Pentagon media manipulation and the law

Some analysis by Sheldon Rampton, director of the Center for Media and Democracy, on the "Pentagon Pundit Scandal" and whether or not the secret PR campaign conducted by the administration to market the war in Iraq was not only unethical, but illegal as well.

According to Rampton, the recently uncovered program which involved a special office in the Defense Department that coordinated and coached self-professed "independent" military analysts appearing on television on what to say so as to spin the Iraq war in a favorable light, violates "[S]pecific restrictions that Congress has been placing in its annual appropriation bills every year since 1951. According to those restrictions, “No part of any appropriation contained in this or any other Act shall be used for publicity or propaganda purposes within the United States not heretofore authorized by the Congress.”

Furthermore, it was specific concerns about “covert propaganda” initiatives conducted by branches of the government like the one in question which led to the GAO’s strong standard for determining when government-funded video news releases constitute propaganda and therefore illegal.

I find it quite interesting, although unfortunately not particularly surprising, that despite the gravity of the lawbreaking this program likely entails it is receiving only the most cursory of media coverage.

Hopefully, the eventual Democratic presidential nominee and the DNC will make this a major part of their attack on the Republican party on whose watch these transgressions occurred.

Iraq War as a signaling strategy for US power relations

Over at the group blog Open Left, Dave Meyer offers up some additional observations on the Bush administration's recently revealed military propaganda program, while putting its disastrous consequences into some historical context. In particular, the Nixon administration's propaganda campaign during the Vietnam War is discussed, as well as a running commentary of some of the late philosopher Hannah Arendt's thoughts on the "enterprise of war."

Also, the Matt Ygleias coined "Green Lantern Theory" of geopolitics is brought in for some quick analysis: It is the fallacious argument employed by the current generation of Hawks that posits "All that is required to win (Iraq) is for the US to demonstrate enough willpower." Of course, this makes no sense at all, yet it has demonstratively been chillingly effective as a rationale to indefinitely continue the illegal military occupation of Iraq, again with no strategy or endgame on the table.

Again, as I mentioned in my previous post, the idea here is for the US as the world's remaining superpower to "signal" to the rest of the world that we will protect our already irredeemably tarnished image in the world by staying in Iraq forever. Or, put another way, preventing damage to Americas image has been the strategic rationale behind the surge and all of Bush's post 9/11 foreign policy interventions.

Meyer quite correctly observes here that "Simply put, democracies shouldn't fight public relations wars. It perverts our democracy and it leads to disaster. The military is not a marketing firm; treating the troops like an armed Amway sales force puts them in an untenable position."

He also points out what is now a commonplace yet essential reality in 21st Century American life: That for the Bush Administration and the neocon dreamers-cum-foreign policymakers who are advocating we stay in Iraq until we somehow "win", "Replacing public diplomacy with armed public relations makes sense to them."

So what after the end of America's economic hegemony?

The New Yorker's always compelling Editor-at-Large Ian Buruma wonders what we should expect in terms of global geopolitics after the inevitable decline of America's Empire. Several recently published books on the topic, written by authors who represent a considerably wide range of the political-philosophical spectrum, are used effectively as an analytic backdrop.

I say "inevitable" here, of course, not because I have any hidden desire to see the end of our reign as superpower of the world forever, but because no empire has ever lasted forever and there are compelling reasons, expounded on in the article, to see why the US could soon be succeeded by China, India and Russia as the next global economic hegemon.

The Pentagon's Tragic Obstructionism, America's Tragic Attention-Span

Dana Milbank, hardly my favorite political pundit, actually has an Op-Ed in today's Washington Post that is worth reading (and short enough to fit into anyone's busy schedule). The piece is entitled "What the Family Would Let You See, the Pentagon Obstructs" and it directly challenges the Pentagon's policy of maintaining a veil of secrecy over military funerals - blocking the media from sharing these tragic events and what they represent to the American public at large.

