Posted at: 2008-04-12 17:56:00.0
Author: James Martin, S.J.
Today Senator Barack Obama announced his national Catholic advisory committee. The names are a fascinating mix of, well, Catholics--and include some regular and recent America contributors, like Mary Jo Bane, Lisa Cahill, Richard Gaillardetz, Cathy Kaveny and David O'Brien. And congratulations to Grant Gallicho, associate editor at our sister (brother?) publication, Commonweal. But what, no Jesuits? Maybe I should reconsider my possible vote. (By the way, if anyone wants to contribute to us Senator Clinton's or Senator McCain's list, we'd be happy to include it.)
Here's Obama's Catholic Kitchen Cabinet:
National Co-Chairs
Senator Bob Casey;
Representative Patrick Murphy (PA-08);
Former Congressman Tim Roemer, President of the Center for National Policy;
Governor Kathleen Sebelius of Kansas;
Governor Tim Kaine of Virginia;
Tom Chabolla, Assistant to the President, Service Employees International Union;
Victoria Reggie Kennedy, President, Common Sense About Kids and Guns;
Sr. Jamie Phelps, O.P., Professor of Theology, Xavier University;
Sr. Catherine Pinkerton, Congregation of St. Joseph.
National Steering Committee
Mary Jo Bane, Professor, Harvard Kennedy School;
Nicholas P. Cafardi, Catholic Author and Scholar, Pittsburgh, PA;
Lisa Cahill, Professor of Theology, Boston College;
M. Shawn Copeland, Associate Professor of Theology, Boston College;
Ron Cruz, Leadership Development Consultant, Burke, VA;
Sharon Daly, Social Justice Advocate, Knoxville, MD;
Richard Gaillardetz, Murray/Bacik Professor of Catholic Studies, University of Toledo;
Grant Gallicho, Associate Editor, Commonweal Magazine;
Sr. Margaret Gannon, IHM, Scranton, PA;
Don Guter, Judge Advocate General of the Navy (2000-2002); Rear Admiral, Judge Advocate General's Corps, U.S. Navy (Ret.), Pittsburgh, PA;
Cathleen Kaveny, Professor of Law and Professor of Theology, University of Notre Dame;
Jim Kesteloot, President and Executive Director, Chicago Lighthouse;
Vincent Miller, Associate Professor of Theology, Georgetown University;
David O'Brien, Loyola Professor of Catholic Studies at the College of the Holy Cross;
Peter Quaranto, Senior Researcher and Conflict Analyst, Resolve Uganda (Notre Dame Class of 2006);
Dave Robinson, International Peace Advocate, Erie, Pennsylvania;
Vincent Rougeau, Associate Professor of Law, University of Notre Dame;
Mary Wright, Inter-Faith Liaison, Louisville, KY;
National Leadership Committee
Governor Jim Doyle of Wisconsin;
Former Senator Majority Leader Tom Daschle;
Senator Richard Durbin of Illinois;
Senator Edward Kennedy of Massachusetts;
Senator John Kerry of Massachusetts;
Senator Patrick Leahy of Vermont;
Representative Xavier Becerra of California;
Representative Mike Capuano of Massachusetts;
Representative Lacy Clay of Missouri;
Representative Jerry Costello of Illinois;
Representative Bill Delahunt of Massachusetts;
Representative Rosa DeLauro of Connecticut;
Representative Anna Eshoo of California;
Representative Raul Grijalva of Arizona;
Representative Patrick Kennedy of Rhode Island;
Representative John Larson of Connecticut;
Representative George Miller of California;
Representative James Oberstar of Minnesota;
Representative Linda Sanchez of California;
Representative Carol Shea Porter of New Hampshire;
Representative Peter Welch of Vermont.
James Martin, SJ
Tuesday, April 15, 2008
Wednesday, April 9, 2008
Spanish Inquisition
Morris' ambiguity left questions
By: Staff Editorial
Posted: 4/8/08
Marquette was fortunate to have two intensely compelling speakers in one week. We were proud to host Mary Robinson on our campus, and feel that she fully embodies our school's Jesuit tradition. We also had the honor of welcoming back Col. Lawrence Morris, the chief prosecutor of the Guantanamo military commissions and Marquette alumnus, as a guest for the "On the Issues with Mike Gousha" series at Marquette Law School.
