Wednesday, April 2, 2008

Sub-Prime Scam Behind Spitzer Fall

New York State Governor Eliot Spitzer, who resigned after a government leak about his involvement in a sex scandal, was reportedly stung by a White House-Wall Street nexus to silence his relentless criticism of their handling of the current financial crisis. Observers predict at least 2.5 million American families may lose their homes this year due to predatory lending practices protected by the White House.

Mr. William Engdahl, author of A Century of War: Anglo-American Oil Politics and the New World Order, argues in Asian Times Online that Spitzer had an impressive record as State Attorney General for pursuing financial crimes like the Enron fraud and corruption by Wall Street investment banks during the 2002 dotcom bubble. He made powerful enemies, such as Hank Greenburg, former head of AIG insurance group, and Wall Street. As New York Governor, Spitzer was attacking Bush administration complicity in fixing covert bailouts for Wall Street friends from taxpayer funds, at the expense of ordinary homeowners, when the ‘scandal’ broke and drove him out of office.

Spitzer’s crime was his harsh condemnation of the White House for the current financial disaster. In February 2008, he testified before the US House of Representatives Financial Services subcommittee on problems in New York-based specialised insurance companies, called “monoline” insurers. He told CNBC he blamed the crisis and its broader economic fallout on the Bush administration.

He said years ago the US Office of the Comptroller of the Currency (OCC) went to court and blocked New York State efforts to investigate the mortgage activities of national banks. The OCC did not stop questionable loan marketing practices or uphold higher underwriting standards. The crisis could have been avoided if OCC had done its job, but the “Bush administration let the housing bubble inflate and now that it’s deflating we’re dealing with the consequences. The real failure, the genesis, the germ that has spread, was the sub-prime scandal,” he said. Fraudulent marketing and very low ‘teaser’ mortgage rates that ballooned higher should have been stopped. When mortgages are marketed, it is mandatory to ensure the borrower can afford to repay the debt; these ground rules were ignored.

Spitzer was doomed with a signed article in the Washington Post on February 14, 2008, titled “Predatory Lenders’ Partner in Crime: How the Bush Administration Stopped the States from Stepping in to Help Consumers.” He blamed the government for the sub-prime crisis: “In 2003, during the height of the predatory lending crisis, the OCC invoked a clause from the 1863 National Bank Act pre-empting all state predatory lending laws, thereby rendering them inoperative. The OCC also promulgated new rules that prevented states from enforcing any of their own consumer protection laws against national banks.” Indian readers may note that national banks in America, including the Federal Reserve, are private banks, not government-owned.

The former New York Governor alleged the Bush administration failed to protect consumers, but “embarked on an aggressive and unprecedented campaign to prevent states from protecting their residents from the very problems to which the federal government was turning a blind eye.” He accused President Bush of being the “predator lenders’ partner in crime” and a fugitive from justice. He decided to launch a campaign to take on the Bush regime and the most powerful financial powers on earth, thus scripting his own exit.

Diplomat Bhaskar Menon feels there was a political method in the sub-prime mortgage crisis. He argues that since Alan Greenspan began lowering interest rates to get the US economy out of the post 9/11 recession, the descent into economic madness can only be explained as politically motivated. The sub-prime mortgage mess has two elements: first, people with little capacity to repay were given mortgages; second, the mortgages were packaged into investment grade securities.

For unknown reasons, the most sophisticated bankers in the US and Europe, insurance companies and hedge funds plunged deep into the sub-prime mess, and are now saddled with bad debt. New York Times reports an arcane form of risk insurance in the bond market has led to an inverted pyramid of obligations amounting to $16 trillion. Other unconfirmed reports say the funds available to the FDIC, which guarantees inpidual bank deposits, are a quarter of what is needed in the event of a general financial collapse. The ratio of American personal debt to GDP is the highest ever at $3 trillion; if mortgage debt is included, personal debt is over $13 trillion, almost equal to the $14 trillion GDP. America can take the entire international financial system to ruin.

Menon says the political nature of events can be understood by looking at Asia. The American invasion of Iraq in 2003 and the subsequent mess in that country was not, he claims, the result of ignorance or miscalculation, but a deliberate attempt to dismantle Iraq. Add to this the propaganda over Iran’s nuclear programme, the deteriorating situation in Afghanistan and Pakistan, the fragility of Nepal following brutal civil strife, insurgencies in India’s resource-rich and strategically important places, and the current turmoil in Tibet, and you have a macro-picture of Asia being destabilised. It needs hardly to be added that all fingers point to Washington as the source of instability.

