Month: September 1998

The Gangster Economy

Way back in 1987, during our last recession, the Fed took steps to bring the U.S. economy out of the doldrums. Those steps led directly to the current global recession.

Credit was “liberalized,” meaning that banks could lower their standards for who they loaned money to: businesses, foreign governments, brokerage firms, and other banks. High risk projects and investments entered the picture, and many banks poured money into the “tiger economies” of Asia and emerging markets in Latin America, Russia and Eastern Europe. Today, the crisis in Russia is a good example of just how risky those investments were.

In the early 1990s, during Boris Yeltsin’s first term in office, he privatized a large number of state-owned industries: mining concerns, oil and natural gas companies, utilities, the beverage alcohol industry, etc. These companies were bought up by the only folks in the former Soviet Republics who had money and were considered “reliable” credit risks: ex-Communist party members and apparatchiks. These were the same folks who managed state firms during the Soviet era–or “mismanaged,” since most managers of state-run companies drained cash out of them to maintain their dachas, private cars, and tickets to the Bolshoi. Well-schooled in corruption, these former apparatchiks saw the newly deregulated Russian economy as a profiteering free-for-all, and naturally snapped up controlling interests in privatized companies at bargain prices.

Before the Russian government offered these assets for sale, they stripped bad loans off the books and assumed the debt burden of these companies. They privatized the assets, but nationalized the debts. These old debts from the Soviet era make up a large part of the current foreign debt load weighing down the Russian government.

After buying controlling interests in these assets with loans from Russian banks, the apparatchiks went on to borrow as much cash as they could from western banks (mostly German and Swiss) in order to “expand” the businesses. This was supposed to fuel Russian economic growth, provide jobs for workers laid off from state industries, and get the Russian stock market off to a nice start. Instead of putting the cash into expanding the companies, however, Russian entrepreneurs invested it in risky developments, the Russian stock market, derivatives, and foreign investments. Much of the cash was funneled into accounts in off-shore banks in the Middle East and the Carribean. Having learned during the Soviet era how to keep two sets of books–the real ones and the ones for the state auditors–these managers were able to hide the theft for a long time. But, as the Asian financial crisis closed in, commodity prices fell, the ranks of unemployed workers swelled, and it became obvious that the money had disappeared: employees had not been paid for a long time. Strikes ensued, factories ceased producing goods for want of raw materials, miners left the mines, oil workers walked off the job, and the economy ground to a halt. The crisis hit home.

Earlier this year, the Russian government accepted a $22 billion bailout package from the IMF. The first installment was paid out in July but, instead of being used to cover Russia’s short term debt payments, the government used it to prop up the ruble just long enough for Russian entrepreneurs to get their cash out of the country. The first installment of the bailout money went directly into the pockets of corrupt businessmen, and now the IMF has refused to give the Russian government the second installment until it outlines a clear plan for the economy that adheres to strict IMF doctrine. Of course, it was IMF-style privatizations that brought on the crisis in the first place.

The new Russian Prime Minister Yevgeny Primakov has an impossible task. On one side is a population of people who can’t afford to buy food, who are just getting by on home-grown vegetables and barter. With inflation that will top out at around 300 percent by the end of this year, it’s going to be the roughest winter in Russia in decades. Right now, the population is demanding two things: that the government pay their back salaries no matter what it takes, and that Yeltsin and Co. abandon all IMF economic “reform” policies. On the other side is the IMF and that desperately-needed second installment that Russia has to have in order to pay its workers and cover its long-term debt payments. Stuck between a rock and a hard place, the Yeltsin government is near collapse. In the meantime, regional governors are taking matters into their own hands and instituting economic policies of their own. It’s only a matter of time before one of these governors decides he could do a better job at running the country; Alexander Lebed, governor of Siberia, has already demanded that Yeltsin resign.

