Northern Country

How globalization changes capitalism, the economy and politics

Posts Tagged ‘G-8

Is there a rift between the democratic party and the Obama administration?

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I have written about Goldman Sachs and how the investment firm contributed to the worst financial crisis since the Great Depression. Matt Taibbi alluded to GS as The Great American Bubble Machine contributing substantially to all major investment bubbles since the 1930s. GS has always been a talent hotbed where privileged alumni leave the firm through what Stieglitz calls a revolving door to end up in critical positions of government. The list of those exiting Goldman and entering the government is long, but it is clear that they are all associated with the Democratic party.

Next to this one there could be another list, one of detrimental political decisions that contributed to the current crisis. On top of it is the repeal of the Glass-Steagall-Act under former GS employee and Bill Clinton’s Treasury secretary Robert Rubin, which allowed bank holding companies to own other financial institutions and eventually become too big to fail and a systemic risk. This of course was never intended but as we painfully recognize one of those far-reaching wrong judgments made by a democratic administration. In light of this anything but impeccable track record we have to ask if democrats are truly forthcoming in their desire for real change or are they about to make another big mistake?

In November of 2008 a new spirit of political leadership in the US was finally entering into the halls of congress and the White House. President Obama has promised to bring change to Washington and the democratic party vowed to stand beside him and his ambitious agenda. In the meantime democrats together with two independents have a sound filibuster majority of 60 in the senate. They are now calling the shots in the government and the legislature. It is therefore even more disturbing to see how the House of Representatives overwhelmingly rejected a signing statement from their president.

In June a $106 billion war supplemental bill passed legislation in the House and Senate which included conditions on World Bank and IMF funding. The bill would extend a credit line of $108 billion for international financial institutions (IFI) to aid struggling developing economies crippled by the current financial and economic crisis. Major recipients of IFI funds could be nations in Eastern Europe under immense pressure to devalue their currencies in an attempt to avoid a default scenario. This would have a ripple effect and threaten the stability of the global financial system similar to events during the Asian crisis in the late 90s.

Despite severe and eventually devastating consequences to an already ailing global financial system of such a devaluation scenario, resistance is mounting among lawmakers who view IFI funding as an unnecessary ‘global bailout’ . To reach a compromise and find the votes to pass the bill House and Senate leaders included restrictions resulting in an amendment requiring the Treasury department to report on World Bank and International Monetary Fund (IMF) activities. Late Thursday the amendment passed with strong bipartisan support and an overwhelming majority of 492-2 votes against the Obama administration.

The president in a statement during signing of the original bill rejected this restrictions and vowed to ignore the amendment’s conditions. They would "interfere with my constitutional authority to conduct foreign relations (with international organizations and foreign governments)… by requiring consultation with the Congress prior to such negotiations or discussions," Obama said in the signing statement. With the passage of the amendment lawmakers including Barney Frank, a democrat and head of the powerful House Financial Services Committee (HFSC), are now threatening to withhold funds in a stand-off with the Obama administration.

492 to 2 speaks a clear language and it remains to be seen if the administration can afford to ignore congress under these conditions. Though it certainly would mean a severe blow to the authority of the president if he will be forced to revoke his signing statement. His foray into environmental politics (see also here), for the first time opening up the United States to international commitments to substantially reducing carbon emissions, could be called into question. So could his commitments he made during his Moscow speech (see also here), to the establishment of an international body together with and under the leadership of the U.S.

Much needed reform in Washington away from neoliberalism towards true and sustainable world leadership hangs on a thread. While first signs emerge of a search for an effective international body that more truthfully represents interests of all nations in a global economy, the coverage of the G-8 summit in Italy by mainstream media in the U.S. suggests otherwise.

The media are either ignoring or mocking efforts of the G-8 to increase the scope of their discussion round tables by opening it up to other powerful nations like China, Brazil, India, Mexico, South Africa and others. The NYT writes: “Eventually, the so-called Group of 8 started what might be considered auxiliary clubs. And that was how they ended up with a meeting on Thursday that was actually dubbed the G-8 + 5 + 1 + 5. Seriously.”

