Next President Weakened by Financial Crisis

After the American Century

The world stock markets have been in turmoil, falling drastically and bouncing back on the news that the US Federal Government will take over huge amounts of bad debt built up by irresponsible banks. Many of them, we now know, were lending out immensely more money than they had themselves, and often lending it to people who could not afford to meet the mortgage payments. Woody Guthrie once said that some men rob you with a six-gun, others with a fountain pen. The investment banks have robbed millions of Americans, not once but twice. First, by getting them into mortgages they could not afford, and second by dumping their mistakes on the taxpayer's doorstep. Elsewhere around the world, people and institutions who bought some of this debt were "only" robbed once.

Just how much this will cost taxpayers is unclear, but early estimates suggest $1 trillion. The US does not have a surplus in its coffers, nor does it currently have a tax system that can cover this sudden additional debt. Both McCain and Obama have been talking about reducing taxes on the middle class, but after this week that may not be realistic.

Foreign investment in US government debt has been keeping the country functioning. In July of 2008 Japan and China each owned more than $500 billion in US Treasury bonds, bills, or notes. Investors from oil exporting nations have bought $174 billion. (Click here for a full list.) Why should Chinese, Japanese, and Saudi investors still buy American debt? Why not buy European government debt which has a higher interest rate? Indeed, will there be enough buyers for $1 trillion in new US treasury bills and bonds? Keep in mind that because the dollar has weakened considerably during the Bush years, such investments may not be profitable.

I hope that I am wrong, but in twenty years historians may see that the autumn of 2008 was the moment when the US lost its leadership of the world economy, and argue that it was the time when the hegemony of the American century ended. Of course, it seems that the US government has just stepped in and saved the world's economy, after its reckless bankers almost ruined it. But the nation cannot emerge stronger than its rivals from this crisis. China, Japan, India, Brazil, and the EU likely will gain on the US. Their economies have not suddenly been burdened with $1 trillion extra debt on top of an equally large debt created by the Iraq War. (For more on this, see Niall Ferguson's thoughtful op ed piece in the Washington Post.)

Even before this crisis the US budget was severely out of balance. The sudden increase in debt means that the future president will have less scope in foreign policy. It will be - even more decisively than before - a debtor nation, one which cannot afford to offend its creditors. And should the next president want to start a new war or underwrite a new peace, how is he going to pay for it?

The added $1 trillion debt will also make it harder for the next president to fund social programs, such as extending medical coverage to all Americans. All of a sudden, there is a whole lot less money to work with. Borrow $1 trillion at, say, 4%, and just servicing that debt will cost $40 billion a year. That money will not be available for schools, research, creating a new energy economy, or roads and bridges.

The next president will struggle to move forward dragging a $1 trillion ball and chain. The investment banks have not only robbed the public twice; they have weakened the next president and diminished the US standing in the world.

The Bush Economy: End of the "Almighty Dollar"?

After the American Century

The US mortgage crisis and the falling prices for houses have been making headlines for months. The stock market is also jittery because consumer spending has begun to fall, as homeowners feel the equity shrink. In a few cities, such as Cleveland, a glut of unsold homes on the market has created a crisis. Housing values are in free fall. Even though most people are not selling their homes, when the value of a house drops, it has a psychological effect.

Bear-Stearns was part of the rush of speculators who got caught up in the housing bubble, stimulating the market, acquiring sub-prime mortgages, luring people to buy homes they could not afford. And now, Bear-Stearns, on the brink of collapse, has been "saved" for a little while, at any rate. Why did the Bush Administration not try to save the homeowners? Then it might have saved Bear Stearns as a secondary result. Why is a speculative corporation more worth saving than several million home owners? This is the Bush double standard at work.

Of course, if Bear Stearns collapses, other investment houses and even some banks might collapse as well. (It might be the domino effect, which never happened in Vietnam, but maybe this is where the under performing domino effect can make a comeback.)