It’s important to understand that this scenario is not unique to Russia. Gangster-style economics goes hand-in-hand with capitalism all over the globe. South Korea has its chaebols (huge family-owned corporations) that have survived on political nepotism and graft. The Suharto family not only ran Indonesia, but they also commandeered huge chunks of government funds to start whatever business projects they wanted. Japan, widely considered the economic engine and main stabilizing force of the region, has been rocked by a long string of banking, industrial, and political scandals involving payoffs, kick-backs, and bribery. Favoritism, corruption, theft, and welfare for the rich are all main characteristics of unregulated global capitalism.

While the Russian collapse has proved that it’s not simply an “Asian” phenomenon, as racist western economists have claimed over the past year, one recent development proves that the U.S. is also part of the global gangster economy. Last Wednesday, top officials of 16 of the world’s largest banks and brokerage firms spent more than $3.5 billion to shore up a single U.S. mutual fund. The Long-Term Capital Management Fund–a “hedge” fund–had invested in $90 billion worth of bond-based derivatives that are now mostly worthless. The fund only had about $2.3 billion in real assets to back up those ethereal investments. Essentially, in a scramble to save the economies of Europe and the U.S., 16 banks bought up large portions of nothing.

To top it all off, this hedge fund is not unique, nor is it some esoteric type of investment run by marginal characters. Investors in the fund include major banks, brokerage firms, and wealthy investors. The fund itself was formed and managed by three former Salomon Brothers employees and two Nobel-prize winning economists, Robert H. Merton and Myron S. Scholes. In short, it’s a black hole that sits squarely in the center of the western financial system. If it or a similar entity goes down, then the crisis will hit home here.

Mr. Public Developer

Every two years it’s budget time for the City of Seattle. The mayor solicits info from each city department and draws up a budget, which he presents to the City Council for review and approval. Two weeks ago, Mayor Paul Schell released the draft budget for 1999-2000, and it contains one item that’s particularly controversial: a radical shift in the city’s housing funds.

The new budget would split off all of the housing funds and personnel from the Department of Housing and Human Services, and then combine those funds with the management of “large, interdepartmental, complex projects” into a new department called the Office of Housing and Project Management.

In prior years, housing and human services were combined in their own office under the Department of Health, Human Services, and Recreation. The bulk of Housing and Human Services money has gone for servicing people most at risk of becoming homeless (if they’re not already), including: retirees on fixed incomes, elderly folks who need community services, “at-risk” youth, and people who need more job-training. Splitting off the low-income housing funds from the money used to provide services to homeless folks, the elderly, and the poor will ghettoize this already economically desperate population.

The move simply makes no sense … until you look at where the money and staff is going. Schell’s proposal would move the housing funds to a new office directly under the Executive Department–meaning that he and his staff would have more direct control over the funds. This could set in motion a process that will downplay low-income housing and place an emphasis on housing for middle-income families, first-time home buyers, and services for vaguely defined public-private partnerships (i.e., developers). This shift becomes clear when we read such statements as: “The office will expand the definition of affordable housing to include mixed-use, moderate income units…” or “The purpose of creating a new office is to provide a clear point of contact for community and private partners…” Two of the major goals of the office are to “Increase supply of housing at all income levels in ways that will enhance communities,” and to “Strengthen partnerships to leverage community resources and public and private dollars.”

We’ve heard the public/private mantra before: to justify spending public funds on sports palaces and luxury condominiums for cars. By now, Seattle residents should be justifiably suspicious of these proposals and sick to their stomach of the kind of vague rhetoric that leaves the door wide open for corporate welfare–in this case, for private developers.

It doesn’t help that Paul Schell is a former developer and, as the PacMed deal showed, is willing to help out his former buddies whenever possible. Creating this new office under the Executive would give him and his staff access to and control of funds that should be moved as far away from him as possible. That he has proposed combining housing money with the construction of capital projects like the Ballard Civic Center, downtown Justice Center, and new libraries, is further evidence that he may be trying to set up his own personal development company within the city bureaucracy.

Schell ran for mayor with the goal of providing solutions to Seattle’s housing crisis. He even sat before a group of homeless folks and service providers to give his ideas for increasing the supply of low-cost housing in Seattle. Most of his speech then–and his subsequent “housing agenda” proposal–relied on tax and regulatory breaks for developers and current homeowners. This budget clearly shows where his priorities lie: low-income housing deserves only a pat on the head, while public funds and staff-time will be directed towards stimulating “market-rate” construction–the very type of development that has already displaced much of Seattle’s scare low-income housing.