When Robinson paid us a visit on Monday she commented extensively on the injustices occurring at Guantanamo Bay, so when we saw Morris speak Tuesday, her message was fresh in our minds. While we are proud that our school has produced such a high profile alumnus, we are unsure whether we can boast that Marquette managed to instill the strong Jesuit values of its tradition upon Morris.
Members of Morris' audience Tuesday seemed equally doubtful. During the question and answer session following Gousha's formal questioning, two audience members touched upon this issue. The first audience member, a current Marquette student, unabashedly asked Morris whether he perceives any conflict between his Jesuit education and the work he is doing at Guantanamo Bay. Morris briefly responded, "You darn well better be thinking about the justice of what you're doing," and said while he had considered it, he found no conflict. Morris did not elaborate on how he had found a resolution for a clear potential conflict.
The second inquirer, a law school alumnus, asked Morris to comment on his Marquette experience and how it guided him. The question was followed by a long, rather uncomfortable silence. Finally, when the room had reached a level of silence in which you could have heard a pin drop, Morris responded by reminiscing about a couple of teachers who passed on to him the "idea of being engaged in the world" and another who "didn't let you argue from sentiment." He seemed almost annoyed at the question and, recognizing the connection to the student who had raised the topic earlier, said "social justice also includes looking out for the victims."
Morris' vague response left much to be desired. Robinson, on the other hand, left no doubt as to her feelings on the situation and blatantly criticized the United States for allowing standards of justice to slip in the name of "national security" and said that she had never dreamed that habeas corpus would be suspended by our nation.
Morris could have been completely honest when he told audience members that he perceives no conflict between Jesuit values and his work at Guantanamo Bay. However, his diminutive response to a perceptive and burning question didn't do much to convince us of his sincerity. We were disappointed that Morris did not seem to feel connected to Marquette's Jesuit teaching and sidestepped an important question.
By: Staff Editorial
Posted: 4/8/08
Marquette was fortunate to have two intensely compelling speakers in one week. We were proud to host Mary Robinson on our campus, and feel that she fully embodies our school's Jesuit tradition. We also had the honor of welcoming back Col. Lawrence Morris, the chief prosecutor of the Guantanamo military commissions and Marquette alumnus, as a guest for the "On the Issues with Mike Gousha" series at Marquette Law School.
When Robinson paid us a visit on Monday she commented extensively on the injustices occurring at Guantanamo Bay, so when we saw Morris speak Tuesday, her message was fresh in our minds. While we are proud that our school has produced such a high profile alumnus, we are unsure whether we can boast that Marquette managed to instill the strong Jesuit values of its tradition upon Morris.
Members of Morris' audience Tuesday seemed equally doubtful. During the question and answer session following Gousha's formal questioning, two audience members touched upon this issue. The first audience member, a current Marquette student, unabashedly asked Morris whether he perceives any conflict between his Jesuit education and the work he is doing at Guantanamo Bay. Morris briefly responded, "You darn well better be thinking about the justice of what you're doing," and said while he had considered it, he found no conflict. Morris did not elaborate on how he had found a resolution for a clear potential conflict.
The second inquirer, a law school alumnus, asked Morris to comment on his Marquette experience and how it guided him. The question was followed by a long, rather uncomfortable silence. Finally, when the room had reached a level of silence in which you could have heard a pin drop, Morris responded by reminiscing about a couple of teachers who passed on to him the "idea of being engaged in the world" and another who "didn't let you argue from sentiment." He seemed almost annoyed at the question and, recognizing the connection to the student who had raised the topic earlier, said "social justice also includes looking out for the victims."
Morris' vague response left much to be desired. Robinson, on the other hand, left no doubt as to her feelings on the situation and blatantly criticized the United States for allowing standards of justice to slip in the name of "national security" and said that she had never dreamed that habeas corpus would be suspended by our nation.