Milbank notes that "The family of 38-year-old [Lt. Col Billy] Hall, who leaves behind two young daughters and two stepsons, gave their permission for the media to cover his Arlington burial -- a decision many grieving families make so that the nation will learn about their loved ones' sacrifice." However:

[T]he military had other ideas, and they arranged the Marine's burial yesterday so that no sound, and few images, would make it into the public domain. That's a shame, because Hall's story is a moving reminder that the war in Iraq, forgotten by much of the nation, remains real and present for some. Among those unlikely to forget the war: 6-year-old Gladys and 3-year-old Tatianna. The rest of the nation, if it remembers Hall at all, will remember him as the 4,011th American service member to die in Iraq, give or take, and the 419th to be buried at Arlington. Gladys and Tatianna will remember him as Dad.

The two girls were there in Section 60 yesterday beside grave 8,672 -- or at least it appeared that they were from a distance. Journalists were held 50 yards from the service, separated from the mourning party by six or seven rows of graves, and staring into the sun and penned in by a yellow rope. Photographers and reporters pleaded with Arlington officials. [Snip]

Media whining? Perhaps. But the de facto ban on media at Arlington funerals fits neatly with an effort by the administration to sanitize the war in Iraq. That, in turn, has contributed to a public boredom with the war. A Pew Research Center poll earlier this month found that 14 percent of Americans considered Iraq the news story of most interest -- less than half the 32 percent hooked on the presidential campaign and barely more than the 11 percent hooked on the raid of a polygamist compound in Texas.

Two more must-reads on Iraq:

First, Steven Simon from the Council on Foreign Relations has written a strong editorial analyzing the "Price of the Surge" in the May/June issue of Foreign Affairs (h/t: Patrick Barry at Democracy Arsenal. And Barry does an excellent job of breaking down and summarizing Simon's rather long article in his blog post at DA:

Steve Simon's new piece in Foreign Affairs [the CFR's house organ -Ed.] is a must-read for anyone concerned with the long-term consequences of the United States arming tribal factions in Iraq. His argument is similar to the ones made by Marc Lynch and Brian Katulis over the past few months - that the administration, by prizing security gains over political consolidation and compromise, has actually worsened Iraq's long term prospects for achieving an open, functional society.

Simon does a pretty good job cataloging the history of the surge - though it was originally intended to be matched by a top-down political strategy of consolidation and cooperation, US leadership grew so frustrated with the apparent lack of political movement that it quickly substituted in a new policy, which embraced a series of local developments and cobbled them together under the dubious label of "bottom-up reconciliation." I agree with Simon's argument, namely that this pursuit is dangerously short-sighted because it has stoked "the three forces that have traditionally threatened the stability of Middle Eastern states: tribalism, wardlordism, and sectarianism."

Of course, chief among the local developments latched onto by the administration, has been the phenomenon of Sunni tribes turning on Al-Qaeda in Iraq, a move largely precipitated by the AQI's use of poisonous methods to subjugate Sunni communities. But when it comes to tribalism, we're tinkering with an especially complex and dangerous dynamic, one that has been a force for instability in the Middle East broadly, and Iraq specifically since at least the 19th century.

Click on the link to the blog post for more.

Second, this widely circulated (in liberal circles, at least) editorial from Frank Rich in the New York Times does a laudatory job of analyzing the factors that have led to the mainstream media, and the American public, to tune out the ongoing catastrophic military occupation of Iraq. As Rich concludes his piece:

The simple explanation for why we shun the war is that it has gone so badly. But another answer was provided in the hearings by Senator George Voinovich of Ohio, one of the growing number of Republican lawmakers who no longer bothers to hide his exasperation. He put his finger on the collective sense of shame (not to be confused with collective guilt) that has attended America’s Iraq project. “The truth of the matter,” Mr. Voinovich said, is that “we haven’t sacrificed one darn bit in this war, not one. Never been asked to pay for a dime, except for the people that we lost.”

This is how the war planners wanted it, of course. No new taxes, no draft, no photos of coffins, no inconveniences that might compel voters to ask tough questions. This strategy would have worked if the war had been the promised cakewalk. But now it has backfired. A home front that has not been asked to invest directly in a war, that has subcontracted it to a relatively small group of volunteers, can hardly be expected to feel it has a stake in the outcome five stalemated years on.