Happily, City Council members have expressed puzzlement over the proposed new office, and why the mayor wants to combine housing funds with public construction projects. Since the City Council must review and approve the city’s budget by late November, it’s important that they hear as soon as possible what the public thinks about all this.

Martha Choe will answer budget questions on a live call-in show on Channel 28 at 7:00 p.m. this Thursday, Oct. 1. Then, on the following Monday, Oct. 5, the City Council will have a public budget hearing in the council chambers at 5:30 PM. Usually, the city’s budget is approved with few changes and little fanfare; it’s time to demand that the council perform a some oversight of the city and Mayor’s office, and not rubber-stamp this budget.

The draft budget can be accessed on the city’s web page at http://www.ci.seattle.wa.us/budget/

The Real Sex Fanatics

Last week we reported that two Republicans, both critics of Pres. Clinton, were outed as adulterers: Rep. Helen Chenoweth of Idaho (who slept with her former business partner–presumably in the workplace) and Rep. Dan Burton of Indiana (who admitted having fathered a child in an extramarital affair). Both are arch-conservatives who openly espouse “family values,” but whose actions show they secretly believe that a little cheating on the side is okay.

To top it all off, last week news broke that the leader of Clinton’s impeachment review, House Judiciary Committee Chairman Henry Hyde (R-Illinois), has admitted that he had an affair with a married woman in the 1960s. Fred Snodgrass, the ex-husband of Hyde’s lover, told the Associated Press: “It’s ridiculous. He had an affair with a young woman with three children. At least the president didn’t do that.” Snodgrass went on to call Hyde a “super hypocrite” and broke into tears as he told of how Hyde’s affair ruined the Snodgrass marriage.

Following in Chenoweth’s footsteps, Hyde denied that he had done anything wrong and pompously replied: “The statute of limitations has long since passed on my youthful indiscretions … After Mr. Snodgrass confronted my wife, the friendship ended and my marriage remained intact.” Hyde neglected to mention that he had lied to Mrs. Snodgrass during their affair by telling her he was single at the time. He was also just beginning his career as a state representative, and his “youthful indiscretions” continued until 46 years of age (he’s now 70).

These revelations about ultra-conservative Republicans are funny, but they’re also revealing. We can now infer that years of railing against “satanic feminism” and immorality may be inspired by a weird dynamic of guilt, repression, and projection within the Christian-fundamentalist mindset.

For example, punishing welfare recipients by launching a campaign against teenage welfare mothers of color may be understood as the response of guilty filanderers to their own racist, pedophilic wet dreams. The bombing and/or attempts to close down abortion clinics and make abortion (indeed, any form of contraception) illegal, may be read as a repetition/compulsion syndrome brought on by a need to erase their “youthful indiscretions” from memory. Of course, they could just be a bunch of sexist bigots. But the fact that they get away with this stuff also says a lot about our own values, actions (most of us have had our own “indiscretions”), and resulting feelings of guilt. People make mistakes, break promises, give in to desires, and do stupid things; the sin is to not acknowledge those mistakes, to lie about them, cover them up, and try to forget about them. In reality, they never go away; the more they’re repressed, the more they become obsessions. So begins a vicious cycle of denial, repetition, shame, and the use or abuse of power to deflect the blame onto somebody else.

I don’t want to be accused of psychologizing politics or foreign policy, but here’s a perfect example of deflecting blame or projecting guilt onto someone else: the Senate’s foreign operations appropriations bill. Reactionary House Republicans have attached a rider to the bill called the Global Gag Rule. Yes, you guessed it: the rider would prevent any group operating overseas from accepting U.S. funds if they even mention abortion to their clients.

Now let’s be frank about this. No U.S. funds have been spent on abortions overseas since 1973. None. On the face of it, this rider seems geared to stop family planning clinics from offering abortion services at all (which, by the way, they already pay for with their own money). But it reality, it’s meant to withhold necessary operating funds from most family planning clinics. It would kill contraceptive aid to the countries where it’s needed most, at a time when pregnancy-related mortalities are the leading cause of death for women in developing nations. If that’s not designed purely to punish women of color, then I don’t know what the objective is.

