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Brian Holmes on Tue, 14 Oct 2008 19:55:15 +0200 (CEST)

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There are only a few serious things to say about what's happened in the 
economy for over the last four weeks, or the last four years for that 
matter. The first is that despite the admiration being showered on 
Paulson, Bernanke and Gordon Brown, what we are witnessing are financial 
crimes, leading to disastrous consequences for nations, institutions and 
probably hundreds of millions of people. Second, the criminals have 
their main offices on Wall Street, in the City of London and in 
Washington, plus on every derivatives trading floor in banks all over 
the earth -- and there they should be prosecuted, not in a witch hunt 
but in order to find out exactly how they did it, to strip them of their 
most egregious spoils (plenty of that out there) and above all, to make 
the whole thing impossible in the future. Third, if the national 
bailouts are not transformed into social works projects producing 
valuable goods and services employing people who need it, and if serious 
financial-market regulation is not installed at the same time, then what 
will come of this whole mess is just a reinforcement of the present 
condition: government by greed, carried out in the coded language of 

The bankruptcy of this transnational financial government is now 
literal, but in terms of human development it has been that way all 
along. The only good news about the recession is that it will be a 
tangible reason to press for far-reaching changes in the system! The 
worst news will hit the most unprotected people, and often the furthest 
away from any of the easy money, which is why we are really talking 
about crimes, deep failures of responsibility on the Part of governments 
as well as businessmen. I am thinking about the impacts on Latin 
America, on Eastern Europe, on Africa, on any small country without some 
juicy resource to put on the market.

It's too early to say anything specific about the geopolitical 
consequences of the meltdown, but what I find most remarkable about this 
recent turbulence is first that it has basically been a familiar case of 
"hot money" following into countries from a powerful outside source of 
liquidity. This time, however, the target countries have been the US and 
Britain, plus the other Anglo-Saxon lands and to a lesser degree, 
European countries like Spain. It's true that Greenspan pumped up this 
excess liquidity with ridiculously cheap interest rates, especially 
after the dotcom bust and September 11, but since the turn of the 
millennium that excess money supply has been massively augmented by 
influxes of capital from east Asia, mostly China. This hot money was 
looking for investments over and above the usual Treasury bonds, and 
what it found was not only the government-backed Fannie and Freddy 
mortgages, but also all kinds of other packaged debt rated triple-A and 
further insured with credit-default swaps. So more and more loans were 
packed into CDOs and the money poured in to buy them, ironically just as 
it had poured into into the Asian dragons or Russia and the newly 
independent Eastern countries in the mid-1990s. This time, however, what 
you got was not capital flight but the systemic collapse of the shadow 
banking system that was trading all that junk, a collapse which is still 
going on via the unfinished process of deleveraging. That means that all 
the borrowed money used to pump up the paper values, often at 30 times 
the value of the actual stake put up by the speculators, now has to be 
either paid back or written off, with collapses and bailouts all along 
the daisy-chain. If the first massive bailouts were reserved for the US 
government-backed mortgage companies and for AIG's big credit-default 
insurance operation (located in the City), that's because the Chinese 
financial pipeline could not just be callously ruptured without 
disastrous consequences on the international capital circuit. Still, the 
potentially positive result of all this is that foreign investors have 
been seriously burned by the Anglo-American derivatives machine, and now 
the London-New York tandem may now effectively lose its directive 
position in the world economy.

A detail you may not have noticed is that directly in the middle of the 
turbulence, Chinese authorities made a decision to give peasants the 
rights to transfer the title of the land they occupy in exchange for 
money. It's not exactly a sale, because the government still formally 
owns the land, but it does mean that the peasants' rights become liquid, 
they can be turned into cash. The significance of this is that China now 
sees the futility of continuing to produce for the West and then invest 
its profits there, in order to keep its currency value low and keep the 
lid on inflation. That circuit, known as Bretton Woods II because it 
kept the American dollar at the center of the world monetary system, may 
now be finished. China is now likely to partially turn its back on the 
capital circuit linking it to America and open the floodgates of 
internal migration from the countryside to the coastal cities, while at 
the same time attempting to develop its internal market far beyond the 
existing levels. The idea will be to make China's productive capacity 
circulate internally in the form of goods and service, rather than 
having exploited Chinese labor produce exports for credit-gorged 
consumers in the West. This could be a huge turnabout, setting the pace 
for the emergence of a truly sovereign Asian region, with respect to 
which the West could just become second-class, period. However, at the 
same time you are looking at another vast expansion of the money 
economy, full of the usual dangers. Unless it is deeply transformed, the 
internal Chinese market will be subject to the same kind of predatory 
lending, real-time turbulence and uncertain future as we have just seen, 
again and again and again. The existing stock markets there have fallen 
by 50% this year (and that was before last week). Even economic history 
isn't over yet!

What does it mean that yesterday (13 October), investors and traders 
made huge sums on the technical rebound of the stock markets? Is that a 
victory? Do we really need this light-speed financial market as a way to 
make capital available for productive activities? I read somewhere that 
in the US in recent years, for every dollar turned over in the real 
economy, you had up to five mathematical dollars biting each other's 
tails in the financial sphere. That circulation has given rise to an 
elite culture of glitz and also of power, the power to twist the state 
governments far from their original mandates (as in Greenspan pumping up 
the bubble) and then again, the power to practically control those 
states directly in real time, as we have seen in the past weeks where 
financial priorities simply took over government, always with the 
insistence that something must be done, now, before thinking, in time 
for the next stock-market bell. In this respect, finance has become the 
mirror of the overriding logic of war, which is the other major enemy of 
any kind of democracy. This is the reality: a vast and powerful culture 
of finance, a transnational state unto itself, with its own language and 
with something like extraterritoriality or diplomatic immunity for its 
representatives. Think about the concept of financial crimes. If not, 
the crooks will be glad to do all the thinking for you.

best, Brian Holmes

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