Defense Contractors: “What Economic Troubles?”

Posted: September 26, 2008 in Uncategorized
Tags: , , ,

Wow, so…my bank failed yesterday! Ouch!  It won’t actually (I think/hope/hear) affect my finances in any concrete way, but the shockwaves from the economic meltdown are starting to rattle my windows, at least. What a mess.

Here’s a succinct description of the cause of the crisis:

Instead, we’re getting a Wall Street bailout not of the mortgages, but of the absurd, speculative, economy-wrecking derivatives based on those mortgages, derivatives that investors and banks ravenously sold each other at unsupportable and quite-probably-crooked prices. Those derivatives, generally speaking, are “bets” on the state of the underlying mortgages. And they didn’t just bet wrong — they bet irrationally, based on presumptions of near-zero risks to those underlying mortgages. And worse, the big banks even — bafflingly — got special permission to overleverage themselves 40 to 1, all but assuring collapse if those derivatives went south. Which they did.

Fine, then, but how is that self-induced bubble an unweatherable economic crisis for the rest of us? Yes, those banks may fail — as they should. It’d be a crime if they didn’t, given their mismanagement of their accounts. But the real problem is that those banks are, literally, too big to be allowed to fail. Their failure would present a liquidity problem for the rest of the market. They can do anything — they could even burn money on the street — and the strong preference of government would be to bail them out for it, because the alternative is financial chaos.

Also note that Wall Street payed out $120 billion in bonuses alone from 2000 to 2006.

Okay now: stop. Breathe. Turn off the TV for a minute.

The world is not ending. Things may be about to get more difficult, but you are going to be okay.

Here, have some free advice from a pretty smart guy.

It’s going to be okay.

Now, if you had to guess which sector of our economy and which budget items would be protected by Congress during this debacle, which would you pick?  Let me give you a hint:

Next year’s Defense Department budget is the largest ever. But many analysts — even before the bailout — predicted that the gravy train was going to have to slow down, under the weight of the costs for the Iraq and Afghanistan wars.

Pentagon spokesbot Geoff Morrell says not to worry. “The current financial conditions are not, as far as I can tell, impacting how business is being conducted within this building,” he tells reporters. “I would note, however, that in good times and in bad, when the market is up and when it is down, the Congress has been consistent in its support throughout history of our nation’s defense. And I don’t see any reason why that would change now.”

I think we’ve just hit on a good measure by which to judge the seriousness of the President’s assertions of a crisis.  If the answer to the question: “Is this serious enough to consider significant cuts to military spending?” is “No!” then we might want to keep that in mind when deciding whether and how to spend an off-budget amount that is fairly close to the total defense spending of our country every year.

I am not an economics expert. I have every reason to believe that there is a crisis and that if the U.S. government wants to avert it, they need to act quickly. But I would point out that this is a prime example of an “act now!” crisis that masks the overall corruption and institutional violence of the status quo before and after the crisis abates. There are slow-burning crises happening all the time (poverty, failing schools, etc.), and the fact that we’re willing to throw $700 billion at this one without considering a cut in our implements of mass violence shows that the U.S. has dropped, for the moment, our pretensions of being a “Christian” nation and that we have decided as a people to withdraw from serious engagement with reality. The economy is withering under our feet, and even then, we cannot let go of our desire for “full spectrum dominance” in order to try to stave off in a responsible way a crisis that may result in deepening poverty, hunger, and unemployment. As it stands, we will try to do both, resulting in a huge jump in U.S. national debt, which in turn will cause a rise in interest payments we must pay on that debt, meaning less and less of the federal budget will be available for future Congresses to appropriate for the purposes of funding public structures like roads, schools, hospitals, etc.

Right now the U.S. reminds me of a drug addict who finds out that if he buys his next bag of heroin, he won’t be able to pay his rent, and who buys the bag anyway. America by and large is addicted to military dominance of the planet, and we will happily mortgage away future generations’ ability to pay for better public structures in order to preserve it.