It’s been proven time and again that the combination of contraception, education, and employment opportunities for women reduce unwanted pregnancies, lower the number of children per family, and lower the abortion rate. Now we can assume that, by closing off women’s access to all three of these things, right-wing members of the Republican Party may be acting out their repressed desires to commit adultery and to make every woman a “sex slave”–a collective fantasy that makes Clinton’s assignations with Monica seem wholesome by comparison.

Or they could just be stupid sexist bigots. You decide.

The Other Shoe

The ink is barely dry on the 99-year lease Wright Runstad signed for the Pacific Medical Center Building on Beacon Hill–an agreement that turns the publicly owned facility sharply away from its mandated mission of providing accessible low-income medical care, and into a new mission of making oodles of money for a private developer. Now the development company has plans to build more office space on the site.

For those who haven’t been following the deal in ETS! and the local weekly papers: the Pacific Medical Center building–that red brick fortress atop the north end of Beacon Hill–is owned by the City of Seattle and was formerly operated as a public hospital to treat people with no health insurance or those who couldn’t afford private medical care. Federal and state government cuts in health care funding for the poor and the elderly throughout the 1980s made it impossible for the hospital to break even, and eventually it closed down. The building has been vacant–except for a community medical clinic in the basement–for years. But instead of turning it into an assisted care facility for the elderly, as one group proposed, the PacMed Public Development Authority opted turn it into commercial office space instead, hoping that the rental income could be used to fund health care.

But the PDA, influenced by Mayor Schell, turned around and leased the building to the Seattle development company Wright Runstad for 99 years for the dirt-cheap price of $8 per square foot. Wright Runstad says it will rent the building out to Amazon.com at market rates, which range from $12 to $40 per square foot, and make an enormous profit. It’s no coincidence that Wright Runstad beat out other health care-related groups for the lease on the building; Mayor Paul Schell’s housing advisor, Joel Horn, works for Wright Runstad.

Wright Runstad also leased the parking lots surrounding the building; on the north side, parking lots cover prime view property which overlooks downtown, the Olympics, and Puget Sound. Last week, the company announced that it would build three buildings, six stories high, with 240,000 square feet of office space where those north parking lots now sit. The original, towering, historic PacMed building only has about 180,000 square feet of space. A simple comparison shows that Wright Runstad obviously wanted the property to develop it into a “business park,” and not for any noble mission to offer health care money in trade for the PacMed building. The PDA sold out its public mission and, with Paul Schell’s blessing, gave Wright Runstad cheap access to prime view property at bargain basement rates–rates much, much lower than Wright Runstad would pay to purchase or lease land in downtown Seattle for a similar development.

Wright Runstad claims that Amazon.com, the proposed new tenants of the PacMed building, will eventually expand to fill the three new buildings. Yet it’s not at all clear that Amazon.com has even signed a lease for the existing PacMed building, much less the proposed new buildings. In fact, Amazon.com has never turned a profit, in spite of their recent expansion fueled by the company’s inflated stock price. Yet even if they don’t move in, Wright Runstad won’t have any problem finding occupants for the space, since downtown office vacancy rates are at an all-time low of 2-3% (and office rents can go nowhere but up).

This is the typical route for public/private partnerships: the public provides the bulk of the money or assets, and the private business reaps the profits. Presumably Wright Runstad will build its new buildings on public land, collect 100% of the rent, and stick the city with the bill for more neighborhood parking, traffic abatement, widening streets and sidewalks, upgrading sewer and electrical lines, adding traffic signals, and all the other expenses related to dealing with a new office park in the midst of a residential area. Meanwhile, the residents of Beacon Hill can look forward to months or years of construction and, once the “campus” is complete, lots of traffic jams, higher property taxes, less parking, less privacy, more noise, and more commercial development.

