Friday, October 27, 2006

10/27 Global Strategic Bargain: Positive Reality Therapy for America’s Critical “States of Denial” (short version)

October 27 – (Econotech FHPN) (Nov 1: I have revised this article to include a new section, further material on leveraged buyouts in several sections, and other additions/revisions, noted in the list of sections below.

This article is the first eight sections (approx. 6,200 words) of a longer article (approx. 17,100 words) consisting of the 18 sections listed below. This abbreviated version can be accessed at link, the full article can be accessed at link. For further details, especially on the critical subject of hedge and private equity funds and investment banks, there is also an extensive set of news summaries for the past month from the mainstream media posted on Oct 24 at link.)

* A New Global Strategic Bargain of Energy and National Security -- Revisions Added
* Time to Reconsider Worldview Based on U.S. as Hegemonic Sole Superpower
* "Sensible Center" Historic American Political Realignment Needed -- Revisions Added
* Attempt to Explain America's Massive Denial of Basic Economic Reality -- Revisions Added
* It's the Hyper-Speculative Global Financial Markets -- Revisions Added
* Return on Leveraged Legal Looting (ROLLL)-- New Material Added
* Self-Described "Schmucks" of the Financial World -- New Material Added
* Historical Context for a New Global Strategic Bargain

* World More Dangerous With Loss of U.S. Power and Domestic Political Stalemate
* What Would Happen Politically If the Housing Bubble Really Collapsed?
* Billions of People Without Clean Water, Basic Sanitation, etc.
* Equity Markets Keep Rising, Regardless of Short-term Rate Expectations
* No Domestic Opposition to Global Hyper-Speculators -- New Material Added
* Europe and Japan Offer Little Opposition to Global Hyper-Speculators
* Whither China?
* Whither Russia?
* Time to Regain America's Moral Authority, Credibility and Trust -- New Section Added
* Any Hope for the Dismal State of Politics in America? -- Revisions Added

“North Korea's declared nuclear bomb test program will increase the incentives for other nations to go nuclear, will endanger security in the region and could ultimately result in nuclear terrorism … demonstrates the total failure of the Bush administration's policy toward that country. For almost six years this policy has been a strange combination of harsh rhetoric and inaction.” (William J. Perry, Secretary of Defense from 1994 to 1997, later Clinton’s Special Adviser on North Korea, WP, Oct 11)

“the Bush administration sees diplomacy as something to be engaged in with another country as a reward for that country's good behavior. They seem not to see diplomacy as a tool to be used with antagonistic countries or parties, that might bring about an improvement in the behavior of such entities, and a resolution to the issues that trouble us. Thus we do not talk to Iran, Syria, Hizballah or North Korea. We only talk to our friends -- a huge mistake.” ("Bush's Blunder in North Korea," by Donald Gregg, was a CIA official since 1951 and a liaison to President Carter's NSC and, National Security Adviser to VP George Bush and U.S. ambassador to South Korea from 1989 to 1993, now chairman of the board of the Korea Society, WP, Oct 9)

“[North Korea’s] test appears to represent a stunning failure for the Bush administration's stated goal of blocking the spread of weapons of mass destruction, the foundation of its security policy." (WSJ, Oct 9)

“the American era in the region has ended … Much more likely is the emergence of a new Middle East that will cause great harm to itself and the world … What brought it to an end? Topping the list is the Bush administration's decision to attack Iraq and its conduct of the operation and resulting occupation … Other factors include the demise of the Middle East peace process, a failure by traditional Arab regimes to counter the appeal of radical Islamism, and globalization.” (Richard Haass, Director of Policy Planning in Powell’s State Dept, now President of the Council on Foreign Relations, FT, Oct 17)

“With the Middle East immersed in its worst crisis for years, we call for urgent international action towards a comprehensive settlement of the Arab-Israeli conflict. The outlines of what is needed are well known.” (Newspaper ad signed by numerous famous former global leaders, FT, Oct 4)

“Israeli officials and politicians across the political spectrum are convinced Iran represents an existential threat … Saudi Arabia, in what was considered a dramatic move several years ago, offered to get much of the Arab world to recognize Israel in exchange for a withdrawal from all territory Israel occupied during the 1967 war. Israel rejected the idea.” (WSJ, Oct 3)

