How Free is the Free Market?
By Noam Chomsky
May 1994 London Speech
http://www.lipmagazine.org/articles/featchomsky_63_p3.htm

The Free Market is socialism for the rich: the public pays the costs and the rich get the benefit--markets for the poor and plenty of state protection for the rich.

There's a conventional doctrine about the era we're entering and the promise that it's supposed to afford. In brief, the story is that the good guys won the Cold War and they're firmly in the saddle. There may be some rough terrain ahead, but nothing that they can't handle. They ride off into the sunset, leading the way to a bright future, based on the ideals that they've always cherished: democracy, free markets and human rights.
In the real world, however, human rights, democracy and free markets are all under serious attack in many countries, including the leading industrial societies. Power is increasingly concentrated in unaccountable institutions. The rich and the powerful are no more willing to submit themselves to market discipline or popular pressures than they ever have been in the past.

Let's begin with human rights, because it's the easiest place to start: they're actually codified in the Universal Declaration of Human Rights, passed unanimously by the United Nations General Assembly in December, 1948. In the United States there's a good deal of very impressive rhetoric about how we stand for the principle of the universality of the Universal Declaration, and how we defend the principle against backward, Third World peoples who plead cultural relativism.

All this reached a crescendo about a year ago, at the Vienna Conference. But the rhetoric is rarely besmirched by any reference to what the Universal Declaration actually says. Article 25, for example, states: "Everyone has the right to a standard of living adequate for the health and well-being of himself and his family, including food, clothing, housing and medical care and necessary social services, and the right to security in the event of unemployment, sickness, disability, widowhood, old age or other lack of livelihood."

How are these principles upheld in the richest country in the world, with absolutely unparalleled advantages and no excuses for not completely satisfying them? The US has the worst record on poverty in the industrialized world a poverty level which is twice as high as England's. Tens of millions of people are hungry every night, including millions of children who are suffering from disease and malnutrition. In New York City 40% of children live below the poverty line, deprived of minimal conditions that offer some hope of escape from misery and destitution and violence.
Let's turn to Article 23. It states: "Everyone has a right to work under just and favourable conditions." The ILO has just published a report estimating the level of global unemployment--understood to mean the position of not having enough work for subsistence--in January 1994 at about 30%. That, it says accurately, is a crisis worse than that in the 1930s. It is, moreover, just one part of a general worldwide human rights catastrophe. UNESCO estimates that about 500,000 children die every year from debt repayment alone. Debt repayment means that commercial banks made bad loans to their favourite dictators, and those loans are now being paid by the poor, who have absolutely nothing to do with it, and of course by the taxpayers in the wealthy countries, because the debts are socialized. That's under the system of socialism for the rich that we call free enterprise: nobody expects the banks to have to pay for the bad loans that's your job and my job.
Meanwhile, the World Health Organisation estimates that 11 million children die every year from easily treatable diseases. WHO's head calls it a silent genocide: it could be stopped for pennies a day.
In the US, of course, there is currently a recovery. But it's remarkably sluggish, with less than a third of the job growth of the previous six recoveries. Furthermore, of the jobs that are being created, an enormous proportion more than a quarter in 1992Ùare temporary jobs and most are not in the productive part of the economy. Economists welcome this vast increase in temporary jobs as an "improvement in the flexibility of labour markets". No matter that it means that when you go to sleep at night you don't know if you're going to have work the next morning it's good for profits, not people, which means that it's good for the economy in the technical sense.

Another aspect of the recovery is that people are working longer for less money. The workload is continuing to increase, while wages are continuing to decline which is unprecedented for a recovery. US wages as measured by labour costs per unit output are now the lowest in the industrial world, except for Britain. In 1991 the US even went below England, although England caught up and regained first place in the competition to crush poor and working people. Having been the highest in the world in 1985 (as one might expect in the world's richest country), US labour costs are today 60% lower than Germany's and 20% lower than Italy's. The Wall Street Journal called this turnaround "a welcome development of transcendent importance". It is usually claimed that these welcome developments just result from market forces, like laws of nature, and the usual factors are identified, such as international trade and automation. To put it kindly, that's a bit misleading: neither trade nor automation has much to do with market forces.

Take trade. One well-known fact about trade is that it's highly subsidized with huge market-distorting factors, which I don't think anybody's ever tried to measure. The most obvious is that every form of transport is highly subsidized, whether it's maritime, aeronautical, or roads or rail. Since trade naturally requires transport, the costs of transport enter into the calculation of the efficiency of trade. But there are huge subsidies to reduce the costs of transport, through manipulation of energy costs and all sorts of market-distorting fashion. If anybody wanted to measure this, it would be quite a job.

Take the US Pentagon, a huge affair. A very substantial part of the Pentagon is intervention forces directed at the Middle East, across the whole panoply of intimidation devices to make sure nobody gets in the way if the US tries to intervene. And a large part of the purpose of that is to keep oil prices within a certain range. Not too low, because the US and British oil companies have to make plenty of profit, and these countries also have to earn profits which they can then send back to their masters in London and New York. So, not too low. But also not too high, because you want to keep trade efficient. I'm not even mentioning so-called externalities, like pollution and so on. If the real costs of trade were calculated, the apparent efficiency of trade would certainly drop substantially. Nobody knows how much.

Furthermore, what's called trade isn't trade in any serious sense of the term. Much of what's called trade is just internal transactions, inside a big corporation. More than half of US exports to Mexico don't even enter the Mexican market. They're just transferred by one branch of General Motors to another branch, because you can get much cheaper labour if you happen to cross a border, and you don't have to worry about pollution. But that's not trade in any sensible sense of the term, any more than if you move a can of beans from one shelf to another of a grocery store. It just happens to cross an international border, but it's not trade. In fact, by now it's estimated that about 40% of what's called world trade is internal to corporations. That means centrally-managed transactions run by a very visible hand with major market distortions of all kinds, some- times called a system of corporate mercantilism, which is fairly accurate.

GATT and NAFTA just increase these tendencies, hence harming markets in incalculable ways. And if we proceed, we find that the alleged efficiencies of trade are to a large extent an ideological construction. They don't have any substantive meaning. With automation, for instance, there's no doubt that it puts people out of work. But the fact of the matter is that automation is so inefficient that it had to be developed in the state sector for decades meaning the US military system. And the kind of automation that was developed in the state sector at huge public cost and enormous market distortion was a very special kind. It was designed in order to de-skill workers and to enhance managerial power. This has nothing to do with economic efficiency; it's to do with power relations.

There have been a number of academic and management-affirmed studies which have shown over and over that automation is introduced by managers, even when it increases costs when it's inefficient just for power reasons.

Take containerization. It was developed by the US Navy that is, by the state sector in the economy masking market distortions. In general, invocation of market forces, as if they were laws of nature, has a large element of fraud associated with it. It's a kind of ideological warfare. In the post Second World War period, this includes just about everything; electronics, computers, biotechnology and pharmaceuticals, for instance, were all initiated and maintained by enormous state subsidies and intervention otherwise they would not exist. Computers, for example in the 1950s, before they were marketable were virtually 100% supported by the taxpayer. About 85% of all electronics was state-supported in the 1980s. The idea is that the public is supposed to pay the cost. If anything comes out of it, you hand it over to the corporations. It's called free enterprise!
All of thisquite sharply increased under the Reagan administration. The state share of GNP rose to new heights in the first couple of years of the Reagan administration. And they were proud of it. To the public they had all kinds of free-market talk, but when they were talking to the business community, they talked differently. So James Baker, when he was Secretary of the Treasury, announced with great pride to a business convention, that the Reagan administration had offered more protection to US manufacturers than any of the preceding post-war administrations, which was true, but he was being too modest; it actually offered more protection than all of them combined.

One of the reasons why Clinton had unusual corporate support for a Democrat is that he planned to go even beyond that level of market distortion and market interference, for the benefit of domestic-based capital. His Secretary of Treasury, Lloyd Bentsen, was quoted in the Wall Street Journal as saying, "I'm tired of this level playing field business. We want to tilt the playing field in favour of US industry." Meanwhile, there's a lot of very passionate rhetoric about free markets but, of course, that's free markets for the poor, at home and abroad.

The fact is that people's lives are being destroyed on an enormous scale through unemployment alone. Meanwhile, everywhere you turn you find work that these people would be delighted to do if they had a chance. Work that would be highly beneficial both for them and their communities. But here you have to be a little careful. It would be beneficial to people, but it would be harmful to the economy, in the technical sense. And that's a very important distinction to learn. All of this is a brief way of saying that the economic system is a catastrophic failure. There's a huge amount of needed work. There's an enormous number of idle hands of suffering people, but the economic system is simply incapable of bringing them together. Now of course this catastrophic failure is hailed as a grand success. And indeed it is for a narrow sector of privileged; profits are sky- rocketing. The economy is working just fine for some people, and they happen to be the ones who write the articles, and give the speeches, so it all sounds great in the intellectual culture.

Looking at these major tendencies, especially in the past twenty years, one crucial event was Richard Nixon's demolition of the Bretton Woods system in the early 1970s. That was the post-war system for regulating international currencies, with the US serving as a kind of international banker. He dismantled that with a lot of consequences.
One effect of the de-regulation of currencies was a huge increase of capital and financial markets. The World Bank estimated it at about 14 trillion dollars, which totally swamps government. And the amount of capital that's being transferred daily is increasing. It's probably now about a trillion dollars a day again swamping government.

In addition to a huge increase in the amount of unregulated capital, there's also a very radical change in its composition. John Eatwell, an economist at Cambridge, and a specialist on finance, pointed out recently that in 1970--before Nixon dismantled the system--about 90% of the capital used in financial transactions, internationally, was for long-term investment trade and about 10% for speculation. Now figures have reversed. It's 90% for speculation, and about 10% for investment and trade. Eatwell suggested that that may be a big factor in the considerable decline in growth rates since this happened in 1970.

The USA is the richest country in the world and it can't carry out even minimal economic planning because of the impact of speculative, unregulated capital. For a Third World country the situation is hopeless. There's no such thing as economic planning. Indeed the new GATT agreements are designed to undercut those possibilities by extending the so-called liberalization, and what they call services meaning that big Western banks the Japanese, British and American banks can displace the banks in smaller countries, eliminating any possibility of domestic national planning.

The accelerating shift from a national to a global economy has the effect of increasing polarization across countries, between rich and poor countries, but also, even more sharply, within the countries. It also has the effect of undermining functioning democracy. We're moving to a situation in which capital is highly mobile, and labour is immobile, and becoming more immobile. It means that it's possible to shift production to low- wage, high repression areas, with low environmental standards. It also makes it very easy to play off one immobile, national labour force against another.
During the NAFTA debate in the United States just about everybody agreed that the effect of NAFTA would be to lower wages in the United States for what are called unskilled workers, which means about 70% or 75% of the workforce. In fact, to lower wages you don't have to move manufacturing, you just have to be able to threaten to do it. The threat alone is enough to lower wages and increase temporary employment.