The original stakes (saving the world from mushroom clouds and an alleged ally of Osama bin Laden) evaporated so far back they seem to belong to another war entirely. What are the stakes we are asked to believe in now? In the largely unwatched House hearings on Wednesday, Representative Robert Wexler, a Florida Democrat, tried to get at this by asking what some 4,000 “sons and daughters” of America had died for.

The best General Petraeus could muster was a bit of bloodless Beltway-speak — “national interests” — followed by another halfhearted attempt to overstate Iraq’s centrality to the war on Al Qaeda and a future war on Iran. He couldn’t even argue that we’re on a humanitarian mission on behalf of the Iraqi people. That would require him to acknowledge that roughly five million of those people, 60 percent of them children, are now refugees receiving scant help from either our government or Nuri al-Maliki’s. That’s nearly a fifth of the Iraqi population — the equivalent of 60 million Americans — and another source of our shame.

The prevailing verdict on the Petraeus-Crocker show is that it accomplished little beyond certifying President Bush’s intention to kick the can to January 2009 so that the helicopters will vacate the Green Zone on the next president’s watch. That’s true, but by week’s end, I became more convinced than ever that in January we’ll have a new policy that includes serious withdrawals and serious conversations with Mr. Maliki’s pals in Iran, even if John McCain becomes president.

General Petraeus and Mr. Crocker define victory as “sustainable security” in Iraq. But both Colin Powell and Gen. Richard Cody, the Army’s vice chief of staff, said last week that current troop levels in Iraq and Afghanistan are unsustainable and are damaging America’s readiness to meet other security threats. And that’s not all that’s unsustainable. An ailing economy can’t keep floating the war’s $3-billion-a-week cost. A Republican president intent on staying the Bush course will find his vetoes unsustainable after the Democrats increase their majorities in Congress in November. No war can be fought indefinitely if the public has irrevocably turned against it.

Mr. McCain says Americans want “victory,” whatever that means today, and yes, they would if it could be won on the terms promised by Mr. Bush five years ago — fast, and with minimal sacrifice. It’s way too late to ask for years of stepped-up sacrifice now in the cause of a highly debatable definition of “national interests.”

This war has lasted so long that Americans, even the bad apples of Abu Ghraib interviewed by Mr. Morris, have had the time to pass through all five of the Kübler-Ross stages of grief over its implosion. Though dead-enders like Mr. McCain may have only gone from denial to anger to bargaining, most others have moved on to depression and acceptance. Unable to even look at the fiasco anymore, the nation is now just waiting for someone to administer the last rites.

Food for thought.

Update: Reading for the ambitious (with abundant time on his or her hands!) - this study "Whose Views Made The News? Media Coverage And The March To War In Iraq."

Quick summary: Criticism of the news media’s performance in the months before the Iraq war has been profuse. Scholars, commentators, and journalists themselves have argued the media aided the Bush administration in its march to war by failing to air a wide-ranging debate that offered analysis and commentary from diverse perspectives. As a result, critics say, the public was denied the opportunity to weigh the claims of those arguing both for and against military action in Iraq. In this paper, we report the results of a systematic analysis of ABC and CBS nightly news coverage in the eight months before the invasion (Aug. 1, 2002 through March 19, 2003).

We find news coverage conformed in some ways to the conventional wisdom: Bush administration officials were the most frequently quoted sources, the voices of anti-war groups and opposition Democrats were barely audible, and the overall thrust of coverage favored a pro-war perspective. But while domestic dissent on the war was minimal, opposition from abroad—in particular, from Iraq and officials from countries such as France, who argued for a diplomatic solution to the standoff—was commonly reported on the networks. While we surmise the opinions of foreign leaders would probably have been accorded less credibility by many Americans than the views of U.S. officials, the public was not entirely deprived of an alternative viewpoint.

Our findings suggest that media researchers should further examine the inclusion of non-U.S. views on high-profile foreign policy debates, and they also raise normative questions about how the news filters the communications of political actors and refracts—rather than merely reflects—the contours of debate.