“Senate Majority Leader Frist said Monday that the Afghan war against Taliban guerrillas can never be won militarily and urged support for efforts to bring "people who call themselves Taliban" and their allies into the government. [Frist] said he learned from briefings that Taliban fighters were too numerous and had too much popular support to be defeated on the battlefield. "It sounds to me ... that the Taliban is everywhere."” (AP, Oct 2)

A New Global Strategic Bargain of Energy and National Security

N. Korea’s nuclear test, the ongoing deep morass in Iraq, Afghanistan, very high and very volatile energy prices, among many other things, indicate two critical facts about the state of the world today which should by now be crystal clear to anyone not in a deep “state of denial” (to borrow what I consider to be the inaccurate title of Bob Woodward’s new book, explained at the end of this article).

First, the U.S. can, and should, not attempt to police and remake the whole world unilaterally. Second, leading nations need to more rationally, fairly share access to energy, to help create more just, sustainable global economic development.

With a rather belated recognition and acceptance of this glaring reality by the world’s leaders, I believe that there would be the possibility of a new global strategic bargain between, most importantly, the U.S. and China, with the EU, Japan, Russia, India, Saudi Arabia and others also playing critical roles. It would not have to be negotiated nor presented as such, I would prefer gradual but steadfast diplomacy with this bargain in mind.

Bluntly put, the U.S. can not ask, let alone try to pressure or cajole, major powers such as China, the EU and Russia, to act on America’s behalf against its own designated enemies, e.g. N. Korea and Iran, which these other powers may not necessarily wish to confront to the same extent as the U.S. does right now, without offering something very significant, beyond its market access and appreciation, to these major powers in return.

“Because of North Korea's track record as an eager exporter of weaponry, some experts are more worried about the government in Pyongyang spreading nuclear technology to other "rogue" nations than about the possibility of it launching a nuclear attack … most experts said the country would probably refrain from doing so." (LAT, Oct 21)

“Whether the NPT survives this combined assault depends on how the big powers rise to the challenge: by co-operating to press both regimes to abandon their nuclear exploits and uphold the rules, or by competing in the wider struggle for regional influence … North Korea is dangerous, but isolated. An Iran with nuclear weapons, says one senior Bush administration official, would be a “game-changer”.” (Economist, Oct 19)

“Ms. Rice's immediate challenge is to get real cooperation from North Korea's neighbors. Yet she appeared to make little progress on that front during her Asia trip, which ended Saturday.” (WSJ, Oct 21)

“As Rice left China today for Russia, her goal of uniting Northeast Asia in a strong, unambiguous punitive stance against North Korea remained elusive … Rice sought Friday to lower expectations … Beijing believes that if it is identified too closely with a U.S. hard-line stance, it loses the opportunity to broker a solution in the future, with the international prestige that entails.” (LAT, Oct 21)

The essence of a possible global strategic bargain is that the U.S. will greatly scale back its so far unsuccessful efforts at regime change in the “Axis of Evil,” to remake the Middle East, Northeast Asia, etc, and rather share influence in critical regions with major powers, including regional ones.

In the case of the Middle East, this would modify a sixty-year U.S. policy of hegemonic domination of by far the most important source of oil. In the case of East Asia, it would simply accept the reality of China as a leading power with its own strong interests and influence, and try to make the best of it.

In return for this change in current U.S. policy, the other major powers, especially China, the EU and Russia, will fully, unreservedly commit to do all that they can to help stop nuclear weapons proliferation, starting with N. Korea, while the world transitions over the next decades to more sustainable sources of inexpensive, clean energy.

I have long believed, and my web site’s tag line, “finance innovators, not speculators” reflects this, that the most important struggle in the world today is not Bush/Cheney’s “war on terror.” It is about who will control the “commanding heights” of the global economy in the 21st century, via its monetary/financial and energy systems.

These global production and financial networks need to be closely linked as part of this new global strategic bargain, in which the U.S. will once again earn its way, rather than relying upon much of the world’s development capital. The “war on terror” and nuclear non-proliferation will naturally be part of global economic development and security, there can not be global prosperity without global peace and security.