Morris could have been completely honest when he told audience members that he perceives no conflict between Jesuit values and his work at Guantanamo Bay. However, his diminutive response to a perceptive and burning question didn't do much to convince us of his sincerity. We were disappointed that Morris did not seem to feel connected to Marquette's Jesuit teaching and sidestepped an important question.
Thursday, April 3, 2008
Tuesday, April 1, 2008
Tuesday, March 25, 2008
Chavez and his Advisor
December 19, 1999
Now Chavez Takes On The Church In Venezuela
By LARRY ROHTER
Since voters swept him to power 12 months ago, President Hugo Chavez has quarreled with and berated nearly every part of the establishment here: political parties, business leaders and intellectuals. So it was probably inevitable that he would also end up feuding with the Roman Catholic Church.
After months of behind-the-scenes jousting, Mr. Chavez, a former paratroop colonel who led an unsuccessful coup attempt in 1992, and the church hierarchy are openly engaged in a war of words that threatens to create a split between church and state in this overwhelmingly Catholic country.
In a matter of weeks, Mr. Chavez has branded the head of the national conference of bishops ''a pathetic ignoramus,'' accused a former papal nuncio of condoning ''immorality,'' and threatened to ''exorcise'' what he called ''devils in vestments.'' Though the church says publicly its policy is one of turning the other cheek, in private there are ample indications that its posture toward the president has already hardened.
''I have the right to respond,'' Mr. Chavez said at a news conference Tuesday, explaining his attacks on members of the church hierarchy, including an elderly retired cardinal who said recently that Mr. Chavez reminded him of Mussolini and another prelate who compared him to Zorro. ''I have to respond.''
The immediate cause of the tension is the new Constitution voters resoundingly approved this week. Though the charter contains an article declaring the right to life ''from conception,'' instead of ''from birth'' as some of Mr. Chavez's supporters wished, church leaders have made it clear they are not satisfied.
''The language is very confusing, and the studies our judicial experts have conducted indicate that it is incomplete,'' Baltazar Porras, president of the Venezuelan Conference of Bishops, said in an interview here. ''It opens the door not only to abortion but to all kinds of anti-natal policies.''
The church hierarchy has also expressed concerns about provisions that describe education as primarily a responsibility of the state. With the example of the Mexican Revolution in mind, the church sees that provision as potentially limiting or even abolishing the right to private education or its own network of schools.
Last month, Bishop Roberto Luckert of Coro spoke against the new Constitution on his diocese's radio station. A day later, in an action criticized by human rights groups, two military intelligence agents entered the station, accused the manager of sabotaging the political process and warned her that they would be monitoring future broadcasts.
Mr. Chavez's dispute with the church is occurring against a backdrop that, in terms of his personal life, can only be called delicate. His wife, Marisabel, is seeking the annulment of her first marriage so that she and the president, married in a civil ceremony in 1997, can have a formal Catholic church wedding.
Bishop Porras said that Mrs. Chavez's long-stalled annulment petition ''bears no relation whatsoever'' to the current state of tension between church and state. But he acknowledged that the Vatican would scrutinize her request, made about four years before she married the president, ''with special care and thoroughness'' and ''could be more strict'' than normal in order to ''avoid the appearance that special privileges have been granted.''
At the same time, the church hierarchy has taken steps to separate from Mr. Chavez the Rev. Jesus Gazo, a Spanish-born Jesuit priest and liberation theology advocate who has been described as the president's ''spiritual guide.''
After 33 years in Caracas as a chaplain at the Central University of Venezuela, Father Gazo was recently transferred to a post near the Colombian border, as was a bishop who has also been an enthusiastic supporter of the president. Church officials maintained both reassignments were ''routine.''
Though he dabbles in Chinese and Indian philosophy, Mr. Chavez describes himself as a Catholic and often mixes religious terminology with military and baseball jargon. ''We're in apocalyptic times, there is no middle ground,'' he said this month in a typical speech urging voters to approve the new charter. ''Either you are with God or you are with the Devil, and we are with God.''
Mr. Chavez has also not hesitated to employ Christian imagery against the church itself. ''Forgive them Lord, for they know not what they do,'' he said, referring to bishops and priests who had criticized the Constitution.
