The Future of the Captured State

Simon Johnson

APR 22, 2014
Newsart for The Future of the Captured State

WASHINGTON, DCConcerns about state capture are nothing new. Special interests hold undue sway over official decision-makers in many countries, and regulators are always prone to see the world through the eyes of the people whose activities they are supposed to oversee. But the rise of finance in industrialized countries has cast these issues in a new, much harsher light.

Before 1939, wages and profits in the financial sector in the United States amounted to less than 1% of GDP; now they stand at 7-8% of GDP. In recent decades, financial assets have expanded dramatically relative to any measure of economic activity, as life expectancy increased and the post-WWII baby boomers began to think about saving for retirement

Compared to the size of the US economy, individual banks are now much bigger than they were in the early 1990’s. (The precise numbers are different in other industrialized countries, but the rise of finance is a general phenomenon.)

The global financial crisis of 2007-2008 and the deep recession that resulted made it plain to see that the financial sector in the US and elsewhere had become too powerful. Since the 1980’s, a form of “cognitive capture” had occurred, with policymakers becoming convinced that innovation and deregulation could only improve the functioning of both financial intermediation and the broader economy. The crisis proved this view completely wrong, imposing massive costsmeasured in terms of jobs lost, lives disrupted, and increased hardship – on millions of people.

Financial regulation entered a new, much more contested phase in 2010at least in the US. Most officials now concede the existence of systemic risk as a form of “pollution,” meaning that banks and other financial firms do not necessarily internalize the full costs of their structures and activities. And these costs can be hugepotentially large enough, despite recent reform attempts, to cause Great Depression II (or worse).

Operating big financial firms with small amounts of equity capital and a lot of debt may be in the interest of their managers, but it is definitely not in the interest of the rest of society. Moreover, providing large implicit subsidies to firms that are too big to fail should not be an attractive policy, because it encourages such firms to take on excessive risk (and to become even bigger).

And yet debate about these issues has remained wide open. The question is no longer so much one of beliefs. Now it is simply about moneyparticularly campaign contributions, but also the revolving door between Washington and Wall Street, as well as the vast pro-megabank interests that pour millions of dollars into think tanks and other, more shadowy organizations.

The Oscar-winning documentary Inside Job raised some sensitivities and led to increased disclosures by some people, including academics, concerning their involvement with the financial industry. But there remain profound monetary ties between big banks and people who purport to be independent analysts providing expert opinions. Some officials remain highly captured.

But there is also good news: Other officials are now much more resistant and inclined to push back against the industry. Well-informed nonpartisan outsiders are increasingly well organized and influential, particularly when they can work closely with pro-reform officials.

The latest indications from the Board of Governors of the US Federal Reserve – a crucial piece of this puzzle – are encouraging. For example, new rules for foreign banks operating in the US essentially require them to fund themselves with as much equity as US banks. But, on the eve of a new presidential campaign, the struggle over this important precinct of the American state remains far from over.

With the exception of the United Kingdom, the extreme free-market view gained less traction in Europe in recent decades than it did in the US; nonetheless, the challenge of implementing financial reforms in the eurozone is actually more difficult. Governments regard domestic banks as important buyers of sovereign debt. The banks argue that more effective regulation would limit credit and slow the pace of economic recovery.

As a result, the authorities in Germany and France (as well as Japan) have consistently resisted increasing capital requirements, despite widespread agreement that doing so is an essential part of effective re-regulation. Their opposition has undermined international efforts to build a more resilient system – and it will likely hamper efforts to put the European economy on a sounder footing.

In other words, key European states remain just as captured by financial interests as the American state ever was. And the big American banks now want to use the slow pace of change in Europe as a brake on US policy (for example, through the ongoing free-trade negotiations between the European Union and the US). If the US is to escape the consequences of government capture by big Wall Street banks, it cannot wait for Europe to catch up on regulation, including capital requirements.

Simon Johnson, a former chief economist of the IMF, is a professor at MIT Sloan, a senior fellow at the Peterson Institute for International Economics, and co-founder of a leading economics blog, The Baseline Scenario. He is the co-author, with James Kwak, of White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.


Ukraine and the grand chessboard

By Pepe Escobar

 Apr 17, '14

The US State Department, via spokeswoman Jennifer Psaki, said that reports of CIA Director John Brennan telling regime changers in Kiev to "conduct tactical operations" - or an "anti-terrorist" offensive - in eastern Ukraine are "completely false". This means Brennan did issue his marching orders. And by now the "anti-terrorist" campaign - with its nice little Dubya rhetorical touch - has degenerated into farce

Now couple that with NATO secretary general, Danish retriever 
Anders Fogh Rasmussen, yapping about the strengthening of military footprint along NATO's eastern border: "We will have more planes in the air, mores ships on the water and more readiness on the land." 