How S&P and Moody's escaped oversight and led to the sub-prime mortgage bust

Roger Lowenstein takes a close look at the role played by the credit rating agencies (mainly Standard & Poor's and Moody's Investor Service) played in the sub-prime mortgage disaster in the New York Times' Magazine. The bottom line is that they weren't being effectively regulated by anyone, and left free to make money off the same financial service firm clients that paid them handsomely to assign ratings to their bonds. Like a magic trick, a managing director at Moody's could wave his wand over a stack of securitized mortgage loans - containing quite a few risky underlying assets that clearly couldn't be counted on to stay in the clear - and suddenly the whole bundle was rated 'AAA' though the byzantine world of structured finance.

In the early 2000's, I covered bonds sold by major US airlines, underwritten by bulge bracket investment banks and "wrapped" by monoline insurance providers such as MBIA and Ambac (which has recently developed quite a few problems of its own!). The result was that many of these deals were given fairly high credit ratings by the agencies despite the junk-bond ratings of these airlines' unsecured debt and the difficult market the companies were facing as the dot-com boom went bust and companies started making their execs fly coach instead of business class. After 9/11, the US airline industry all but collapsed and had to be bailed out by taxpayers in the form of federal loan guarantees. And the structured bonds issued by the airlines saw their high ratings based on structural enhancements rather than the underlying asset downgraded to sub-investment grade overnight.

What happened to the airline industry was repeated with mortgage-backed securitizations several years later. As Lowenstein makes abundantly clear in this article, one of the major problems is the god-like power the rating agencies play in the world of high finance, combined with the existence of clear conflicts of interest with their clients (whose securities they simultaneously were evaluating and passing judgement on)and the fact that there was no SEC-led overview of these firms' activities. In effect, the government outsourced its regulatory function to three for-profit companies.

As Lowenstein points out:

Who was passing judgment on the quality of the mortgages, on the equity behind them and on myriad other investment considerations? Certainly not the investors. They relied on a credit rating.

Thus the agencies became the de facto watchdog over the mortgage industry. In a practical sense, it was Moody’s and Standard & Poor’s that set the credit standards that determined which loans Wall Street could repackage and, ultimately, which borrowers would qualify. Effectively, they did the job that was expected of banks and government regulators. And today, they are a central culprit in the mortgage bust, in which the total loss has been projected at $250 billion and possibly much more.

In the wake of the housing collapse, Congress is exploring why the industry failed and whether it should be revamped (hearings in the Senate Banking Committee were expected to begin April 22). Two key questions are whether the credit agencies — which benefit from a unique series of government charters — enjoy too much official protection and whether their judgment was tainted. Presumably to forestall criticism and possible legislation, Moody’s and S.&P. have announced reforms. But they reject the notion that they should have been more vigilant. Instead, they lay the blame on the mortgage holders who turned out to be deadbeats, many of whom lied to obtain their loans.

Arthur Levitt, the former chairman of the Securities and Exchange Commission, charges that “the credit-rating agencies suffer from a conflict of interest — perceived and apparent — that may have distorted their judgment, especially when it came to complex structured financial products.” Frank Partnoy, a professor at the University of San Diego School of Law who has written extensively about the credit-rating industry, says that the conflict is a serious problem. Thanks to the industry’s close relationship with the banks whose securities it rates, Partnoy says, the agencies have behaved less like gatekeepers than gate openers. Last year, Moody’s had to downgrade more than 5,000 mortgage securities — a tacit acknowledgment that the mortgage bubble was abetted by its overly generous ratings. Mortgage securities rated by Standard & Poor’s and Fitch have suffered a similar wave of downgrades.

How market deregulation contributed to the global food crisis

Food First/IFDP fellow Gretchen Gordon explains in layman's terms how deregulation of the global agricultural market has led to the current worldwide food crisis (eg: food prices doubling, famine, protests and riots, etc) in a way similar to the impact deregulation has had in precipitating the US mortgage crisis (though differing in scope degree).

