Bill Totten's Weblog

Monday, June 23, 2008

Estate Sale

by Lewis H Lapham

Harper's Magazine Notebook (May 2008)

It costs a lot of money to be rich. -- Peter Boyle

Not being expert at the interpretation of economic data, I'm never sure which leading indicators point in what direction, but when every morning's newspaper offers a further proof of the bankrupt American dream, I'm prepared to believe that somewhere near at hand there is a piper waiting to be paid. The voices of informed financial opinion in New York and Washington (bond salesman, stock market analyst, investment banker, currency trader, chairman of the Federal Reserve) act the part of the alarmed chorus in an ancient Greek play, bearing witness to the pride that goeth before a fall, generating the portents of doom - the American dollar sinking to record lows against the euro, the capital and credit markets reduced to a state of paralysis, hedge funds vanishing into clouds of blown-back smoke, home mortgages abandoned in the Arizona desert, banks drowned in pools of toxic debt, yet another American corporate sweetheart (department store, hotel chain, record label) sold to a syndicate of Chinese communists or into the seraglio of an Arab emir.

When the appalled bystanders find themselves momentarily at a loss for words, they move downstage and run the numbers. The national debt pegged at $9.4 trillion (up from $6.4 trillion in 2003), running expenses of $16 billion a month for the wars in Iraq and Afghanistan (the eventual cost projected at more than $3 trillion); $4 trillion borrowed since 2002 using homes as collateral, the value of American real estate diminished by $1 trillion in a matter of months; losses of $600 billion to be incurred by investors holding debt instruments backed by specious credit, American assets in the amount of $414 billion sold to foreign buyers in 2007, the Federal Reserve on March 11 2008, cleansing the wounds of the New York banks with $200 billion in liquidity and then, a few days later, allotting $30 billion for the salvage of Bear Steams.

The numbers speak to the scale of the speculative bubble risen to the height of an Air Force weather balloon, but I tend to lose track of their significance in the long rows of hollow-eyed zeros, and so I am at least grateful for the clarification that appeared on the front page of the New York Times on March 1 under the headline "DRUM-BEAT OF GRIM REPORTS SENDS MARKETS TUMBLING". The previous day hadn't been a happy one on the New York Stock Exchange (the Dow off 315 points in a spasm of late-afternoon panic), and the Times rounded up several of the usual Wall Street suspects known to have been present at or near the scene of the accident. Most of the witnesses couldn't remember how or when the tapping on the drum first came to their attention - the sound jaunty or solemn, the drum muffled or accompanied by bagpipes - and so it was left to Douglas Peta, chief investment strategist for J. & W. Seligman, to discover the moral in the tale:

There is not any one news item that I can point to. We know that there is paper out there that we can't trust. We don't know exactly who owns it and how much. And we don't know how they are valuing it.

The observation embraced both the joys and the sorrows of an enterprise dependent upon the manufacture of something for nothing. On the summertime side of the proposition, when the fish are jumping and the cotton is high, the paperwork slows down the momentum, gets in the way of the oceanfront views. God forbid that any buyers out there (of Florida sandcastles, credit-debt obligations from JPMorgan Chase) should know exactly what they own - how much or how little of it, whether it fades in strong sunlight or washes off in the laundry. When the autumn leaves begin to fall the only intelligible paper that anybody is likely to see is the arrest warrant and the eviction notice.

Which isn't to say that the confidence game is somehow un-American or wrong. It is a national pastime as dearly beloved as baseball - appreciated as an art and enjoyed as a sport - but the rules are sometimes hard to explain to Baptist clergymen and bearded foreigners. Our creditors in Europe, Asia, and the Persian Gulf (from whom we currently borrow $2 billion a day to export the blessing of democracy to Iraq) begin to suspect that the American modus operandi doesn't lend itself to the trustworthy management of global empire. With what collateral do we secure our credit rating as the world's AAA hegemon? George Soros addressed the question at last January's meeting of the World Economic Forum in Davos, Switzerland. Speaking for what was reported as the consensus of sound judgment circulating among the assembled finance ministers, Soros referred to the break in the American housing market as "basically the end of a sixty-year period of continuing credit expansion based on the dollar as the reserve currency.