Welcome to the Two Stooges doctrine of post-modern warfare.

Pay up or freeze to death

Ukraine is for all practical purposes broke. The Kremlin's consistent position for the past three months has been to encourage the European Union to find a solution to Ukraine's dire economic mess. Brussels did nothing. It was betting on regime change to the benefit of Germany's heavyweight puppet Vladimir Klitschko, aka Klitsch The Boxer.

Regime change did happen, but orchestrated by the Khaganate of Nulands - a neo-con cell of the State Department and its assistant secretary of state for European and Eurasian Affairs Victoria Nulands. And now the presidential option is between - what else - two US puppets, choco-billionaire Petro Poroshenko and "Saint Yulia" Timoshenko, Ukraine's former prime minister, ex-convict and prospective president. The EU is left to pick up the (unpayable) bill. Enter the International Monetary Fund - via a nasty, upcoming "structural adjustment" that will send Ukrainians to a hellhole even grimmer than the one they are already familiar with.

Once again, for all the hysteria propagated by the US Ministry of Truth and its franchises across the Western corporate media, the Kremlin does not need to "invade" anything. If Gazprom does not get paid all it needs to do is to shut down the Ukrainian stretch of Pipelineistan. Kiev will then have no option but to use part of the gas supply destined for some EU countries so Ukrainians won't run out of fuel to keep themselves and the country's industries alive. And the EU - whose "energy policy" overall is already a joke - will find itself with yet another self-inflicted problem

The EU will be mired in a perennial lose-lose situation if Brussels does not talk seriously with Moscow. There's only one explanation for the refusal: hardcore Washington pressure, mounted via the North Atlantic Treaty Organization (NATO).

Again, to counterpunch the current hysteria - the EU remains Gazprom's top client, with 61% of its overall exports. It's a complex relationship based on interdependence. The capitalization of Nord Stream, Blue Stream and the to-be-completed South Stream includes German, Dutch, French and Italian companies

So yes, Gazprom does need the EU market. But up to a point, considering the mega-deal of Siberian gas delivery to China which most probably will be signed next month in Beijing when Russian President Vladimir Putin visits President Xi Jinping.

The crucial spanner in the works

Last month, while the tortuous Ukraine sideshow was in progress, President Xi was in Europe clinching deals and promoting yet another branch of the New Silk Road all the way to Germany

In a sane, non-Hobbesian environment, a neutral Ukraine would only have to gain by positioning itself as a privileged crossroads between the EU and the proposed Eurasian Union - as well as becoming a key node of the Chinese New Silk Road offensive. Instead, the Kiev regime changers are betting on acceptance into the EU (it simply won't happen) and becoming a NATO forward base (the key Pentagon aim).

As for the possibility of a common market from Lisbon to Vladivostok - which both Moscow and Beijing are aiming at, and would be also a boon for the EU - the Ukraine disaster is a real spanner in the works

And a spanner in the works that, crucially, suits only one player: the US government

The Obama administration may - and "may" is the operative word here - have realized the US government has lost the battle to control Pipelineistan from Asia to Europe, despite all the efforts of the Dick Cheney regime. What energy experts call the Asian Energy Security Grid is progressively evolving - as well as its myriad links to Europe.

So what's left for the Obama administration is this spanner in the works - still trying to scotch the full economic integration of Eurasia

The Obama administration is predictably obsessed with the EU's increasing dependency on Russian gas. Thus its grandiose plan to position US shale gas for the EU as an alternative to Gazprom. Even assuming this might happen, it would take at least a decade - with no guarantee of success. In fact, the real alternative would be Iranian gas - after a comprehensive nuclear deal and the end of Western sanctions (the whole package, not surprisingly, being sabotaged en masse by various Beltway factions.)

Just to start with, the US cannot export shale gas to countries with which it has not signed a free trade agreement. That's a "problem" which might be solved to a great extent by the secretly negotiated Trans-Atlantic Partnership between Washington and Brussels (see Breaking bad in southern NATOstan, Asia Times Online, April 15, 2014.)