One of her key points is:

The Cargills and ADMs of the world are traders—similar to financial traders—but in livestock and commodity futures. In an un-regulated global market they’ve gained enough market share that through buying and selling, they can play off both supply and demand. And their actions can set the direction of global prices. They can send shockwaves through the entire system. Now the unregulated market runs on the principle that capital will work in its best interest, and it’s not in agribusiness’ best interest to tank the entire agricultural system. But in the recent corn and soy spike, even the multinational livestock producers and food companies have begun to feel the sting. When the stakes get to a certain level, the gambler can make decisions that are against his own self-interest.

Gordon goes into the recent history of agricultural market deregulation which is a bit wonky even for yours truly - although I would recommend at least skimming through the whole article as I did to understand the fundamental causes of this incredibly important global crisis.

She also gives the $280 million Farm Bill making its way through Congress - and likely to be passed by the Democratic majority - a good, well-deserved thrashing.

Mindwar: Television "military analysts" with undisclosed ties to Pentagon

Another dispatch from the "Selling the Iraq War" file . . .

A jaw-dropping, although not really surprising investigation by the New York Times confirms in large part what those carefully observing the PsyOps program the Pentagon has waged to influence public opinion in the US have long known. Many of the "independent" military analysts appearing on news programs, radio and other media were nothing more than mouthpieces for the Pentagon, used as "message force-amplifiers" to conduct a not so subtle propaganda campaign against the American public.

The NYT sued the Pentagon - and won - in order to obtain records that ended up containing damning evidence connecting many of these pundits, who used their highly-touted military credentials and implied independent viewpoints to undermine criticism of the Bush Administration's post 9/11 foreign policy, including the run-up to the Iraq War, calls for closing Guantanamo Bay and other violations of international law. This section of the article provides a good idea of what I'm talking about here, although by all means you should take the time to read this very interesting (and troubling) of investigative journalism at its finest.

By early 2002, detailed planning for a possible Iraq invasion was under way, yet an obstacle loomed. Many Americans, polls showed, were uneasy about invading a country with no clear connection to the Sept. 11 attacks. Pentagon and White House officials believed the military analysts could play a crucial role in helping overcome this resistance.

Torie Clarke, the former public relations executive who oversaw the Pentagon’s dealings with the analysts as assistant secretary of defense for public affairs, had come to her job with distinct ideas about achieving what she called “information dominance.” In a spin-saturated news culture, she argued, opinion is swayed most by voices perceived as authoritative and utterly independent.

And so even before Sept. 11, she built a system within the Pentagon to recruit “key influentials” — movers and shakers from all walks who with the proper ministrations might be counted on to generate support for Mr. Rumsfeld’s priorities.

In the months after Sept. 11, as every network rushed to retain its own all-star squad of retired military officers, Ms. Clarke and her staff sensed a new opportunity. To Ms. Clarke’s team, the military analysts were the ultimate “key influential” — authoritative, most of them decorated war heroes, all reaching mass audiences.

The analysts, they noticed, often got more airtime than network reporters, and they were not merely explaining the capabilities of Apache helicopters. They were framing how viewers ought to interpret events. What is more, while the analysts were in the news media, they were not of the news media. They were military men, many of them ideologically in sync with the administration’s neoconservative brain trust, many of them important players in a military industry anticipating large budget increases to pay for an Iraq war.

Even analysts with no defense industry ties, and no fondness for the administration, were reluctant to be critical of military leaders, many of whom were friends. “It is very hard for me to criticize the United States Army,” said William L. Nash, a retired Army general and ABC analyst. “It is my life.”

Other administrations had made sporadic, small-scale attempts to build relationships with the occasional military analyst. But these were trifling compared with what Ms. Clarke’s team had in mind. Don Meyer, an aide to Ms. Clarke, said a strategic decision was made in 2002 to make the analysts the main focus of the public relations push to construct a case for war. Journalists were secondary. “We didn’t want to rely on them to be our primary vehicle to get information out,” Mr. Meyer said.