Consider the matter of democracy. Power is shifting into the hands of huge transnational corporations. That means away from parliamentary institutions. Furthermore, there's a structure of governance that's coalescing around these transnational corporations. This is not unlike the developments of the last couple of hundred years, when national states more or less coalesced around growing national economies. Now you've got a transnational economy, you're getting a transnational state, not surprisingly. The Financial Times described this as a de facto world government, including the World Bank and the IMF, and GATT, now the World Trade Organisation, the G7 Executive, and so on. Transnational bodies remove power from parliamentary institutions. It's important to keep the technocrats insulated -- that's World Bank lingo; you want to make sure you have technocratic insulation. The Economist magazine describes how it's important to keep policy insulated from politics.
Power is drifting not only to corporations but into the structures around them--all of them completely unaccountable. The corporation itself has got a stricter hierarchy than exists in any human institution. That's a sure form of totalitarianism and unaccountability, the economic equivalent of fascism which is exactly why corporations are so strongly opposed by classical liberals.

Thomas Jefferson, for example, who lived just about long enough to see the early development of the corporate system, warned in his last years that what he called banking institutions, money and corporations would simply destroy liberty and would restore absolutism, eliminating the victories of the American Revolution.

Adam Smith was also concerned about their potential power, particularly if they were going to be granted the rights of "immortal persons".
The end of the Cold War accelerates all this. The Financial Times, for example, had an article called "Green shoots in communism's ruins"; one of the good things it saw going on was that the pauperization of the workforce and a high level of unemployment were offering new ways to undercut "pampered Western European workers" with their "luxurious lifestyles".

A British industrialist explained in the Wall Street Journal that when workers see jobs disappearing it has a salutary effect on people's attitudes. This was part of an article praising the Thatcher reforms for bringing about a low-wage, low-skill economy in England with great labour flexibility, and wonderful profits. Take General Motors, already the biggest employer in Mexico it is now moving into Eastern Europe but in a very special way. When General Motors set up a plant in Poland they insisted upon high tariff protection; similarly, when Volkswagen sets up a plant in the Czech Republic it insists on tariff protection and also externalization of costs. They want the Czech people and the Czech Republic to pay the costs; they just want the profit and they get it. That's the tradition: markets for the poor and plenty of state protection for the rich.

The biggest test is Poland. A country where multinational corporations can get people who are well-trained and well- educated and they'll have blue eyes and blond hair unlike in the Third World, and they'll work for 10% of your wages, with no benefits, because of the effectiveness of capitalist reforms in pauperizing the populations and in increasing unemployment.
That in fact tells us something about what the Cold War was about. We learn a lot about what it was about just by asking a simple question: who's cheering and who's despairing? If we take the East. Who's cheering? The old Communist Party hierarchy is; they think it's wonderful. They are now working for international capitalism. What about the population? Well, they lost the Cold War, they're in despair, despite their victory over the Soviet experiment.

What about the West? There's a lot of cheering from corporations and banks and management firms about the experts who were sent to Eastern Europe to clinch a friendly takeover, as the Wall Street Journal put it, but ran away with all the aid, it turns out. Very little of the aid got there; instead it went into the pockets of the Western experts and management firms.

The workers in General Motors and Volkswagen lost the Cold War because now the end of the Cold War just gives another weapon to undermine their "luxurious lifestyles".

These misnamed free-trade agreements, GATT and NAFTA, carry that process forwards. They are not freetrade agreements but investor rights agreements and they are designed to carry forward the attack on democracy. If you look at them closely, you realize they are a complicated mixture of liberalization and protectionism carefully crafted in the interests of the transnational corporations. So, for example, GATT excludes subsidies except for one kind: military expenditures.

Military expenditures are a huge welfare system for the rich and an enormous form of government subsidy that distort markets and trade. Military expenditures are staying very high: under Clinton they're higher in real terms than they were under Nixon and they are expected to go up. That is a system of market interference and benefits for the wealthy.

Another central part of the GATT agreement, and NAFTA, is what are called intellectual property rights which is protectionism: protection for ownership of knowledge and technology. They want to make sure that the technology of the future is monopolized by huge and generally government subsidized private corporations GATT includes an important extension of patents to include product patents; this means that if someone designs a new technique for producing a drug, they can't do it because they violate the patent. The product patents reduce economic efficiency and cut back technical innovation. France, for example, had product patents about a century ago and that was a reason why it lost a large part of its chemical industry to Switzerland which didn't, and therefore could innovate.

It means that a country like India, where there is a big pharmaceutical industry which has been able to keep drug costs very low simply by designing smarter processes for producing things, cannot do that any longer.

Right after his NAFTA triumph Clinton went off to the Asia Pacific summit in Seattle where he proclaimed his "grand vision" of the free-market future. Corporations to emulate were the Boeing Corporation, for example, and in fact he gave a speech about the grand vision in a hangar of the Boeing Corporation. That was a perfect choice, as Boeing is an almost totally subsidized corporation. In fact, the aeronautical industry the leading export industry in the 1930s couldn't survive, and then the war came along and it made a huge amount of money, but it was understood right after the Second World War that they were not going to survive in the market. If you read Fortune magazine, it would explain how the aeronautical industry can't survive in the market. The public has to come in and subsidize them, and in fact the aircraft industry, which includes avionics and electronics and complicated metallurgy, is simply subsidized through the Pentagon and NASA. This is the model for the free-market future. The profits are privatized and that's what counts it's socialism for the rich: the public pays the costs and the rich get the profits. That's what the free market is in practice.

Noam Chomsky is a professor of linguistics at the University of Cambridge, Massachusetts, USA. He is the author of many books, including Manufacturing Consent, published by Pantheon Books (1988). The above article is edited extracts from Chomsky's speech given in London in May, 1994.

Until they become conscious, they will never rebel, and until after they have rebelled they cannot become conscious.
Nineteen Eighty Four, Chapter 7, George Orwell.

Nineteen Eighty Four, Part II, Chapter 9, George Orwell
In Oceania there is no law. Thoughts and actions which, when detected, mean certain death are not formally forbidden, and the endless purges, arrests, tortures, imprisonments, and vaporizations are not inflicted as punishment for crimes which have actually been committed, but are merely the wiping-out of persons who might perhaps commit a crime at some time in the future. A Party member is required to have not only the right opinions, but the right instincts. Many of the beliefs and attitudes demanded of him are never plainly stated, and could not be stated without laying bare the contradictions inherent in Ingsoc. If he is a person naturally orthodox (in Newspeak a goodthinker), he will in all circumstances know, without taking thought, what is the true belief or the desirable emotion. But in any case an elaborate mental training, undergone in childhood and grouping itself round the Newspeak words crimestop, blackwhite, and doublethink, makes him unwilling and unable to think too deeply on any subject whatever.

Shock and oil: Iraq's billions & the White House connection
Stephen Foley reports from New York
independent.co.uk

Published: 14 January 2007

The American company appointed to advise the US government on the economic reconstruction of Iraq has paid hundreds of thousands of dollars into Republican Party coffers and has admitted that its own finances are in chaos because of accounting errors and bad management.

BearingPoint is fighting to restore its reputation in the US after falling more than a year behind in reporting its own financial results, prompting legal actions from its creditors and shareholders.

According to the Center for Responsive Politics, BearingPoint employees gave $117,000 (£60,000) to the 2000 and 2004 Bush election campaigns, more than any other Iraq contractor. Other recipients include three prominent Congressmen on the House of Representatives' defence sub-committee, which oversees defence department contracts.

One of the biggest single contributors to BearingPoint's in-house political fund was James Horner, who heads the company's emerging markets business which is working in Iraq and Afghanistan. He donated $5,000 in August 2005.

The company's shares have collapsed to a third of their value when the firm listed in 2001, and it faces being thrown out of the New York Stock Exchange altogether. Despite annual revenues of $3.4bn, the company made a loss of $722m in 2005. Those figures were released only last month, nine months late, and the company has not yet been able to report any fully audited figures at all for 2006.

Analysts in the US claim the reason is a culture of poor management controls stretching back to before the company was carved out of KPMG, the global accounting giant, at the start of the decade. A litany of failings included invoices going astray, poorly trained accounting staff and a failure to work out the tax implications of having so many employees working in foreign countries.

The chaos is not the result of malfeasance, but is "embarrassing and inexcusable" none the less, according to Harry You, a former computer company finance chief brought in to head BearingPoint in 2005 after it fired its long-standing previous chief executive, the former US army captain Randolph Blazer. BearingPoint did not return calls asking for comment yesterday.

BearingPoint is being paid $240m for its work in Iraq, winning an initial contract from the US Agency for International Development (USAid) within weeks of the fall of Saddam Hussein in 2003. It was charged with supporting the then Coalition Provisional Authority to introduce policies "which are designed to create a competitive private sector". Its role is to examine laws, regulations and institutions that regulate trade, commerce and investment, and to advise ministries and the central bank.

Last week The Independent on Sunday revealed that a BearingPoint employee, based in the US embassy in Baghdad, had been tasked with advising the Iraqi Ministry of Oil on drawing up a new hydrocarbon law. The legislation, which is due to be presented to Iraq's parliament within days, will give Western oil companies a large slice of profits from the country's oil fields in exchange for investing in new oil infrastructure.

BearingPoint's first task in Iraq in 2003 was to help to plan the introduction of a new currency, and it was hoped that it would eventually organise small loans to Iraqi entrepreneurs to stimulate a significant market economy. The contract award was immediately criticised by public integrity watchdogs and by the company's rivals, because BearingPoint advisers to USAid had a hand in drafting the requirements set out in the tender. It spent five months helping USAid to write the job specifications and even sent some employees to Iraq to begin work before the contract was awarded, while its competitors had only a week to read the specifications and submit their own bids after final revisions were made.

USAid's independent inspector ruled that "BearingPoint's extensive involvement in the development of the Iraq economic reform program creates the appearance of unfair competitive advantage in the contract award process". The company said it was selected through a transparent and competitive bidding process.

Across the world, BearingPoint has become, thanks to USAid funding, a part of the US government's strategy of spreading free-market reforms to developing countries and America's allies. Elsewhere in the Middle East it is advising the government of Jordan on how to minimise the regulation of business and reform its tax policies in order to attract foreign investment; in Egypt it is advising on customs reform and respect for international companies' patents.