The loss of this public land, which should have been used to benefit the neighborhood and the city in general, is a scandal. While companies can sue the government for illegal “takings” when it passes laws to regulate mining, clear-cutting, or the development of wetlands and sensitive ecosystems, the public has no recourse when a PDA or the city engages in an outright give-away–as we have seen with attempts to block the stadium give-aways and the Nordstrom/Pacific Place garage deal. Court cases and appeals to governmental and regulatory agencies have not worked and are not likely to bring an end to unfair public-to-private gifts; it’s time for the public to do something more vocal, more visible, and more pro-active. Whether that means forming watch-dog groups, demanding a moratorium on closed-door deals, or simply doing a little old-fashioned civil disobedience (or a little of all three), we have to do something. We simply have to draw the line somewhere.

Airbus Slaughters Boeing

Last week we were treated to day after day of front page stories in both daily newspapers about Boeing’s participation in the Farnborough International Airshow in England. Airplane manufacturers return year after year to Farnborough to show off their wares for major customers: commercial airline companies and military airplane purchasers.

Of course, Airbus was there, too. While the local newspapers fawned on Boeing and used the show to discuss recent personnel shifts among Boeing management (anything to boost Boeing’s stock price!), Airbus was busy taking home the bacon. As it became apparent that Airbus was the star of the show, the articles on the airshow were pushed back from page one of the daily papers to deeper inside Section A, then finally to the Business page. Each article continued to repeat the same, dull information about Boeing: it took a loss last year, its commercial airplane business is still behind schedule, CEO Phil Condit fired his old friend and head of the commercial airplane business, Ron Wood, etc., etc.

Towards the end of each article were tidbits of more important information that, when added up, certainly spell trouble for Boeing. For example:

Boeing needs to get more orders for its F-16 military plane soon or they’ll have to shut down the production line. In the next year or two, the last of the current orders will be rolled out and delivered. (We can only hope.)

Boeing failed to announce new orders for its commercial 717 model, whose last big order was from Valujet in 1995. Airbus is developing a new model to compete with the 717, and it’s possible that potential 717 customers are waiting for the new Airbus jet to appear before they place orders–with Airbus instead.

Boeing and Airbus have been in a long-running price war that Airbus seems to be winning; commercial airline customers have been getting double-digit discounts on their orders.

The 1996-98 sales seasons for airplanes have been viewed by most industry analysts as a “boom” time for the airplane industry. Yet Boeing is in deep financial trouble–mostly because of their aggressive merger strategy, which has left Boeing unable to meet production schedules.

Condit wants to place the blame for Boeing’s poor performance on Boeing President Harry Stonecipher, the former CEO of McDonnell Douglas, without examining why the Boeing Board of Directors appointed Stonecipher as President in the first place (especially after his stint as top manager of a failing company).

A single year’s poor financial performance and an ailing stock price now means a lot more for large companies than it used to. Boeing and Airbus went into the Farnborough show neck-and-neck. Each company had won about an equal amount of airplane orders in the past year, yet Airbus walked away with a record $12 billion in new orders–about double Boeing’s haul.

To add insult to injury, United Parcel Service chose Airbus over Boeing to build 30 new airplanes with options for 30 more; the order totaled $5 billion.

Industry analysts are predicting that the current airplane boom will come to an end within the next year, leaving Boeing poorly prepared for a downturn in new orders. Yet Boeing is already experiencing that downturn, and neither the Seattle Times nor the P-I have reported it or bothered to examine what it will mean for the local economy–whether it will heighten Boeing’s new dependence on military sales and exports, or whether the company’s poor track record for producing orders on time and its general miasma will impact that, too. We can only hope that Boeing’s woes will help slow down some of the rampant growth-at-all-costs that we’ve experienced in this region in the last few years.

ETS! Farmer’s Almanac

The Real Fair

September is the month for The Fair. Yes, the Puyallup Fair. I practically grew up there, and every year I go back to see the cows and think about what the Fair used to be for me.

I want to talk about the real Puyallup Fair. Not the crowded, sweaty, sore feet, baby-strollers-from-hell, shop till you drop, can’t find a parking space, what-haven’t-we-seen-yet, how much did you buy, did that ride make you vomit, junk-food Fair that we see advertised on TV.