In parallel, the Obama administration keeps applying instances of "divide and rule" to scare minor players, as in spinning to the max the specter of an evil, militaristic China to reinforce the still crawling "pivoting to Asia". The whole game harks back to what Dr Zbig Brzezinski conceptualized way back in his 1997 opus The Grand Chessboard - and fine-tuned for his disciple Obama: the US ruling over Eurasia.

Still the Kremlin won't be dragged into a military quagmire. It's fair to argue Putin has identified the Big Picture in the whole chessboard, which spells out an increasing Russia-China strategic partnership as crucial as an energy-manufacturing synergy with Europe; and most of all the titanic fear of US financial elites of the inevitable, ongoing process centered on the BRICS-conducted (and spreading to key Group of 20 members) drive to bypass the petrodollar.

Ultimately, this all spells out the progressive demise of the petrodollar in parallel to the ascent of a basket to currencies as the reserve currency in the international system. The BRICS are already at work on their alternative to the IMF and the World Bank, investing in a currency reserve pool and the BRICS development bank. While a tentative new world order slouches towards all points Global South to be born, Robocop NATO dreams of war

Pepe Escobar is the author of Globalistan: How the Globalized World is Dissolving into Liquid War (Nimble Books, 2007), Red Zone Blues: a snapshot of Baghdad during the surge (Nimble Books, 2007), and Obama does Globalistan
(Nimble Books, 2009).

April 22, 2014 7:04 pm

High-stakes Asian tour for Obama

US must reassure allies without fuelling China’s fears

It has become fashionable to talk of the US-Japan relationship as a relic of a bygone era. President Barack Obama must use his first state visit to Japan on Wednesday to reassure his hosts of its continued relevance.

His trip comes at a tense moment. China is stepping up its sovereign claims in the Japanese-controlled Senkaku Islands and with its neighbours in the South China Sea. Japan, the Philippines and others worry that the Obama administration is lukewarm in upholding US treaty commitments to them. China, on the other hand, fears the US is trying to contain it.

At a time when the US and its allies are struggling to roll back Russia’s predatory designs on Ukraine, Asia will be reading Mr Obama’s signals very closely. Reassuring America’s allies without stoking Chinese fears will require all his diplomatic skills.

Mr Obama’s challenge will be steepest in Japan. Relations between Tokyo and Beijing are at their lowest ebb in years. Shinzo Abe’s unapologetic brand of nationalism has emboldened Beijing’s adventurism in the Senkakus, which China calls the Diaoyu, and elsewhere. Almost 18 months into his premiership, Mr Abe has yet to meet Xi Jinping, China’s president.

Mr Obama is thus walking into a dialogue of the deaf. He will need to reassure Mr Abe that the US stands firmly behind its defence obligations to Japan. But he must do it in a way that does not fuel China’s paranoia.

In themselves, Mr Abe’s efforts to loosen Japan’s constitutional limits on its military are reasonable – and in line with longstanding US requests. But combined with gestures such as visiting the Yasukuni shrine, which counts war criminals among fallen warriors, they look provocative. Mr Obama must insist his Japanese hosts stop offending China’s sensitivities.

The US president must also navigate a delicate course in the Philippines, which he will visit as part of his four-nation tour. Ties between Manila and Beijing are close to breaking point over Chinese incursions on to rocky shoals within the 200-mile Philippine exclusion zone. More than 20 years after ejecting the US from its Subic Bay naval base, Manila is having a change of heart. As he has in Australia, Mr Obama will sign a deal to rotate US troops through the Philippines.

Again, the signalling will be critical. The US should continue to insist that China abide by the UN Law of the Sea in pursuit of its claims. But Mr Obama must also make sure that the reinvigoration of US-Philippines defence ties is not mistaken for encirclement. Striking that balance will be key.

The strongest plank of Mr Obama’s pivot to Asia” is the 12-nation Trans-Pacific Partnership talks. Unfortunately, politics in Japan and the US makes a breakthrough unlikely on this trip. Familiar US complaints about barriers to American agricultural and car exports are holding up a larger deal. Congress’s refusal to grant Mr Obama fast-track negotiating authority has slowed momentum further.

However, the absence of a final deal should not spell failure of the process. The TPP will be critical to Asia’s continued integration with the global economy. Both leaders should reiterate their commitment to its ultimate conclusion. At the same time Mr Obama must reassure China that the TPP will not be a closed pact and that the US aims for neither economic nor military encirclement.