“Global leaders must find a way to unravel lop-sided trade and investment flows or risk a slump in the U.S. dollar that would create havoc for the world economy, ADB Chief Economist Ali said. An international agreement along the lines of the 1985 Plaza Accord ``on a bigger scale'' is needed to unwind the imbalances that have resulted in the U.S. current account deficit swelling to a record $805 billion.” (Bloomberg, Oct 3)

Whether or not this "Plaza II" suggestion is a way to go I'll leave to the true international economic and monetary experts, the unbiased ones that is. I believe that, as I wrote in my Sep 26 article link:

“Reforming the monetary/financial system to make the U.S. earn its way once again, as it had proudly done for two centuries, would profoundly change everything, including the low image of the U.S. in the world and the social/political mass culture of this nation. Wouldn't U.S. corporate innovation become focused on what the rest of the world really needs? And wouldn't Americans be proud in doing so? Wouldn't that be a more positive image and vision for the world?”

Frankly, by running such unprecedented current account deficits, which draw upon the world’s savings that could otherwise go towards global economic development, and by its less than 5% of the world's population consuming about 25% of the world’s oil, the U.S. has lost much moral authority in the eyes of the rest of the world (along with other reasons).

The U.S. asking the rest of the world to do its bidding is like a credit junkie telling his card companies what to do. Likewise with energy, how could the U.S. with a straight face tell China, with 20% of the world's population, and others which nations are politically correct enough for it to cut energy deals with?

Not only is the U.S. heavily dependent on East Asia, and the Arab Persian Gulf, for financing its massive twin deficits. It is also heavily dependent on the former, most especially China, for its supply chains and productions networks.

Indeed, it may not be completely far-fetched to say that East Asia and the Arab Persian Gulf are essentially helping to finance, via the twin deficits, U.S. military presence and operations in regions whose stability is of paramount importance to those major powers with their own strong interests (and influence) in those regions and in stable economic development.

This is an unprecedented situation for a country purportedly trying to dominate the world as the hegemonic sole superpower, and is clearly not a sustainable strategic position. Rather, it means that the U.S. and its creditors and producers will need to cooperate ever more closely in the future, especially on key issues involving energy security and nuclear proliferation.

The sooner U.S. leaders accept and act on that basic reality of the U.S. strategic situation, the better off the nation and world will be.

Time to Reconsider Worldview Based on U.S. as Hegemonic Sole Superpower

Most, perhaps all, in the U.S. foreign policy “establishment” would balk at this bargain, especially when it comes to sharing U.S. power in the Middle East.

One of the biggest “states of denial” that extends clear across the ideological spectrum of the U.S. elite, from Kissingerian “realists” to neocon “idealist” Jacobins, is that the U.S. is the world’s unquestioned, unchallenged superpower or hegemon (sometimes called hyper- or uber-power in Europe), its current global dominance greater than even the Roman and other (in)famous empires of the past.

Since the breakup of the Soviet Union, I have never read, heard or seen even a single solitary public dissent (what is said in private I’m obviously not privy too) from a leading economic, foreign policy and national security expert, of any ideological persuasion, from this characterization of the U.S. as unprecedented, virtually unlimited superpower, regardless of how strongly critical various members of the elite may be of important aspects of U.S. foreign/military policy at any given moment.

Yet it is precisely this hubristic delusion of America’s unprecedented, unlimited, and unchecked power on the part of Bush, Cheney, Rumsfeld and the neocon’s that has now gotten the U.S. into the huge mess described by leading bipartisan former government officials and mainstream "establishment" experts quoted at the very beginning of this article.

The harsh reality is that the U.S. of today has nowhere near the economic, industrial, technological and most especially financial power in the world that it did in 1945, when an ailing FDR met with Saudi Arabia’s first monarch, Ibn Saud, on a Navy ship in Egypt to seal the foundation "oil for security" deal of the postwar era between the two nations, nor even in 1980, as U.S. industrial descent was already picking up steam just before the disastrous precipitous decline in Reagan's first term, when the “Carter Doctrine” of unchallenged U.S. control of the Persian Gulf was explicitly declared.