This economy is hurting people on the lower end of the income scale, it’s hopelessly dependent on and intertwined with military contractors, and the contractors and Wall Street CEO’s aren’t hurting with their billions of dollars in bonuses. The U.S. government will dump money in $700 billion chunks on the military/industrial complex and on Wall Street. And:

…despite what we’ve been told, then, we can only presume that the problem is in fact not all the bad, scary subprime mortgages…a lot of people are finding themselves upside-down on their houses right now, but Paulson isn’t proposing we…solve that — and even the “controversial” Democratic counterproposal, that we actually do at least a little something to help those people, after they’ve already gone bankrupt, is pathetically weak.

In other words, no direct help for those who fell for Wall Street’s debt marketing directly targeting people who could least afford it. All this leads me to believe along with Geoff Holsclaw that:

the event[s] of last week have revealed the true motivations of this administrations (as well as its faith in the Market before all else), as well as revealed that the essential orientation of politics is to ensure a smoothly running economy (rather than things like justice, goodness, peace, or even the commonwealth).

UPDATE: ThinkProgress connects some dots between American militarism and the economic crisis:

While the subject matter seems disconnected from the situation in financial markets, prescient economists predicted this fall-out from the Iraq war long ago. In 2002, Gerd Hausler, director of international capital markets at the IMF, said that “a serious conflict with Iraq would not be a very healthy development” for the financial markets. Robert Shapiro, undersecretary of commerce in the Clinton administration stated, “If the [Iraq] conflict wears on or, worse, spreads, the economic consequences become very serious.” The debt was $5.7 trillion when Bush took office; it will be $10.3 trillion by the time he leaves. While Congress hesitates to appropriate $700 billion for the financial crisis, the administration still is pouring $12 billion a month into Iraq, also raising the question of how the Iraq war funds could be spent better at home.

IRAQ RECESSION?: A significant reason for the current $9.6 trillion federal debt has been the Iraq war, which the U.S. largely financed through borrowing. This week, President Bush said that the crisis began after “a massive amount of money flowed into the United States from investors abroad because our country is an attractive and secure place to do business,” which led to easy credit and to the housing bust. But the problem isn’t simply one of excessive foreign investment because of businesses. “It’s that the U.S. had to borrow money from foreign nations at an alarming rate, after it dug itself into debt paying for the Iraq War while cutting taxes,” The Wonk Room observed. Thus, the United States had to turn to investment from abroad for financing. This, as well as lax regulation and oversight of Wall Street contributed to the credit troubles. Currently, 45 percent of Treasury securities are owned by foreign nations, with the most owned by China and Japan. Other nations owned less than 20 percent of these securities as recently as 1994. Bush left out of his assessment the fact that much of the foreign investment went to finance a war and his tax cuts.

UPDATE #2:  stuperb (who stopped by for comments earlier) points to a scary indicator of how well-thought-out the plan is:

From Forbes.com, regarding the $700 billion bailout proposed by President Bush and Treasury Secretary Paulson:

“In fact, some of the most basic details, including the $700 billion figure Treasury would use to buy up bad debt, are fuzzy.

‘It’s not based on any particular data point,’ a Treasury spokeswoman told Forbes.com Tuesday. ‘We just wanted to choose a really large number.'”

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Comments
  1. Greg says:

    Your words, spoken with such clarity, are so needed. I hope your getting paid to use your words in whatever you do for income. You have a gift.

    “We just wanted to choose a really large number.”

    Incredible.

  2. dcrowe says:

    That may be the nicest comment ever left on this blog. Thanks Greg.

    I know – what a mind-blowing answer from a paid spokesperson at Treasury. I was floored. Thanks to stuperb for finding that little nugget.

  3. stuperb says:

    I agree with Greg. After I left my comment yesterday, I poked through your blog and found it engaging, thoughtful and unique. You’re definitely in my regular rotation now!

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