It has won more than $100m of business in Afghanistan since American troops invaded in 2002, and has been helping to build a banking system, training civil servants in the finance ministry and offering advice on economic policy.

Its economic reconstruction work grew out of early work in eastern Europe after the fall of communism, and became a significant contributor to the business after it won contracts in the former Yugoslavia following US intervention there.

The company changed its name to BearingPoint from KPMG Consulting in 2002, shortly after separating from its parent company. In the years since, contracts with the US government have proved the highlight of the business, while its work for private company clients has failed to live up to hopes. In part because of its reliance on the US federal government - which accounts for about 30 per cent of revenues - BearingPoint has dramatically stepped up its attempts to buy influence in Washington. Its contracts in Iraq and Afghanistan coincide with a big increase in its lobbying efforts on Capitol Hill. In 2005, the latest year for which figures have been collated, BearingPoint paid $1m to lobbyists, equalling the record total it paid in 2003. That is five times its average annual bill for lobbyists prior to the war in Iraq.

It also dramatically increased its political contributions in the run-up to the midterm elections, distributing $120,000 to candidates and campaign groups from its employee-sponsored political fund. That compares with $61,000 in the 2004 elections.

Note to Nancy Pelosi: Challenge Market Fundamentalism
by Ruth Rosen
January 30, 2007
by CommonDreams.org

Allison Stevens, a contributor to Women’s enews, a news service which too few good men bother to read, has just reported that the hugely expanded bipartisan Congressional Caucus for Women's Issues now has the power to put women’s issues on the national agenda. The caucus, which Stevens says may end up outnumbering the so-called “Blue Dog Coalition, a caucus of 44 fiscally conservative Democrats, and the New Democrat Coalition, a group of 63 pro-business Democrats,” also has access to, and probably the support of Speaker Nancy Pelosi, who was a member of the caucus, which was founded in 1977.

Among the issues on their “wish list” according to Women’s enews, are women’s health, educational equity and sex trafficking, women in prison, and international domestic violence.

All are important but will go nowhere if they don’t challenge Market Fundamentalism, the exaggerated and quite irrational belief in the ability of markets to solve all problems, an economic fundamentalism that has dominated our national political debate for a generation. Without directly challenging Market Fundamentalism, they will ultimately fail to improve the lives of ordinary American women and their families.

Put it this way: What do catastrophic climate change, the widening gulf between the wealthy and the poor, America's obesity epidemic, and our society’s lack of care for the young and the elderly have in common? Each has powerful special interests who insist that we need to let the market work its private magic and that government action would create more problems than it would solve. These interest groups also block any effort to enlist the government by invoking the arguments of Market Fundamentalism: privatize everything, rely on yourself and expect nothing from your government.

Market fundamentalism has become like the air we breathe; we hardly notice it. Every time George W. Bush argues for more tax cuts, he relies on the unquestioned assumption that we all embrace Market Fundamentalism. Like religious fundamentalism, it is based more on faith than on reason. Through constant repetition, however, the American public has been bullied into believing that private spending is rational and efficient while public spending is always wasteful and unproductive. (Tell that to people in New Orleans.)

Progressives and liberals have assumed that Americans would eventually turn against these ideas, much as they become disillusioned with the Iraq War. But the truth is, neither the women in Congress nor progressives outside of D.C challenge Market Fundamentalism directly. Two decades of the reign of Market Fundamentalism have impoverished both the language and aspirations of progressive Democrats.

Instead, they dance around Market Fundamentalism; they try to gain support for their cause without directly attacking the 800 pound gorilla that sits in Congress, in our deteriorating schools, and at the bottom of the gulf between those who hold stocks and those who wait for their next minimum-wage paycheck.

Ideas that are not challenged or questioned become even more deeply entrenched. We have private “security guards” who are doing the work of soldiers in Iraq, but who are not accountable to the military. When Hurricane Katrina tore through New Orleans, many of us imagined that the Bush Administration’s callous and incompetent failure to rescue the people of New Orleans and to provide the leadership to rebuild the city would lead to massive disillusionment with the Administration’s market-oriented rhetoric.

But has it? I’m not sure. Many people saw Bush’s incompetence, but they also viewed it as one more example of the government’s incapacity to solve problems.

This is a huge problem for liberals and progressives. Even if a decent Democrat wins the White House in 2008, his or her ability to offer compelling leadership and to propose new progressive solutions will be limited if Market Fundamentalist ideas remain unquestioned. Ditto for the women in Congress who think they will push women’s issues on to the national agenda.

So, it’s necessary­no,urgent­that we immediately challenge Market Fundamentalism every chance we get. Between now and the 2008 election, we need take every opportunity­on blogs, among political progressive---to explain to others why this exaggerated faith in markets is so dangerous and misplaced.

Fortunately, there is now a resource to help us make these arguments. The Longview Institute, a progressive think tank with which I am affiliated, has just launched a Market Fundamentalism resource page, designed to help people recognize and refute these arguments. Longview’s Fred Block, a sociologist at the University of California at Davis, has long been articulating the dangers of Market Fundamentalism. Take a look: www.longviewinstitute.org The plan is to steadily add new arguments and new material, but what is already there provides plenty of fodder for a collective assault on the irrational ideas that support Market Fundamentalism.

Market Fundamentalism is what prevents us from having universal health care, mass transit, affordable housing, trains that cross the nation, subsidized care for the young and elderly, and government efforts to reduce carbon emissions. The list, of course, is endless.

Aside from ending the war in Iraq, there is nothing more important we can do to improve our domestic future. Ending the reign of Market Fundamentalism is a precondition for every kind of progressive cause. For a quarter of a century, Conservatives have tried to convince us that we, rather than the government, should be responsible for what is know in other industrialized nation as the “common good.” If we don’t attack the effort to privatize every public service that belongs to this common good, we will ultimately fail to move this nation in any progressive direction.

Ruth Rosen is a journalist and historian. She is a senior fellow at the Longview Institute in Berkeley and a professor emerita of history at the University of California, Davis. She is currently a visiting professor of public policy and history at U.C. Berkeley.

Thom Hartmann: Three Great American Myths
June 23, 2007
by Sara
Orcinus



The first thing that strikes you about Thom Hartmann in person is that he looks about 20 years younger than he actually is. The second is that he's got an energy level that's unbelievable.

"I got off the plane from DC at 3:15 this morning," he admits, apologizing for getting a name wrong in a story he was telling. "And I had to be on the air at six, so I'm running on very little sleep." It's now getting on toward two in the afternoon, and he's been speaking for 45 minutes, bouncing around the platform with energy and a recall of names, people, places, dates -- hundreds of years of American and English history -- that dazzles. If this is what he's like when he's been up all night, he must be hell on wheels when he's well-rested.

Hartmann's got a new book out (Screwed: The Undeclared War Against the Middle Class). Thursday afternoon, given the chance to preach to the faithful of the religious left, the themes of the book became the text of his sermon. It's obvious that the skill set that makes for good radio talkers is pretty much the same one that makes for good preachers; and Hartmann warms eagerly to the task.

Today, he's debunking three dominant myths that he argues are undermining the American middle class. Culture, he says, is nothing more than a collection of shared stories -- collected over long periods of time, reflecting a lot of our past experiences. Unfortunately, the stories we tell ourselves as Americans about what democracy is and what it means to us are fraught with myths. These stories are at the core of our thinking about democracy: we are living our lives and basing our decisions on the basis of stories that are, in fact, not true. And change will not occur until we puncture these stories in order to make room for new ones.

The first myth Hartmann wants us to puncture is the myth of the free market, which has been elevated to the level of a religion. He invoked Grover Norquist -- who famously said that he wanted to shrink government down to where he could drag it into the bathtub and drown it -- and noted that New Orleans was what ended up getting drowned instead.

"Why does the Bush administration replace competent people with ideologues?" asked Hartmann. The answer lies in the essence of the conservative worldview. Conservatives believe that corporations are morally neutral; but human beings are essentially evil. Given that equation, it's obvious that corporations are thus morally superior to human beings, and thus should be given greater rights and dominance. Government, on the other hand, expresses the will of the people -- and since people are inherently evil, government is inherently evil as well.

Liberals, on the other hand, generally agree on the moral neutrality of corporations; but they believe that people are fundamentally good. "This is the fundamental cleavage between these two world views," notes Hartmann, pointing out that this worldview is clearly reflected in the preamble to the Constitution. "Our founders' six stated purposes reflect this belief -- that government exists to lift people up to their highest potential." We provide for the common defense in order to protect ourselves from the handful of bad apples in the bunch; but the rest of the document, asserts Hartmann, is about maximizing human opportunity.

On the other hand: "The free market is just a euphemism for large multinational corporations controlling the planet," he concluded.

The second myth, says Hartmann, is that "those who grew up in the middle class in America think a middle class is a normal thing. This isn't true. The middle class is an aberration, not a norm." In every case of laissez-faire capitalism in history, he argues, what has resulted -- every time -- was a very small, preposterously wealthy ruling class; a relatively small middle class of professionals and trades; and a huge class of working poor.

"A middle class is not a normal thing. It has to be created." Historically, middle classes only emerge under unusual (and usually unstable) circumstances: in fact, there have only been four great middle class periods in the past 600 years. The first occurred in Europe around 1450, after a quarter to a third of the population died in the plague. This drove up the cost of labor; and this rise in wages created the first major European middle class. We now call this period the Renaissance; and it led to some of the earliest democracies in Europe.

In time, the European aristocracy pushed back with maximum wage laws and other means of destroying this emergent class; and feudalism gradually returned. But when the Spaniards discovered gold in the Americas (and the Dutch and others were trading elsewhere as well), the amount of wealth available dramatically increased. Wages went up, families grew richer, and another middle class formed. We now remember this period as the Enlightenment.

The third wave was the American settlement, in which relatively few people took lots of land (killing the residents who'd long husbanded a rich array of resources), and used them to create a prosperous middle class in both the US and Europe from the mid-1600s to the early 1800s. The upshot of this was the American Revolution. But once it was over, the upper classes reasserted themselves: from the 1830s through the early 1900s, we slipped back into feudalism.

To show how far that decline went, Hartmann pointed out that in 1900, the average American family made the modern equivalent of $9700 -- well below our current poverty line. Small business owners and family farmers struck back briefly through the Populist movement; and 30 years later, FDR codified their values in the New Deal, which reinvigorated the middle class once again.

Those of us who remember the American middle class as it existed between 1945 and 1985 find it hard to adjust to the idea that it doesn't exist any more. And, says Hartmann, we're right to be worried about it. "FDR got that a middle class is a) essential for democracy; and doesn't happen by accident. It isn't even normal."