The accelerating decline in key economic parameters of U.S. power, military excluded where the U.S. almost outspends the rest of the world combined, since that time has become so glaringly obvious by now that it seems to me it takes almost deliberately willful blindness on the part of the U.S. elite to continue not to see the evidence and deny it. How can one read any leading news publication without noticing what is happening to the underpinnings of U.S. power? One could find many quotes any week from the mainstream media like the following recent ones:

“During the past five years America has accounted for only 13% of global real GDP growth, using purchasing-power parity (PPP) weights. Asia has accounted for over half of the world's growth since 2001. Even in current dollar terms, Asia's 21% contribution exceeded America's 19%.” (Economist, Oct 19)

“IBM has moved its global procurement headquarters to southern China from New York to ``capitalize on emerging market opportunities.'' IBM spends 30 percent of its $40 billion annual procurement in Asia. This is the first time the company is moving the headquarters of one of its biggest divisions to China … The move ``places us closer to the core of the technology supply chain.”” (Bloomberg, Oct 12)

“Azim Premji, chairman of Wipro, the Indian outsourcing group, has warned that the US faces a more acute skills shortage in information technology than India, blaming failings in America’s education system and restrictive immigration policies. “Math is not considered as important, and students are not getting a premium when they graduate as engineers,” he said.” (FT, Oct 26)

“Global trading in futures and options contracts on lending rates, currencies and stock indexes increased to $484 trillion from $429 trillion in the first quarter, the Basel, Switzerland- based BIS said in a quarterly review.” (Bloomberg, Sep 11) To put the last quote in context, U.S. current dollar annual GDP is $13.3 trillion.

As best I can tell, it seems that the U.S. elite actually believes that Wall Street, along with its City of London ally, dominating this orgy of global derivatives trading and structured finance is THE viable basis of U.S. economic power.

"Sensible Center" Historic American Political Realignment Needed

For many years now, the current U.S. political party alignment has proven to be incredibly dysfunctional. E.g., the two critical issues of Iran and N. Korea have been barely mentioned by either party in the current election, yet both will be sure to have major consequences following it.

To head off the possibility of increasing internal and international conflicts based on genuine frustration and anger, a new historical political realignment is needed.

A critically needed political realignment can be done simply by combining the moderate, progressive, centrist majority of the two major parties into whichever party decides to come to its senses first (don’t hold your breath), rather than allowing the "sensible center" majority to continue to remain divided, frustrated and trapped in two separate parties, due to the heavy influence in both parties of their extreme wings.

Such an obvious realignment would leave the anti-evolution right of the ultra-cynical Rove and the ultra-liberal left of Hollywood in their own self-made minority camps. My choice of adjectives to characterize the extremes is an attempt to distinguish between sensible views of the right and left, and those of the extremes.

The vast majority of Americans doesn’t believe either extreme has a self-proclaimed monopoly on morality and ethics, and understandably is tired of the extremes’ attempting to impose their small minority, personal views in Rove's highly cynically orchestrated "culture wars."

This is not to deny the critical and vital importance of morality, ethics, religion, lifestyles, etc. in American lives and culture. My site emphasizes the critical link between morality and ethics and finance, economics and business.

Rather, it is simply to draw some boundaries which, until the advent of Rove's ultra-cynical "negative" "attack" politics, were usually respected between private views and deliberately contrived and manipulated public divisiveness. I think it would be a mistake to get down in the mud and fight Rove's "culture wars" on his divide-and-conquer terrain, as some seem to advise doing.

A progressive "sensible center" majority realignment would produce a durable, powerful, ethical coalition of business people and labor force focused on innovation for real, sustainable, fair wealth creation, hopefully relegating Rove’s “culture wars” to history’s trashbin, and pre-empting any ridiculous charges of "soft on terror" and "class war" also.

It seems increasingly likely that, barring a huge pre-November election surprise, Rove’s pipedream of a durable realignment may go up in smoke, not so much because of Foley or Iraq, but rather because it was based on a very negative, inherently unstable coalition of the anti-evolution right and “conservatives” who didn’t want to pay taxes but did want pork-barrel, not “free market,” handouts and subsidies, to the point of corruption.

A new progressive realignment would be historically similar to the Republican industrial ascendancy in the 1896 election and the Democratic social safety net one in 1932, less similar to the racial “wedge issue” Republican "Southern strategy" realignment in 1972, the clear precursor to the even more dismal negative politics of Rove in this era.

(Rove's lifestyle-religious-oriented wedge issues of "guns, gays, and God" were preceded by racially-oriented ones of busing, urban crime and affirmative action, both sets of issues were very deliberately used to break up the FDR "New Deal" coalition.)

These major political realignments seem to occur every 30-40 years, along with significant economic/financial crisis.