If a really big organization like Bear Stearns is run badly, society has to pay for it twice - first by suffering the effects, and second by bailing out the people who inflicted the suffering. Instead, Bush should take a truly conservative line: corporations that are run badly should not expect a government handout. Their overpaid executives, many of whom make more money in one year the most working people make in their entire lives, should not helped. Rather, the victims of such corporations should be protected from unscrupulous lenders.

My father was a lifelong Republican, of the old school. He had actually read Adam Smith. He was an engineer and an educator who ended his career as a college dean. He also was a investor. But his fellow Republicans wandered far off the path of hard work, stewardship, and honesty, and he was robbed in the last years of his retirement by Enron. That corporation's brazen lies, arrogance, and manipulations knew no bounds, and the executives of that corporation were campaign contributors to George W. Bush and Dick Cheney.

A few of Enron's executives have been sent to prison, but the Bush Administration did not punish many, and the punishments were mild compared to the economic destruction they caused. The executives cooked their books and issued misleading profit statements, when they were really losing money. Near the end, they quietly began selling their own stock holdings, since they knew that the company was close to worthless. But they would not let their employees sell their stock, and many lost everything. Enron's leaders milked the company literally to death, as they robbed investors and abandoned their employees, who lost their jobs and their pensions.

That is how the Bush League Economy works. It started by giving huge tax cuts to the wealthy. It continued by letting many of the white-collar criminals from ENRON get away. In Iraq, it was time to give away billion dollar contracts (with no competitive bidding) to Bechtel executives and other old friends. And now it is time to bail out Bear Stearns. Save the capitalists, and the American public be damned? Actually it is worse than that.

The Bush economy apparently will end with a debacle much bigger than the collapse of Enron. Does this prove that the Republicans cannot safeguard the economy for the well-being of all Americans? No, it is much worse than that. The Republicans have failed to safeguard the value of the dollar itself, which is plunging to new lows. Things will continue to get worse before they can have any hope of getting better, because the Bear Stearns bailout requires the US Federal Reserve to print more money, making the dollar even less valuable. Ominously, the oil markets are beginning to operate in other currencies, and one wonders if the dollar will ever again be "almighty". If things get much worse, this blog might have to change its title to "After the American Economy."

The Bush Economy, Part 2

More than one month ago, on December 12, I put out a blog on the failings of the Bush economy.(See the archive.) In the past week the failures of his economic policies have been driving down the stock market, and have prompted the head of the Federal Reserve to call for an economic stimulus package as quickly as possible.  Bush's immediate response has been to call for an across the board tax cut. Now, recall that the foolish tax cuts of his first year in office helped to over-heat the economy, and recall that these overwhelmingly favored the very rich. The immediate problem is not that these same rich people need yet another tax cut, but that relief is needed specifically by the middle class. More specifically still, people who bought houses recently need help in paying their mortgages. Rather than give a tax cut to everyone, in other words, Bush should be focusing on those families who are on the brink of going under. If they default on mortgages, the ripple effects will further destabilize the entire economy. What to do?

First, Congress should step in and guarantee mortgages, helping banks and borrowers to renegotiate the terms of their debt. Neither banks nor borrowers gain anything if the mortgage market collapse. Rather than just give some money to everyone, including rich people who already have received a terrific tax cut, and then hope that the economy as a whole will be stimulated enough to help people with big mortgages, why not attack the problem directly?

Second, Bush should admit that the US cannot afford to keep spending $1 billion a day in Iraq. There were strong military and strategic arguments against going into that war in the first place, but they made no impression upon the true-believers who directed policy. Perhaps the Republicans will listen to an economic argument, especially in an election year.

Third, the Democrats should seize this opportunity to attack the Republicans for their mistaken foreign policy and their failed economic policy. During the last week in the Nevada Caucuses we have witnessed some rather pitiful in-fighting, especially from the Clinton side. It is time to tell the American people just how bad a President Bush has been. The Democrats have to attack the neo-conservative policies that have weakened the United States financially and hurt its international image. Obama must move beyond "feel good" unity and hope toward a more detailed vision of what will change and how. And Clinton should stop crowing about her vast experience and start to show the American people that she has the courage to confront the Republicans and hold them accountable for their mistakes. 