The Fair I want to talk about is the 6:00 AM, pitching out the stalls, taking the blankets off the cows, backing the pickup into the cattle barns, unloading the 10-gallon jugs, milking the cows, loading up the jugs, washing out the portable milking machine, and getting the truck out of there before “the public” shows up at 8:30. For me The Fair was taking a nap with my cow in a stall, leaning on Holly while my whole body rises and falls with her breath. Or scrubbing Holly’s feet at the wash rack as she stands placidly chewing her cud and jangling her wash chain, enjoying the cool water on a hot day.

Or forgetting to take a halter rope with me to the wash rack and deciding to try and lead Holly back to her stall with only the loose wash chain dangling around her neck (which means I can’t signal her to stop or go, or control her if she decides to take a detour on her own). Happily, Holly follows me as if nothing were wrong, and remembers the way back better than I do–navigating by smells, because cows are near-sighted.

Or the dozens of children who want desperately to touch a cow, but are afraid of them because of their size. I have an old trick to make Holly seem less menacing; I put my hand underneath Holly’s neck and scratch her there, so she closes her eyes and stretches her neck with pleasure…and stays immobile long enough for the kids to gently pat her on the side without fear.

I remember the times I woke up early on show days and nervously worked ahead of time, always checking the clock, to make sure my cows were spotless, had eaten just enough but not too much, that their feet were clean and their hair shone…that they were ready to impress The Judge.

That was always the main point of The Fair: to impress The Judge–whether it meant having the best-trained dairy cow, the biggest pumpkin, or the best-tasting apple pie. Like all the other farmers and their families, I was there to show off the work I’d done all summer and all the previous spring and winter. The Fair existed because of our work; all of the other stuff–rides, food, commercial exhibits–were all secondary to what the farmers brought to The Fair.

For those of us who showed animals, there was the added challenge and prestige of working in partnership with animals, especially large ones. A lot of time and effort went into training them. For example, because a dairy cow can weigh up to 2,000 pounds or more, it’s simply impossible to control one with strength alone–no short cuts would do the job. Some people would try to use fear, but find out later that their animals had developed “bad habits” or phobias. Usually, persuasion and reward would work much better.

Good trainers learn how to overcome a herd animal’s natural distrust and fear. Because most people eat meat, cows and horses smell this and immediately identify people as predators. The trick is to appeal instead to the animal’s curiosity, need for physical and social contact (it’s a herd animal, after all), and its reasoning ability. Animals are not stupid; they can see cause and effect, and exercise self-control. And, of course, they also feel, regardless of what scientists say. The best trainers know this and work to accommodate animals’ emotions.

Which brings me to why I still prefer to visit The Fair during the early morning hours. When there are no crowds around, I can pretend that the animals are as much the main event at the Fair now as they were when I was a kid–when there were more of them, and fewer objects for sale. During the peak of the day, when hundreds of people crowd the aisles, stare for a moment at the cows, and then pass on to something more interesting, the animals seem to know that something’s wrong. It’s as if they understand that they’re not at the center of things anymore, that The Fair has changed and left them behind.

And when I see an article in a Seattle newspaper laughing about the hokey animals and produce displays at the Puyallup Fair, I wonder if it isn’t time for me to get out of town for a while.

To hang out with some animals, of course.

The Next Banking Crisis

“Everyone is always shouting, ‘Quickly, quickly, quickly. In my opinion, you should move quickly only when you need to go to the toilet.”–Alexander Bakaev, head of the Russian Finance Ministry’s Department of Accounting Methodology.

It took a while for the details to emerge, but several banks and brokerage houses have lost big in the recent collapse in Russia and the ensuing panic in Latin American stock markets.

The first bank to come forward and report its losses was the Republic Bank of New York, which $10-20 million when the Russian government defaulted on $43 billion in short-term debt last month. This was a shock to other bankers, because Republic Bank of New York is only the 27th largest bank in the U.S.–relatively small–and well-known for its “conservative” lending practices (which says a lot about how unstable the bigger banks are).