Perhaps it was no historical accident that the creation of Lincoln’s Republican party, which was based on promoting northern industrial capitalism, came with the great crisis of the Civil War; McKinley’s Republican industrial capital consolidation with the major economic/financial crisis in the 1890s; FDR’s Democratic “New Deal” with the 1930’s “Great” Depression; and Nixon’s 1972 Republican racial “Southern strategy” with the 1971-73 collapse of the Bretton Woods post WW II monetary system and the end of the era of ultra-cheap oil with the assertion of the OPEC cartel's power.

Attempt to Explain America’s Massive Denial of Basic Economic Reality

For years I have found it almost impossible to believe that elite policy-makers could seriously think that the U.S. is performing a great service for the rest of the world by being the global “shopper of last resort.”

The only explanations for this massive denial of basic economic reality by both elites and the average American that I have been able to come up with over the years are the following, I’m sure I’ve missed other crucial ones.

First, the CEOs of U.S. global corporations no longer have significant incentives, most especially financial, for national self-interest, so the U.S. skill gap, decline of industrial competitiveness, etc. simply doesn’t matter too much to them. Even the corporations of those few well-meaning leading CEO’s who consistently warn about such dangers to the U.S., such as IBM’s Palmisano and Intel’s Grove and Barrett, must constantly shift their resources and efforts to outside the U.S.

Fifty years ago American industrial CEO’s actually believed that “what is good for General Motors is good for America,” as GM’s CEO and Secretary of Defense "Engine Charlie" Wilson said in 1955, so for example, a perceived lag in science and math education, especially following Sputnik in 1957, was actively addressed.

This is no longer the case today. What is good for any major global corporation is now good for its CEO stock options and hedge funds, which inevitably has meant massive outsourcing offshore, not building up U.S. domestic capabilities.

That is a major change in mindset, and until the rules of the game are changed to alter it, there is very little hope that the growing problems of the U.S. can and will be altered, because there is not the power, money and incentive to do so in corporate America.

Second, the U.S. has become a nation of middle-class homeowners who are doubling as inadvertent (mostly) speculators, especially in real estate, whose economic self-interest in their home equity makes it virtually impossible for them to tell, or even be aware of, the difference between real economic wealth creation and the paper version. (I've written about this several times, starting with my Feb 14 article, "Mommy, Where Do McMansions Come From?" link,
also see the section below titled "What Would Happen Politically If the Housing Bubble Really Collapsed?")

As I've previously mentioned a number of times, the same applies to their political leaders and pundits, especially in the liberal “blue states,” where real estate speculation has been most egregious.

Their financial self-interest makes it all but impossible for them to see how U.S. economic policies are negatively affecting the rest of the world they usually sincerely would like to help, because it seems almost impossible to honestly understand the huge negative impact of the rest of the world funding the U.S. massive twin deficits, when one is sitting on huge real estate capital gains resulting from those twin deficits and the policies that helped create them.

Again, this is particularly difficult for liberal leaders, pundits, advisors, even economists, to come to grips with (not to single them out, there's plenty of blame to go around), but until they do, the prospects of truly meaningful change is very limited, if not impossible.

Btw, one big negative side effect of the real estate bubble is the even greater huge disparities in public education systems funded by local property taxes, which makes a mockery of the chance at equal opportunity in this country that both liberals and conservatives supposedly embrace as a core value (see my Feb 12 article, "Home-Equity ATM of Blue-State Liberals and Inequitable Funding of American Education" link).

Third, somewhat related, the average American doesn't know a great deal about subjects that have rapidly become in just the past few years critical to his future, such as China, derivatives/structured finance, the Middle East, N. Korea, etc., etc., , in part due to the abysmal oligopolistic state of the mainstream mass media and two major political parties.

It’s one thing if decades ago voters, let alone the highest government officials, didn’t know much about the differences between Sunni and Shia, Iraq and Iran, it’s quite another for that to be the case when the U.S. now has a declared national security strategy of pre-emptive/preventive undeclared, in the Constitutional sense (which doesn't seem to bother the "strict constructionist" faction on the Supreme Court), war all over the globe.

Fourth, key parts of the technology elite in the U.S., which I've long considered perhaps its "last best hope," as reflected in my site's name, "econotech," now actually seems to believe that the 24/7 narcissistic obsessive social networking of MySpace, YouTube, etc., combined with relentless massive media advertising and branding, is the economic and technological equivalent of developing leading edge advanced industrial capital goods, new genuinely high-tech sources of cheap, sustainable energy, and affordable, good quality basic consumer goods and services to help raise desperately low global living standards.

