>The Great College Hoax

>by Kathy Kristof

Forbes.com (February 02 2009)

As steadily as ivy creeps up the walls of its well-groomed campuses, the education industrial complex has cultivated the image of college as a sure-fire path to a life of social and economic privilege.

Joel Kellum says he’s living proof that the claim is a lie. A forty-year-old Los Angeles resident, Kellum did everything he was supposed to do to get ahead in life. He worked hard as a high schooler, got into the University of Virginia and graduated with a bachelor’s degree in history.

Accepted into the California Western School of Law, a private San Diego institution, Kellum couldn’t swing the $36,000 in annual tuition with financial aid and part-time work. So he did what friends and professors said was the smart move and took out $60,000 in student loans.

Kellum’s law school sweetheart, Jennifer Coultas, did much the same. By the time they graduated in 1995, the couple was $194,000 in debt. They eventually married and each landed a six-figure job. Yet even with Kellum moonlighting, they had to scrounge to come up with $145,000 in loan payments. With interest accruing at up to twelve percent a year, that whittled away only $21,000 in principal. Their remaining bill: $173,000 and counting.

Kellum and Coultas divorced last year. Each cites their struggle with law school debt as a major source of stress on their marriage. “Two people with this much debt just shouldn’t be together”, Kellum says.

The two disillusioned attorneys were victims of an unfolding education hoax on the middle class that’s just as insidious, and nearly as sweeping, as the housing debacle. The ingredients are strikingly similar, too: Misguided easy-money policies that are encouraging the masses to go into debt; a self-serving establishment trading in half-truths that exaggerate the value of its product; plus a Wall Street money machine dabbling in outright fraud as it foists unaffordable debt on the most vulnerable marks.

College graduates will earn $1 million more than those with only a high school diploma, brags Mercy College radio ads running in the New York area. The $1 million shibboleth is a favorite of college barkers.

Like many good cons, this one contains a kernel of truth. Census figures show that college grads earn an average of $57,500 a year, which is 82% more than the $31,600 high school alumni make. Multiply the $25,900 difference by the forty years the average person works and, sure enough, it comes to a tad over $1 million.

But anybody who has gotten a passing grade in statistics knows what’s wrong with this line of argument. A correlation between BAs and incomes is not proof of cause and effect. It may reflect nothing more than the fact that the economy rewards smart people and smart people are likely to go to college. To cite the extreme and obvious example: Bill Gates is rich because he knows how to run a business, not because he matriculated at Harvard. Finishing his degree wouldn’t have increased his income.

All the while students have been lulled into thinking of the extra $1 million that will be theirs, they have been forced to disgorge an ever larger fraction of it in pursuit of the degree. While the premium that college grads earn over high schoolers has remained relatively constant over the past five years, the cost of acquiring a degree has risen at twice the rate of inflation, dramatically undermining any value a sheepskin adds.

Offsetting that million-dollar income discrepancy is the $46,700 four-year cost of tuition, fees, books, room and board at a public school and $99,900 at a private one – even after financial aid, scholarships and grants. Add all this to the equation and college grads don’t pull even with high school grads in lifetime income until age 33 on average, the College Board says. Even that doesn’t include the $125,000 in pay students forgo over four years.

“I call it the million-dollar misunderstanding”, says Mark Schneider, vice president of the American Institutes for Research, of the prevailing propaganda.

Not only are college numbers spun. Some are patently spurious, says Richard Sander, a law professor at UCLA. Law schools lure in minority students to improve diversity rankings without disclosing that less than half of African-Americans who enter these programs ever pass the bar. Schools goose employment statistics by temporarily hiring new grads and spotlighting kids who land top-paying jobs, while glossing over far-lower average incomes. The one certainty: The average law grad owes $100,000 in student debt.

“There are a lot of aspects of selling education that are tinged with consumer fraud”, Sander says. “There is a definite conspiracy to lead students down a primrose path”.

Warped as the numbers are, they don’t begin to account for the hidden cost of higher education: financing it. Borrowing has doubled over the past decade, to roughly $85 billion in new student loans in the 2007–08 academic year, bringing total student debt owed to well over half a trillion dollars. The average borrower went $19,200 into debt for a diploma in 2004, a 58% increase after inflation since 1993, according to the Project on Student Debt.

The proportion of students who graduate with more than $40,000 in debt jumped sixfold during that period, to 7.7% of the one million grads in 2004, or 77,500 people. Most will struggle for more than a decade to work it off, assuming relatively low 6.8% interest rates, the Project on Student Debt says.

For many, the terms are far worse. A decade ago nearly all student lending was of the low-cost, federally guaranteed variety, most of it with six to eight percent interest kicking in only after a student left school. As costs outpaced such financing over the past decade, the share of student loans from “private” lenders rose from seven percent to 23% of the market, or $20 billion in the 2007-2008 academic year.

The rise of private student lending closely paralleled the subprime mortgage boom, which went from eight percent of home loan originations in 2003 to twenty percent in 2006, before the housing meltdown sent that mortgage sector over a cliff. Private student loans resemble subprime mortgages in other ways, too. As banks and brokers did with subprime home loans, colleges and the lenders in cahoots with them commonly market private student loans alongside lower-cost alternatives, blurring the differences.

The key one is cost. Many private lenders tack ten percent origination fees onto eighteen percent variable interest rates (there is no legal limit), which begin accruing the moment a loan is funded. That has made private loans more than twice as profitable as government-guaranteed ones and lured heavy involvement from Citigroup, Bank of America and Wells Fargo.

New York Attorney General Andrew Cuomo has called private lending “the Wild West of the student loan industry”. Some problems he notes smack of subprime mortgage lending: lax disclosure requirements, variable interest rates that compound and make paying off the principal a Sisyphean task, and kickback agreements by which lenders pay loan originators – in this case, colleges – a cut of their revenues.

State and federal authorities have taken action to curb the outright bribery. No less illustrious institutions of higher learning than Columbia University, New York University and the University of Pennsylvania paid $1 million-plus each to settle charges of wrongdoing in the student loan market.

Yet investigations still found “troubling, deceptive and often illegal practices … involving lenders, educational institutions and financial aid officials”, according to Cuomo’s office and the Congressional Committee on Education & Labor. Don’t count on Washington to provide any more safeguards than it did with housing. Department of Education oversight of the student loan industry has been deemed insufficient by the Government Accountability Office.

Lacking honest input, three-quarters of high schoolers still seek to go on to college, many deluded about the financial prospects it holds, says American Institutes for Research’s Schneider. “Part of the drive is the idea it pays”, he says. “We need somebody making more realistic statements about the risks”.

The risks are hefty. Half of students entering college never earn a degree. Six in ten African-Americans depart without one. “Hundreds of thousands of young people leave our higher education system unsuccessfully, burdened with large student loans that must be repaid, but without the benefit of the wages a college degree provides”, warned a 2004 Education Trust study.

Among the half of entering students fortunate enough to get through college, millions go into debt for two-year associate degrees. These alumni outearn high school grads by only $8,400 a year. (Community colleges currently enroll 11.5 million.)

Tracy Kratzer, 27, enrolled in the International Academy of Design & Technology in Orlando, Florida. in 2003. With visions of making big bucks as a Web designer, she didn’t give much thought to the interest rate on her loan from Sallie Mae, the Fannie Mae of student lending. Kratzer didn’t know it at the time, but she was part of an experiment that has proved disastrous for borrowers and shareholders of Sallie’s parent, SLM Corp. It’s called “nontraditional” lending.

“That’s not a sociological term”, Albert Lord, chief executive of SLM Corporation, told an audience of financial analysts last fall. “It’s basically kids and parents with poor credit who are at the wrong schools”.

Sallie Mae was set up by the government in 1972 and began privatizing its ownership in 1997. It began nontraditional lending in the easy-money heyday of 2002, when it cut deals with dozens of trade schools to become their preferred subprime student lender. Over the next four years Sallie doled out about $5 billion to people like Kratzer, waiving the credit scores and cosigners formerly required for its loans.

The bill arrived last year after nontraditional borrowers began entering the workforce. Of the half no longer studying, Sallie had written off fifteen percent of loans by last June, the most recent period for which it has released figures; another 24% were delinquent. Among traditional loans for four-year universities, writeoffs ran two percent and delinquencies 4.9%.

SLM set aside $884 million to cover these bad loans in 2007 and posted its first loss. It expects nontraditional-loan writeoffs to peak this year. SLM’s stock has lost eighty percent since the beginning of 2007, wiping out $15 billion in value. Lord, who was unavailable for comment, is a 28-year company veteran. He made $72 million as chief executive in 2007 by unloading SLM stock before it tanked. Sallie largely abandoned nontraditional lending last January.