Mr Obama’s trip comes as US power is being tested by Russia, China and others. Geopolitics is reasserting itself from Crimea to the Sea of Japan. Mr Obama’s task will be to uphold America’s global commitments without goading its challengers. He must stand by America’s friends without creating enemies. This is a difficult task to which the US president must prove equal on this trip.

Copyright The Financial Times Limited 2014.

jueves, abril 24, 2014



Second Opening of Japan

Shinzo Abe

APR 21, 2014
Newsart for The Second Opening of Japan

TOKYOUS President Barack Obama is visiting Tokyo at a unique moment in my country’s history, with Japan’s economy moving onto a stable new growth path that will take full advantage of its geographic position. Japan no longer considers itself the “FarEast; rather, we are at the very center of the Pacific Rim, and a neighbor to the world’s growth center stretching from Southeast Asia to India.

There can be little doubt that this growth center will continue to propel Japan’s economy for the foreseeable future. Japanese direct investment is expanding in Vietnam and India, for example, which will boost demand for Japanese machine tools and capital goods.

But, to maximize its opportunities, Japan must open its economy further and become a country that actively incorporates capital, human resources, and wisdom from abroad. Japan must be a country capable of growing by channeling the vitality of a growing Asia.

To this end, we have sharply accelerated the pace of negotiations on economic partnership agreements, or EPAs, with various partners around the world. Earlier this month, Australian Prime Minister Tony Abbott and I reached agreement in principle on a Japan-Australia EPA. Next in line is the Trans-Pacific Partnership (TPP), which would unite 12 countries in the world’s largest trading area.

Both Japan and the United States attach great importance to rules, uphold the principles of freedom and democracy, and possess the most advanced technologies and industries. We intend to overcome our differences and together forge, in the form of the TPP, a twenty-first-century economic order for Asia and the Pacific that will serve as an unshakable foundation for growth.

My government is also pushing hard to realize an EPA with the European Union. Given that the US and the EU already are engaged in trade talks, an EPA between Japan and the EU, coupled with the TPP, will give rise to a truly immense market – a single enormous growth engine that will benefit the entire global economy.

But Japan’s economic frontiers extend well beyond Asia and the Pacific, to Latin America and Africamore reason to abandon our long-held inward-looking perspective. A large number of highly motivated and ambitious young people have already come to Japan from around the world, especially from neighboring Asian countries, to study or work. Japan must remain their hope. We must not be disrespectful of them, and our arms must always be wide open towards them. Japan, I believe, is that kind of country.

In the near future, we will designate six National Strategic Economic Growth AreasTokyo, Kansai, Okinawa Prefecture, and the cities of Niigata, Yabu, and Fukuoka – to serve as models for the rest of the country. In health care, education, agriculture, and employment practices, we are identifying policies and practices that have fallen out of step with today’s needs, and we will move quickly to reform them. The National Strategic Economic Growth Areas will insert the probe of reform down into our regulatory system, which has hardened into bedrock.

Another habit that Japanese must change is our pervasive male-oriented thinking. We have already resolved to ensure that at least 30% of all personnel hired by the national government are women. I am also now urging publicly traded companies to add at least one woman as a board member. Once we reach the point at which it is no longer news to have a woman or a non-Japanese serving as a CEO, Japan will have reinvented itself and recovered its true spirit of risk-taking and innovation.

Womenomicstells us that a society in which women are dynamically engaged will also have a higher birth rate. My government intends to address, urgently, the need to expand day-care facilities and other such infrastructure as the foundation for a society that benefits from all of its members’ skills and talents.

We are fully capable of change; indeed, we relish it, as the world will see in the months and years to come. But some things about Japan are unchanging, and some must not be changed.

One of these is our track record, which supports our ambition to be a “proactive contributor to peace.” Japan has made more than its fair share of financial contributions to the United Nations and its organizations, both historically and today. And our embrace of our global responsibilities extends to Japan’s Self-Defense Forces
Members of the Self-Defense Forces displayed exemplary cooperation with the US and Australian armed forces in the wake of the Great East Japan Earthquake in 2011, and they have earned deep appreciation and respect everywhere they have been deployed, including Haiti, Indonesia, and most recently, the Philippines.

To make a proactive contribution to peace means that Japan will bear its own share of responsibility for assuring the security that supports global prosperity and stability. Working alongside countries with which we share common values and interests, we will safeguard and cultivate international public goods, ranging from space and cyberspace to the skies and the seas.

As the world will see during Obama’s visit, Japan is back and thriving. And its return is indispensable for global stability and prosperity.

Shinzo Abe is Prime Minister of Japan.