The US economic meltdown

Empowering Weak & Oppressed

Zafar Bangash

Dhu al-Qa'dah 02, 1429 2008-11-01


by Zafar Bangash (Reflections, Crescent International Vol. 37, No. 9, Dhu al-Qa'dah, 1429)

By the time these lines are read, the US presidential election would be over. Current trends suggest Barack Obama would be the next president unless some unforeseen catastrophe or electoral fraud like those in 2000 and 2004 occur. Obama will inherit the biggest economic mess in US history since the 1930s depression. How did the US, the largest economy in the world, come to such a sorry state?

Few commentators have touched on the genesis of this crisis: in the immediate aftermath of 9/11, US President George Bush urged Americans to go out and shop. They needed little prodding: Americans have traditionally spent more than they earned. Their guiding mantra is shop-till-you-drop. Wall Street bankers pursued even more untenable schemes without any oversight. First, people were encouraged to borrow money to buy houses with no ability to pay. This led to the sub-prime mortgage crisis. Mortgage lenders literally forced people to borrow beyond their means, primarily because agents earned huge fees. Getting rich quick with easy money was the name of the game. But it was not merely the greedy bankers; US officials themselves encouraged the creation of a casino economy.

Billions of dollars were loaned to people and these mortgages were then sold to other banks, underwritten by equally dubious arrangements that were declared sound. Alan Greenspan, former chairman of the US Federal Reserve Bank (incidentally, a non-governmental private institution), boldly pronounced in 2004: “Not only have individual financial institutions become less vulnerable to shocks from underlying risk factors, but also the financial system as a whole has become more resilient.” He was referring to what is called derivatives, a new financial instrument that even the smartest investors did not fully comprehend. George Soros, a leading financier, avoided derivatives because he admitted he did not really understand how they worked. Felix Rohatyn, the investment banker who saved New York from financial catastrophe in the 1970s, described derivatives as potential “hydrogen bombs” while Warren Buffett called them “financial weapons of mass destruction.”

Greenspan, however, fiercely protected derivatives from scrutiny in Congress or on Wall Street. Deregulation was vigorously promoted to enable Bush’s cohorts to make money. Wall Street bankers were asked to regulate themselves. Even as financial institutions faced serious risks from over-exposure, CEOs on Wall Street earned annual bonuses of $31 billion. In this free for all, a number of financial institutions—Fannie Mae and Freddie Mac, Merrill Lynch, Morgan Stanley, Lehman Brothers, Goldman Sachs, AIG et al—literally went belly-up. The $700 billion rescue package approved by Congress, under the threat of martial law, no less, by Bush may still not be enough. The derivatives market has ballooned to $531 trillion while the global GDP is $60 trillion. Vast new powers have been granted to Henry Paulson, the US Treasury Secretary, to manipulate the market. He has become America’s financial czar with few oversights. He says trust me, but the man who got a $38 million bonus when he left Goldman Sachs as CEO in 2005, is hardly trustworthy.

There are other factors as well that have contributed to the US economic meltdown. The wars in Iraq and Afghanistan have consumed nearly $1 trillion so far; the actually costs would be $3 trillion. Ceiling on the mountain of debt at $9 trillion has just been raised to $11 trillion; there is also the recurring trade deficit. Not only the US but the entire capitalist system is collapsing because the contagion has spread to Europe and the Middle East as well. This will have serious repercussions globally, both good and bad. On the negative side, the US meltdown will affect other countries, especially in the Third World, that do not have the capacity to withstand such financial shocks. Washington has a nasty habit of making others pay for its greed-driven follies. Even the market forces will punish them; if the US is unable to buy, countries that export commodities will suffer a decline in income. Others—like Egypt, Pakistan and Jordan, but not sacred cow Israel—that are dependent on US largesse will suffer even more. A bankrupt US will not have the money to pay them.

On the positive side, US arrogance will be deflated because it will no longer have the ability to carry out military adventures on such a grand scale as those in Afghanistan and Iraq. Already World Bank President Robert Zoellick has admitted that the G-7 group has become obsolete and that a new steering group that would include China, Brazil, India, South Africa and Saudi Arabia should be formed. Neither the International Monetary Fund nor the World Bank is capable of solving the current financial crisis. The days of US unilateralism are over. Allah works in His own mysterious ways. Who would have imagined only a decade earlier that the “sole superpower” will collapse so soon. Greed and imperial hubris blinded Washington’s cowboys to overstretch themselves to breaking point. While the mujahideen in Afghanistan, Iraq, Lebanon and Palestine held the US and zionists at bay, it was the stupidity of US rulers themselves that brought the entire temple down upon their heads.

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