The Times also calls into question the relevance of the G-8 if they seemingly cannot take landmark action without enlisting others, and misses the point completely: It is not about relevance of the G-8 but rather about sustainable credibility within the G-15, G-20 or even G-194. It is not about America but rather about sustainable relations between all nations in a political and economic environment more and more intertwined by globalization. If we have learned nothing else from the current financial and economic crisis this should be it.

Leaving other nations out makes the G-8 nothing but an elite club of snobbish leaders who in a reactionary move desperately seek to conserve neoliberal, neoconservative mindset. Barak Obama, Angela Merkel, Nicolas Sarkozy and other powerful leaders understand that and therefore support this search for a new international world order. Reactionary dinosaur politicians will eventually face the same destiny. In the meantime there are still too many of them and they are still very powerful. President Obama’s stand-off with the congress on the issue of the signing statement serves as a litmus test about the determination towards change in a modernized America.

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This crisis is far from over

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This weekend finance minister of the G-8 nations gather in the south of Italy hopefully not only to take a sunbath. While leading economists are still warning of high uncertainty regarding growth and systemic risk for financial contagion still lingers the G-8 finance ministers are already discussing a possible exit from fiscal and monetary stimulus programs.

This seems premature. The subprime fiasco seems largely over but other problems prop up in particular in Eastern Europe. This region of the former communistic Soviet Union is a going concern. While some of the worst fears are probably exaggerated systemic risk and possible contagion for some Central European banks still lingers.  Banks in Austria, Germany and Sweden have 1.6 trillion US dollar loan exposure in the region.

Of particular interest is the Baltic mini-state of Latvia. GDP of Latvia was 36 billion US dollar in 2008 but problems might spread to neighboring countries yet and get out of control. Just recently foreign exchange markets got upset by failure of Latvia’s bond auction.

Sweden is Latvia’s biggest creditor and its banks have heavy exposure to the Baltic state. Recently Sweden’s Riksbank borrowed 3 billion euros from the ECB. That shows how serious the situation is. The bank is drawing down on a 10 billion euro swap agreement.

Latvia is now in negotiations with the IMF to secure another round of funding, but first it has to implement spending cuts and restrictive fiscal measures, which could further dampen the outlook for growth and lead to even higher unemployment.

But Latvia is not the only problem. About a third of fund managers polled expect more Eastern European countries to default and about 11 percent expect a full-blown systemic meltdown. This has prompted the ECB to issue a warning for 2010 rather than 2009 if the recession lingers.

According to the European Commission 27 EU states have so far pumped 3.7 trillion Euro into rescuing the banks, that’s almost a third of European GDP. Out of that pool 311 billion have been in the form of direct capital injections, that is more than US banks received.

In the meantime the German government has agreed to implement a ‘bad-bank-model’ where large regional banks, like the German Landesbanken, will be able to transfer their bad investments worth about 600 billion euros until 2010. A similar drastic measure might be necessary for Austrian banks too. It seems to be a weird coincidence that this dumping institution for bad assets has been named after a beautiful Italian opera, AIDA.

Complicating the situation is a moldering conflict within the IMF, where funding in the US seems to be called into question. A proposal to send $108 billion is attached in a supplemental appropriations bill to fund the wars in Irak and Afghanistan. While funding for the wars is most likely to be approved the IMF has come under criticism, mainly because of lack of economic stimulus measures among European states.

Republicans and Democrats in the House of Representatives oppose the fund because they fear that the money will mainly be used to bail out Central European banks. If the administration will fail to garner sufficient votes they can pull the funding bill out and support a war-only funding bill. That’s a smoking gun for Eastern Europe and Central Europe alike.

will it cause a snowball effect?

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Written by Alfred

12. June 2009 at 11:13 am