Within the past two weeks, larger American banks began to issue their statements. Chase Manhattan and Citicorp both lost about $200 million each. Bankers Trust took a heavy loss, too, but refused to say how much.

Brokerage firms and investment companies dropped a load, too. Merrill Lynch and Morgan Stanley Dean Witter, the two largest securities firms in the world, posted losses related to Russia and volatile markets in Venezuela, Brazil, Colombia, and Argentina. Merrill Lynch’s loss is $135 million. The other losers were: Travelers Group (Salomon Smith Barney), Lehman Bros, and Donaldson Jufkin & Jenrette–a who’s who of Wall Street.

But the bad times are just beginning. U.S. banks and securities firms only had small amounts invested in Russian markets compared to what they own in Latin American debt and securities. The six “money-center” banks–Chase, Citicorp, BankAmerica, JP Morgan, Bankers Trust, and First Chicago–together own about $61.9 billion in Latin American investments, which far surpasses anything they owned in Russia or the whole of Asia. For example, Citicorp’s exposure to Latin America is $15.5 billion, versus a mere $400 million it owned of Russian investments (now mostly worthless). Chase Manhattan’s exposure to just one country–Brazil–is about $3.5 billion.

Notably, Moody’s Investor’s Service, which rates the credit-worthiness of corporate and government debt, downgraded Brazil’s debt only a week ago–a sign that Brazil’s ability to pay is slipping.

Another valuable service that Moody’s performs is its rating of the world’s banks. Each nation’s banking sector is assigned a rating according to its ability to pay its own debts and depositors without needing the World Bank, IMF, or taxpayers to bail them out. The ratings for specific banks are grouped together by nation and an average score is assigned to each country. This only makes sense for smaller countries with smaller banks, because the largest banks tend to be truly multinational, but the scores are interesting anyway. They show how truly dismal the global markets really are.

The scale is a simple one, like a high school report-card, and it’s laughably restrained in how it describes each rating: “A” banks have “exceptional financial strength,” “B” banks are “strong,” “C” banks are merely “good,” “D” banks have only “adequate financial strength” (meaning that they’re just teetering on the edge of collapse), and “E” banks have “very weak intrinsic financial strength”–in other words, they “already receive outside support or are likely to need it.”

A glance at Moody’s list immediately shows that no nation’s banks rate an A (so much for the free markets’ mythical ability to promote excellence). Only three nations rate a B: The Netherlands, Switzerland, and tiny Liechtenstein. A few other nations can claim to be almost “strong”: Spain, Belgium, Canada, Singapore, and Luxembourg. But then the list drops down to the realm of C+ nations–those that are just barely above mediocre: the U.K., Sweden, Germany, and the good ol’ USA.

Unfortunately for U.S. banks, most Latin American nations rank very low on the list. Colombia and Peru hover in the D+ range; Brazil, Venezuela, Panama, Argentina, and Ecuador lurk in the mid to low D range. Interestingly, the Mexican banking system, still heavily in debt to U.S. banks, is fifth from the bottom–way behind Russia (D) and just ahead of South Korea, Thailand, Pakistan, and Indonesia (E). The list, of course, leaves off F nations and neglects to define what an F would mean, but we can guess which countries would qualify and why (i.e., Cuba, Libya, Iraq, Nicaragua, Nigeria, Angola … indeed, most of Africa).

Our analysis of Moody’s ratings of world banks only confirms what we already know: that the wealthy feed on the poor. But, by the same token, the wealthy rely on the poor to provide them a continuous profit–when that begins to collapse, the rich go down, too.

So keep all of this in mind when you read or hear pundits say that the Russian collapse doesn’t mean anything, that it was relatively small, and it won’t have any impact on the U.S. economy. In reality, it’s just another domino in a line that stretches around the globe.

Russia: The Domino Effect

During the Cold War, military propagandists frightened a generation with the “domino theory”: the concept that one by one, Global Communism, eminating from Moscow, would topple countries and bring untold misery to its people. Never happened. Instead, decades later, Moscow itself is another domino, with the Russian people being hammered by the abuses of global capitalism.