Like earlier eras of middle-class dominance, the one just past was also a time of cultural renewal and unrest. Hartmann reminds us that conservatives consider the 60s a terrible aberration that must never be repeated -- and know that one way to keep it from repeating is to eliminate the middle class, thus reducing the number of agitators. "If you leave it to the corporate class, you will destroy the middle class. They know that when people are working 60-hour weeks, they don't have time to show up, be informed, or even vote." If the price of "social stability" is an entire nation of underpaid working poor, then it's a price our ruling classes are apparently all too happy to pay.

The third myth, according to Hartmann, is that we elect leaders in the United States. "We do not elect leaders…we elect representatives. We elect people to represent us." (And, looking at our leaders, it's sobering to consider just who and what it is that they represent.) "We can't sit around thinking some politician is going to save us….Congress, the Senate, the president, Ralph Nader's group -- none of them are going to do a thing until we push them into it. "

Politicians, Hartmann told us, don't initiate change. Invariably, they wait for a parade to form, and then get out in front of it and claim it as their own. "If enough of us create the parade -- I 100% guarantee it, because it's always happened this way -- some politician will run out in front of it, hoist up his flag, and say "This is my parade!"

So, concludes Hartmann: Like every generation of Americans before us, it's our turn to get out there and be the parade. The fate of the comfortable American middle class -- and the democratic government it supports -- hangs in the balance.

Justices End 96-Year-Old Ban on Price Floors
By STEPHEN LABATON
June 29, 2007

WASHINGTON, June 28 — Striking down an antitrust rule nearly a century old, the Supreme Court ruled today that it is no longer automatically unlawful for manufacturers and distributors to agree on setting minimum retail prices.

The decision will give producers significantly more leeway, though not unlimited power, to dictate retail prices and to restrict the flexibility of discounters.

Five justices said the new rule could, in some instances, lead to more competition and better service. But four dissenting justices agreed with the submission of 37 states and consumer groups that the abandonment of the old rule would lead to significantly higher prices and less competition for consumer and other goods.

The court struck down the 96-year-old rule that resale price maintenance agreements were an automatic, or per se, violation of the Sherman Antitrust Act. In its place, the court instructed judges considering such agreements for possible antitrust violations to apply a case-by-case approach, known as a “rule of reason,” to assess their impact on competition.

The decision was the latest in a string of opinions this term to overturn Supreme Court precedents. It marked the latest in a line of Supreme Court victories for big businesses and antitrust defendants. And it was the latest of the court’s antitrust decisions in recent years to reject rules that had prohibited various marketing agreements between companies.

The Bush administration, along with economists of the Chicago school, had argued that the blanket prohibition against resale price maintenance agreements was archaic and counterproductive because, they said, some resale price agreements actually promote competition.

For example, they said, such agreements can make it easier for a new producer by assuring retailers that they will be able to recoup their investments in helping to market the product. And they said some distributors could be unfairly harmed by others — like Internet-based retailers — that could offer discounts because they would not be incurring the expenses of providing product demonstrations and other specialized consumer services.

A majority of the court agreed that the flat ban on price agreements discouraged these and other marketing practices that could be helpful to competition.

“In sum, it is a flawed antitrust doctrine that serves the interests of lawyers — by creating legal distinctions that operate as traps for the unaware — more than the interests of consumers — by requiring manufacturers to choose second-best options to achieve sound business objectives,” the court said in an opinion by Justice Anthony M. Kennedy and signed by Chief Justice John G. Roberts Jr. and Justices Antonin Scalia, Clarence Thomas and Samuel A. Alito Jr.

But in his dissent, portions of which he read from the bench, Justice Stephen G. Breyer said there was no compelling reason to overturn a century’s worth of Supreme Court decisions that had affirmed the prohibition on resale maintenance agreements.

“The only safe predictions to make about today’s decision are that it will likely raise the price of goods at retail and that it will create considerable legal turbulence as lower courts seek to develop workable principles,” he wrote. “I do not believe that the majority has shown new or changed conditions sufficient to warrant overruling a decision of such long standing.”

During the period from 1937 to 1975 when Congress allowed the states to adopt laws that permitted retail price fixing, economists estimated that such agreements covered about 10 percent of consumer good purchases. In today’s dollars, Justice Breyer estimated that the agreements translate to a higher annual average bill for a family of four of roughly $750 to $1,000.

The dissent was signed by Justices John Paul Stevens, David H. Souter and Ruth Bader Ginsburg.

The case involved an appeal of a judgment of $1.2 million against Leegin Creative Leather Products Inc. after it cut off Kay’s Kloset, a suburban Dallas shop, for refusing to honor Leegin’s no-discount policy. The judgment was automatically tripled under antitrust law.

Leegin’s marketing strategy for finding a niche in the highly competitive world of small leather goods was to sell its “Brighton” line of fashion accessories through small boutiques that could offer personalized service. Retailers were required to accept a no-discounting policy.

After the United States Court of Appeals for the Fifth Circuit, in New Orleans, upheld the judgment and said it was bound by Supreme Court precedent, Leegin took the case to the Supreme Court. Unless it is settled, the case, Leegin Creative Leather Products v. PSK Inc., will now be sent down to a lower court to apply the new standard.

The Supreme Court adopted the flat ban on resale price agreements between manufacturers and retailers in 1911, when it founded that the Dr. Miles Medical Company had violated the Sherman act. The company had sought to sell medicine only to distributors who agreed to resell them at set prices. The court said such agreements benefit only the distributors, not consumers, and set a rule making such agreements unlawful.

Justice Kennedy said today that the court was not bound by the 1911 precedent because of the “widespread agreement” among economists that resale price maintenance agreements can promote competition.

“Vertical agreements establishing minimum resale prices can have either pro-competitive or anticompetitive effects, depending upon the circumstances in which they are formed,” he wrote.

But Justice Breyer said in his dissent that the court had failed to justify the overturning of the rule, or that there was significant evidence to show that price agreements would often benefit consumers. He said courts would have a difficult time sorting out the price agreements that help consumers from those that harm them.

“The upshot is, as many economists suggest, sometimes resale price maintenance can prove harmful, sometimes it can bring benefits,” he wrote. “But before concluding that courts should consequently apply a rule of reason, I would ask such questions as, how often are harms or benefits likely to occur? How easy is it to separate the beneficial sheep from the antitrust goats?”

“My own answer,” he concluded, “is not very easily.”

Cato, Trade and Outsourcing Blinded by Ideology.
By PAUL CRAIG ROBERTS
October 9, 2007

On August 28 the Cato Institute in Washington DC published a report, "Thriving in a Global Economy: The Truth about US Manufacturing and Trade." The report confuses a company's offshored products with its import competition and wrongly concludes that US companies with the most import competition are the companies that are thriving.

The Cato report never mentions the practice of US corporations of offshoring their production for US markets. Consequently, the report conflates offshored inputs and final goods of US corporations with imports from competitive foreign firms. The report thus confuses corporations or industries that offshore their manufacturing with those most exposed to import competition.

This extraordinary mistake results in an incorrect conclusion. The Cato report finds that revenues, profits, and value added rose most for industries most exposed to import competition and mistakenly attributes this result to the beneficial workings of free trade.

In US trade statistics, offshored US production is counted as imports. Offshored production comprises a substantial percentage of manufacturing imports. Let's rewrite Cato's conclusion to take account of these facts: "Revenues, profits, output, and value added rose the most for industries that offshored manufacturing, and they rose the least for those industries that produced their output domestically."

Obviously, corporations that arbitrage labor and replace their US employees with less expensive foreign labor are going to enjoy greater growth in profits and value added.

The Cato report did not set out to prove the benefits to corporations of offshoring. The goal of the report is to combat protectionist sentiments in Congress that might result in trade restrictions. Thus, a report that attributes the health of US manufacturing to import competition.

In January 2004 in the New York Times and at a televised Brookings Institution conference, Senator Charles Schumer and I attempted to create a new discussion around a new and unrecognized problem. The problem is that the collapse of world socialism and the rise of the high speed Internet made it possible for domestic corporations to arbitrage labor across national boundaries in pursuit of absolute advantage.

In the years since, I have written extensively on this issue. Labor arbitrage is not trade and does not meet the Ricardian conditions for comparative advantage upon which the case for free trade is based.

Few economists have bothered to think about the issue of offshoring, preferring to dismiss concerns about it as manifestations of the old protectionist fallacy. They learned in graduate school that free trade is always mutually beneficial and ceased to think when they passed their exams. This is especially true of "free market economists" who believe that economic freedom, which they identify with the freedom of capital, is always good. Thus, most economists mistakenly believe that offshoring is protected under the authority of free trade doctrine.

However, free trade doctrine is based on the assumption that domestic capital seeks its comparative advantage in its home economy, specializing where its comparative advantage is best and, thereby, increasing the general welfare in the home economy. David Ricardo, who explicated the case for free trade, rules out an economy's capital seeking absolute advantage abroad instead of comparative advantage at home.

Jobs offshoring is not only a problem for displaced US manufacturing employees--displacement that Princeton economist and former Federal Reserve vice chairman Alan Blinder says will also impact 30 to 40 million high-end US service sector jobs as well-- but also a problem for economic theory.

Economic theory assumes that capitalists pursuing their individual interests are led to benefit the general welfare of their society by an indivisible hand. But offshoring, or the pursuit of absolute advantage, breaks the connection between the profit motive and the general welfare. The beneficiaries of offshoring are the corporations' shareholders and top executives and the foreign country, the GDP of which rises when its labor is substituted for the corporations' home labor. Every time a corporation offshores its production, it converts domestic GDP into imports. The home economy loses GDP to the foreign country which gains it.

Recently, Ralph Gomory, co-author with William Baumol, of Global Trade and Conflicting National Interests, the most important work in trade theory in 200 years, pointed out that traditional trade theory has broken down because companies are no longer bound to the interests of their home countries. Offshoring has de-coupled the link between a company's motivation for profit and a nation's desire to improve the wealth of its citizens. "Most economists," Gomory observed, "have not acknowledged this fundamental change and its implications for economic theory."

The Cato report shows no awareness of the problem for economic theory when the profit motive becomes disconnected from the general welfare, and the report does not appreciate the restraint placed on traditional protectionist legislation (tariffs and quotas) by manufacturers that offshore. The traditional purpose of trade protection is to shield domestic producers from foreign competition. Neither manufacturers that offshore production nor their trade associations favor any tariffs or quotas that would reduce their profits from offshoring by treating their offshored production as the products of foreign competitors. The Cato report is worried about a protectionist policy for which there is no organized constituency.