Again, the financial self-interest of massive stock options, usually to unjustified excess, even backdated at times, and IPO’s seems to have something to do with this Silicon Valley shift to the fantasy worlds of Hollywood and Madison Ave. in the real estate bubble consumer boom of the 2000s, from the emphasis on tools for corporate and individual productivity in the 1990s (see my Feb 27 article, "The New, Old Thing: Silicon Valley, Hollywood, Madison Ave.," link).

I guess what all four reasons boil down to, in the final analysis, is that if humans can get a "free lunch," which the U.S. has been able to do since 1971 with its paper dollar, then it is simply hard-wired in their nature to take it, and then make up all sorts of plausible-sounding reasons, at least to oneself most importantly, and hopefully to one's close family and friends, for why that's not what they're actually doing.

Modern academic psychology has shown the amazing power of humans to delude themselves in this way many times in small lab experiments, so why should it be any different on the scale of the global economy?

It’s the Hyper-Speculative Global Financial Markets

James Carville said after the 1992 elections, "It's the economy, stupid," often attributed to Bill Clinton. I've updated that slogan for this era, leaving off the "stupid."

Perhaps one of the most fundamental of America’s states of denial is the simple failure to admit the obvious, i.e., that the U.S. economy and government is now mainly one of, by, and for hyper-speculators, not the people.

A simple way of trying to show this is that Wall Street’s estimate before third-quarter results started coming in was that “the financial industry will account for 48 percent of the S&P 500's third-quarter growth, according to Thomson.” (Bloomberg, Oct 16)

The other nine sectors of the economy together add up to the other half. This probably understates the role of finance in the U.S. economy, as many large non-financial corporations make significant profits from their financial activities.

Regardless of the exact percentage after all the results have been reported, finance now occupies the “commanding heights” of the U.S. economy after a thirty-plus year transformation.

The same conclusion is shown looking at tax receipts. Bush closed the budget gap this year because of much greater than expected capital gains taxes. Payroll tax receipts increased far less.

For more details on the dominance of the hyper-speculators in the global economy, please see examples of the "wall of liquidity" in the section below titled "Equity Markets Keep Rising ... ", and especially the first section on hedge and private equity funds and investment banks in my Oct 24 news summaries link. Here are a couple of examples from the section below:

“U.S. leveraged-buyout activity is on pace for a record. 371 leveraged buyouts worth about $124.6 billion have closed in the first nine months, a 50% increase from the $83.1 billion in deals for the same time period a year ago … The total for deals announced but not yet closed this year is a whopping $238.7 billion across 405 deals, up from $111 billion across 317 deals at this time last year.”(WSJ, Oct 9)

“Takeovers involving European companies have climbed to $1.26 trillion this year from $819 billion in the same period a year ago … Finance has been the most active, with $341 billion of deals involving banks and insurance companies … Private-equity firms record $160 billion they have raised this year.” (Bloomberg, Oct 9)

Bottom line, the U.S. is not a service, information or any other fad term economy, but rather a hyper-speculative one.

It is also very self-delusional and even arrogant, not surprisingly for those who don't like advanced math and science, to label the hyper-speculators, and those who do very well-paid professions in their service in some way, as somehow more creative than those designing, engineering and manufacturing the actual products and services we use. Scientists and engineers, like true artists, are very creative.

Return on Leveraged Legal Looting (ROLLL)

Global finance now means what I have labeled ROLLL, return on leveraged legal looting, by hedge and private equity funds and the largest investment and commercial banks, usually in private, deliberately opaque non-transparent, even to the regulators, transactions, and usually at the expense of the public in one way or another, which has long since superceded the emphasis on “shareholder value.” E.g.,

"Cheap credit is everywhere … the most avid consumers of leveraged loans have been private equity groups. Many corporate executives sniff at what they see as financial engineering, especially when private equity groups quickly sell their investment or lock in their returns by floating a portfolio company on the stock market. It is even harder for a CFO to announce that he is planning to trash his employer’s credit rating just for the sake of returning capital to investors. The current situation has created an arbitrage that is being exploited by private equity groups at the expense of public shareholders. Either defaults begin to rise and corporate credit conditions tighten again, limiting the scope for buy-outs, or companies will inevitably conclude that they should be more aggressive in their borrowing." (Peter Thal Larsen, FT, Sep 26)

