How the Economy Was Lost: The War of the Worlds (Counterpunch) by Paul Craig Roberts Read Free Book Online Page A

obligations and swaps, allowed short sellers to make fortunes by driving down the share prices of the investment banks, thus worsening the crisis. With their capitalization shrinking, the investment banks could no longer borrow. The authorities took their time in halting short-selling, and short-selling is set to resume soon.
    If the mark-to-market rule had been suspended and short-selling prohibited, the crisis would have been mitigated. Instead, the crisis intensified, provoking the U.S. Treasury to propose to take responsibility for $700 billion more in troubled financial instruments in addition to the Fannie Mae, Freddie Mac, and AIG bailouts. Treasury guarantees are also being extended to money market funds.
    All of this makes sense at a certain level. But what if the $700 billion doesn’t stem the tide and another $700 billion is needed? At what point does the Treasury’s assumption of liabilities erode its own credit standing?
    This crisis comes at the worst possible time. Gratuitous wars and military spending in pursuit of U.S. world hegemony have inflated the federal budget deficit, which recession is further enlarging. Massive trade deficits, magnified by the offshoring of goods and services, cannot be eliminated by U.S. export capability.
    These large deficits are financed by foreigners, and foreign unease has resulted in a decline in the U.S. dollar’s value compared to other tradable currencies, precious metals, and oil.
    The U.S. Treasury does not have $700 billion on hand with which to buy the troubled assets from the troubled institutions. The Treasury will have to borrow the $700 billion from abroad.
    The dependency of Treasury Secretary Henry Paulson’s bailout scheme on foreign willingness to absorb more Treasury paper in order that the Treasury has the money to bail out the troubled institutions is heavy proof that the U.S. is in a financially dependent position that is inconsistent with that of America’s “superpower” status.
    The U.S. is not a superpower. The U.S. is a financially dependent country that foreign lenders can close down at will.
    Washington still hasn’t learned this. American hubris can lead the administration and Congress into a bailout solution that the rest of the world, which has to finance it, might not accept.
    Currently, the fight between the administration and Congress over the bailout is whether the bailout will include the Democrats’ poor constituencies as well as the Republicans’ rich ones. The Republicans, for the most part, and their media shills are doing their best to exclude the ordinary American from the rescue plan.
    A less appreciated feature of Paulson’s bailout plan is his demand for freedom from accountability. Congress balked at Paulson’s demand that the executive branch’s conduct of the bailout be non-reviewable by Congress or the courts: “Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion.” However, Congress substituted for its own authority a “board” that possibly will consist of the bailed-out parties, by which I mean Republican and Democratic constituencies. The control over the financial system that the bailout would give to the executive branch could mean, in effect, state capitalism or fascism.
    If we add state capitalism to the Bush administration’s success in eroding both the U.S. Constitution and the power of Congress, we may be witnessing the death of accountable constitutional government.
    The U.S. might also be on the verge of a decision by foreign lenders to cease financing a country that claims to be a hegemonic power with the right and the virtue to impose its will on the rest of the world. The U.S. is able to be at war in Iraq and Afghanistan and is able to pick fights with Iran, Pakistan, and Russia, because the Chinese, the Japanese and the sovereign wealth funds of the oil kingdoms finance America’s wars and military budgets. Aside from nuclear