That’s little consolation to Kratzer. Shortly after graduating with an associate of arts degree, she discovered that the high-paying jobs she’d hoped to qualify for go to people with bachelor’s degrees and years of experience. After a bout of unemployment, when she lived off credit cards, Kratzer recently found an hourly job as a clerk at a magazine, where she earns less than the average high school grad. In the meantime her $14,000 student loan has mushroomed to $27,000 – more than she makes in a year – and continues to accrue interest at eighteen percent a year. She says collection agents for Sallie and others hound her to hit up relatives for the money she owes.

“My mom works in a restaurant. My stepdad is in prison”, says Kratzer. “There are so many people like me out there. They don’t get seen. They don’t get heard.”

Mindy Babbitt entered Davenport University in her mid-twenties to study accounting. Unable to cover the costs with her previous earnings as a cosmetologist, she took out a $35,000 student loan at nine percent interest, figuring her postgraduate income would cover the cost.

Instead, the entry-level job her bachelor’s degree got her barely covered living expenses. Babbitt deferred loan repayments and was then laid off for a time. Now 41 and living in Plainwell, Michigan, she is earning $41,000 a year, or about $10,000 more than the average high school graduate makes. But since she graduated, Babbitt’s student loan balance has more than doubled, to $87,000, and she despairs she’ll never pay it off.

“Unless I win the lottery or get a job paying a lot more, my student debts are going to follow me to the grave”, she says.

Babbitt is no oddity. In fact, one in four college grads takes home considerably less than the top quartile of high school grads, according to a College Board study. Even some people with doctorates earn less than people without so much as an associate degree, it shows.

For an indication of how out of touch the degree factories are with economic reality there’s no need to pick on UCLA’s course in queer musicology or Edith Cowan University’s degree in “surf science”. US universities also minted 37,000 history degrees in 2006, including 852 PhDs. That for a field with fewer than 500 job openings and average pay of $48,500. Plumbers, by contrast, enjoyed 16,000 new jobs that year and earned only $6,000 less than historians, census figures show.

Of course, not all history majors want to become historians. For many a bachelor’s degree is nothing but a stepping-stone to a professional degree. Joel Kellum is one of those. After graduating from the University of Virginia, he got into California Western. Kellum approached a law professor about the wisdom of borrowing for the tuition.

“He said, ‘Don’t worry’ “, Kellum recalls. ” ‘We had the same thing when we were in school’ “.

Kellum filled out a fat packet of forms in his school’s financial aid office. Weeks later, he says, he got a call asking him to sign over a check to the school without any discussion of the loan terms. Kellum complied.

Only after he graduated, and his payments came due, did he dig into the details. What Kellum discovered was that, instead of cheap government loans, the bulk of his debt was in Signature loans: variable-rate debt from Sallie Mae. Kellum’s variable rate has ticked as high as nine percent and his ex-wife’s to as much as twelve percent.

Like many grads, Kellum and Coultas hit bumps along their career paths. They deferred payments once when they were unemployed and twice more after their children were born. Each time, Kellum says, Sallie Mae tacked on fees for the delay. When he was a few days late making payments, he says, he got hit with more fees, which also accrued interest, and with a scolding.

“When you’re a second late, you get twenty or thirty calls”, he says. “It [Sallie Mae’s Signature loan] is coated as a sweet government loan, but you can get better interest rates, and better treatment, borrowing from Vito in downtown Brooklyn”.

Like Vito, private student lenders don’t dwell on the dollar cost of compound interest. Cathelyn Gregoire says she applied for financial aid at the Tampa campus of the design school Kratzer attended and was assured she’d receive a loan at a fixed seven percent rate. Three months after classes began Gregoire received a $14,000 loan. Only after graduating did she discover she was being charged a variable 13.25%, plus a “supplemental fee” of six percent. Her loan balance had jumped to $20,000 by the end of 2007.

Gregoire is now a plaintiff in a federal suit in Connecticut, accusing Sallie Mae of targeting minorities with deceptive lending. Her lawyers are trying to make it a class action.

Sallie Mae denies wrongdoing and distributes rate disclosures when students apply for loans, according to spokesperson Thomas Joyce. Sallie’s disclosure document warns in capital letters that the rate a borrower sees may not be the one he gets.

Joyce says Sallie’s borrowers receive detailed paperwork within ten days of funding and can rescind their loans then. In reality loan checks often go directly to schools after classes have begun. To rescind a loan a student must get the college to return the money. The student must then find new funding or drop out.

Education lenders, unlike other consumer financiers, are not required to provide Truth in Lending disclosures before reeling in borrowers. A law passed last year requires advanced disclosure, but not until 2010.

Get caught in this quagmire and you’re stuck for good. Consumers who go on a credit card binge stand a good chance of getting debt discharged in bankruptcy. Not so if they take out a loan to educate themselves. Those loans, per the 2005 bankruptcy law, are not dischargeable. One reason: Without this exception, every student would run through a bankruptcy between graduation and starting a career.

Who gets stuck with these toxic loans? As with subprime mortgages, the people who can least afford them. A disproportionate number of high-interest student loans go to low-income students attending for-profit institutions, according to a 2008 study by Charlene Wear Simmons, assistant director of the California Research Bureau, an arm of the state government.

“Borrowing, combined with other risk factors for not completing higher education (such as working too many hours, lack of adequate preparation and part-time attendance), puts many students, especially low-income and first-generation students, at a particular disadvantage”, says a 2005 study by Lawrence Gladieux, an education policy consultant, and Laura Perna, assistant professor of education at the University of Pennsylvania.

It’s too late to save the country from the housing finance bubble. But the college bubble is not quite as far along.

Sidebars:

Docs in Hock
http://www.forbes.com/forbes/2009/0202/060a.html

Subprime Student Loans
http://www.forbes.com/forbes/2009/0202/060b.html

http://www.forbes.com/forbes/2009/0202/060.html

Bill Totten http://www.ashisuto.co.jp/english/index.html

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>The Propaganda of the Victor

>How the poor were airbrushed from history

by George Monbiot

The Guardian (February 24 2009)

Is there any other democracy so adept at editing its history? Even Spain, for years notoriously reluctant to get to grips with the legacy of Franco, has begun to acknowledge the past, as the success of Guillermo del Torro’s masterpiece Pan’s Labyrinth shows. The French are aware of every sordid detail of the excesses of both monarchs and revolutionaries. The Germans are pricked by their past every day. In the United States everyone knows about slavery, the civil war and segregation. But in Britain our collective memory has been wiped clean.

Despite the efforts of authors such as Mike Davis, John Newsinger, Mark Curtis, Caroline Elkins and David Anderson {1, 2, 3, 4, 5, 6}, our colonial atrocities still leave the national conscience untroubled. We appear to be even less aware of what happened at home.

Last week the National Trust, which is Britain’s biggest private landowner and biggest NGO, announced that it is creating 1000 allotments – small patches which local people can rent for growing vegetables – on its properties, among them some of its grandest parks and estates {7}. This was universally, and rightly, hailed as a good thing. But no one stopped, as no one ever does, to ask where this land came from.

The National Trust has done more than any other body to open up the countryside to the British people, and more than any other body to close down our minds. It bears more responsibility than any other body for the sanitised, tea-towel history which dominates the national consciousness. Last year over 100 million visitors explored its properties {8}. They were exposed to a partial and selective view of Britain’s past.

Take one of its finest and most famous holdings: Stowe Landscape Gardens. I know them well, for I enjoyed the astonishing unearned privilege of attending the school that’s housed there. The gardens (really a landscaped deerpark) were a vast playground of crumbling follies and overgrown lakes, of coverts and laurel brakes in which ruined monuments could, like Mayan temples, be discovered by adventurous boys. Licensed by tolerant teachers, I played swallows and amazons here for five years.

Now the gardens have been beautifully, if starkly, restored by the National Trust. The temples have been cleaned and mended, the thickets cleared, the volunteer woodland felled. They have been returned to the state intended by their authors: the first Viscount Cobham (1675-1749) and his descendants.

When you visit the gardens today, or read about them on the Trust’s website, you will learn about the thirteen phases of the development of the gardens, the creation of the avenues, monuments and temples, the commissions executed by the famous architects and designers who worked here {9, 10}. But nowhere, as far as I can discover, will you find a word about who lived here before the estate was consolidated in the late 16th Century, or how local people were treated after the gardens were established 150 years later. The Trust, in other words, says nothing about the village cleared to create the deer-park, or the eviction, imprisonment, transportation or execution of those who lived there {11}.