Such remarks clearly distress church leaders. ''His language is Manichaean and somewhat apocalyptic and does not help to create a climate of tolerance and mutual respect,'' Bishop Porras said.
Now Chavez Takes On The Church In Venezuela
By LARRY ROHTER
Since voters swept him to power 12 months ago, President Hugo Chavez has quarreled with and berated nearly every part of the establishment here: political parties, business leaders and intellectuals. So it was probably inevitable that he would also end up feuding with the Roman Catholic Church.
After months of behind-the-scenes jousting, Mr. Chavez, a former paratroop colonel who led an unsuccessful coup attempt in 1992, and the church hierarchy are openly engaged in a war of words that threatens to create a split between church and state in this overwhelmingly Catholic country.
In a matter of weeks, Mr. Chavez has branded the head of the national conference of bishops ''a pathetic ignoramus,'' accused a former papal nuncio of condoning ''immorality,'' and threatened to ''exorcise'' what he called ''devils in vestments.'' Though the church says publicly its policy is one of turning the other cheek, in private there are ample indications that its posture toward the president has already hardened.
''I have the right to respond,'' Mr. Chavez said at a news conference Tuesday, explaining his attacks on members of the church hierarchy, including an elderly retired cardinal who said recently that Mr. Chavez reminded him of Mussolini and another prelate who compared him to Zorro. ''I have to respond.''
The immediate cause of the tension is the new Constitution voters resoundingly approved this week. Though the charter contains an article declaring the right to life ''from conception,'' instead of ''from birth'' as some of Mr. Chavez's supporters wished, church leaders have made it clear they are not satisfied.
''The language is very confusing, and the studies our judicial experts have conducted indicate that it is incomplete,'' Baltazar Porras, president of the Venezuelan Conference of Bishops, said in an interview here. ''It opens the door not only to abortion but to all kinds of anti-natal policies.''
The church hierarchy has also expressed concerns about provisions that describe education as primarily a responsibility of the state. With the example of the Mexican Revolution in mind, the church sees that provision as potentially limiting or even abolishing the right to private education or its own network of schools.
Last month, Bishop Roberto Luckert of Coro spoke against the new Constitution on his diocese's radio station. A day later, in an action criticized by human rights groups, two military intelligence agents entered the station, accused the manager of sabotaging the political process and warned her that they would be monitoring future broadcasts.
Mr. Chavez's dispute with the church is occurring against a backdrop that, in terms of his personal life, can only be called delicate. His wife, Marisabel, is seeking the annulment of her first marriage so that she and the president, married in a civil ceremony in 1997, can have a formal Catholic church wedding.
Bishop Porras said that Mrs. Chavez's long-stalled annulment petition ''bears no relation whatsoever'' to the current state of tension between church and state. But he acknowledged that the Vatican would scrutinize her request, made about four years before she married the president, ''with special care and thoroughness'' and ''could be more strict'' than normal in order to ''avoid the appearance that special privileges have been granted.''
At the same time, the church hierarchy has taken steps to separate from Mr. Chavez the Rev. Jesus Gazo, a Spanish-born Jesuit priest and liberation theology advocate who has been described as the president's ''spiritual guide.''
After 33 years in Caracas as a chaplain at the Central University of Venezuela, Father Gazo was recently transferred to a post near the Colombian border, as was a bishop who has also been an enthusiastic supporter of the president. Church officials maintained both reassignments were ''routine.''
Though he dabbles in Chinese and Indian philosophy, Mr. Chavez describes himself as a Catholic and often mixes religious terminology with military and baseball jargon. ''We're in apocalyptic times, there is no middle ground,'' he said this month in a typical speech urging voters to approve the new charter. ''Either you are with God or you are with the Devil, and we are with God.''
Mr. Chavez has also not hesitated to employ Christian imagery against the church itself. ''Forgive them Lord, for they know not what they do,'' he said, referring to bishops and priests who had criticized the Constitution.
Such remarks clearly distress church leaders. ''His language is Manichaean and somewhat apocalyptic and does not help to create a climate of tolerance and mutual respect,'' Bishop Porras said.
