Bush Mess Endangers the Economy and Much Else

The United States came into existence in a violent uprising against one King George. It is ironic that having risen to unprecedented global power, prestige and respect through the twentieth century, having defeated all her adversaries in the last century, it should cause so much to come undone in the reign of another George.

After seven years, it is difficult not to come to the conclusion that the present American administration is imbued with a level of distilled cynicism that is unprecedented – and fatally self-defeating. That the amorality of pure utilitarianism – about ends justifying the means – do not deliver any lasting benefit to its practitioners was made more than clear in the collapse of Stalinist rule-by-repression. The lesson however continues to be lost on even those who won the Cold War. Since it took office in early 2001, the moment is not seen as a receptacle of problems needing resolution, but as a bag of opportunities that can be used to further a narrow and specific agenda of choice.

In early 2000, the US economy was doing quite well and there appeared to be little to be overly concerned with – barring the warnings about Osama bin Laden. These were ignored, perhaps because it was unclear what agenda could be furthered by seizing on them. Oil prices had risen to $30 per barrel and the White House seized on this as an excuse to open the Arctic Wildlife Refuge up for exploration. The Vice President (it is said also the de facto Chief of Staff and adjunct Decider-in-Chief) headed a group to look into these issues.  When US Congress wanted to know what the former boss of Halliburton was discussing with his oil company friends, executive privilege was invoked and the minutes remain hidden to this day from the eyes of the legislature.

But this was a minor affair. On September 11, 2001, Osama had his minions fly four planes filled with people into buildings filled with thousands more. Bin Laden was lording it over Afghanistan and protected by Pakistan. The US did go into Afghanistan, but if Mr. Paul O’Neill, the then Treasury Secretary is to be believed, from the very first day, it was Iraq that was on the table. Within a few months, the US with its “coalition” invaded Iraq in search of non-existent Weapons of Mass Destruction. A study released by the Centre for Public Integrity has listed 935 times when the Administration made false statements after 9/11 about the threat from Iraq. Thus the tragedy of 9/11 served as an opportunity to take out Iraq. Whether it was to prove a point vis-à-vis the first Bush administration, or to try out the US army in a real battle, or to help US oil interests, or whatever harebrained idea – that does not really matter. What matters is that the principal outcome of 9/11 was the war in Iraq. Even if you look at it in a narrow US-centric way – the consequences have been dreadful for its own interests, image and global power.

The media widely reported that besides the war in Iraq, the other main reason for the Republicans to lose the elections to the US Congress in 2006 was the bungling in the aftermath of Hurricane Katrina. Which should not surprise, for an adequate response to the hurricane would pre-suppose a functional administration, not one seemingly always on the hunt for an opportunity to advance its partisan agenda.

We then come to the current financial crisis. Millions of loans were extended for buying homes without proper documentation or filtering for the ability to pay. The loans were packaged into complex products and sold down. This went on for many years since 2002. By early-2006 it was clear to almost anybody associated with the business that there was a serious crisis brewing. In August 2007, the game came completely apart. During all of these years the federal regulators – the US Federal Reserve, the Office of Federal Housing Enterprise Oversight etc. – appear not to have done much, except keep their fingers crossed. On August 31, 2007 President Bush announced a new program: “FHA (Federal Housing Administration) will launch a new program called FHA-Secure. This program will allow American homeowners who have got good credit history but cannot afford their current payments to refinance into FHA-insured mortgages. This means that many families who are struggling now will be able to refinance their loans, meet their monthly payments and keep their homes.” So what happened then?

FHA claims in its website that “more than 40,000 households have refinanced” under the FHA Scheme. Reuters however reported that “according to data compiled by the Department of Housing and Urban Development” and provided to the news agency “between September and mid-December only 266 such (sub-prime) borrowers have cleared all FHA hurdles”. The problem it is believe is that the FHA is using an approach that selects not sub-prime borrowers, but those not so: Akin to reaching flood relief to Rajasthan when Orissa has the floods. Undeterred, on December 7, 2007, the US administration announced another program called Hope Now that would help 1.2 million homeowners. Given the track record this estimate of millions may also be off by many orders of magnitude and end up in the hundreds.

The subprime crisis has caused an enormous crisis in the international financial system. Bankers and regulators in the rest of the world are aghast at the extent of regulatory carelessness and official unconcern at the trillions of dollars of suspect securities that were being created right under their noses. When President Bush announced the FHA-Secure program this columnist believed that the rot would be stemmed. For in a crisis like this, all that is needed is some refinancing support so that asset prices do not collapse, bringing down with it other parts of the market and eventually the economy. Stemming the collapse permits a level-headed sorting out later. This is the rationale for the “lender of last resort” in the banking sector – namely the central bank – and why normally regulatory power is also vested in it.

That was of course not to be. An idea of setting up of a $75 billion fund to be co-ordinated by the US Treasury to help beleaguered banks tide over the worst of the crisis was abandoned for no clear reason. The consequence is what we have today: Leading US banks are on the rope seeking capital from the Arab Gulf and East Asia; the US Federal Reserve in an extra-ordinary meeting slashing the policy rate by 75 basis points (bps); dire warnings of recession and the White House talking of $150 billon of federal assistance. There will be negotiations on the latter – the clear purpose is to try to get the Democrats to agree to make the Bush tax cuts permanent. That US banks are scrounging in Asia for capital will perhaps be finessed into the argument that a dramatic rescue package is needed just now. Or you are responsible for the consequences. Reminiscent of the “45 minutes” that it would take Iraqi missiles to hit Britain – a lie that convinced many doubters in 2003.

Make the tax cuts permanent, nothing else matters. As Machiavelli once wrote: “be a great pretender and dissembler; and men are so simple …. he who deceives will always find someone who will let himself be deceived.” Except that it does not work. US foreign policy interests have been devastated by the lies about Iraq. The consequences of winning the battle for the Bush tax cuts may be about losing the war for economic pre-eminence. And thus perhaps the West will be un-won.

(The author is Economic Advisor, ICRA)

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To be published in Mail Today, Friday, 25 Jan. 2008