 2009 National versions of what has been misleadingly called the Emissions Trading Scheme (ETS) have been about redistributing wealth upwards. The difference between the Governments has been slight. National might pose as a low tax outfit, prudent guardians of the public purse, but Bertram and Terry show that “the main effect of the 2009 change is to push the bulk of the liability even further out and onto a future generation of taxpayers”.

They untangle the mess of percentages to do with Kyoto and Copenhagen and the targets for greenhouse gas reduction. Knowing that one of the surest ways to dull public interest is to muddy the facts, polluters worldwide have tried to make these numbers confusing. How much is safe? Can we reach a safe number? In contrast to the blowhards, Bertram and Terry offer meticulous documentation. They show that, with the present National proposal, gross emissions can be expected to go down 0.6%. Labour’s idea would have cut them by 1.7%. You might as well say that nothing will be done.

Who will pay for the meagre efforts? Householders are responsible for less than 20% of the country’s pollution but will pay 50% of the “clean up” cost. In all, 84% of financial liability will be carried by taxpayers. Agriculture emits 49% of all emissions but it will be exempted from the capping and taxing till 2015 (at least). In justifying this, the Government has said that there exist “no proven, practical and cost-effective farm practices and technologies to reduce emissions”. This is not true, say Bertram and Terry - as do the authors of “Cents And Sustainability”, reviewed below.

Paid To Pollute

The authors have calculated the numbers. Pastoral farmers will pay 2% of what would be a “fair share”. Transport (roads) will pay 5%. Large industrial producers will pay minus 42% of a “fair share”. That means they will get paid to pollute. Yes, this looks a lot more like politics than economics. Clean green Middle Earth, the land of the hobbit, is one of the world’s worst polluters. Since 1990, year zero in policy circles (measured in percentage terms), NZ has the fifth worst record for greenhouse gas emissions. This book cuts through the smoke which obscures our core values. It’s one of the most important of the year. But in NZ it can’t compete with news about Jamie Oliver or Lindsay Lohan, so it’s not surprising that it has garnered little publicity. It could, however, appeal to minority tastes. Readers with an interest in niche lifestyle markets like (for example) jobs, taxes, wildlife, recreation, rivers, mountains, beaches, farms, buildings, mining, fishing, conservation, income, energy, food, world peace, traffic, clean air and the future of their families might dip into it.

CENTS AND SUSTAINABILITY
by Michael H Smith, Karlson Hargroves and Cheryl Desha,
Earthscan, London, 2010

The so-called debate about climate change in New Zealand has been a disappointing affair. Apart from “The Carbon Challenge” by Geoff Bertram and Simon Terry (see my review above) the general reader has had access to practically no reliable analysis of Government policy. One reason for this is that opinion tends to be divided between those who think there’s no problem and those who think the problem’s so bad that nothing can be done. This book amasses evidence that both views are dangerously wrong. Don’t judge the result by its ponderous title. There is no law that says every advisory on money has to make the same pun. Adding to the awkwardness in this instance is the inept allusion to Jane Austen. You wouldn’t imagine that browsers will fasten onto this thick tome. The wordy sub-title – “Securing Our Common Future By Decoupling Economic Growth From Environmental Pressures” - doesn’t help either, though at least it gives a hint as to what’s inside.

The three Australian authors are members of a thinktank, The Natural Edge Project, which is devoted to sustainability, another numbing term. Being the flavour of the decade, “sustainability” has been appropriated by all sorts of scoundrels who pay lip service to a clean planet while doing nothing to achieve it. It sounds worthy, perhaps insincerely so, but boring. Not this time, not when it comes to the content which is thorough, interesting and important. These authors mean what they say. The central argument, advanced relentlessly through 400 dense pages, is that a world in which people are enabled to live fulfilling lives and a clean, green world are compatible.

Despite the clunky cover, the authors are impassioned about this and fluent in making their case. Rather than being incompatible, they write, economic development and a cleaner environment are complementary. They call this understanding “decoupling”.The blame for the confusion is said to be a misunderstanding of the recommendations of the so-called Club of Rome (the main European countries) and its document “The Limits Of Growth”.* This seemed to propose that the way to restore a messed up planet was to accept that economic growth was the culprit. The authors, one of whom is introduced as representing the present views of the Club, say they never meant this; that they envisaged clean technologies, but surely this is drawing a long bow.

After all, it’s now 40 years later, and in NZ at any rate, most discourse on the topic is still mired in simplistic dualities. Just as popular attitudes to climate change tend to be either fatalistically pessimistic or denialist*, it’s infrequent to come across an informed discussion as to how to avert the collapse of civilised life. In circles close to the Government it’s said that a clean environment will ruin us. This is grossly irresponsible. It would help if national policy was informed by science rather than, as at present, by the self-interested propaganda of lobbyists for polluters. *For my review of five significant books on this topic, see Watchdog 124, August 2010, http://www.converge.org.nz/watchdog/24/10.htm.

It’s Possible To Produce More Without Emitting More Greenhouse Gases

The good news, not often heard above the munching of cows in Canterbury and the whine of bulldozers in Buller, is that you can produce more without emitting more greenhouse gases. Many Organisation for Economic Cooperation and Development (OECD) countries are becoming more efficient. As an example, Denmark’s Grfoss Domestic Product (GDP) has grown by 75% over the last 25 years but its energy consumption hasn’t gone up. The authors maintain that companies can typically reduce emissions by 60% while increasing profits. They cite Massachusetts in the US, where toxic chemical releases have been reduced by 91%. It can be done, at least in technologically sophisticated societies, from which most of the examples are adduced. Building design is one important way (let’s hope post-quake Christchurch is on to this). And it’s easy to use less water (in manufacturing).

It would take a team of specialists to pronounce on the accuracy and timeliness of the big array of detail. One sobering realisation is that the references to New Zealand are misleadingly optimistic, based seemingly on past aspiration rather than present policy. A welcome and unexpected feature is the authors’ willingness to twice draw on a popular source. Jared Diamond’s book (“Collapse: How Societies Choose To Fail Or Survive”, Penguin, Victoria, 2005), is a stimulating and erudite history of the end of civilisations. Diamond shows how present environmental trends are echoing the pattern of past disasters.

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