In his book Whigs and Hunters (1990), E P Thomson gives us a vignette of what happened here. As constable of Windsor Castle, the first Viscount Cobham had been responsible for enforcing the Black Acts, which created some fifty new capital offences for poaching and resisting the encroachments and enclosures carried out by the ruling class. He imported this management ethic into his estate at Stowe. “In 1748 two young men … were caught while raiding his deer-park. According to a firm local tradition, the wives of the men sought an interview at Stowe and begged for their husbands’ lives. It seemed that old Cobham, now in his eightieth year, was moved by their tears. He promised that their husbands would be returned to them by a certain day – and so they were, for on that day their corpses were brought to the cottage doors on a cart. Cobham celebrated the occasion by striking statues of the dead men in his park, a deer across their shoulders.” {12}

In Liberty Against the Law (1997), Christopher Hill tells the story of the redistribution of land and wealth from rural labourers to the landed classes between the 16th and 18th centuries and the rack-renting, eviction and persecution of the poor. For landless labourers, he says, the termination of rights to common land “meant the difference between a viable life and starvation” {13}. Many died in the famines of the 1590s, 1620s and 1640s {14}. Many more – 80,000 in the early 17th Century according to the historian Peter Clark {15} – became vagabonds whose wandering put them on the wrong side of the law. They were branded, flogged back to their parishes, press-ganged by the navy and the merchant marine or forced into industries whose conditions and wage rates were “little better than slavery” {16}. The children of vagabonds and paupers were transported to Virginia, effectively as slaves {17}. Many of them died in transit. There were enclosure riots (attempts to resist the landlords’ seizure of the commons) all over the country {18}. Almost all of them failed, and many of the rioters were transported or executed. In the 18th and 19th Centuries, Marion Shoard records in her book This Land is Our Land (1987), a further seven million acres of England – twenty per cent of the total land area – were enclosed by landowners{19}.

Of course there is no single history of the countryside and no single means of interpreting it. Sir Tony Wrigley, for example, emphasises instead the constraints of a local agrarian economy, and sees population growth as the main driver of migration {20, 21}. But neither version of the lives of the other 99% is given by the National Trust when you visit its stately homes and grand estates. The story is told solely from the point of view of the landowner. History, to the Trust, is the propaganda of the victor.

In its document History and Place, the National Trust maintains that “we can never hope fully to understand the past, but we can at least recognise that history is open to widely different interpretations … The Trust is ready to explore unfamiliar or uncomfortable history in new ways”. {22} And it is true that if you visit one of the workhouses it has lovingly restored, you can relive “the harshness of the nineteenth-century Poor Laws” {23}. But when you read what it says about its great estates, you will find no clues as to how those workhouses were populated. Perhaps because it doesn’t want to scare its visitors away, perhaps because it has absorbed the views of previous landowners, it has airbrushed the poor from history.

Allotments have been used as a sop to the dispossessed for at least four centuries. The General Enclosure Act of 1845 took 615,000 acres from the poor and gave them 2,200 acres of allotments in return {24}. Just because we love and value allotments should not stop us from seeing that they also represent paternalistic tokenism. But I’m not asking the Trust to divide up all its lands and give them back to the people: its management of property on our behalf is liberal and benign. I am asking it to give us back our history.

http://www.monbiot.com

References:

1. Mike Davis, 2001. Late Victorian Holocausts: El Nino Famines and the Making of the Third World. Verso, London.

2. John Newsinger, 2006. The Blood Never Dried: a people’s history of the British empire. Bookmarks, London.

3. Mark Curtis, 2003. Web of Deceit: Britain’s Real Role in the World. Vintage, London.

4. Mark Curtis, 2007. Unpeople: Britain’s secret human rights abuses. Vintage, London.

5. Caroline Elkins, 2005. Britain’s Gulag: The Brutal End of Empire in Kenya. Jonathan Cape, London.

6. David Anderson, 2005. Histories of the Hanged. Weidenfeld & Nicholson.

7. Sarah Mukherjee, 19th February 2009. Trust frees land for allotments. BBC News Online. http://news.bbc.co.uk/1/hi/sci/tech/7898314.stm

8. Rebecca Smithers, 19th February 2009. Dig for recovery: allotments boom as thousands go to ground in recession. The Guardian.

9. The National Trust, viewed 23rd February 2009. Stowe Landscape Gardens: History. http://www.nationaltrust.org.uk/main/w-vh/w-visits/w-findaplace/w-stowegardens/w-stowegardens-history.htm
This page then refers us to the following:

10. John Tatter, 2007. Stowe Landscape Gardens: A Summary History. http://faculty.bsc.edu/jtatter/summary.html

11. Interestingly, Tatter (see above) records that “This early seventeenth-century landscape also included Stowe church and the village of Stowe, to the east”. But he doesn’t mention the village again. It simply vanishes from the record. In reality, all its buildings were destroyed, except the church.

12. E P Thomson, 1975. Whigs and Hunters, page 223. Penguin, London.

13. Christopher Hill, 1996. Liberty Against the Law, page 31. Allen Lane, London.

14. ibid, page 33.

15. Peter Clark, 1983. The English Ale-house: a social history. Cited by Christopher Hill, ibid, page 52.

16. ibid, page 30.

17. ibid, page 165.

18. ibid, page 38.

19. Marion Shoard, 1997. This Land Is Our Land. Gaia Books, London.

20. Tony Wrigley, pers comm. See:

21. E A Wrigley and R S Schofield, 1981. The Population History of England 1541-1871. Edward Arnold, London.

22. The National Trust, no date given. History and Place.
http://www.nationaltrust.org.uk/main/w-whatwedo-history_place.pdf

23. ibid.

24. http://www.allotment.org.uk/articles/Allotment-History.php

Copyright (c) 2006 Monbiot.com

http://www.monbiot.com/archives/2009/02/24/the-propaganda-of-the-victor/

Bill Totten http://www.ashisuto.co.jp/english/index.html

>The Unnoticed Technologies

>by John Michael Greer

The Archdruid Report (February 18 2009)

Druid perspectives on nature, culture, and the future of industrial society

When people talk about the role of technology in the future, most of the time the technologies they have in mind are the flashy ones – that is, those that haven’t been around long enough to slip into the background texture of everyday existence. Especially in periods of decline, though, it’s far more likely to be the technologies so common they’re hardly noticed that determine, by their survival or disappearance, the fate of societies.

For the Polynesian inhabitants of Easter Island, for example, deepwater canoes had been part of daily life for thousands of years. This, I suspect, is among the core reasons that nobody on Easter Island seems to have anticipated the consequences of cutting down too many trees. The resulting deforestation eliminated an essential resource – large tree trunks – without which deepwater canoes could not be made, cutting off the majority of the island’s food supply and, at the same time, the only way out of the trap the Easter Islanders set for themselves. The canoe had been so omnipresent a part of life for so long that the possibility of its absence very likely never entered into the islanders’ darkest dreams.

A similar sort of inattention, according to the medieval Arab historian ibn Khaldun, played a catastrophic role in the collapse and abandonment of cities across the Middle East and North Africa in the centuries prior to his own time. The Muqaddimah, ibn Khaldun’s treatise on the forces that shape history, paid close attention to the relationship between settled agricultural civilizations and nomadic herding societies. It’s a relationship worth watching; as far back as ancient Sumer, which in historical terms is pretty much as far back as you can go, the ebb and flow of power between desert herdspeople and settled agriculturalists sets the heartbeat of history. In Mesopotamia and many other places, civilizations rise on the backs of new technologies, prosper and expand at the expense of their nomadic neighbors, transmit their technical skills to those same neighbors, and then falter and collapse beneath nomad incursions.

What sets ibn Khaldun’s analysis apart from those of the many other historians who once tracked this cycle is his attention to the role of background technologies in bringing the cycle to an end. From Sumerian times onward, irrigation canals formed the backbone of settled life across the Middle East. While irrigation in a desert setting can cause salinization (the slow buildup of salts in the soil), this does not happen as automatically or as disastrously as some current theorists insist; it’s rarely mentioned, for example, that Syria – where grain agriculture was probably invented, and has certainly been practiced as long as anywhere else in the world – is still a significant exporter of wheat today. Two other factors less often discussed in modern studies of ecological history played at least as large a role.

The first of these, and over the long term the most important, is climate change. Over the ten thousand years or so since the end of the last ice age, climates have shifted dramatically many times over large areas of the world, and rarely so drastically as in the Middle East. The ice age climate spread deserts over much of the world, including areas that now receive plenty of rainfall, while a few regions that are now barren – for example, the Great Basin deserts in North America – got heavy rains and supported rich ecosystems and human societies. The chaotic climates that followed the breakup of the glaciers, and likely made the lives of our ancestors all too interesting, eventually gave way to what paleoclimatologists call the Holocene Climatic Optimum, a period of several thousand years in which global temperatures were much warmer and wetter than they are today.

During those years, the winter rains that now fall north of the Mediterranean swept across it to douse North Africa, and tropical monsoons rolled north into today’s deserts from Ethiopia to Pakistan. As recently as 6000 years ago, as a result, hippopotami flourished in a great chain of lakes across what is now the southern Sahara Desert, and further north the lakes and marshes gave way to a vast savanna full of giraffes, gazelles, lions, and elephants. Similar conditions prevailed over large parts of the Arabian peninsula and across the band of deserts that now stretch from Mesopotamia east to India.