The Pentagon’s regular press office would be kept separate from the military analysts. The analysts would instead be catered to by a small group of political appointees, with the point person being Brent T. Krueger, another senior aide to Ms. Clarke. The decision recalled other administration tactics that subverted traditional journalism. Federal agencies, for example, have paid columnists to write favorably about the administration. They have distributed to local TV stations hundreds of fake news segments with fawning accounts of administration accomplishments. The Pentagon itself has made covert payments to Iraqi newspapers to publish coalition propaganda.

Rather than complain about the “media filter,” each of these techniques simply converted the filter into an amplifier. This time, Mr. Krueger said, the military analysts would in effect be “writing the op-ed” for the war.

Is there still anyone out there who trusts what suppoed "military analysts" say on the evening news? Realistically, one would expect any President waging a military operation on false pretenses to use the media to brainwash the public into supporting the illegal enterprise. But the dereliction of duty by mainstream media sources to even skim the backgrounds of the analysts they were paying for coverage ought to be an absolute outrage.

Update: Predictably, CNN (Howie Kurtz in particular) is ignoring the scandal.

Dean Baker's proposal for dealing with the mortgage market crisis

Center for Economic and Policy Research economist Dean Baker, one of the few macro forecasters to accurately predict the mortgage/housing crisis in the US in terms of its timing and scope, testified to the Senate Committee on Banking, Housing and Urban Affairs last week on the topic of "Examining Proposals to Mitigate Foreclosures and
Restore Liquidity to the Mortgage Markets."

This might be one transcript* you'll want to read - if the future of the US economy's stability is of at least some passing interest to you.

But for a quick and dirty briefing, here are some of the takeaways from Baker's testimony:

¶ There are large differences in the state of the housing market across the nation. Policies that may be appropriate for some parts of the country may not be appropriate for other parts of the country.

¶ The Congressional effort [under the proposed Hope for Homeowners Act of 2008 ] to stabilize prices in bubble-inflated areas is counter-productive. Insofar as it succeeds, it makes homeownership less affordable for young people and families moving into the area.

¶ For geographic regions already hard hit by the crisis (where in the last 18 months house prices are down by 16.5 percent in real terms from their peak, for example) such Atlanta, Cleveland and Detroit, the mortgage guarantee program in the Hope Act may be a useful mechanism for keeping homeowners in their homes and stabilizing prices. This is possible because prices are not out of line with the fundamentals in the housing market. In this context, the government can help to play a stabilizing role in the market as it did during the Depression with the Home Owners’ Loan Corporation.

¶ But for regions where the housing bubble was concentrated (cities such as Los Angeles, San Diego, and Miami) house prices are still way out of line with fundamentals. In the cities with bubble-inflated housing markets, sale prices are still more than 20 times annual rents.1 The loan guarantee program in the Hope Act is far less suited for these cities. (It would be easy to distinguish between these markets by not allowing a price guarantee to exceed a multiple of 15 times
the appraised annual rent for a unit.)

* For the full transcript, see here.

Global public opinion on the "Free market" system is shifting

Courtesy of the venerable PIPA (the Program on International Policy Attitudes at the University of Maryland), a new study (10-page .pdf) presents some interesting findings, albeit not particularly shocking considering recent economic crises and stock market declines:

Majorities in most countries continue to support the free market system, but over the last two years support has eroded in 10 of 18 countries regularly polled by GlobeScan. In several countries this drop in support has been quite sharp.

The latest polling was completed before the current stock market volatility that began
earlier this year.

Back in 2005 only one country polled—France—had more citizens disagreeing than agreeing with the statement that “the free enterprise system and free market economy is the best system on which to base the future of the world.”

Displacing France as the least supportive of the free market system today is Turkey where approval of the free market system has plunged from 47 percent in 2005 to 34 percent now, while opposition has risen from 36 to 41 percent.

Support for free markets has also dropped 15 points in South Korea since 2005, though a majority (55%) continue to be supportive. Opposition there has jumped 20 points from 19 to 39 percent.

Support among Chileans is also down 14 points since 2003 when Chileans were last polled on this question.

Support in other countries is down by more modest though significant numbers: China (down 9 points), Britain (7 points), Brazil (7 points), Mexico (6 points), and Kenya (6 points).