Sunday, March 23, 2008
Will the US remain the US or become a neo-USSR?
Will the US remain US? Or become a neo-USSR?
________________________________________
The population of derivative products has grown to gigantic levels that is beyond the competence of any system, mind, or force to deal with.
________________________________________
S. Gurumurthy
The title is not to tease the reader. If the ongoing debate initiated by Martin Wolf, associate editor and chief economic commentator in Financial Times and Prof. Nouriel Roubini, professor of economics at New York University, is to be given a title, that could be this.
Wolf, whose Wednesday columns in FT are discussed by fifty most influential economists of the world, is a mainline economic thinker. Roubini, who has held different positions in US government, now occupies important seats in academia and runs Roubini Global Economics [RGE] Monitor, an influential Web site.
In July 2006 itself, Roubini had predicted that US was in recession. But, like others had, Wolf had ignored Roubini for nearly 20 long months. But, as the unfolding events were proving Roubini right, Wolf wrote [FT, February 18, 2008] that Roubini deserved to be taken seriously.
March towards disaster
Wolf also held Alan Greenspan, who had dismissed the housing issue “as not a bubble but a froth”, wrong. Wolf pointed out how Roubini has [on February 5, 2008] predicted a 12-step march towards a ‘catastrophic’ financial and economic outcome as a “rising possibility”.
In his column, Wolf recalled Roubini’s 12-step recipe for disaster, including:
Housing recession that wipes out family wealth of $4-6 trillion, forces a million to surrender house keys to lenders, and turns home builders bankrupt;
Home loan losses that exceed the estimated $250-300 billion and, together with consumer loan losses, spread credit crunch across;
Top-rated credit insurers get downgraded, causing a further $150 billion loss;
Commercial property market melts;
A large bank goes bankrupt;
Big losses in leveraged buyouts, with hundreds of billions of dollars of bank funds stuck;
Corporate bond defaults force losses of $250 billions on credit default swap insurers and bankrupt many;
With meltdown of hedge funds delinked from central banks, further collapse of the stocks force huge fall in security prices;
Acute illiquidity dogs financial markets with jump in concern about solvency; and
“A vicious circle” of deep recession makes financial losses “more severe” and “financial losses and meltdown” make the recession “even more severe.”
Roubini estimates $1 trillion loss in the meltdown. “Is this scenario at least plausible?” asks Martin Wolf, and answers, stunningly, “It is”. [This was on February 18. But the loss meter in March projects $3 trillions loss!] If this “nightmarish scenario” lasts for six quarters, Roubini warned on February 5, it would be too late for other nations to devise ‘policies’ to ‘de-couple’ from US.
But can the US Fed head off this danger? Roubini says ‘no’ for many reasons. Two of them are important. One, the Fed can deal with liquidity, but, not solvency, which is the real issue. Two, the transactions-oriented financial system itself is in deep crisis. This second one is critical and needs some explanation.
Derivatives in control
The world of finance which Roubini calls as transaction-oriented system looks a bizarre, dollar jungle now. A peep into this mind-boggling labyrinth will unnerve even the most diehard among optimists. The world of finance today is controlled by derivatives. What is a derivative? ’Derivatives are financial Weapons of Mass Destruction [WMD]’, ‘now latent’ but ‘are potentially lethal’. This is not socialist Fidel Castro, but, capitalist Warren Buffet speaking recently (on March 10, 2008). Yet, the most among those who count in the world seem unaware of this WMD. ‘Politicians, senior executives, regulators, even portfolio managers have limited knowledge’ about it, says an expert Web on derivatives. Derivative is a financial instrument whose value is not its own, but derived from something else, on some underlying asset or transaction, such as commodities, equities (stocks) bonds, interest rates, exchange rates, stock market indexes, why, even inflation indexes, index of weather!
The CDOs (collateralised debt obligations), by which the underlying US local subprime loans were palmed off to other continents, was, till the fraud was not out, a reputable credit derivative. So derivative is not only a WMD but also an ICBM, an Inter Continental Ballistic Missile, that hits across continents!