What dried up the lakes and replaced savannas with sand dunes was the gradual cooling of the Earth’s climate, which shifted the rain bands toward their present locations, leaving deserts in their wake. Whole river systems vanished, along with the people who once lived beside them, as the rain that once fed both went away. The process took time – as late as the heyday of the Roman Empire, for example, North Africa still received winter rains and remained the Mediterranean’s major grain-producing area – but by ibn Khaldun’s time it was essentially complete. This was where the third factor, central to his own analysis, came into play.

The cyclic interaction between settled urban societies and desert nomads depended on the maintenance of irrigation technologies first put into place by the ancient Sumerians. The slow march of climate change made irrigation more difficult and more necessary at the same time, and most desert civilizations had to direct a fair proportion of their economic output into maintaining the canals and waterworks on which survival depended. This, as ibn Khaldun pointed out, became their Achilles’ heel, because the desert nomads who conquered the urban centers never quite grasped the necessity of the irrigation systems, and starved them of resources until they slid down the slow curve of failure. Like the deforestation that doomed the people of Easter Island, the abandonment of the irrigation canals was a one-way ticket to collapse; once farmland turned into desert, the agricultural wealth that made canal building and repair possible was no longer there to be spent, and regions that had been settled for millennia turned into deserts spotted with crumbling ruins.

All this has more than a little relevance to the twilight of the industrial age beginning around us today. Like the inhabitants of Easter Island, we depend on the reckless exploitation of limited resources to sustain our way of life; like the civilizations of the Middle East whose fate was chronicled by ibn Khaldun, our survival depends on fragile infrastructure systems that few of us understand and most of our leaders seem entirely willing to starve of necessary resources for the sake of short-term political advantage. The industrial system that supports us has been in place long enough that most of us seem to be unable to conceive of circumstances in which it might no longer be there.

One of the wrinkles of catabolic collapse – the process by which societies in decline cannibalize their own infrastructure to meet immediate needs, and so accelerate their own breakdown – is that it can trigger abrupt crises by wrecking some essential technology that is not recognized as such. We are already witnessing the early stages of exactly such a crisis. What large trees were to the Easter Islanders and irrigation canals were to the early medieval Middle East, the current form of money economy is to modern industrial society, and the speculative delusions that passed for financial innovation over the last few decades have played exactly the same role as the invading nomads of ibn Khaldun’s history, by stripping a fragile system of resources in the pursuit of immediate gain. The result, just as in the 1930s, is that a nation still relatively rich in potential resources, and provided with a large and skilled labor force, is sliding into crushing poverty because the intricate social system we use to allocate labor and resources has broken down.

Other unwelcome surprises along the same lines are likely events in the future. Before we get there, however, those of us who are concerned about the possible downside of history might be well advised to pay more attention to the unnoticed technologies in our lives, and to start thinking about how to make do without them, or get some substitute in place in a hurry, if the unthinkable happens and one or more of them suddenly goes away.
_____

John Michael Greer has been active in the alternative spirituality movement for more than 25 years, and is the author of a dozen books, including The Druidry Handbook (2006) and The Long Descent (2008). He lives in Ashland, Oregon.

http://thearchdruidreport.blogspot.com/2009/02/unnoticed-technologies.html

Bill Totten http://www.ashisuto.co.jp/english/index.html

>The Real Great Depression

>The depression of 1929 is the wrong model for the current economic crisis

by Scott Reynolds Nelson

The Chronicle Review (October 17 2008)

As a historian who works on the 19th century, I have been reading my newspaper with a considerable sense of dread. While many commentators on the recent mortgage and banking crisis have drawn parallels to the Great Depression of 1929, that comparison is not particularly apt. Two years ago, I began research on the Panic of 1873, an event of some interest to my colleagues in American business and labor history but probably unknown to everyone else. But as I turn the crank on the microfilm reader, I have been hearing weird echoes of recent events.

When commentators invoke 1929, I am dubious. According to most historians and economists, that depression had more to do with overlarge factory inventories, a stock-market crash, and Germany’s inability to pay back war debts, which then led to continuing strain on British gold reserves. None of those factors is really an issue now. Contemporary industries have very sensitive controls for trimming production as consumption declines; our current stock-market dip followed bank problems that emerged more than a year ago; and there are no serious international problems with gold reserves, simply because banks no longer peg their lending to them.

In fact, the current economic woes look a lot like what my 96-year-old grandmother still calls “the real Great Depression”. She pinched pennies in the 1930s, but she says that times were not nearly so bad as the depression her grandparents went through. That crash came in 1873 and lasted more than four years. It looks much more like our current crisis.

The problems had emerged around 1870, starting in Europe. In the Austro-Hungarian Empire, formed in 1867, in the states unified by Prussia into the German empire, and in France, the emperors supported a flowering of new lending institutions that issued mortgages for municipal and residential construction, especially in the capitals of Vienna, Berlin, and Paris. Mortgages were easier to obtain than before, and a building boom commenced. Land values seemed to climb and climb; borrowers ravenously assumed more and more credit, using unbuilt or half-built houses as collateral. The most marvelous spots for sightseers in the three cities today are the magisterial buildings erected in the so-called founder period.

But the economic fundamentals were shaky. Wheat exporters from Russia and Central Europe faced a new international competitor who drastically undersold them. The 19th-century version of containers manufactured in China and bound for Wal-Mart consisted of produce from farmers in the American Midwest. They used grain elevators, conveyer belts, and massive steam ships to export trainloads of wheat to abroad. Britain, the biggest importer of wheat, shifted to the cheap stuff quite suddenly around 1871. By 1872 kerosene and manufactured food were rocketing out of America’s heartland, undermining rapeseed, flour, and beef prices. The crash came in Central Europe in May 1873, as it became clear that the region’s assumptions about continual economic growth were too optimistic. Europeans faced what they came to call the American Commercial Invasion. A new industrial superpower had arrived, one whose low costs threatened European trade and a European way of life.

As continental banks tumbled, British banks held back their capital, unsure of which institutions were most involved in the mortgage crisis. The cost to borrow money from another bank – the interbank lending rate – reached impossibly high rates. This banking crisis hit the United States in the fall of 1873. Railroad companies tumbled first. They had crafted complex financial instruments that promised a fixed return, though few understood the underlying object that was guaranteed to investors in case of default. (Answer: nothing). The bonds had sold well at first, but they had tumbled after 1871 as investors began to doubt their value, prices weakened, and many railroads took on short-term bank loans to continue laying track. Then, as short-term lending rates skyrocketed across the Atlantic in 1873, the railroads were in trouble. When the railroad financier Jay Cooke proved unable to pay off his debts, the stock market crashed in September, closing hundreds of banks over the next three years. The panic continued for more than four years in the United States and for nearly six years in Europe.

The long-term effects of the Panic of 1873 were perverse. For the largest manufacturing companies in the United States – those with guaranteed contracts and the ability to make rebate deals with the railroads – the Panic years were golden. Andrew Carnegie, Cyrus McCormick, and John D Rockefeller had enough capital reserves to finance their own continuing growth. For smaller industrial firms that relied on seasonal demand and outside capital, the situation was dire. As capital reserves dried up, so did their industries. Carnegie and Rockefeller bought out their competitors at fire-sale prices. The Gilded Age in the United States, as far as industrial concentration was concerned, had begun.

As the panic deepened, ordinary Americans suffered terribly. A cigar maker named Samuel Gompers who was young in 1873 later recalled that with the panic, “economic organization crumbled with some primeval upheaval”. Between 1873 and 1877, as many smaller factories and workshops shuttered their doors, tens of thousands of workers – many former Civil War soldiers – became transients. The terms “tramp” and “bum”, both indirect references to former soldiers, became commonplace American terms. Relief rolls exploded in major cities, with 25-percent unemployment (100,000 workers) in New York City alone. Unemployed workers demonstrated in Boston, Chicago, and New York in the winter of 1873-74 demanding public work. In New York’s Tompkins Square in 1874, police entered the crowd with clubs and beat up thousands of men and women. The most violent strikes in American history followed the panic, including by the secret labor group known as the Molly Maguires in Pennsylvania’s coal fields in 1875, when masked workmen exchanged gunfire with the “Coal and Iron Police”, a private force commissioned by the state. A nationwide railroad strike followed in 1877, in which mobs destroyed railway hubs in Pittsburgh, Chicago, and Cumberland, Maryland

In Central and Eastern Europe, times were even harder. Many political analysts blamed the crisis on a combination of foreign banks and Jews. Nationalistic political leaders (or agents of the Russian czar) embraced a new, sophisticated brand of anti-Semitism that proved appealing to thousands who had lost their livelihoods in the panic. Anti-Jewish pogroms followed in the 1880s, particularly in Russia and Ukraine. Heartland communities large and small had found a scapegoat: aliens in their own midst.