You know the world’s economy is on the skids when stockbrokers breath a sigh of relief that China is still isolated from the global economy, so they won’t have to devalue their currency any time soon…well, at least not until next year.

Russia, however, hasn’t been so lucky. Recent developments have left a lot of people scratching their heads and wanting to know how currency fluctuations can destabilize a whole government. It’s not the devaluation of the ruble that’s causing the problem. That’s just the most obvious symptom of a bigger problem: a global deflationary spiral and recession brought on by too much borrowing, wild speculation that’s driven national stock markets to unsustainable highs, and the increasing concentration of wealth in the hands of fewer and fewer people worldwide.

One of the main features of a deflationary cycle is that prices fall, usually for one of two reasons: either people and companies don’t have enough income to pay for the products or raw materials that they need, or there’s an oversupply of products (or both). In the distant past, in order to avoid deflation and recession, it was important under capitalism for companies to pay their workers a decent wage to keep them spending freely, which kept the economy growing at a modest pace. But in recent years, with the onset of the high-tech “global economy,” which can move money around in the form of electronic transactions at the speed of light, is managed by investors doing business over satellite phone-links, and is monitored by a global mass media, no one feels bound to play by the old rules. “Inflation” has become the evil to avoid at all costs, while “modest” growth isn’t enough for the MTV generation of investors.

Today, companies avoid paying their workers more by offering them stock options instead (which, more often than not, turn out to be worthless), while enormous, predatory, monoline banks offer credit cards to an ever poorer population to keep consumption levels high. On a global level, large banks like Chase Manhattan, BankAmerica, and Wells Fargo do the same for corporations, foreign banks, and foreign governments: extending short-term credit at high interest rates to fund risky enterprises.

In turn, high interest payments have boosted the growth of these banks enormously. But, all this outstanding debt also means that the debtors pay enormous amounts of money to service their debt, instead of using it for productive ends. And the money that was borrowed has been going to build speculative real estate, privatize national industries, lay off workers (thereby destroying their buying power), and increase production of the few items that Third World countries can export (primarily commodities like oil, coal, copper, coffee, and other cash crops). Increasing the production of a few commodities produces a worldwide oversupply of those items, and drives prices down–the beginning of the deflationary cycle.

One example of this is the continued downward slide of oil prices, which has been key in bringing Russia to its knees. When a company or country can’t get a decent price for its main product or export, it can’t make its debt payments on time and it has to either borrow more money to make interest payments, or default on its debt. After borrowing $23 billion from the IMF in July, the Russian government still couldn’t pay its debts (or even its own workers), so it defaulted on $40 billion in short-term debt two weeks ago. That $40 billion is owed mostly to foreign banks, especially German and Swiss banks (who, in turn, owe money to U.S., British, and French banks).

The Russian default set off a chain reaction: without that income, Western banks had to sell off other investments to get enough cash to meet their own short-term debts, and the massive sell-off sent stock markets plunging from Russia to Taiwan to Venezuela (another oil-exporting country).

In the coming days, investors will cry about the devaluation of their stocks, but the people who will really suffer are average Russians, who’ve seen the ruble lose over 50% of its value in just one week. Many Russians (miners, teachers, health care workers) are still waiting for back wages and pensions that have been overdue for anywhere from several months to several years. And most Russian banks have refused to let depositors withdraw their savings, because the banks need the money to pay their own debts (proving that banks serve investors before depositors).

While the IMF and Western banks screw with the Russian economy, Russian people are starving–literally standing in line at grocery stores just to look at the foods stocked on the shelves, so they’ll know what to buy as soon as they get their hands on some money. It’s no wonder they want Boris Yeltsin to resign; it’s a wonder they haven’t kicked him out by force. (We go to press on Monday.)

Yeltsin, of course, did what the IMF and Western investors wanted him to do, and what any desperate politician would do in his place–he’s fired his entire cabinet twice this year, in an effort to place the blame on them. Increasingly, it’s becoming obvious that the real problem is the system itself. No one is in control, either in Russia or in the West…and the magnificent soap bubble of the U.S. stock market may be the next one to burst.

 

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