Having had occasion eleven years ago to attend the Forum's meeting at Davos, I could recall the setting - prominent businessmen, important politicians, visionary intellectuals, primetime journalists passing documents to one another across the plum tarts and the coffeepots. The remembrance of time past served to measure the lifespan of the American imperium billed by the Bush Administration as the deserving heir to both the glory that was Greece and the grandeur that was Rome. In 1997 the United States was flush with money and long on self-congratulation, the Clinton government fat with the promise of a budget surplus and an as-yet-unexploded stock market bubble, no enemies of consequence on or below the horizon, the euro five years away from being established as a legal tender. Although for the most part unfamiliar with languages other than their own, the American participants in the Forum seldom missed a chance to preach the doctrine of enlightened globalism, awakening the representatives of less fortunate nations to the need for "transparency" in their financial dealings, to the sin of "crony capitalism" (as practiced by the Indonesians and the Turks), to the dangers of "bandit oligarchy" (as practiced by the Russians and the sub-Saharan Africans), to the subtle but necessary distinctions between a "feverish" and a "consumptive" capital market, between a "palsied" and a "suppurating" trade balance. To replay the tape is to appreciate the worth of the material as stand-up comedy.

Soros also had been present at Davos eleven years ago, which maybe was why the report of his speech brought to mind the lofty and condescending height from which, once upon a time and in a galaxy far, far away, the liege lords of American finance looked down upon people whom they regarded as vassals, bound both by divine providence and geopolitical circumstance, to serve the new world order centered on the navel of the universe in Washington. Or possibly it was a matter of coincidence. On February 12, at the Council on Foreign Relations in New York three weeks after reading the report from Davos, I attended a roundtable discussion entitled "Sovereign Wealth Funds on the Rise: Should We Worry?" Owned and operated by foreign governments, among them Russia and China as well as Norway, Saudi Arabia, and the United Arab Emirates, the funds control a pool of capital (currently $3 trillion, expected to rise to $12 trillion in another ten years) that waters the oases of the world's credit markets. What was instructive was the attitude of the monied interest in the room - the same kind of crowd that I'd encountered at Davos, but one that had come to learn instead of teach. All present were mindful of the fact that over the past several months the sovereign wealth funds had supplied $60 billion of liquidity to a roster of favored American financial institutions, among them Citigroup and Merrill Lynch, that otherwise might have been exposed to the embarrassment of having to sell the furniture, the silver, and the CEO's daughter. The money, of course, was welcome, but was it to be accepted as an unrestricted gift from Allah, or did it come with strings attached? Did any of the attachments mean anything? If so, why, how, and to whom?

The consiglieri seated on the podium, among them a representative of the International Monetary Fund and a former deputy secretary of the US Treasury, answered the questions with the reassuring news that, at least for the time being, geopolitical terms and conditions didn't impede the progress of the wire transfers. Nobody in Singapore was looking to acquire Donald Rumsfeld's maps or Condoleezza Rice's piano. The experienced investors, most of them Arabs, could be relied upon to do straightforward business deals unencumbered by tactical or strategic objectives; the Russians and the Chinese were learning how to behave like gentlemen. Although it was true that the international funds weren't subject to regulatory oversight, which meant that one still had to contend with the problems of both opacity and corruption, at the end of the day and all things considered, sovereign wealth money was better than private equity money - not as volatile, less eager for a quick profit, not subject to redemption. Nor was there much reason to worry about undermining the national security. Except for a few fragments of homeland defense (weapons-grade uranium, the runways at Ronald Reagan National Airport) nearly everything in the American estate sale (shopping malls, universities, telephone companies, movie studios) could be sold to almost any buyer whose name the lawyers knew how to spell. The discussion attracted the Council's equivalent of a sellout crowd - sixty or seventy highend Wall Street lawyers and merchant bankers imbued with the wisdom of the country's ruling oligarchy - and an executive summary of both what was said and what wasn't said could have been abstracted under the headings of two PowerPoints:

1. Goodbye to the sovereignty of nation-states. The world dances to the music of money, and the only frontier that matters is the one that separates the gardens of the rich from the deserts of the poor. The Upper East Side of Manhattan belongs to the same polity as the 8th Arrondissement in Paris and the Odintsovo district in Moscow. The yachts moored in the Bay of Naples and the lagoon at Bora Bora sail under the flags of the same admiralty that posts squadrons off the shore of Nantucket and the Costa Brava.