The one country to show upward movement in agreement with the free market system is France—up five points. However, more continue to disagree (45%) than agree (41%).

The GlobeScan poll of 9,357 people worldwide also found that large numbers continue to look to their government to take a strong hand in regulating the market. In 17 of the 18 countries a majority (15 countries) or a plurality (two countries) agreed that “the free enterprise system and the free market system work best in society’s interest when accompanied by strong government regulation.”

Interestingly, supporters of the free market show more enthusiasm for a strongly regulated free market system than critics. Among those who agree that the free market system is the best system, three-quarters also agree that it works best with strong government regulation.

Those who are not enthusiastic about the free market system are divided as to whether it works best with government regulation.

At the same time agreement with this proposition, while still averaging 62 percent across all countries polled, is down in ten countries. This appears to be related to the drop in confidence in the free market system. Among the ten countries for which
there was a drop in agreement with the proposition that the free market system works best with strong regulation, six of them also had a significant drop in support for the free market system, and only one had an increase.

Interestingly, three countries that in 2005 were among the four highest in support for the free market system—China, the Philippines, and South Korea—showed substantial increases in agreement with the idea that the market works best with
regulation.

Also, this new poll from Pew shows Americans are continuing to shift their support away from the current neoliberal 'free' trade policies of our government, which is heartening to see (h/t SirotaBlog).

Update (5/1): For more on the limits of markets in general, check out this book review by economist James Gailbraith in the Washington Monthly back in March 2001. He reviews "Selling the Free Market: The Rhetoric of Economic Correctness" by James Arnt Aune.

Update II: Another helpful resource on this important topic is this interview of TAP Editor Robert Kuttner by The Atlantic. Kuttner's book on the subject, "Everything for Sale: The Virtues and Limits of Markets" qualifies as mandatory reading for those who want to understand the very real downsides to out-of-control capitalism and an unregulated free market to be used for all human transactions . . .

Greenspan: Guilty as Charged

In Foreign Policy, longtime Morgan Stanley economist (currently serving as Chairman of Morgan Stanley - Asia) provides us with a much-needed history lesson of Fed monetary policy failures, throwing some well deserved cold water on former Chairman Alan Greenspan's triumphalist attempts to secure his legacy as the 'maestro of Wall Street'.

Roach helpfully recalls that:

[D]uring the 18 ½ years [Greenspan] spent at the helm of the Fed, guided by the belief that the U.S. public wants rapid, albeit noninflationary, economic growth. A politically compliant central banker, he has stated in his best-selling memoirs that he believes the independence of the Federal Reserve is not set in stone—implying that there is always huge pressure to keep the growth machine humming. A market libertarian, he has long argued that regulatory intrusion slows the economy. [. . .]

Greenspan’s handling of the housing bubble is the smoking gun. The Greenspan mantra is that markets know best—that central bankers should not attempt to override the verdict of millions of market participants by declaring that an asset bubble has formed. After all, there are the costs to economic growth to consider if monetary policy is used to deflate such bubbles. And why should any modern economy have to incur those costs? After all, goes the script, the authorities always have the wherewithal to clean up any post-bubble mess. [. . .]

Increasingly supported by the confluence of both property and credit bubbles, U.S. consumers spent well beyond their means. Personal consumption climbed to an unheard-of 72 percent of real GDP in 2007—a record for the United States and, for that matter, for any leading economy in modern history. At the same time, household debt soared to a record 134 percent of disposable personal income. America certainly achieved the rapid growth that Greenspan felt the body politic wanted. [. . .]

Of course, squabbling over Alan Greenspan’s place in history is not going to get us out of this crisis. But vigorous debate about the past is absolutely essential if we are to avoid such a quagmire in the future. As always, the search for scapegoats is on. Rating agencies, regulators, Wall Street, loan sharks, property speculators, and subprime homeowners will all pay a steep price. Some, of course, already have. In the end, I suspect the Federal Reserve will also pay a steep price, losing some autonomy when Congress adds financial stability to the Fed’s mandated charge of maintaining full employment and price stability. As well it should. The central bank’s stewardship of the U.S. economy is far too important to be left to politics and ideology.