Also, the virtual derivative economy is gradually decoupling itself from the actual in quality as well as size. Hundreds of exotic derivative products have been innovated and innovations by the best minds are continuing.
Mind-boggling size
The population of these beastly financial products has grown to gigantic levels that is beyond the competence of any system, mind, or force to deal with. The sheer collective size of these modern financial beasts is terrifying. According to the Bank of International Settlements [BIS], the aggregate derivative positions of banks grew from $100 trillion in 2002 to — believe it — $516 trillions in 2007, that is over 500 per cent in five years!
Yet they do not appear in bank or corporate balance sheets. Some of the vital actuals seem pygmies in comparison to these virtuals. The total derivatives are more than ten times the global GDP [$50 trillion]; some seven times the world’s estimated real estate value [$75 trillions]; more than five times the world’s stock values [$100 trillions]; more than 33 times the US GDP [$15 trillions] or the US money supply [$15 trillion]; 172 times the US federal budget [$3 trillion] — it can go on. The size of the virtual economy is indeed petrifying. Worse, it unpredictably targets, yet accurately eliminates, the distant and the unwary as the CDOs did.
A decade earlier, Long Term Capital Management [LTCM] a hedge fund co-promoted by two Nobel laureates, collapsed. Its loss of $5 billion was peanuts compared to the trillion dollar-plus loss that is forecast now. Yet the LTCM fall nearly snuffed out the global monetary system. The derivative economy was much smaller then. When billions could devastate the world market then, what could trillions not do now? It is so huge now that, no one, not even all governments and central banks in the world put together, can control this huge and growing population of derivatives. This is what Akio Morita, the former Sony Corporation chairman, told the Group-7 leaders as far back as 1993, when the size of the derivative population was far less. With the derivatives growing so malignant, it is not the actual finance which controls its derivative, but, the other way round – the virtual controls the actual. What, if this off-balance-sheet virtual architecture collapses?
It is so fragile that it can. Martin Wolf warns “the connection between housing bubble and the fragility of the financial system has created huge dangers, for the US and for the rest of the world.” If a collapse starts, it is beyond any known power’s power to stop or repair it. The balance sheet of the whole world is too small for it and the actual will too meet the fate of the virtual.
Roubini’s caveat regarding transaction-oriented financial system being in crisis and Warren Buffet’s warning about derivatives as financial WMDs, expose how fragile is today’s virtual financial architecture, which is several times the actual.
A way out?
What is the way out? And is there a way out at all? There are ‘ways out’, claims Martin Wolf, but, warns, ‘they are poisonous ones’. Wolf says, “In the last resort governments resolve financial crisis. This is the iron law.” And adds, “The US public sector is coming to the rescue.” Public sector? To the rescue of world’s most efficient financial market? In the freest economy in the world? Yes. And Wolf hopes, “In the end, they will succeed.” This was Wolf on February 20, 2008. The state in US as the answer to the mess created by the free market? Confession indeed from a diehard capitalist!
Some 18 years back, market was touted as the answer to the mess created by the state in USSR. A 360-degree turn now. Read on, it is more interesting.
Nationalisation of losses?
In his later article on March 11, 2008, Wolf says, “The government would have to mount a rescue. The most plausible means of doing so would be via nationalisation of all losses.” Nationalisation? And of losses? In free market US, which pontificates on privatisation of public sector and government works the world-over?
But how to nationalise only losses? To keep the ownership with those who lost others’ money? Roubini also says that some market observers are already talking about nationalisation of the US banking system — first covert and then explicit — as the next step to the financial meltdown.
Obviously the US Government is seen as the saviour for the faltering — or better, collapsing? — financial market of the US. So, massive state penetration of Wall Street seems inevitable. And it is already happening. And that will be a topic by itself.
QED: What then is its consequence? If the banking system in US, which holds the Capital of capitalism, is nationalised, what will be left of capitalism in US? Capitalism without Capital ’C’? If US nationalises capital, will US capitalism remain market capitalism or become State Capitalism? Will the US be US then? Or will it become a neo-USSR? No seer is needed to give the answer. It’s obvious.