"As dozens of collateralized loan obligations (CLO) structures have set up shop, buy-out groups have been issuing waves of leveraged loans into this pool of demand. Investment bankers have also been creating tailor-made instruments for buy-out groups. These instruments have been gobbled up so eagerly by hedge funds and other investors that the price of raising funds has fallen to extraordinarily low levels. many buy-out firms have started to raise cash to pay themselves dividends … if big corporations are not willing to leverage themselves up, they could fall victim to hostile bids from private equity groups themselves." (Gillian Tett, FT, Sep 26)

Much of modern finance, based on innumerable arbitrage games, doesn’t create real economic wealth, as most corporations do through innovation, but rather simply redistributes it to the super-wealthy, via their control and use of the credit system with which to expropriate real wealth. Calling this looting financial innovation doesn’t change its essential nature.

"[management buyouts] should simply not be allowed at all as a matter of law … they buy the assets on the cheap and sell them off for their own management benefit, or they manage the company differently for the benefit of themselves and their buyout partners … breaching that fiduciary duty … management is seeking to pay the least it can get away with for the assets of the public holders, while the public holders want the most they can get. irreconcilable conflict of interest … lack of full disclosure … [buyout] memos are not disclosed to the stockholders or to the market generally … insider trading. what is a management buyout other than trading on inside knowledge?" (Ben Stein, NYT, Sep 3)

ROLLL has been based on a few obvious one-time tricks, some of which may not be repeatable, at least on the same scale, such as the global real estate bubble. Unfortunately, by the time that becomes more obvious to most people, whatever breathing room these tricks have bought the U.S. over the past decades to begin to transition to a much more healthy U.S. economy will have disappeared.

Here's a timely example of hyper-speculators’ big gains. I discuss in a section below on China how long it might continue to play along with the Goldman's of the world.

“The first-day stock gains give Goldman Sachs, the world's most profitable securities firm, a paper gain of $4.9 billion on its investment. Goldman paid almost $2.58 billion in April for 16.48 billion shares of ICBC for itself and its employee- and client-owned private-equity funds.” (Bloomberg, Oct 27)

“[Goldman’s] China bonanza is the result of more than 70 visits by former Goldman Chief Executive Officer Paulson, who became U.S. Treasury Secretary last June.” (Bloomberg, Oct 23)

“Goldman will announce on Oct. 25 its new class of partners, who will join the 287 who currently hold that title. Last year, that group shared more than $2 billion, or about 20% of the total compensation Goldman paid. That averages out to about $7 million per partner. Goldman's partners also are offered opportunities to invest beside the firm when it buys stakes in other companies, which can be lucrative.” (WSJ, Oct 13)

Politically, splitting actually economically innovative corporations, and countries for that matter, those that create real products and services, away from control by global hyper-speculators, in the case of corporations via CEO stock options and buy-outs, will be critical. The purpose of the changes proposed in this article is to encourage everyone to get very wealthy the “old-fashioned way,” by actually creating something of economic value, not as the hyper-speculators have done.

"Private-equity firms have notched seven of the 10 largest leveraged buyouts of all time this year … [CEOs] are both buying and selling the company … fraught with potential conflicts of interest. "Every private-equity firm markets itself to its potential investors on the basis of its access to deals, preferably exclusive access to deals" without competitive bidding, says a merger-and-acquisition lawyer … little that is more important to a private-equity firm than courting the management. offer management … as much as a 10% stake … when the company is recapitalized or goes public, the executives often get windfalls valued at hundreds of millions of dollars." (WSJ, Sep 8)

Good business is a very morally uplifting endeavor, it's all about creatively meeting the needs of customers with innovative ways of providing products and services. Good business is thus the essence of creativity and connection, the two things that psychologists have shown are the keys to personal happiness. Therefore, we want as many people as possible to be involved in business in a creative and connected way, so that they will be as happy and fulfilled as possible by "doing well by doing good."

“Former NYSE chairman Grasso must return tens of millions of dollars in compensation to the exchange, a New York state judge ruled on Thursday. Mr Spitzer filed a high profile law suit in 2004 arguing that the $139.5m in salary, bonus and benefits paid to Mr Grasso in 2003 for his eight years as NYSE chairman violated New York law requiring that compensation for executives at not-for-profit organisations be “reasonable” and “commensurate with services performed.”” (FT, Oct 19)

I only mention Grasso’s case because, if I recall correctly, in a recent tv interview perhaps the most celebrated, respected CEO of the prior two decades defended him, before the verdict, on the grounds that no executive would turn down huge sums of money if legitimately offered by its board.