The echoes of the past in the current problems with residential mortgages trouble me. Loans after about 2001 were issued to first-time homebuyers who signed up for adjustable rate mortgages they could likely never pay off, even in the best of times. Real-estate speculators, hoping to flip properties, overextended themselves, assuming that home prices would keep climbing. Those debts were wrapped in complex securities that mortgage companies and other entrepreneurial banks then sold to other banks; concerned about the stability of those securities, banks then bought a kind of insurance policy called a credit-derivative swap, which risk managers imagined would protect their investments. More than two million foreclosure filings – default notices, auction-sale notices, and bank repossessions – were reported in 2007. By then trillions of dollars were already invested in this credit-derivative market. Were those new financial instruments resilient enough to cover all the risk? (Answer: no.) As in 1873, a complex financial pyramid rested on a pinhead. Banks are hoarding cash. Banks that hoard cash do not make short-term loans. Businesses large and small now face a potential dearth of short-term credit to buy raw materials, ship their products, and keep goods on shelves.

If there are lessons from 1873, they are different from those of 1929. Most important, when banks fall on Wall Street, they stop all the traffic on Main Street – for a very long time. The protracted reconstruction of banks in the United States and Europe created widespread unemployment. Unions (previously illegal in much of the world) flourished but were then destroyed by corporate institutions that learned to operate on the edge of the law. In Europe, politicians found their scapegoats in Jews, on the fringes of the economy. (Americans, on the other hand, mostly blamed themselves; many began to embrace what would later be called fundamentalist religion.)

The post-panic winners, even after the bailout, might be those firms – financial and otherwise – that have substantial cash reserves. A widespread consolidation of industries may be on the horizon, along with a nationalistic response of high tariff barriers, a decline in international trade, and scapegoating of immigrant competitors for scarce jobs. The failure in July of the World Trade Organization talks begun in Doha seven years ago suggests a new wave of protectionism may be on the way.

In the end, the Panic of 1873 demonstrated that the center of gravity for the world’s credit had shifted west – from Central Europe toward the United States. The current panic suggests a further shift – from the United States to China and India. Beyond that I would not hazard a guess. I still have microfilm to read.

_____

Scott Reynolds Nelson is a professor of history at the College of William and Mary. Among his books is Steel Drivin’ Man: John Henry, the Untold Story of an American legend (Oxford University Press, 2006).

The Chronicle Review – Volume 55, Issue 8, Page B98

Copyright (c) 2008 by The Chronicle of Higher Education

http://chronicle.com/temp/reprint.php?id=477k3d8mh2wmtpc4b6h07p4hy9z83x18

Bill Totten http://www.ashisuto.co.jp/english/index.html

>"It’s (not) the Economy, Stupid"

>by Dan Bednarz

Culture Change (January 28 2009)

Author’s note: This article will be followed by “How Brittle Is Healthcare?”

As societies throughout the world wobble on the edge of socioeconomic chaos, New York Times columnist Bob Herbert avers, “The economy is obviously issue Number One”. Well, that’s the proximate problem, but what else is going on? What has made the continuing decline so massive? Why is it that “… the current economic crisis has totally scrambled the intellectual assumptions of almost every policymaker”? {1}

Behind the decadence, greed and folly of financial institutions and those charged with regulating them is, in a word, overconsumption. In detail, our culturally coded pursuit of economic expansion has pushed us into The Bottleneck {2} of ecological limitations and dilemmas. Petroleum – peak oil – is the first major resource constraint; further, we have climate change, fresh water scarcity, dying oceans, species extinction, overpopulation, soil erosion, and other problems narrowing our options to align our economy with obdurate ecological realities.

President Obama arrives promising “change”, yet he and his Clinton throwback advisors betray a yearning for the status quo ante. He pursues Keynesian demand creation because he believes this worked seventy years ago for FDR, when the age of oil was dawning and not entering its denouement. The added debt – already vast in the public and private spheres – and associated risks must be accepted, so goes this gambler’s reasoning, to preserve “our way of life”, as if this way of life has no role in creating our predicament.

The ecological question, “Is growth sustainable?” would lead to integrative and forward-looking problem solving, but it is absent from Obama’s recovery lexicon, let alone guiding policy.

To bring this full circle, many financial institutions may be bankrupt and colluding with or deceiving governments, including the US Treasury, hoping that the economy can rebound – especially housing prices – to make them solvent or far less debt-ridden. Failing this improbable event, they want a taxpayer bailout. Commitment to growth as much as money-based politics and cronyism, I suggest, explains the government’s silence about investigating and exposing insolvency. In other words, if these institutions are drenched in debt, belief in limitless growth is cast into radical doubt. Therefore, solvency is a taboo topic, as is an airing of the implications of peak oil.

We should remember that public policy and business strategic planning posit an expanding economic pie. How often have we heard, “We’ve got the resources, we just need the commitment”? If growth as we have known it is no longer possible because oil production has peaked, then pressing social issues, in addition to the havoc energy descent is now beginning to wreak, make it imperative to begin a national dialogue about realistic options for overhauling our way of life: credit, consumption, travel, agriculture, education, healthcare – you name it.

Redesigning society to function with less energy, which translates into less consumption, should be our national mission – it’s qualitatively and quantitatively more threatening than terrorism. Indeed, Mother Nature is rearranging our lives now as, for example, colleges impose hiring freezes, lose large portions of their endowments, and propose “no frills education”; automobile and many other consumer goods sales plummet; states cutback on services and furlough workers; healthcare is more expensive and less available; Obama hints at reducing entitlements; millions lose their jobs; and in a thousand other ways our society contracts.

An aside: Overconsumption presents an irony because many Americans are not ostentatious consumers; they are hard working yet struggling to make ends meet or are mired in or sliding into poverty. They could, I believe, accept massive de-consumption and a reduced standard of living if they knew they were spared destitution and sacrifices were introduced in across-the-board fairness. (This is, by the way, Obama’s ace in the hole when his legitimacy comes into question.) This urgent public discussion is absent because it requires a political and cultural transformation similar to what Thomas Kuhn {3} calls a paradigm-shift in science. Kuhn describes paradigm shifts as governed by political struggle and sociological processes. His controversial core thesis is that scientific evidence itself is paradigm-dependent for meaning and even its recognition as evidence.

Michel Foucault {4} has written in a similar vein of the “episteme”, which operates at a meta-level to regulate social constructions of “reality” by proscribing thought, knowledge, and notions of morality and judgment to serve current arrangement of power, status and propriety. Foucault describes it as the non-consciously operating yet functionally “strategic apparatus” determining which statements may be regarded as reasonable, obvious, true, et cetera and which other statements are considered absurd, illogical, irrelevant, and unworthy of consideration.

Those who toil in the peak oil vineyards know that most people unwittingly rely on the dominant episteme – “growth and technological progress are natural, unbounded and will save us” – to reconfigure or dismiss “the facts” of peak oil geology and, more generally, The Bottleneck dilemmas. Blessedly, this episteme is beginning to “rupture”, as Foucault phrases it, because it is unable to provide soothing, controlling and cohesive explanations of our disintegrating social-empirical world. Similarly, Kuhn refers to a paradigmatic “crisis” as when scientific “anomalies” accumulate to the point that they inhibit the workings of “normal science”. During a scientific crisis the dominant paradigm’s adherents check their data and instruments and search for hidden “intervening” variables to account for anomalies; but only under duress as a last resort do they – if ever – question the validity of the paradigm itself. Alternative paradigms offer radically different accounts of these anomalies, as in: the economic crisis is rooted in reduced net energy flowing into society – that’s why none of the common “stimulus” tools are working.

In this way competing paradigms and epistemes “talk past” one another and lead to differing problem formations, policies and actions. To illustrate, at a PBS NewsHour seminar held in Pittsburgh in April 2008 on the burgeoning subprime loan crisis, the economist on the panel told the restive retirees in the audience battering him with questions not to worry about their losses in the market because, “Growth overcomes many blunders and misdeeds … and I assure you we’ll grow our way out of this crisis”. I then raised the question of oil scarcity as a front-end trigger to the spreading financial crisis and, most important, as disallowing a return to growth. He became exasperated and said, “Well, that’s just wrong. We’ve got lots of coal and nuclear power to switch to; energy’s so plentiful it’s not a concern; that’s just basic economics.”

It is basic dominant episteme economics, rooted in the premise that we can never exhaust the earth’s resources. This episteme has inspired the monetarist, Keynesian and Marxist traditions of economics.