(The author is a corporate advisor. His e-mail is guru@gurumurthy.net)
© Copyright 2000 - 2008 The Hindu Business Line
________________________________________
The population of derivative products has grown to gigantic levels that is beyond the competence of any system, mind, or force to deal with.
________________________________________
S. Gurumurthy
The title is not to tease the reader. If the ongoing debate initiated by Martin Wolf, associate editor and chief economic commentator in Financial Times and Prof. Nouriel Roubini, professor of economics at New York University, is to be given a title, that could be this.
Wolf, whose Wednesday columns in FT are discussed by fifty most influential economists of the world, is a mainline economic thinker. Roubini, who has held different positions in US government, now occupies important seats in academia and runs Roubini Global Economics [RGE] Monitor, an influential Web site.
In July 2006 itself, Roubini had predicted that US was in recession. But, like others had, Wolf had ignored Roubini for nearly 20 long months. But, as the unfolding events were proving Roubini right, Wolf wrote [FT, February 18, 2008] that Roubini deserved to be taken seriously.
March towards disaster
Wolf also held Alan Greenspan, who had dismissed the housing issue “as not a bubble but a froth”, wrong. Wolf pointed out how Roubini has [on February 5, 2008] predicted a 12-step march towards a ‘catastrophic’ financial and economic outcome as a “rising possibility”.
In his column, Wolf recalled Roubini’s 12-step recipe for disaster, including:
Housing recession that wipes out family wealth of $4-6 trillion, forces a million to surrender house keys to lenders, and turns home builders bankrupt;
Home loan losses that exceed the estimated $250-300 billion and, together with consumer loan losses, spread credit crunch across;
Top-rated credit insurers get downgraded, causing a further $150 billion loss;
Commercial property market melts;
A large bank goes bankrupt;
Big losses in leveraged buyouts, with hundreds of billions of dollars of bank funds stuck;
Corporate bond defaults force losses of $250 billions on credit default swap insurers and bankrupt many;
With meltdown of hedge funds delinked from central banks, further collapse of the stocks force huge fall in security prices;
Acute illiquidity dogs financial markets with jump in concern about solvency; and
“A vicious circle” of deep recession makes financial losses “more severe” and “financial losses and meltdown” make the recession “even more severe.”
Roubini estimates $1 trillion loss in the meltdown. “Is this scenario at least plausible?” asks Martin Wolf, and answers, stunningly, “It is”. [This was on February 18. But the loss meter in March projects $3 trillions loss!] If this “nightmarish scenario” lasts for six quarters, Roubini warned on February 5, it would be too late for other nations to devise ‘policies’ to ‘de-couple’ from US.
But can the US Fed head off this danger? Roubini says ‘no’ for many reasons. Two of them are important. One, the Fed can deal with liquidity, but, not solvency, which is the real issue. Two, the transactions-oriented financial system itself is in deep crisis. This second one is critical and needs some explanation.
Derivatives in control
The world of finance which Roubini calls as transaction-oriented system looks a bizarre, dollar jungle now. A peep into this mind-boggling labyrinth will unnerve even the most diehard among optimists. The world of finance today is controlled by derivatives. What is a derivative? ’Derivatives are financial Weapons of Mass Destruction [WMD]’, ‘now latent’ but ‘are potentially lethal’. This is not socialist Fidel Castro, but, capitalist Warren Buffet speaking recently (on March 10, 2008). Yet, the most among those who count in the world seem unaware of this WMD. ‘Politicians, senior executives, regulators, even portfolio managers have limited knowledge’ about it, says an expert Web on derivatives. Derivative is a financial instrument whose value is not its own, but derived from something else, on some underlying asset or transaction, such as commodities, equities (stocks) bonds, interest rates, exchange rates, stock market indexes, why, even inflation indexes, index of weather!
The CDOs (collateralised debt obligations), by which the underlying US local subprime loans were palmed off to other continents, was, till the fraud was not out, a reputable credit derivative. So derivative is not only a WMD but also an ICBM, an Inter Continental Ballistic Missile, that hits across continents!