Congress and most economists are as confused about the issues as the Cato report. Today the profit motive causes capitalists to create job opportunities and GDP in low-wage foreign countries instead of their own. Every job that does not require a "hands-on" presence can be offshored. Charles McMillion and I have pointed out for years that the nonfarm payroll jobs data from the Bureau of Labor Statistics show that the US economy can only create net new jobs in domestic non-tradable services.

The Cato report does not acknowledge that the financial prosperity of US capital is at the expense of US labor. The report does not explain how an $800 billion trade deficit can be closed when domestic corporations face powerful incentives to offshore, and it shows no awareness of Susan Houseman's findings that productivity gains and output growth that result from offshoring, and which occur abroad, are mistakenly being counted as US GDP and productivity growth. This phantom US output and productivity growth would explain the disconnect between rapid productivity growth and US real median family income, which is lagging far behind.

The financial prosperity that US corporations are enjoying from offshoring increases the US trade deficit and makes American consumers increasingly dependent on imports. In 2006 (the most recent annual data) the US trade deficit in manufactured consumer durable and nondurable goods was 3.4 times greater than the US trade deficit with OPEC. The US "superpower" has a massive trade deficit in consumer manufactured goods and even has a deficit in capital goods, including machinery, electric generating machinery, machine tools, computers, and telecommunications equipment.

In 2006 The US trade deficit with Europe was $142,538,000,000. With Canada the deficit was $75,085,000,000. With Latin America it was $112,579,000,000 (of which $67,303,000,000 was with Mexico). The deficit with Asia and Pacific was $409,765,000,000 (of which $233,087,000,000 was with China and $90,966,000,000 was with Japan). With the Middle East the deficit was $36,112,000,000, and with Africa the US trade deficit was $62,192,000,000. The trade deficit with OPEC was $106,260,000,000.

The more US corporations prosper by offshoring, the greater the US trade deficit will grow and the more unbearable the pressure will be on the dollar's role as reserve currency.

At some point crisis will force Congress, economists and think tanks to deal with the real issues.

Paul Craig Roberts was Assistant Secretary of the Treasury in the Reagan administration. He was Associate Editor of the Wall Street Journal editorial page and Contributing Editor of National Review. He is coauthor of The Tyranny of Good Intentions.He can be reached at: PaulCraigRoberts@yahoo.com

THE INVISIBLE HAND

The key to conservative arguments on the free market is a concept called the "invisible hand." This is one of the most popular terms in conservative literature, coined by Adam Smith (a Scottish professor greatly beloved by his students and peers for his delightful absent-mindedness) in his 1776 classic, The Wealth of Nations:

"It is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from their regard to their own self-interest... [Every individual] intends only his own security, only his own gain. And he is in this led by an invisible hand to promote an end which was no part of his intention. By pursuing his own interest, he frequently promotes that of society more effectually than when he really intends to promote it."

In other words, the "invisible hand" represents all the social good incidentally caused by individuals pursuing their own self-interest. And it is true, the social benefits of the invisible hand are clearly seen in many cases. A businessman who wants to become a millionaire must first come up with a product that is beneficial, pleasing and desired by thousands of customers. By pursuing his own greed, the millionaire also benefits society.

But there are many misconceptions about the invisible hand, starting with the belief that Smith himself was a absolute believer in it. In fact, he was not. Smith actually viewed merchants with great suspicion:

"People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices."

Another misconception is that the invisible hand is a form of individualism. It would be hard to call the actions of a baker who spends all day baking bread for strangers "individualism." A more accurate word is exchange, and it represents a balance between individualism and collectivism, even if that exchange is ultimately self-interested. True individualism is taking from the group without giving anything back; true collectivism is giving to the group without getting anything back. Seen in this light, the exchange inherent in the invisible hand should deserve the full and enthusiastic endorsement of liberals.

Unfortunately, today's conservatives have corrupted the meaning of Smith's term. They use it to suggest that the pursuit of self-interest in the economy will always (or almost always) result in group benefit, and that individuals should feel free to pursue it. Because this corrupted definition is the most popular use of this term, this is also the definition of "invisible hand" that I use throughout this webpage.

There are many problems with the invisible hand, even in principle. First, it is simply untrue that personal greed will always result in society's best interest: crime is a devastating counter-example. The very reason we have police and criminal justice systems is to prevent the harm caused to society by individuals seeking to enrich themselves at the expense of the group. As long as conservatives admit that traditional crimes like rape, murder and robbery legitimize a government response against them, then it's obvious that extreme positions on the invisible hand are indefensible. The true debate is relative; it comes down to drawing a line between socially-acceptable self-interest and socially harmful self-interest. Who should draw that line? The people should -- this is the raison d'être behind democratic government.

Conservatives might object: "We're not talking about criminals who rob banks for a million dollars. We're talking about the market, and the legitimate business decisions of entrepreneurs." The problem here, of course, is the word "legitimate." What determines whether an entrepreneur's actions are legitimate? Clearly, many are illegitimate: insider-trading, price-gouging, unfair trading practices, union-busting, monopolization, lobbying for pork, economic intimidation, graft, polluting, etc. In fact, this entire list of free-market failures highlights examples of business decisions that were harmful and therefore illegitimate to the public.

And there can be no distinction between a gun-toting bank robber and a white-collar bank robber. The greatest "bank robbery" in history was the Savings & Loan scandal, where S&L owners robbed the taxpayers of $500 billion. Only a handful went to jail; the rest took cover under the deregulation laws that made their robbery "legal." Liberals argue that this failure of the invisible hand should be punished as a formal crime, just as surely as any other bank-robbery would be.

Another line of argument in favor of the invisible hand is that it is the most efficient way to organize an economy. That is, a free market of self-interested individuals is better at producing general prosperity than a government practicing centralized control. This is true up to a point. Individuals are indeed the experts of their local situations, and can respond much more flexibly and quickly to changing demands than centralized government can. For government to micromanage every little aspect of the economy, the centralized planners would require the knowledge of God. This is the main argument against overly-centralized control.

But that does not mean that government should not govern the larger aspects of the economy, which lend themselves to much easier education. If you have already read the section entitled "Government Success Stories," you know that government played an irreplaceable role in building the basic infrastructure of this country (telephones, roads, electrification, etc.). Government is more suited for strategic concerns; private enterprise more suited for tactical concerns.

The following story is an excellent example illustrating the correct balance between the free market and the role of strategic planners. Conservatives originally quoted this story as a defense of the invisible hand; but, as we shall see, they completely ignored one of its lessons:

The Free Market of SPAWN

In 1988, a team of Xerox computer scientists led by Bernardo Huberman was faced with a problem over its computer network. Each member of the team frequently ran long computer programs that would take hours crunching numbers before coming up with a result, and they were eager to cut down the waiting time. Huberman's team knew that, as with all computer networks, not all computers are in use at the same time. Therefore, the idle stations could be used to speed up the process. Huberman's team devised an ingenious way to divide their long computational tasks into pieces, which then could be sent to several idle computers on the net for work. Once finished, the remote computers would return their partial solutions, which could then be reassembled into a final result. It was an obvious time-saver, but there was a hitch.

It turned out no one could write a computer program that could efficiently schedule or allocate tasks to the various idle computers. The workload kept changing, so no one could figure out in advance where to allocate the tasks. It was also difficult to tell when an idle computer would become busy again. Furthermore, some computers sat idle as they waited for the results delegated to another computer. After almost a year of frustration, the team abandoned its "command and control" approach to scheduling computer time and tried a free market approach instead.

This solution, called SPAWN, creates a "free market" among all the computers on the net. In brief, pieces of computational tasks are given "computer dollars," and they bid for the use of idle computers under an open auction. The computers are programmed to maximize profits. The system works beautifully - less than 10 percent of each station's time is wasted in the auction process. Market prices fluctuate chaotically, and no one can predict which computer will receive a certain task. From this spontaneity and anarchy arises a self-organizing and smooth-flowing system.

At first, conservatives cited this story as evidence of the "magic of the market." However, what they ignored was that SPAWN works under highly controlled, limited, fixed and unevolving conditions. The role of a strategic planner therefore seems limited. Even so, Huberman and his programmers played a strategic role in setting up the net's entire system of a "free market" in the first place. They constructed its paths of communications and its vehicles of information (called "worms"); they designed all the conditions by which the market worked. Because their market place was brutally simple (compared to a national economy), they only had to tinker with it briefly. Except for the addition of new computer stations, the underlying conditions of the SPAWN market do not change.

But one can easily imagine that events analogous to the economy could also occur within a computer network, and would require the intervention of strategic planners. Just as new technology can revolutionize an economy, a faster and better computer could compel the network's owners to replace the entire system. Just as a national plague would compel the government to declare a federal emergency, the net's infection by computer virus would compel a computer programmer to take defensive measures. Government is charged with national security; computer programmers are responsible for the security of their files against hackers. A natural disaster can wipe out a city's economy; an electrical surge can burn out a computer system. The economy also has problems that SPAWN's free market does not have to worry about. Imagine that a computer station, by some miracle of computer science, could fix bids and engage in unfair market practices, maximizing its individual store of "computer dollars" while increasing waiting time on the net. Would Huberman's team intervene in such a case? Of course they would. If a computer net were as complex as a national economy, you can be certain the intervention of programmers would be every bit as frequent as the government's.

In fact, every second of work that Huberman's team put into making SPAWN -- starting with the very purchase of its computers -- is the work of strategic planning.

Ultimately, the proper role of government is to support and promote the free market, and prevent individuals within it from causing harm to society.

The Wall Street Fix: WorldCom and Citibank Con.

Update - June 2005: With WorldCom CEO Bernard Ebbers -- found guilty of securities fraud, conspiracy, and filing false documents with regulators -- facing sentencing for his crimes, this FRONTLINE report traces WorldCom's stunning rise and fall in an hour-long investigation of what New York State Attorney General Eliot Spitzer calls Wall Street's "corrupt business model," which cost American investors trillions.

In "The Wall Street Fix," FRONTLINE correspondent Hedrick Smith looks inside the culture of Wall Street and the world of investment banking, investigating the hidden relationships between the Street's biggest bank, Citigroup, and the bubble's most spectacular failure, WorldCom. Focusing on the story behind WoldCom's incredible rise and fall -- and the relationship between its CEO, Bernie Ebbers, and Citigroup's star telecom analyst Jack Grubman -- Smith shows how Wall Street drove the telecom boom, pocketing enormous profits, and then took millions of investors on a ride that eventually cost $2 trillion in losses on WorldCom and other telecom stocks.

"Jack Grubman and Salomon Smith Barney were essential enablers for WorldCom to take off," says Scott Cleland, CEO of the Precursor Group, an independent research firm specializing in high tech and telecom. "It took a rising stock price. It took some very good investment banking, and some very good salesmanship in order to sell the marketplace [on the company]."