Unfortunately, I doubt that any of these things will occur. In an election year Congress is likely to be distracted, and the Democrats may not want to rescue the Republicans. They may calculate that the worse the economy gets, the less chance there is for McCain or Romney or whoever it turns out to be. Nor should one expect that Bush will retreat from Iraq. He will no doubt stubbornly "stay the course," just as Richard Nixon stubbornly stayed in Vietnam, convinced that a victory and vindication would eventually come. Even if Bush suddenly did change his mind, it will take more than a year to get the troops out in an orderly fashion, and that $1 billion a day will continue to hemorrhage out of the economy. Finally, it seems that the Clintons may lower the tone of the Democratic primaries. Bill Clinton in particular has become more aggressive toward Obama. In contrast, McCain and Huckabee on the whole seemed to be take the high road of civility in South Carolina.  (But note the latter has begun to embrace the Confederate flag!)

In short, while the economic woes of the US continue to worsen, there is no clear sign yet of intelligent policy or good leadership from Bush. Meanwhile, the Democrats may squander the opportunity to lead in an internal war of attrition. 

What was different at the end of the American Century?

The twentieth century, it is generally agreed, was the American Century. This webpage is dedicated to studying where the United States is headed in this new century, which cannot belong to the US to the same degree. It seems appropriate to reflect back over what changed between 1900 and 2000 in this first blog. For the nation changed stupendously in that time.

By 2006, the American population had grown to 300 million, four times that of 1900. The people were no longer concentrated in the Northeast, but had spread more evenly across the country. A rural nation had become urban and then suburban. A nation where only men over 21, and primarily white men, could vote, had expanded the franchise to all its citizens over 18. A nation that had banned African Americans from most public amusements and often denied them the vote had elected many Black men and women to the office of mayor, governor, and US Senator. In 2006 the public considered Barak Obama and Condoleezza Rice suitable for the presidency. A largely white nation had become a hub of multiculturalism.

A nation primarily of farmers and blue-collar workers had become a nation of office workers. A nation lighted mostly by gas and powered almost entirely by steam had electrified. A nation that once relied on horses and railroads had one car for every adult, plus an enormous airline industry. A few small companies making five-minute silent films had grown into the massive film industry. A nation devoted to the live entertainment of vaudeville, theaters, and other public places had largely privatized leisure by embracing the phonograph, radio, television, and Internet. A nation so uncertain about the value of its own literature that many still read British novels and poetry had both rediscovered the great writers of its first centuries and had produced a new pantheon of authors. A nation that once accepted the supremacy of European fine art had pioneered abstractionism and established New York as the world art capital. A nation bent on prohibiting alcohol had not only accepted its consumption but also fostered excellent vineyards and breweries.

There were more problematic developments, however. An isolationist nation with no standing army in peacetime had become the world's only superpower, capable of intervention anywhere. A nation that had identified itself with democracy had at times supported totalitarian regimes abroad. A nation proud of its Bill of Rights had imprisoned men for years on a military base at Guantanamo Bay, Cuba, without pressing charges against them or allowing them the rights normally granted to prisoners. A nation that had periodically been obsessed with "100% Americanism," the dangers of Catholicism, Fascism, and Bolshevism, found a new enemy, the religiously inspired terrorist. A nation that had prided itself on being the asylum of immigrants from around the world built an expensive wall across parts of the Mexican border, in an unsuccessful attempt to keep out illegal immigrants. A nation that had appeared to be shifting toward secularism in 1900 now seemed to welcome fundamentalism, and religious sectarianism not only flourished but gained increasing political influence.

How important were each of these various elements of the "American Century"? That is what this Blog seeks to understand.

If you want a more detailed retrospective, have a look at The American Century

[coauthored with Thomas Johansen], which is now available from SDU Forlag.