Also, the virtual derivative economy is gradually decoupling itself from the actual in quality as well as size. Hundreds of exotic derivative products have been innovated and innovations by the best minds are continuing.
Mind-boggling size
The population of these beastly financial products has grown to gigantic levels that is beyond the competence of any system, mind, or force to deal with. The sheer collective size of these modern financial beasts is terrifying. According to the Bank of International Settlements [BIS], the aggregate derivative positions of banks grew from $100 trillion in 2002 to — believe it — $516 trillions in 2007, that is over 500 per cent in five years!
Yet they do not appear in bank or corporate balance sheets. Some of the vital actuals seem pygmies in comparison to these virtuals. The total derivatives are more than ten times the global GDP [$50 trillion]; some seven times the world’s estimated real estate value [$75 trillions]; more than five times the world’s stock values [$100 trillions]; more than 33 times the US GDP [$15 trillions] or the US money supply [$15 trillion]; 172 times the US federal budget [$3 trillion] — it can go on. The size of the virtual economy is indeed petrifying. Worse, it unpredictably targets, yet accurately eliminates, the distant and the unwary as the CDOs did.
A decade earlier, Long Term Capital Management [LTCM] a hedge fund co-promoted by two Nobel laureates, collapsed. Its loss of $5 billion was peanuts compared to the trillion dollar-plus loss that is forecast now. Yet the LTCM fall nearly snuffed out the global monetary system. The derivative economy was much smaller then. When billions could devastate the world market then, what could trillions not do now? It is so huge now that, no one, not even all governments and central banks in the world put together, can control this huge and growing population of derivatives. This is what Akio Morita, the former Sony Corporation chairman, told the Group-7 leaders as far back as 1993, when the size of the derivative population was far less. With the derivatives growing so malignant, it is not the actual finance which controls its derivative, but, the other way round – the virtual controls the actual. What, if this off-balance-sheet virtual architecture collapses?
It is so fragile that it can. Martin Wolf warns “the connection between housing bubble and the fragility of the financial system has created huge dangers, for the US and for the rest of the world.” If a collapse starts, it is beyond any known power’s power to stop or repair it. The balance sheet of the whole world is too small for it and the actual will too meet the fate of the virtual.
Roubini’s caveat regarding transaction-oriented financial system being in crisis and Warren Buffet’s warning about derivatives as financial WMDs, expose how fragile is today’s virtual financial architecture, which is several times the actual.
A way out?
What is the way out? And is there a way out at all? There are ‘ways out’, claims Martin Wolf, but, warns, ‘they are poisonous ones’. Wolf says, “In the last resort governments resolve financial crisis. This is the iron law.” And adds, “The US public sector is coming to the rescue.” Public sector? To the rescue of world’s most efficient financial market? In the freest economy in the world? Yes. And Wolf hopes, “In the end, they will succeed.” This was Wolf on February 20, 2008. The state in US as the answer to the mess created by the free market? Confession indeed from a diehard capitalist!
Some 18 years back, market was touted as the answer to the mess created by the state in USSR. A 360-degree turn now. Read on, it is more interesting.
Nationalisation of losses?
In his later article on March 11, 2008, Wolf says, “The government would have to mount a rescue. The most plausible means of doing so would be via nationalisation of all losses.” Nationalisation? And of losses? In free market US, which pontificates on privatisation of public sector and government works the world-over?
But how to nationalise only losses? To keep the ownership with those who lost others’ money? Roubini also says that some market observers are already talking about nationalisation of the US banking system — first covert and then explicit — as the next step to the financial meltdown.
Obviously the US Government is seen as the saviour for the faltering — or better, collapsing? — financial market of the US. So, massive state penetration of Wall Street seems inevitable. And it is already happening. And that will be a topic by itself.
QED: What then is its consequence? If the banking system in US, which holds the Capital of capitalism, is nationalised, what will be left of capitalism in US? Capitalism without Capital ’C’? If US nationalises capital, will US capitalism remain market capitalism or become State Capitalism? Will the US be US then? Or will it become a neo-USSR? No seer is needed to give the answer. It’s obvious.
(The author is a corporate advisor. His e-mail is guru@gurumurthy.net)
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