The key to these relationships between up-and-coming companies and investment banks, industry insiders say, were the Wall Street analysts who were supposed to provide investors with objective recommendations on which stocks to buy. The analysts, however, worked for the investment banks, and instead of issuing objective reports, these analysts were helping their employers secure the lucrative banking business of the companies they were supposed to be objectively covering.

"What we found was that analysts were involved from the very beginning of the investment banking relationship -- going out there, soliciting a client, promising that if you bring your business to our firm, we will take your company [and] proclaim to the world that it is the best thing since sliced bread," asserts Spitzer. "It wasn't just one corrupt individual," he adds. "It was an entire business model that was flawed. ... It wasn't so complicated that you said, 'Wow, at least they're smart in the way they're doing it.' It was simple. It was brazen. The evidence of it was overwhelming."

The report also looks at the relationship between Grubman and Citigroup CEO Sandy Weill, and how Weill's creation of the nation's first "superbank" in 1998 -- merging Salomon Smith Barney with Citibank, a giant commercial bank, and Travelers, an insurance giant, under one corporate umbrella -- contributed to the conflicts of interest addressed in last week's settlement. The merger that created Citigroup was made possible by Federal Reserve Board decisions in the 1980s and 1990s, and by Congress's eventual repeal in 1999 of the Glass-Steagall Act, a 70-year-old law aimed at protecting investors by separating investment and commercial banking.

"The repeal of Glass-Steagall was a big deal because it enabled kind of colossal combinations that just weren't envisioned before," Cleland says, "where you brought the savvy of an investment banking house like Salomon Smith Barney together with a Citibank. And Citibank could loan an enormous amount of money."

In "The Wall Street Fix," FRONTLINE reveals that Travelers gave WorldCom CEO Bernie Ebbers a personal mortgage for $1 billion. Ebbers would use the loan to build a personal business empire by purchasing half a million acres of timberlands in Mississippi, Alabama, and Tennessee. In addition, Citibank gave Ebbers another loan that he used to finance ownership of a 500,000-acre ranch in Canada -- a loan that attorneys representing irate stockholders charge was backed by 2.3 million shares of Ebbers' WorldCom stock.

"That's a very troubling link in our view," says attorney Sean Coffey, whose client, the New York State Employees Pension Fund, has sued Wall Street banks to recover $300 million in WorldCom losses. "Citibank [had] an interest in the stock price of WorldCom being high enough to cover the loans they've made to Mr. Ebbers. And yet, in another part of the same building you've got Jack Grubman issuing analyst reports saying, 'Buy, buy, buy that stock' to drive the price up."

Coffey also questions whether Grubman's close relationship with WorldCom executives would have alerted him to signs of the accounting fraud with which WorldCom has been charged. According to Coffey, Grubman's e-mails confirm that instead of objectively analyzing WorldCom's performance, Grubman was coaching WorldCom executives on what to tell other stock analysts about the company's accounting practices.

FRONTLINE also speaks with two former Salomon Smith Barney brokers, who describe in detail how their firm steered choice initial public offerings (IPOs) to telecom CEOs like WorldCom's Ebbers far more frequently than was reported to Congress. By offering large blocks of IPO stock at the typically low, opening-day price -- even after the actual price had doubled, tripled, or quadrupled in trading -- these brokers say Salomon was essentially giving millions of dollars in "free money" to CEOs in exchange for their investment banking business.

"How do you pay a corporate officer five, 10, $20 million in risk-free profits and not have it influence his decisions?" asks David Chacon, a former Salomon Smith Barney broker who handled IPO offerings. "It's an impossibility. Of course it's a quid pro quo."

Ebbers, Grubman, and Weill declined FRONTLINE's requests to be interviewed for this program.

"The Wall Street Fix" concludes with the settlement reached by 10 Wall Street banks and several regulators. The settlement combines $1.4 billion in fines and other payments with a handful of reforms, such as prohibiting IPO giveaways to CEOs, and creating more distance between Wall Street analysts and investment banking deals.

But several Wall Street veterans and investors tell FRONTLINE that the settlement does not adequately protect investors. Some Wall Street experts say that research analysts should be totally separated from investment banking, while others say the banks should be forced to publicly acknowledge how they hurt investors. Still others believe that criminal prosecution is necessary to restore investor confidence in Wall Street.

"We've moved the ball somewhat, but the problem is still very much there," says former SEC Chairman Arthur Levitt. "Have we heard from the firms precisely what they did? The fines are symbolic. A satisfactory settlement of this issue would involve a public revelation and public admission, by all parties across the board, of what went wrong."

The Wall Street Fix.


During the bull market of the 1990s, Salomon Smith Barney telecom analyst Jack Grubman was notorious for blurring the traditional "Chinese wall" that was supposed to insulate analysts from investment banking departments so they could maintain their objectivity. "What used to be a conflict has now become a synergy," he famously told Business Week in 2000. "The notion that keeping your distance makes you more objective is absurd," he continued. "Objective? The other word for it is uninformed."


As investors rode the telecom boom of the 1990s, Grubman was celebrated for his close ties to corporate managers. However, when the bull market turned bearish -- and Grubman continued to urge investors to accumulate telecom stocks -- many observers came to question his motivations. Could an analyst -- so intimately tied to corporate management that he had attended board meetings of several companies whose stocks he covered -- provide credible independent advice to investors?

A math and marketing whiz, Grubman started his career at AT&T in 1977, where he performed strategic planning and economic analysis of demand in long-distance business. He discovered a mathematical flaw in AT&T's celebrated computer economic-modeling system, and with his trademark tenaciousness he convinced the company to stop using it.

In 1985, Grubman moved to PaineWebber, where his experience at AT&T proved to be a tremendous asset in covering telecoms -- he knew the industry players and could get access to critical information. At PaineWebber, where he made nearly $1 million per year, Grubman was known for working long days and weekends. It was at PaineWebber that Grubman first met Bernie Ebbers of WorldCom.

Ebbers' strategy of building WorldCom through acquiring regional rivals closely resembled Grubman's telecom thesis, in which he argued that younger start-up firms could outperform the industry giants by growing to meet what was expected to be an explosive demand for networking infrastructure. Grubman served as an advisor to Ebbers and WorldCom as the company executed larger and larger deals -- bringing large fees to Salomon Smith Barney, which underwrote many of the transactions. Grubman advised WorldCom on its 1996 acquisition of MFS Communications, as well as its 1997 merger with MCI, for which Salomon earned $7.5 million and $32.5 million respectively.

But critics say that the money flowed in both directions. According to a lawsuit filed by former Salomon Smith Barney broker David Chacon, Grubman guided a strategy in which his favored telecom clients would receive shares in hot initial public offerings (IPOs) in order to win their banking business. The clients would make a windfall on the IPO allocations, which typically soared in price on the first day of trading.

As the telecom bubble burst, and with various telecoms engulfed in scandal, Grubman found himself increasingly under fire from investors -- and under the microscope of regulators, including the Securities and Exchange Commission (SEC), the National Association of Securities Dealers (NASD) and New York State Attorney General Eliot Spitzer. Called to testify before Congress about WorldCom's bankruptcy in July 2002, Grubman defended his research, saying he had believed in WorldCom until the company first revealed its accounting problems. In August 2002, Grubman resigned from Salomon Smith Barney saying that it was impossible to do his job under a cloud of suspicion. Grubman received a $30 million severance package and Salomon Smith Barney agreed to continue to pay his legal bills.

It was after Grubman resigned that he became caught up in another firestorm -- this time over his November 1999 upgrade of AT&T stock from a "neutral" to a "buy." Grubman had traditionally been bearish on his former employer, but his boss, Citigroup CEO Sandy Weill, asked him to "take a fresh look" at the stock. Weill was a friend of AT&T Chairman Michael Armstrong, and each man sat on the board of directors of the other's company.

Shortly after Grubman upgraded AT&T, the company announced it was spinning off its wireless division, in what would become the largest IPO in Wall Street history. Salomon Smith Barney was chosen as one of the underwriters and Citigroup made $63 million on the deal. Six months later, Grubman downgraded his rating on the stock to "neutral."

The upgrade had been controversial at the time, but Spitzer's investigators uncovered a bombshell. They discovered an e-mail that Grubman had sent to a social friend on Jan. 14, 2001, in which he wrote:

You know everyone thinks I upgraded [AT&T] to get lead for [AT&T Wireless]. Nope. I used Sandy to get my kids in 92nd ST Y pre-school (which is harder than Harvard) and Sandy needed Armstrong's vote on our board to nuke Reed in showdown. Once coast was clear for both of us (ie Sandy clear victor and my kids confirmed) I went back to my normal negative self on [AT&T]. Armstrong never knew that we both (Sandy and I) played him like a fiddle.

According to Grubman's e-mail, Weill was motivated by a necessity to obtain Armstrong's vote in a boardroom battle with Citigroup co-CEO John Reed, who resigned in February 2000. After the e-mail was leaked to the press, however, Grubman disavowed it and said he had been showing off to impress a friend.

However, Spitzer's investigators also discovered a memo from Grubman to Weill entitled "AT&T and the 92nd Street Y," dated Nov. 5, 1999, in which Grubman reported back to Weill on a meeting with Armstrong, and reiterated a request for assistance in gaining the preschool admission for his children. Although Weill admits that he asked Grubman to take another look at his position on AT&T, both he and Grubman deny that there was a quid pro quo. Armstrong also denies that the stock upgrade had anything to do with his board vote.

In December 2002, Spitzer and the other regulators announced the terms of a preliminary settlement they had reached with Citigroup and nine other investment banks. Grubman was banned for life from the securities industry and ordered to pay a $15 million fine. Although he is still facing numerous civil suits, Grubman will not face criminal charges.



As CEO of WorldCom, Ebbers attracted attention for his penchant for wearing jeans and cowboy boots in business settings, and his passion for driving his tractor around his brother's soybean and cattle farm. Ebbers' career before WorldCom took a meandering path -- he started as a milkman and bouncer before becoming a high school basketball coach and then manager of a motel chain.


In 1982, Ebbers, along with Bill Fields, David Singleton and Murray Waldron, saw a golden opportunity, with the breakup of AT&T, to sell cheap long-distance service. The group sketched out the details of their business, named LDDS for "Long Distance Discount Service," at a coffee shop in Hattiesburg, Miss., and obtained a $650,000 loan from a local bank to buy a computer switch to route long-distance calls. Because AT&T was under court order to lease its phone lines cheaply to start-up companies, LDDS was able to offer cut rates to small businesses.