2. Geoeconomics trumps geopolitics. It is the value of the American dollar that imparts meaning to the principles of the American democracy; loss of confidence in the former depreciates the character of the latter. Democracy works toward an idea of equality, capitalism moves in the direction of inequality, which is the preferred travel destination.

At the end of the discussion the expressions on the faces of at least some of the gentlemen in the room registered trace elements of regret. The departing company clearly was glad to know that the foreign shills were still in the game, but there was also the humiliation of America having to cut back on the royal elephants and the pretensions to empire. One gentleman in particular looked so dispirited as he was putting on his topcoat that had I known his name or where to find his hat, I would have pointed him to the light at the end of the tunnel, assured him that the redeployment of the world's wealth wouldn't entail the giving up of his customary table at Le Cirque. Even if America were to be reclassified as a Third World country, he would discover that Third World countries are by no means as unpleasant or as dangerous as they can be made to seem by the editorial writers at the New York Times. The girls are good-looking, the golf courses up to the standard of those in Palm Springs, the nightclubs trendy, the secret police efficient and courteous, the income spread between the haves and have-nots in line with the one to which he was accustomed here at home.

The United States has been ridding itself of its First World status for as long as it has been privatizing its critical infrastructure (aka the common good), at the same time despoiling the natural resource embodied in the health, welfare, courage, and intelligence of its citizenry. Over the past eight years, under the absentee landlord economic policies of the Bush Administration, the stepped-up rate of disinvestment has resulted in the Third World confusion and mismanagement for which the American guidance counselors eleven years ago at Davos rebuked their economic inferiors - bandit oligarchy, gangster capitalism, nontransparent finance, palsied capital markets, and a suppurating trade balance.

Although not touched upon at the Council on Foreign Relations, the question that remains to be discussed is the one about putting the preferred spin on the story. The going gracefully into the imperial twilight with Britain and France wouldn't sit well with the parties of the nationalist right. We do better with the production of Super Bowl halftime shows than with the staging of historical ceremony; our cathedrals don't come furnished with the tombs of museum-quality kings. As an advanced industrial nation along the lines of Holland or Germany we would run into trouble with the paperwork. From advanced industrial nations the bankers in Hong Kong and Mumbai expect sincere proofs of "accountability" as well as earnest attempts to strengthen the currency and occasional repayments of outstanding debt. The requirements aren't configured to match the irrational exuberance of the freebooting American spirit. Accountability is a concept poorly understood both in Washington and Wall Street, our economy is a faith-based initiative, we're not in the habit of honoring our debts, and we're low on creditors willing to believe that our word is as good as Barack Obama's can-do smile.

Our liabilities become assets if we can recast the United States as a developing nation that contains within its borders the excitements of an emerging market. On first looking into an emergent market for fabulous risk-free wealth, the foreign investors don't yet know what anything is really worth - how much oil is under the sand in Utah, if the chi-nook salmon will return to the Sacramento River, who holds the mortgage on the Brooklyn Bridge. The circumstances favor the sunny side of the American street, allow for the freedom of entrepreneurial maneuver, and encourage imaginative interpretations of what constitutes an exploitable natural resource. Together with its expressions of interest in such things as the Lincoln Memorial and the Marine Corps Band, the foreign money can be counted upon to assign value to commodities that the natives believe to be worthless. The seventeenth-century princes of Europe maintained private menageries stocked with Spanish and Italian dwarves; it's conceivable that the Arab sovereign wealth funds might wish to collect, as rare specimens of an exotic breed, ornamental American CEOs prized for their capacity to turn gold into lead. Priceless objects unavailable for purchase with MasterCard, capitalist action figures embodying the treasure of the Christian West, to be as proudly displayed as the peacocks in the gardens of Doha and Riyadh.

Lewis H Lapham is the National Correspondent for Harper's Magazine and the editor of Lapham's Quarterly.

Bill Totten


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