One reason could be to destabilise China, because a stable world and peaceful Asia will made China a formidable power. But if the world economy collapses and there is unrest in Asia, Beijing will be cornered. This will also threaten the stability of South East Asia and India. The Islamic world is already in turmoil; matters could get worse with rising regional distress. No doubt America and Europe would also suffer, but their elites have the ability to shift the cost of distress on the general masses while cushioning themselves perfectly. America’s rich have grown richer with every world or regional war! What is more, the Euro-Americans would have staved off an economic and political challenge from Asia. This is now the challenge before Asia’s ruling elites - do they still believe their future lies with the West rather than with their own nations and peoples?

Saturday, March 8, 2008

India’s accelerating economic growth is a matter of celebration. But many have expressed concern about the distributional impacts of the growth process. The vulnerability of India’s large population below poverty, the gap between the rich spending and the poor spending capacity have become the biggest failure of globalisation.

The big story is that after globalisation, between 1993 and 2008 the rich-poor gap has widened; the growth was more equitable during the previous decade. Has this widening gap got anything to do with the priorities set by the reformers ? Or is it simply the result of a process of development that in any way is bound to result in such disparities ?

Closer look at the World Bank Country Strategy will reveal that the focus is more on the profitability on investment. And on its trickle down effect on general poverty alleviation. Equitable distribution of resources, elimination of regional disparities and better opportunities for the poor are not part of this globalisation drama. This is so because the corporates are allowed a whole lot of concessions whereas the small and marginal enterpreneurs are given a raw deal. They are harassed by an unfriendly tax regime, inspector raj and unequal competition from big business. There is no statutory insistence on corporate social responsibility. The corporates are allowed to increase their profit earning by many hundred times; they spent hugely on saturation advertisements and lavishingly on political lobbying. But the smaller entities suffer from paucity of funds, labour regulations, difficult access to credit, infrastructural constraints and administrative interference.

The International Monetary Fund (IMF), India: Selected Issues, 2008, has at last admitted that 17 years after liberalisation the gap between the rich and the poor in India has widened. This has happened more under the UPA in the last four years. This is at the heart of India’s current political debate. Decisive reforms are required to ensure continuing economic growth, yet the ability of the government to pass and sustain reform momentum depends on popular support.

The study admits: “India is enjoying a period of unprecedented growth, with real GDP rising at over 8 percent per year for the past four years, making it one of the world’s fastest growing economies. Yet India still has the largest concentration of poor people in the world. The extent to which India’s poor have been able to take up the opportunities provided by an expanding economy and contribute to its expansion is an important question for the well-being of millions…If large parts of the populations are left behind even if only in relative terms, the viability of future reforms may be threatened… Overall consumption inequality increased in the 1990s, particularly in urban areas, and within almost all states according to a variety of measures. While inequality was stable (in urban India) and declining (in rural India) in the 1980s this trend was reversed in the 1990s. (emphasis added) As real consumption growth was significantly higher in urban areas, the urban-rural gap widened. The change in the distribution of consumption across households can explain the lower than expected poverty reduction. Despite the pick-up in consumption growth rate from the 1980s to the 1990s the decline in poverty incidence remained roughly unchanged... Anecdotal evidence suggests that wealth inequality may be even higher…There is no evidence of correlation between the speed of growth and its inclusiveness, however the sectoral composition matters. Faster growth in services is associated with a larger gap between the consumption growth of the poor and the rich in favour of the rich”. (P. 113-116).

This study further says that there was a 100 per cent increase in wealth in the past four years which India witnessed from three key sources, the equity market, the residential property market and gold.

With four to seven per cent of the population participating in the stock market, 47 per cent of the population owning a pucca house and the top 34 per cent of households holding 71 per cent of the value of consumer durables including gold and jewellery, it is likely that the bulk of wealth accretion was concentrated within a very small segment of the population. There is no poverty of crocodile tears. It was the World Bank-IMF dictated policy that resulted in the uneven distribution. But they prescribe more of the same medicine.

It is interesting to note that this study accepts the fact that under globalisation the distribution of wealth was unequal. The removal of poverty in the 1980s was through a more inclusive growth, distribution was better compared to the post-reform from 1993-94 to 2004-05. In the 1980s changes in the distribution of income enhanced the effect of growth on poverty reduction and the distribution of income was more in favour of the poor. On the other hand during the post reform period, the decline in urban and rural poverty would have been substantially higher if the distribution of growth was more equitable.

The new market-oriented framework governing India’s economic life introduced a marked change in the way the gains from growth were distributed across India’s households. Simply put, pre-reform growth meant relative reduction in poverty. Post-reform growth meant large concentration of wealth in fewer hands.