At first, Ebbers was merely an investor in LDDS. However, two years later, with the company in debt, Ebbers was named president, and he instituted the growth strategy for which the company would become known -- the purchase of its regional rivals, using LDDS stock as currency. Within 10 years, LDDS had purchased 30 companies and its sales reached nearly $1 billion. The company was renamed WorldCom in 1995.

Along with many in the telecom industry, Ebbers believed that the Internet age would lead to insatiable demand for fiberoptic networks and bandwidth. He aggressively pursued his growth strategy throughout the 1990s, all the while focused on relentless cost-cutting within his ever-growing company.

In 1997, WorldCom shocked the business world when it launched an unsolicited bid for MCI, which had been close to merging with British Telecom. With the merger, MCI WorldCom became the second largest U.S. long-distance company.

Two years later, WorldCom and Sprint announced plans to merge, but the deal was scuttled by regulators, and marked the end of WorldCom's major acquisitions binge. By this time, long-distance prices were plummeting and the telecom bubble had produced a glut of overcapacity. Some telecom analysts warned investors to sell their telecom stocks -- including WorldCom.

However, one important analyst maintained a "buy" rating as WorldCom shares continuously lost value. Throughout WorldCom's meteoric rise, Ebbers and his board of directors were advised by Salomon Smith Barney telecom analyst Jack Grubman. Grubman attended three meetings of WorldCom's board and was listed as a financial adviser on the WorldCom-MCI deal.

According to former Salomon Smith Barney broker David Chacon, Ebbers profited personally from his relationship with Grubman. Chacon alleges in a lawsuit that Grubman's strategy of "spinning" IPO shares to win over banking business from Salomon clients proved very lucrative for Ebbers. Although Salomon told Congress that Ebbers made $11 million off 21 IPOs, Chacon says that he made much more than that in one IPO alone. According to Chacon's lawsuit, Ebbers received 350,000 shares in the April 1999 IPO of a company called Rhythms NetConnections -- and made $16 million off the deal. Salomon Smith Barney disputes the lawsuit.

Salomon Smith Barney earned roughly $140 million from WorldCom over four years. In May 2001 and again in May 2002, with WorldCom desperate for cash and its stock price declining, Citigroup, Salomon's parent company, sold investors $17 billion in WorldCom bonds, limiting its own exposure from loans to the company -- and to Ebbers personally.

Over the years, Ebbers had accumulated a private business empire, which included a luxury yacht named Aquasitions, a lumber mill, a ranch in Canada and a half million acres of timberland across Mississippi, Tennessee, and Alabama. Records of the 1999 timberlands purchase show that a $499 million loan, later folded into a billion dollar mortgage, was arranged by Travelers, a Citigroup subsidiary, and backed by WorldCom stock. Critics argue that Citigroup should have disclosed its interest in keeping WorldCom shares high in order to guarantee the loans, and note that Grubman kept a "buy" rating on the stock, even as shares were plummeting.

In addition to his Citigroup loans, Ebbers received hundreds of millions of dollars in loans from WorldCom itself. In late 2000, Bank of America, which had also granted Ebbers loans backed by WorldCom stock as collateral, threatened him with a margin call, which would have forced him to sell shares to pay back the loan. WorldCom guaranteed the loan in order to avoid Ebbers selling off a large number of its shares and damaging its stock price.

Ebbers was forced to resign from WorldCom in April 2002 amid an SEC inquiry into both his corporate loans and WorldCom's accounting practices. At the time of his resignation, he owed $343 million to the company. He is currently living on his 2100-acre estate.



The Brooklyn-born son of Polish immigrants, Sandy Weill's first job on Wall Street was as a stock runner for Bear Stearns. A legendary deal-maker, renowned as the Street's dominant banker, Weill has also been reviled (and in some quarters admired) as an imperial boss and a ruthless cost-cutter.


In the early 1960s, Weill and three partners, including future SEC Chairman Arthur Levitt, opened a small Wall Street research firm named Cogan, Berlind, Weill and Levitt (disparagingly known on Wall Street as "Corned Beef with Lettuce"). CBWL established itself in the 1970s through mergers and acquisitions with several prestigious brokerage houses, including Hayden Stone, Shearson Hamill, and Loeb Rhoades. The firm, renamed Shearson Loeb Rhoades, became the second largest brokerage firm in the U.S.

Weill made what turned out to be a disastrous move in 1980, when he sold Shearson Loeb Rhoades to American Express for nearly $1 billion. He soon clashed with American Express' corporate style and chafed as second-in-command under CEO John Robinson. Frustrated, he quit in 1985, at age 58, and failed in a subsequent attempt to take over Bank of America the same year.

Weill's comeback began the following year, when he became CEO of a consumer-loan company called Commercial Credit. Again he built his new company through a series of mergers and acquisitions that were followed by ruthless cost-cutting. He acquired Primerica, which included the Smith Barney brokerage firm, in 1988, and the Travelers insurance company in 1993. The following year his company, renamed Travelers, bought Shearson back from American Express for $1 billion and in 1997 he purchased the Salomon Brothers brokerage firm and combined it with Smith Barney to form Salomon Smith Barney.

Weill's crowning glory, however, was merging Travelers with Citicorp in 1998 to create Citigroup, the largest financial institution in the world. The superbank combined one of the largest insurance companies (Travelers), one of the largest investment banks (Salomon Smith Barney), and one of the largest commercial banks (Citibank) in America. Weill and Citibank CEO John Reed became co-CEOs of Citigroup, a stormy arrangement that lasted until early 2000, when Reed stepped down after losing a power struggle to Weill.

The only thing standing in the way of Weill's superbank was the 1933 Glass-Steagall Act, which prevented commercial banks from selling securities. So Weill took his case to Washington to convince the Federal Reserve to approve the merger and persuade Congress to repeal Glass-Steagall (which it had attempted to do several times in the previous decade and for which support was growing). He privately lobbied Fed Chairman Alan Greenspan, Treasury Secretary Robert Rubin, and President Bill Clinton for their support. In September 1998, the Fed agreed to give temporary approval for Weill to operate his superbank for two years, and Congress repealed Glass-Steagall in November 1999.

Citigroup, like many Wall Street investment firms, found itself under fire when the 1990s bull market turned bearish. Regulators began investigating Salomon Smith Barney analyst Jack Grubman for conflicts of interest and for his alleged involvement in "spinning" IPO allocations to the personal accounts of corporate banking clients to win further business. The firm was under attack from shareholders, who filed lawsuits accusing Citigroup of not performing due diligence before it became involved in WorldCom's May 2001 and 2002 bond offerings.

Perhaps most damaging, however, was when Weill personally became a target of New York Attorney General Eliot Spitzer's investigation into Wall Street practices. Weill admitted to having asked Grubman to "take a fresh look" at AT&T before Grubman raised his rating in November 1999. However, he denied giving Grubman a direct order to upgrade the stock and insisted the reason behind his request was his firm belief in the company. Weill did direct a $1 million request to the 92nd Street Y, where Grubman was trying to enter his children in its exclusive preschool, but denies that it had any connection to Grubman's upgrade.

In August 2002, with Citigroup under increasing scrutiny, Weill announced that the firm would enact a series of voluntary reforms, including new regulations to maintain the "Chinese wall" between the research and investment banking departments, and requiring analysts to formally certify their reports to ensure that they "accurately reflect their personal views." In the wake of criticism for Citigroup's role in structuring Enron's off-the-books corporate entities, the firm also said it would not participate in structuring such deals unless the corporations involved fully disclosed them on their balance sheets. And to mollify corporate governance critics, Citibank promised to expense stock options on its income statements. Weill withdrew his nomination to the board of the New York Stock Exchange in March, after critics, including Eliot Spitzer, protested vigorously.

In the April 2003 final settlement between Citigroup and regulators, Weill was barred from talking to his firm's research analysts without a company lawyer present. Spitzer agreed not to pursue criminal charges against Weill or the firm, which agreed to pay $400 million in penalties, disgorgement of profits, and other payments.

Wall Street Dems Unveil Plan to Undermine Progressives
davidsirota.com

Here's a big shocker - the Wall Street wing of the Democratic Party today announced it would be beginning its new war in earnest on the grassroots elements of the party that are demanding serious public policy changes. As the Financial Times reports, Citigroup Chairman Bob Rubin held a press conference at the Brookings Institution to announce the formation of the so-called "Hamilton Project." After paying lip service to various economic problems afflicting the country, Rubin and his former Treasury colleague Roger Altman quickly let it be known exactly what they are up to.

Here's the key excerpt:

"At a time when Democrats have become more aggressive in voicing concerns about the foreign ownership of US assets, Roger Altman, former deputy Treasury secretary under Mr Clinton, added that more inclusive economic growth could also 'blunt the political demands for protectionism'...[The group] said it was willing to take on entrenched Democratic interests, such as teaching unions. Policy papers unveiled on Wednesday proposed vouchers for summer schools..."

There it all is. First there's the dishonest name-calling aimed at those courageous Democrats who are challenging the free trade orthodoxy that is destroying the lives of millions of American and foreign workers. Then there is the promise of an ensuing attack on the labor movement - a reflexive move, of course, for a bunch of corporate executives. And finally, the nod to efforts to defund public education through "vouchers."

None of this is surprising, of course. As head of Citigroup, Rubin has a financial interest in the agenda he's pushing. And he's made no apologies for the brazenness with which he pushes his corporatism. Remember, it was Rubin during the debate over the Central American Free Trade Agreement who demanded that congressional Democrats back off their efforts to include labor, human rights and environmental protections in the pact. He and his pals are the same people who rammed trade deals like NAFTA, WTO and China PNTR down the throats of Americans, and then left government service for the high life of the corporate boardroom. There, they reaped the rich financial rewards of the very sell-out policies they used public office to push, while millions of Americans saw their jobs outsourced, their wages frozen and their benefits slashed.

Oh sure, the group claims it is going to look at critical issues like income inequality - but you can be sure they will look at that issue without looking at issues like "free" trade that are fueling that inequality. Because make no mistake about it - this move today is nothing more than the beginning of a frontal attack by Corporate America on the progressive movement, using the Democratic Party as an all-too-transparent cloak of legitimacy.

How Wall Street Evolved from a Trading Epicenter to an Offshore Manufacturer of Black Holes
The Free Market Myth Dissolves into Chaos
By PAM MARTENS
January 3, 2008

With each new revelation of multi-billion dollar losses from the largest Wall Street firms, there has been this nagging question as to how these Masters of the Universe got stuck with these massive write-downs. Isn't Wall Street supposed to execute trades for others; not build huge inventories of toxic, non-trading securities for themselves?