In 1975 heterodox economist Nicholas Georgescu-Roegen characterized this episteme as “anchored in a deep-lying belief in mankind’s immortality” {5}. He wrote “Energy and Economic Myths” {5} to systematically and with humor expose orthodox economics’ profound misunderstanding of resources, the environmental costs of economic activity and, most pointedly, how the laws of entropy over the long-term invalidate perpetual growth. For example, he comments on Nobel economist Robert Solow’s incredible contention that we could substitute “other factors for natural resources” should we ever need to do so:

One must have a very erroneous view of the economic process as a whole not to see that there are no material factors other than natural resources. To maintain further [as Solow does] ‘that the world can, in effect, get along without natural resources’ is to ignore the differences between the actual world and the Garden of Eden.

So it is that mainstream analyses of the current financial/economic crisis proceed as if human existence is non-corporeal. For example, two prominent economists {6} argue: “The world’s fundamental economic problem today is a staggering loss of business confidence”. Ugo Bardi, writing about the parallels between the end of the whaling era and today’s blindness to peak oil, observes of a book written in that twilight period:

… we never find mention that whales had become scarce. On the contrary, the decline of the catch was attributed to such factors as the whales’ “shyness” and the declining “character of the men engaged”. [The author] seems to think that the crisis of the whaling industry of his [nineteenth century] times [could] be solved by means of governmental subsidies. {7}

Such is the power of episteme to obfuscate the obvious – until it ruptures.

References

1. VandeHei, Jim and John F Harris. “Seven reasons for healthy skepticism”. Yahoo News, January 21 2009. news.yahoo.com.
2. Wilson, Edward O. “The Bottleneck”. Scientific American, February 22 2002. sciam.com.
3. Kuhn, Thomas. The Structure of Scientific Revolutions. Chicago: University of Chicago Press. 1965.
4. Foucault, Michel. The Archaeology of Knowledge & the Discourse on Language. New York: Pantheon books. 1972.
5. Georgescu-Roegen, Nicholas. “Energy and economic myths”. Southern Economic Journal, V 41, N 3, January 1975. dieoff.org.
6. Ackerlof, George and Robert Schiller, Animal Spirits: How Human Psychology Drives the Economy and Why It Matters for Global Capitalism. Princeton: Princeton University Press. 2009.
7. Bardi, Ugo. “Crude oil; how high can it go?” The Oil Drum: Europe. May 15 2008. europe.theoildrum.com

_____

Dan Bednarz has a website, healthafteroil.wordpress.com,
and has written several articles on Culture Change:

“Peak Oil and the health care crisis in America”, June 30 2006: http://www.culturechange.org/cms/index.php?option=com_content&task=view&id=61&Itemid=34

“Sicko and the Ecology of Health Care Reform”, July 31 2007 (Co-authored with J Mac Crawford): http://www.culturechange.org/cms/index.php?option=com_content&task=view&id=119&Itemid=1

“Al Gore’s gamble”, September 12 2008: http://www.culturechange.org/cms/index.php?option=com_content&task=view&id=190&Itemid=1

“Priests, Prophets and Palin: On Bill Moyers”, September 12 2008: http://www.culturechange.org/cms/index.php?option=com_content&task=view&id=216&Itemid=1

“Our Humpty-Dumpty Economy”, November 20 2008: http://culturechange.org/cms/index.php?option=com_content&task=view&id=256&Itemid=33

http://culturechange.org/cms/index.php?option=com_content&task=view&id=301&Itemid=1

Bill Totten http://www.ashisuto.co.jp/english/index.html

>The Abyss Stares Back

>Clusterfuck Nation

by Jim Kunstler

Comment on current events by the author of
The Long Emergency (2005)

http://www.kunstler.com (February 23 2009)

The public perception of the ongoing fiasco in governance has moved from sheer, mute incomprehension to goggle-eyed panic as the scrims of unreality peel away revealing something like a national death-watch scene in history’s intensive care unit. Is the USA in recession, depression, or collapse? People are at least beginning to ask. Nature’s way of hinting that something truly creepy may be up is when both Paul Volcker and George Soros both declare on the same day that the economic landscape is looking darker than the Great Depression.

Those tuned into the media-waves were enchanted, in a related instance, by Rick Santelli’s grand moment of theater in the Chicago trader’s pit last week when he seemed to ignite the first spark of revolution by demonstrating that bail-out fatigue had morphed into high emotion – and that the emotion could be marshaled against public policy. The traders in the pit on-screen seemed to color up and buzz loudly, like ordinary grasshoppers turning into angry locusts preparing to ravage a waiting valley. “Are you listening, President Obama?” Mr. Santelli asked portentously.

In the broad blogging margins of the web that orbit the mainstream media like the rings of Saturn, an awful lot of reasonable people have begun to ask whether President Obama is a stooge of whatever remains of Wall Street, with Citigroup and Goldman Sachs’s puppeteer, Robert Rubin, pulling strings behind an arras in the Oval Office. Personally, I doubt it, but it is still a little hard to understand what the President is up to. For one thing, the stimulus package, so-called, looks more and more like national sub-prime mortgage itself, a bad bargain made under less-than-realistic terms, with future obligations fobbed onto whoever inhabits this corner of the world for the next seven hundred years – and all to pay for a bunch of granite counter-tops and flat-screen TVs.

I suppose Mr Obama is burdened with the knowledge that the economic truth is so much worse than he imagined back in November that there is simply nothing to do at this point except pretend to serve up a “tasting menu” of rescue plans in the hope that markets and mechanisms might be conned back into compliance with our wish keep getting something-for-nothing forever. FDR already used the fear of fear itself trope, so Mr O is left with little more than displaying pluck and confidence in the face of overwhelming bad news.

The sad truth is that banking has become a Chinese fire drill – a frantic act of futility – as insolvent companies persist in covering up their losses in order to avoid the counter-party hell of credit default swaps that would ring the world’s “game over” bell. This can only go on so long. All the chatter about “nationalizing” the banks really boils down to what kind of bankruptcy work-out will they be put through, how destructive will the process be, and how much of the pain can be shoved forward in time to people now in diapers and their descendants.

Among the questions that disturb the sleep of many casual observers is how come Mr O doesn’t get that the conventional process of economic growth – based, as it was, on industrial expansion via revolving credit in a cheap-energy-resource era – is over, and why does he keep invoking it at the podium? Dear Mr President, you are presiding over an epochal contraction, not a pause in the growth epic. Your assignment is to manage that contraction in a way that does not lead to world war, civil disorder or both. Among other things, contraction means that all the activities of everyday life need to be downscaled including standards of living, ranges of commerce, and levels of governance. “Consumerism” is dead. Revolving credit is dead – at least at the scale that became normal the last thirty years. The wealth of several future generations has already been spent and there is no equity left there to re-finance.

If contraction and downscaling are indeed the case, then the better question is: why don’t we get started on it right away instead of flogging rescue plans to restart something that is DOA? Downscaling the price of over-priced houses would be a good place to start. This gets to the heart of Rick Santelli’s crowd-stirring moment. Let the chumps and weasels who over-reached take their lumps and move into rentals. Let the bankers who parlayed these fraudulent mortgages into investment swindles lose their jobs, surrender their perqs, and maybe even go to jail (if attorney general Eric Holder can be induced to investigate their deeds). No good will come of propping up the false values of mis-priced things.

No good, in fact, will come of a campaign to sustain the unsustainable, which is exactly what the Obama program is starting to look like. In the folder marked “unsustainable” you can file most of the artifacts, usufructs, habits, and expectations of recent American life: suburban living, credit-card spending, Happy Motoring, vacations in Las Vegas, college education for the masses, and cheap food among them. All these things are over. The public may suspect as much, but they can’t admit it to themselves, and political leadership has so far declined to speak the truth about it for them – in short, to form a useful consensus that will allow us to move forward effectively. One of the sad paradoxes of politics is that democracies do not seem very good at disciplining their citizens’ behavior. The wish to please voters and the influence of campaign money overwhelm even leaders with mature instincts. In America’s case, this could lead to what I like to call corn-pone Naziism a few years down the road. Someone will design snazzy uniforms and get us all marching around to “God Bless America.” At the point of a gun.

It’s not too late for President Obama to start uttering these truths so that we can avoid a turn to fascism and get on with the real business of America’s next phase of history – living locally, working hard at things that matter, and preserving civilized culture. What a lot of us can see now staring out of the abyss is a new dark age. I don’t think it’s necessarily our destiny to end up that way, but these days we’re not doing much to avoid it.

_____

My new novel of the post-oil future, World Made By Hand, is available at all booksellers.

http://jameshowardkunstler.typepad.com/clusterfuck_nation/2009/02/the-abyss-stares-back.html

Bill Totten http://www.ashisuto.co.jp/english/index.html

>Finance Capitalism Hits a Wall

>The Oligarchs’ Escape Plan –
at the Treasury’s Expense

by Professor Michael Hudson

Global Research (February 17 2009)

The financial “wealth creation” game is over. Economies emerged from World War II relatively free of debt, but the sixty-year global run-up has run its course. Finance capitalism is in a state of collapse, and marginal palliatives cannot revive it. The US economy cannot “inflate its way out of debt”, because this would collapse the dollar and end its dreams of global empire by forcing foreign countries to go their own way. There is too little manufacturing to make the economy more “competitive”, given its high housing costs, transportation, debt and tax overhead. A quarter to a third of US real estate has fallen into Negative Equity, so no banks will lend to them. The economy has hit a debt wall and is falling into Negative Equity, where it may remain for as far as the eye can see until there is a debt write-down.