But are these offers really legitimate, even when perfectly legal most of the time? Buffett recently said of current corporate morality: “many perpetrators of corporate scandals acted because they felt others were doing it.” (FT, Oct 10)

Corporate morality is not going to change by hiring more moral CEO’s and MBAs with ethics classes. It is critical to break the systemic link of corporate America, the repository of crucial talent, know-how and technology, that is tethering it in its now more than two-decade alliance with the global hyper-speculators. (See my April 10 article, "SOX counterproductive; Corp America responds to distorted incentives," link.}

Self-Described “Schmucks” of the Financial World

The larger ROLLL becomes, the worse off America’s and the global future ultimately will be, as capital/savings is siphoned off in pure hyper-speculative activity solely designed to line the pockets of the super-wealthy, with no useful or redeeming economic value whatsoever, rather than being rationally invested to raise global living standards.

Who are these hyper-speculators, and what drives them? A revealing self-description was in the lead article on page one of the Sept 30 WSJ:

“Mr. Tepper, 49 years old, is head of Appaloosa Management, a $4.5 billion hedge fund that owns 9.3% of Delphi's stock. Mr. Tepper has gotten rich investing in America's broken companies and declining industries … Mr. Tepper says he is not causing economic pain -- he is just capitalizing on it … Delphi wants to close many plants and lay off thousands of people. It also intends to cut wages and benefits … On [Tepper’s] desk sit three plastic pigs. He jokes that he rolls them for guidance on difficult trades. If all three snouts point down, in the eating position, it's a signal to buy. "The media says that hedge funds are the new masters of the universe," he chuckles. "We're just a bunch of schmucks."” (WSJ, Sep 30)

Tepper’s amorality is not an aberration, it is the norm. The world’s financial system is being run by people who make the 1987 character played by Michael Douglas, Gordon “Greed is Good” Gekko, seem benign (despite their philanthropic activities of returning some of the legal looting).

“After Weetabix, the maker of Britain's best-selling breakfast cereal, fired 7 percent of its workers and canceled the employee bus service to free up cash for debt from a leveraged buyout, [it] borrowed $249 million so it could enrich owner Lion Capital. This year more than 80 companies controlled by LBO firms have borrowed at the expense of workers and debt investors just so they can pay themselves dividends … The payments have helped the firms recoup 86 percent of their investments within two years … Weetabix will pay annual interest of 13 percent for the next decade because of the dividend to Lion Capital. That's almost double the cost on loans it used earlier this year to refinance debt from its 2004 buyout. Interest costs like those may force the company to cut more expenses … Robin Smith, a spokesman for Weetabix, declined to comment. Lion Capital spokeswoman Mani Pillai also had no comment.” (Bloomberg, Nov 1)

There is now a whole MBA army of Gekko’s on financial steroids and with very little adult supervision whatsoever, a key point as to who might possibly restrain these “masters of the universe,” that I will get back to shortly.

Historical Context for a New Global Strategic Bargain

At the risk of seeming even more hubristic and self-deluded than the elite that I've just criticized, such a global bargain as the one I sketched above would be of the same historic importance for long-lasting peace and prosperity in the 21st century as the creation of the post WW II Bretton Woods institutions and economic reconstruction along with security alliances.

Sixty years ago, the latter without the former could very well have ended up in yet a third round of the 20th century’s extended “Thirty Years’ War,” with even many more tens of millions dead, this time in nuclear holocausts. Everything possible must be done ASAP to avoid going down that path toward international anarchy today.

This global strategic bargain should have been attempted thirty years ago during the huge energy, monetary, foreign policy and political crises of the 1970s. If it had, perhaps a great deal of unnecessary pain and suffering could have been avoided, and a huge amount of global development achieved.

But global leadership on all sides, trapped in a Cold War mindset, clearly was nowhere close to being up to the task back then. Hopefully this time around they will be, better late than never, although as a result the U.S. has already unnecessarily squandered huge amounts of historically earned goodwill and prestige, “soft power” if you prefer, or "political capital" as Bush might put it.

For the rest of the full article, please go to this link. Thanks very much.