Given that these big Wall Street players now own some of our largest, taxpayer insured, depositor banks (courtesy of a legislative gift from Congress called the Gramm-Leach-Bliley Act) and the Federal Reserve is shoveling tens of billions of our dollars into some very big black holes, common sense might suggest that Congress would be holding public hearings. These hearings might shed light on how Wall Street has, under the cloak of darkness, mutated from a trading venue to manufacturing and warehousing exotic concoctions registered offshore.

So far, Congress has shown only cursory interest in the details. The Bush administration is spinning the mess as a subprime mortgage problem lest the public figure out that a $1 Trillion unregulated market has blown up under the free market noses of this administration.

Collectively losing $70 Billion in a matter of months with projections of ongoing losses climbing to as much as $400 Billion globally sounds like serious trouble to me. And, it's very uncharacteristic of Wall Street to lose billions of its own money.

Typically, they know long before the general public that a bust is coming (because they are the ones who sowed the seeds for the bust) and dump their losses on less knowledgeable market participants, usually the small investor. Since they are now stuck with mega losses themselves, wouldn't that have to mean that they are the least knowledgeable market participants?

Before we break out the bubbly over Wall Street finally getting a taste of how it feels to be mauled, reflect on what it might mean to average Americans if the least knowledgeable market participants own the banks that hold their savings, money market, car loan, credit card, mortgage; and these firms' stocks are loaded up in 401(k) plans.

The first clue to the mega losses is a three letter acronym, CDO. That stands for Collateralized Debt Obligation; a financial instrument so convoluted that even veteran business writers are having difficulty getting their brains around it.

A good analogy to visualize a CDO is the episode of the sitcom Friends where Rachel tries to make an English trifle for dessert on Thanksgiving. She puts in the requisite layers of custard and jam but when she turns the cookbook page to continue the recipe for the layers, she is unaware that the pages are stuck together and she completes the dessert with the recipe for Shepherd's Pie. The final product is an indigestible concoction of multi layers of custard, jam, ground beef, sautéed peas and onions.

English trifles are typically served in a clear glass bowl to show off the exquisite layers. Wall Street prefers opaque pottery for its CDOs.

From 2002 through 2006, big manufacturing plants run by the largest Wall Street firms, along with some smaller players, churned out CDO trifles in the cumulative amount of over $1 trillion; half of that was pumped out in just 2006.

The recipe was quite flexible. Layers (called tranches on Wall Street) could consist of student loans, credit card receivables, auto loans, commercial or residential real estate loans, subprime mortgages or corporate loans. Layers could also be highly leveraged bets on indices (Synthetic CDOs) or pieces of other CDOs (CDOs squared). Beginning in 2003, a growing percentage of CDOs were assembled with just one asset class: residential mortgages; frequently using subprime mortgages and home equity loans as the predominant collateral.

While the layers were being assembled, the pieces sat in what Wall Street calls its warehouse operation. Once the CDO was assembled in the opaque pottery bowl, only the whipped cream was showing at the top. The rating agencies, Standard and Poor's, Moody's and Fitch gave the indigestible concoction a AAA rating based on that whipped cream. That the rating was requested and paid for by the issuer of the CDO was no trifling matter, as future events would expose. Even as the ground beef and sautéed peas (junk debt) began to rot in the underlying layers, the concoction maintained its AAA rating. (Only in 2007, after think tanks began to expose the chicanery and markets began to seize up did the rating agencies begin to downgrade the ratings.)

Five years went by with the so-called "efficient market" stumbling around in the darkness of fantasy ratings, failing to ponder the obvious questions about these AAA instruments. Questions, such as:

How could a layered concoction of questionable debt pools, many of dubious origin, achieve the equivalent AAA rating as U.S. Treasury securities, backed by the full faith and credit of the U.S. government, and time-tested over a century of panics, crashes and the Great Depression? (Despite the political rogues that come and go in Washington, we, the American people, show an inordinate and historical willingness to suffer fools and still pay our income taxes for the greater good of our fellow citizens. It doesn't hurt either that, in most cases, the tax is removed from our paycheck before we get it.)

How could an opaque instrument made up frequently of more than 100 hard to track pieces be safe enough for pension funds, insurance company funds and, disguised as commercial paper, stashed to the tune of over $50 billion in Mom and Pop money market funds?

How did a 200-year old "efficient" market model that priced its securities based on regular price discovery through transparent trading morph into an opaque manufacturing and warehousing complex of products that didn't trade or rarely traded, necessitating pricing based on statistical models?

There was at least one research analyst that was more curious than Congress as to how Wall Street got stuck with these CDOs on their books:

Citigroup conference call, November 5, 2007:

Mike Mayo, Deutsche Bank analyst: "...I mean $43 billion of CDOs. And, excuse me, when were these structures established?..."

Gary Crittenden, Citigroup CFO: "...In terms of the -- so the positions, the warehouse positions have obviously been accumulated over -- the super senior portfolio positions have been accumulated over time. As I mentioned earlier on the call, the $25 billion that was effectively the liquidity puts really came on during the course of the summer. So this really happens in two different time periods..."

Merrill Lynch conference call, October 24, 2007:

Mike Mayo, Deutsche Bank analyst: "And how did you wind up with such a large concentration [of CDOs] in the place?..."

Stanley O'Neal, CEO [now retired]: "...Why do we have such a large position in the first place? We made a mistake. There were some errors of judgment made in the businesses themselves and there were some errors of judgment made within the risk management function and that is the primary reason why those exposures exist."

This kind of bobbing and weaving and ducking and speaking gibberish is why we need Wall Street under oath in a Senate hearing room.

The Citigroup translation goes like this: we've been buying the AAA-rated super senior tranches all along because we were told by the physics brainiacs that these securities were walled off from losses by over collateralization. Our pat answer for how we got $25 billion of CDOs back on our balance sheet this summer is going to be a "liquidity put." We are standing by the position that we gave our buyers the right to "put" the securities back to us without losses under certain conditions. (How that complies with securities laws banning guarantees against losses has yet to be addressed. How one can make an arms length sale of a security and still be contractually bound to take it back on the balance sheet has also not been addressed. Stockbrokers would lose their job, livelihood and licenses if they used this defense. This raises the additional question of regulatory passes for the privileged, another serious contributor to inefficient markets.)

Stan O'Neal's answer on behalf of Merrill Lynch is, on its face, very humble and simple: mistakes were made; errors of judgment. Recent articles, however, have raised suspicions that Merrill was not only holding the AAA tranches because they thought they were safe from losses because of over collateralization, but was also making hedging bets against the very subprime debt they were selling to customers; in other words, Enronomics: heads I win, tails you lose.

The danger with Alice in Wonderland securities concocted by the invisible hand of a rigged machine, is that all it takes to start a panic is for some sober looking types in scholarly garb to step into the public square and yell "the Emperor has no clothes!"

This is exactly what happened on February 15, 2007. Joseph R. Mason, associate professor of finance at Drexel University's LeBow College of Business and researcher Joshua Rosner, delivered a paper at Hudson Institute that laid bare the preposterous notion that one could indefinitely put lipstick on a pig (as they liked to say during the dot.com mania) and call it a AAA security. As the working paper found its way into the hands of Gretchen Morgenson at the New York Times and her article appeared three days later, the fireworks factory began to smolder in lower Manhattan, eventually igniting showy global displays throughout 2007. There was a run on a bank in London for the first time in 140 years, bankrupted hedge funds on Wall Street, insolvent mortgage lenders across the U.S., bailouts of money market funds by premier financial institutions and over a half trillion dollars of a liquidity infusion by the European Central Bank. There was also unprecedented help from the U.S. Federal Reserve in terms of cash infusions and back channel chats. But, by far, the most serious damage is the lingering distrust between the largest Wall Street trading firms which, unfortunately, also own banks. No one trusts each other's solvency so interbank lending has seized up.
Mason and Rosner made a prophetic pronouncement in their paper:

"The growing investor acceptance of CDO structures has been supported by rating agencies' willingness to rate these assets. Unlike other assets that rating agencies rate, these assets are subject to considerable market risk, a risk which rating agencies do not claim to be able to effectively rate...Because many buyers of senior CDOs can only hold investment grade assets they may continue to hold deteriorating and increasingly illiquid assets as long as their ratings have not been downgraded. Because the market is OTC [over the counter], investors may incorrectly value these assets in their portfolio and be forced to recognize large mark to market losses in a fast moving, liquidating market...."

J. Kyle Bass, managing partner at Hayman Advisors, framed more of the problem to the House subcommittee on Capital Markets in testimony on September 27, 2007:

I will tell you why and how regulators completely missed the epic size and depth of the problem in the credit markets today. An important concept to appreciate is that each securitization is essentially an off balance sheet bank...However, the securitization market has no Federal and State banking regulators to monitor its behavior. The only bodies that provide oversight or implicit regulation are the NRSROs [rating agencies] -- bodies that are inherently biased towards their paymasters, the securitization [Wall Street] firms.

Without sufficient oversight, this highly levered, unregulated, off balance sheet securitization market and its problems will continue to have severe ramifications on global financial markets.

Efficient markets need transparency and alert cops on the beat. Why is that so difficult to achieve? Because opacity and rigged markets produce the desired goal of enriching the one percent who now own 44% of the wealth of the nation. This one percent, in turn, keeps Congress on a short leash by holding the purse strings to campaign funding.

Wall Street is a two-sided market. The Wall Street firms' losses were another party's profits. Until we know where and how these profits were booked and the details of how the losses occurred, we are choosing to be the idiots of crony-capitalism. We are choosing to hand our country over to the robber barons.

Pam Martens worked on Wall Street for 21 years; she has no securities position, long or short, in any company mentioned in this article. She writes on public interest issues from New Hampshire. She can be reached at pamk741@aol.com

Private businesses don't chose to produce whatever they want. In a free market, they produce to satisfy the consumer.

“But if the producer reached out to influence or shape consumer wants, this socially admirable concept was in peril….This could not be”. The New Industrial State.(1976)p. xxiii.”

Big business rarely supports the free market. That's why they support regulations. It keeps the little guy, the upstart out of the market. We are not lacking in regulation. Fascism is a form of big-government.

“The two parts of the economy—the world of the technically dynamic, massively capitalized and highly organized corporations on the one hand and the hundreds of thousands of small and traditional proprietors on the other—are very different. It is not a difference of degree but a difference, which invades every aspect of economic organization and behavior, including the motivation to effort itself. It will be convenient, even in advance of more formulation, to have a name for the part of the economy, which is characterized by the large corporations. One is readily at hand; I shall refer to is as the ‘Planning System.’ The planning system, in turn is the dominant feature of the New Industrial State.”
The New Industrial State.(1976) p. 9