Mr Obama’s “recovery” plan based on infrastructure spending will make real estate fortunes for well-situated properties along the new public transport routes, but there is no sign of cities levying a windfall property tax to save their finances. Their mayors would rather keep the cities broke than to tax real estate and finance. The aim is to re-inflate property markets to enable owners to pay the banks, not to help the public sector break even. So state and local pension plans will remain underfunded while more corporate pension plans go broke.

One would think that politicians would be willing to do the math and realize that debts that can’t be paid, won’t be. But the debts are being kept on the books, continuing to extract interest to pay the creditors that have made the bad loans. The resulting debt deflation threatens to keep the economy in depression until a radical shift in policy occurs – a shift to save the “real” economy, not just the financial sector and the wealthiest ten percent of American families.

There is no sign that Mr Obama’s economic advisors, Treasury officials and heads of the relevant Congressional committees recognize the need for a write-down. After all, they have been placed in their positions precisely because they do not understand that debt leveraging is a form of economic overhead, not real “wealth creation”. But their tunnel vision is what makes them “reliable” to Wall Street, which doesn’t like surprises. And the entire character of today’s financial crisis continues to be labeled “surprising” and “unexpected” by the press as each new surprisingly pessimistic statistic hits the news. It’s safe to be surprised; suspicious to have expected bad news and being a “premature doomsayer”. One must have faith in the system above all. And the system was the Greenspan Bubble. That is why “Ayn Rand Alan” was put in charge in the first place, after all.

So the government tries to recover the happy Bubble Economy years by getting debt growing again, hoping to re-inflate real estate and stock market prices. That was, after all, the Golden Age of finance capital’s world of using debt leverage to bid up the book-price of fictitious capital assets. Everyone loved it as long as it lasted. Voters thought they had a chance to become millionaires, and approved happily. And at least it made Wall Street richer than ever before – while almost doubling the share of wealth held by the wealthiest one percent of America’s families. For Washington policy makers, they are synonymous with “the economy” – at least the economy for which national economic policy is being formulated these days.

The Obama-Geithner plan to restart the Bubble Economy’s debt growth so as to inflate asset prices by enough to pay off the debt overhang out of new “capital gains” cannot possibly work. But that is the only trick these ponies know. We have entered an era of asset-price deflation, not inflation. Economic data charts throughout the world have hit a wall and every trend has been plunging vertically downward since last autumn. US consumer prices experienced their fastest plunge since the Great Depression of the 1930s, along with consumer “confidence”, international shipping, real estate and stock market prices, oil and the exchange rate for British sterling. The global economy is falling into depression, and cannot recover until debts are written down.

Instead of doing this, the government is doing just the opposite. It is proposing to take bad debts onto the public-sector balance sheet, printing new Treasury bonds [to] give the banks – bonds whose interest charges will have to be paid by taxing labor and industry.

The oligarchy’s plans for a bailout
(at least of its own financial position)

In periods of looming collapse, wealthy elites protect their funds like rats fleeing a sinking ship. In times past they bought gold when currencies started to weaken. (Patriotism never has been a characteristic of cosmopolitan finance capital.) Since the 1950s the International Monetary Fund has made loans to support Third World exchange rates long enough to subsidize capital flight. In the United States over the past half-year, bankers and Wall Street investors have tapped the Treasury and Federal Reserve to support prices of their bad loans and financial gambles, buying out or guaranteeing $12 trillion of these junk debts. Protection for the US financial elite thus takes the form of domestic public debt, not foreign currency.

It is all in vain as far as the real economy is concerned. When the Treasury gives banks newly printed government bonds in “cash for trash” swaps, it leaves today’s unpayably high private-sector debt in place. All that happens is that this debt is now owed to (or guaranteed by) the government, which will have to impose taxes to pay the interest charges.

The new twist is a variant on the IMF “stabilization” plans that lend money to central banks to support their currencies – for long enough to enable local oligarchs and foreign investors to move their savings and investments offshore at a good exchange rate. The currency then is permitted to collapse, enabling currency speculators to rake in enough gains to empty out the central bank’s reserves. Speculators view these central bank holdings as a target to be raided – the larger the better. The IMF will lend a central bank, say, $10 billion to “support the currency”. Domestic holders will flee the currency at a high exchange rate. Then, when the loan proceeds are depleted, the currency plunges. Wages are squeezed in the usual IMF austerity program, and the economy is forced to earn enough foreign exchange to pay back the IMF.

As a condition for getting this kind of IMF “support”, governments are told to run a budget surplus, cut back social spending, lower wages and raise taxes on labor so as to squeeze out enough exports to repay the IMF loans. But inasmuch as this kind “stabilization plan” cripples their domestic economy, they are obliged to sell off public infrastructure at distress prices – to foreign buyers who themselves borrow the money. The effect is to make such countries even more dependent on less “neoliberalized” economies.

Latvia is a poster child for this kind of disaster. Its recent agreement with Europe is a case in point. To help the Swedish banks withdraw their funds from the sinking ship, EU support is conditional on Latvia’s government agreeing to cut salaries in the private sector – and not to raise property taxes (currently almost zero).

The problem is that Latvia, like other post-Soviet economies, has scant domestic output to export. Industry throughout the former Soviet Union was torn up and scrapped in the 1990s. (Welcome to victorious finance capitalism, Western-style.) What they had was real estate and public infrastructure free of debt – and hence, available to be pledged as collateral for loans to finance their imports. Ever since its independence from Russia in 1991, Latvia has paid for its imported consumer goods and other purchases by borrowing mortgage credit in foreign currency from Scandinavian and other banks. The effect has been one of the world’s biggest property bubbles – in an economy with no means of breaking even except by loading down its real estate with more and more debt. In practice the loans took the form of mortgage borrowing from foreign banks to finance a real estate bubble – and their import dependency on foreign suppliers.

So instead of helping it and other post-Soviet nations develop self-reliant economies, the West has viewed them as economic oysters to be broken up to indebt them in order to extract interest charges and capital gains, leaving them empty shells. This policy crested on January 26 2009, when Joaquin Almunia of the European Commission wrote a letter to Latvia’s Prime Minister spelling out the terms on which Europe will bail out the Swedish and other foreign banks operating in Latvia – at Latvia’s own expense:

Extended assistance is to be used to avoid a balance of payments crisis, which requires … restoring confidence in the banking sector [now entirely foreign owned], and bolstering the foreign reserves of the Bank of Latvia. This implies financing … outstanding government debt repayments (domestic and external). And if the banking sector were to experience adverse events, part of the assistance would be used for targeted capital infusions or appropriate short-term liquidity support. However, financial assistance is not meant to be used to originate new loans to businesses and households …

… it is important not to raise ungrounded expectations among the general public and the social partners, and, equally, to counter misunderstandings that may arise in this respect. Worryingly, we have witnessed some recent evidence in Latvian public debate of calls for part of the financial assistance to be used inter alia for promoting export industries or to stimulate the economy through increased spending at large. It is important actively to stem these misperceptions.

Riots broke out last week, and protesters stormed the Latvian Treasury. Hardly surprising! There is no attempt to help Latvia develop the export capacity to cover its imports. After the domestic kleptocrats, foreign banks and investors have removed their funds from the economy, the Latvian lat will be permitted to depreciate. Foreign buyers then can come in and pick up local assets on the cheap once again.

The practice of European banks riding the crest of the post-Soviet real estate bubble is backfiring to wreck the European economies that have engaged in this predatory lending to neighboring economies as well. As one reporter has summarized:

In Poland sixty percent of mortgages are in Swiss francs. The zloty has just halved against the franc. Hungary, the Balkans, the Baltics, and Ukraine are all suffering variants of this story. As an act of collective folly – by lenders and borrowers – it matches America’s sub-prime debacle. There is a crucial difference, however. European banks are on the hook for both. US banks are not. Almost all East bloc debts are owed to West Europe, especially Austrian, Swedish, Greek, Italian, and Belgian banks. {1}

This was the West’s alternative to Stalinism. It did not help these countries emulate how Britain and America got rich by protectionist policies and publicly nurtured industrialization and infrastructure spending. Rather, the financial rape and industrial dismantling of the former Soviet economies was the most recent exercise in Western colonialism. At least US investors were smart enough to stand clear and merely ride the stock market run-up before jumping ship.