The chimera of the UPA’s affirmative action and the minority quota schemes in the name of inclusive growth has to be seen in this light. In fact it is again a World Bank-dictated ploy to hoodwink the poor and silence rebellion against this unequal pattern of growth.

The tragedy is inbuilt into the system. The IMF study says, “The shift in the growth patterns of consumption across the income distribution is striking—in almost all states growth became less equalizing in the 1990. From 1983 to 1993-94 growth in consumption at the bottom of the income distribution outpaced growth at the top, especially in rural India. In urban areas, growth was remarkably distribution-neutral. As India launched market-oriented reforms in 1991 and overall growth accelerated the shape of the growth incidence reversed, with far faster growth at the top than the bottom. In fact, though aggregate growth was significantly higher in the 1990s (even when measured in the NSS data), the bottom 50 percent of India’s population experienced faster consumption growth in the previous decade. Similar to the previous period there was a substantial difference between the experience of urban and rural areas, with a stronger pro-rich bias of growth in urban areas.” (during the post reform period) (p. 116)

The studies by the NSS on the 61st round of Household Consumer Expenditure and the report of the National Commission for Enterprises in the Unorganised Sector on Conditions of Work and Promotion of Livelihood in the Unorganised Sector (August, 2007) reveal a more disturbing reality. What is glaring is that the IMF study re-emphasises the pattern. The government has not so far explained the reasons for this disparity.

The official definition of inclusiveness is a growth process in which people in different walks of life feel that they too benefit significantly from the process. The unevenness in consumption growth rates across households is the measure that defines this disparity. Inclusiveness or pro-poor bias of growth thus is the difference between the consumption growth rate of the poorest 30 per cent and richest 30 per cent of Indians.

Is there a direct relation between the growth of disparity and reform ? Do economic policies affect the distribution of the benefits of growth in the Indian context ? That is for next week.

Abrasive Posturing of MNS

The February 17 issue of The Week has a cover story on Raj Thackeray, self-appointed leader of the Maharashtra Navanirman Sena (MNS) who has been leading an attack on North Indians in the approved manner of goons. Raj is a nephew of the Shiv Sena leader Bal Thackeray who, in his time, had led a crusade against South Indians in Mumbai. The cover picture of Raj portrays him, very precisely, as a Hitler, dressed like the vicious German dictator of the 1930s. Raj has been venting his strong anti-North Indian feelings in recent times attracting the attention of the Mumbai police and the disgust of decent citizens. Raj has been especially critical of Amitabh Bachchan, wanting to know what Bachchan has done for Maharashtra. Raj forgot to notice what Bachchan has done to India as a whole, which is more than what all the Thackerays put together have done for the country.

The Hindu(February 6) described Raj’s “ranting” as “a crude and opportunistic attempt to whip up Marathi regional chauvinism … the expense of imagined aliens, mostly hapless migrants from UP and Bihar.” “Hopefully” said the paper “this unsavoury episode will peter out but what remains of concern is the threat to the identity of Mumbai whose cosmopolitan spirit remains the pride of India even as its greatness reflects the hard-work, talent and contributions of millions of people from several states”.

The Times of India (February 12) wanted to know what was the thinking of the ageing leader of the Shiv Sena, Bal Thackeray, and said he must clarify his views. It asked: “Does he want to fall back into old politics or does he want his party to move ahead to an inclusive image more suited to the face of a great cosmopolis?” This was because Bal Thackeray’s son and the Shiv Sena’s executive president Uddhav sounded a warning to ‘outsiders’ that they should not apply for jobs in Mumbai and if they did they would be packed off.

The Chandigarh-based The Tribune (February 5) pointed out that Mumbai is not “just another Maharashtra town but the heart of India (and) it is the duty of everyone who loves it to make an effort to make the heartbeat stronger”. Raj Thackeray, the paper said “is certainly not doing that” but is doing the exact opposite. “It is imperative” concluded the paper, “to stop him and others of his ilk in their tracks”.

Gomantak Times (February 8) said that Raj’s “abrasive posturing in Mumbai is almost certainly a desperate ploy to shore up the sagging fortunes of his party” and that “his own interest, not the welfare of the Thane-Mumbai belt, is the motive behind his actions”. Predictably the paper said, the Congress and the Nationalist Congress Party, coalition government partners, are playing the waiting game, hoping that Raj will do enough damage to the Shiv Sena vote bank. Apparently it is not the interests of India in this regard that matters with the Congress as much as chances of its winning elections. When will we have a truly great leadership that goes beyond narrow political interests and looks for the concept of One India One People prevailing in the land? Raj, one hopes, will get his comeuppance soon—and the sooner, the better. People from all over India are watching the Mumbai scene with subdued feelings.