But now, the government’s plan to “save” the economy is to “save the banks”, along similar lines to the West trying to save its banks from their adventure in the post-Soviet economies. This is the basic neoliberal economic plan, after all. The US economy is about to be “post-Sovietized”.

The US giveaway to banks, masquerading as
“help for troubled homeowners”

The Obama bank bailout is arranged much like an IMF loan to support the exchange rate of foreign currency, but with the Treasury supporting financial asset prices for US banks and other financial institutions. Instead of banks and oligarchs abandoning the dollar, the aim is to enable them to dump their bad mortgages and CDOs and get domestic Treasury bonds. Private-sector debt will be moved onto the US Government balance sheet, where “taxpayers” will bear losses – mainly labor not Wall Street, inasmuch as the financial sector has been freed of income-tax liability by the “small print” in last autumn’s Paulson-Bush bailout package. But at least the US Government is handling the situation entirely in domestic dollars.

As in Third World austerity programs, the effect of keeping the debts in place at the “real” economy’s expense will be to shrink the domestic US market – while providing opportunities for hedge funds to pick up depreciated assets cheaply as the federal government, states and cities sell them off. This is called letting the banks “earn their way out of debt”. It’s strangling the “real” economy, because not a dollar of the government’s response has been devoted to reducing the overall debt volume.

Take the much-vaunted $50 billion program designed to renegotiate mortgages downward for “troubled homeowners”. Upon closer examination it turns out that the real beneficiaries are the giant leading banks such as Citibank and Bank of America that have made the bad loans. The Treasury will take on the bad debt that banks are stuck with, and will permit mortgagees to renegotiate their monthly payment down to 38% of their income. But rather than the banks taking the loss as they should do for over-lending, the Treasury itself will make up the difference – and pay it to the banks so that they will be able to get what they hoped to get. The hapless mortgage-burdened family stuck in their negative-equity home turns out to be merely a passive vehicle for the Treasury to pass debt relief on to the commercial banks.

Few news stories have made this clear, but the Financial Times spelled the details buried in small print {2}. It added that the Treasury has not yet decided whether to write down the debt principal for the estimated fifteen million families with negative equity (and perhaps thirty million by this time next year as property prices continue to plunge). No doubt a similar deal will be made: For every $100,000 of write-down in debt owed by over-mortgaged homeowners, the bank will receive $100,000 from the Treasury. Government debt will rise by $100,000, and the process will continue until the Treasury has transferred $50,000,000 to the banks that made the reckless loans.

There is enough for just 500 of these renegotiations of $100,000 each. Hardly enough to make much of a dent, but the principle has been put in place for many further bailouts. It will take almost an infinity of them, as long as the Treasury tries to support the fiction that “the miracle of compound interest” can be sustained for long. The danger is the economy may be dead by the time saner economic understanding penetrates the public consciousness. In the mean time, bad private-sector debt will be shifted onto the government’s balance sheet. Interest and amortization currently owed to the banks will be replaced by obligations to the US Treasury. Taxes will be levied to make up the bad debts with which the government is stuck. The “real” economy will pay Wall Street – and will be paying for decades!

Calling the $12 trillion giveaway to bankers a “subprime crisis” makes it appear that bleeding-heart liberals got Fannie Mae and Freddie Mac into trouble by insisting that these public-private institutions make irresponsible loans to the poor. The party line is, “Blame the victim”. But we know this is false. The bulk of bad loans are concentrated in the largest banks. It was Countrywide and other banksters that led the irresponsible lending and brought heavy-handed pressure on Fannie Mae. Most of the nation’s smaller, local banks didn’t make such reckless loans. The big mortgage shops didn’t care about loan quality, because they were run by salesmen. The Treasury is paying off the gamblers and billionaires by supporting the value of bank loans, investments and derivative gambles, leaving the Treasury in debt.

US/post-Soviet Convergence?

It may be time to look once again at what Larry Summers and his Rubinomics gang did in Russia in the mid-1990s and to Third World countries during his tenure as World Bank economist to see what kind of future is being planned for the US economy over the next few years. Throughout the Soviet Union the neoliberal model established “equilibrium” in a way that involved demographic collapse: shortening life spans, lower birth rates, alcoholism and drug abuse, psychological depression, suicides, bad health, unemployment and homelessness for the elderly (the neoliberal mode of Social Security reform).

Back in the 1970s, people speculated whether the US and Soviet economies were converging. Throughout the 20th century, of course, everyone expected government regulation, infrastructure investment and planning to increase. It looked like the spread of democratically elected governments would go hand in hand with people voting in their own economic interest to raise living standards, thereby closing the inequality gap.

This is not the kind of convergence that has occurred since 1991. Government power is being dismantled, living standards have stagnated and wealth is concentrating at the top of the economic pyramid. Economic planning and resource allocation has passed into the hands of Wall Street, whose alternative to Hayek’s “road to serfdom” is debt peonage for the economy at large. There does need to be a strong state, to be sure, to keep the financial and real estate rentier power in place. But the West’s alternative to the old Soviet bureaucracy is a financial planning. In place of a political overhead, we have a financial and real estate overhead.

Stalinist Russia and Maoist China achieved high technology without land-rent, monopoly rent and interest overhead. This purging of rentier income was the historical task of classical political economy, and it became that of socialism. The aim was to create a Clean Slate financially, bringing prices in line with technologically necessary costs of production. The aim was to provide everyone with the fruits of their labor rather than letting banks and landlords siphon off the economic surplus.

Ideas of economic efficiency and “wealth creation” today are an utterly different kind of liberalism and “free markets”. Commercial banks lend money not to increase production but to inflate asset prices. Some seventy percent of bank loans are mortgage loans for real estate, and most of the rest is for corporate takeovers and raids, to finance stock buy-backs or simply to pay dividends. Asset-price inflation obliges people to go deeper into debt than ever before to obtain access to housing, education and medical care. The economy is being “financialized”, not industrialized. This has been the plan as much for the post-Soviet states as for North America, Western Europe and the Third World.

But we are far from having reached the end of the line. Celebrations that our present financialized economy represents the “end of history” are laughingly premature. Today’s policies look more like a dead end. But that does not mean that, like the Roman Empire, they won’t lead us down toward a new Dark Age. That’s what tends to happen when oligarchies do the planning.

Is America a Failed Economy?

It may be time to ask whether neoliberal pro-rentier economics has turned America and the West into a Failed Economy. Is there really no alternative? Have the neoliberals made the shift of planning from governments to the financial oligarchy irreversible?

Let’s first dispose of the “foundation myth” of the idea still guiding the United States and Europe. Free-market economists pretend that prices can be brought into line most efficiently with technologically necessary costs of production under capitalism, and indeed, under finance capitalism. The banks and stock market are supposed to allocate resources most efficiency. That at least is the dream of self-regulating markets. But today it looks like only a myth, public relations patter talk to get a generation of increasingly indebted voters not to act in their own self-interest.

Industrial capitalism always has been a hybrid, a symbiosis with its feudal legacy of absentee property ownership, oligarchic finance and public debts rather than the government acting as net creditor. The essence of feudalism was extractive, not productive. That is why it created industrial capitalism as State Policy in the first place – if only to increase its war-making powers. But the question must now be raised as to whether only socialism can complete the historical task that classical political economy set out for itself – the ideal that futurists in the 19th and 20th centuries believed that an unpurified capitalism might still be able bring about without shedding its legacy of commercial banking indebting property and carving infrastructure out of the public domain.

Today it is easier to see that the Western economies cannot go on the way they have been. They have reached the point where the debts exceed the ability to pay. Instead of recognizing this fact and scaling debts back into line with the ability to pay, the Obama-Geithner plan is to bail out the big banks and hedge funds, keeping the volume of debt in place and indeed, growing once again through the “magic of compound interest”. The result can only be an increasingly extractive economy, until households, real estate and industrial companies, states and cities, and the national government itself is driven into debt peonage.

The alternative is a century and a half old, and emerged out of the ideals of the classical economic doctrines of Adam Smith, David Ricardo, John Stuart Mill, and the last great classical economist, Marx. Their common denominator was to view rent and interest are extractive, not productive. Classical political economy and its successor Progressive Era socialism sought to nationalize the land (or at least to fully tax its rent as the fiscal base). Governments were to create their own credit, not leave this function to wealthy elites via a bank monopoly on credit creation. So today’s neoliberalism paints a false picture of what the classical economists envisioned as free markets. They were markets free of economic rent and interest (and taxes to support an aristocracy or oligarchy). Socialism was to free economies from these overhead charges. Today’s Obama-Geithner rescue plan is just the reverse.

Notes:

{1} Ambrose Evans-Pritchard, “If Eastern Europe falls, world is next”, The Telegraph (February 14 2009)

{2} Krishna Guha, “US closes in on subsidy plan to stop foreclosures”, Financial Times (February 13 2009)

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(c) Copyright Michael Hudson, Global Research, 2009

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