For more criticism of Greenspan, see William Greider's article for The Nation last September "Greenspan's Fraud" as well as Ravi Batra's book by the same name.

Reconsidering Bush's proposal to reform the Fed

Nomi Prinz from Demos gets it exactly right in her piece for Slate. The Federal Reserve as an institution needs to be reformed from top to bottom, not given additional oversight responsibilities. As odious as the Greenspan era was in terms of widening economic inequality in the US, it s the Fed itself that is the real culprit, not whoever happens to be the private bank's chairman at any given time.

She notes:

[Treasury Secretary] Paulson's plan [for post-bubble regulatory reforms] wants to add a couple more [regulatory bodies]: the Prudential Financial Regulatory Agency to watch government-guaranteed banks and the Business Regulatory Agency to focus on consumer protection.

None of that, however, will control the excesses of investment banks which, among other things, led to the mid-March meltdown of Bear Stearns. That task would putatively fall to the Fed.

To some extent, that is already what the Fed is charged with doing. The Fed is supposed to maintain liquidity to grease the system (through discount windows to the "worthy" banks); exercise monetary policy to keep it going; control risk; and provide oversight to protect consumers. It is already regulator to much of the industry, including bank holding companies and diversified financial holding companies formed under the Gramm-Leach-Bliley Act of 1999.

Had the Fed shown any appetite or competence for these roles, we might not be in the situation we are in now. It could, for example, have questioned how certain Wall Street institutions already in its jurisdiction—notably Citigroup and others that have been forced to write off billions in subprime mortgage losses—were overleveraging the loans on their books.

But it didn't. Today's banking system has too many intertwined players that all do one another's jobs. Its complexity is the creation of all the legislators who gleefully embraced deregulation during the last two decades.

This is, of course, exactly on target. Read the whole piece.

Another interesting read is this post over at TPMCafe provocatively titled "Who Gained When Bear Sterns Fell?" A good way to answer this question would be to finger which market players (most likely hedge funds) were simultaneously spreading rumors of Bear Sterns' insolvency at the same time as shorting its stock. Or is that a conspiratorial bridge too far?

Regardless, as the post's author makes clear, government investigators (even if they wanted to) would never be able to get to the bottom of these types of potential widespread market manipulation scheme as long as hedge fund transparency remains a non-starter in Congress.

The Paulson plan and the future of Wall Street

Here are some articles you really should read to get a sense of how the Bush administration, under Treasury Secretary Paulson, wants to reshape the federal government's oversight and regulation of financial markets as well as how to respond to the immediate challenges stemming from the mortgage crisis. First, this report from the New York Times reveals that a significant plank of Secretary Paulson's plan involves giving the Federal Reserve Board greater responsibility for regulating the financial markets, as well as creating a new agency for handling mortgage securities trading and consolidating several agencies already in existence.

Tweaking the organizational structure of some of these regulatory bodies and altering the oversight functions might in theory be a good idea (if a political non-starter in an election year, as the NYT article notes), but giving the Fed more responsibility? Chris Dodd, Chair of the Senate Banking Committee, is far from being my favorite Senator, but he hits the nail on the head with this criticism:
On the one hand, it would allow the Fed to examine all financial companies — not just banks — to be sure they are not posing a risk to the overall financial system. On the other hand, it fails to realize that the Fed helped create this crisis by ignoring the red flags as far back as five years ago. It does not make sense to give a bigger shovel to the very people who helped dig us into this hole.

Another key element of the plan that, while representing an all too predictable policy response from Republicans, is clearly a dangerous consideration is further de-regulating the securities industry. As the article reports:
The plan proposes . . . to reduce the enforcement authority of the SEC in a variety of ways and hand that authority instead to industry groups. The plan recommends that investment advisers no longer be directly regulated by the commission, but instead be supervised by an industry regulatory organization.
Leave it to the GOP to argue that after the numerous corporate scandals of the decade, the solution is to have corporations police themselves and their peers as opposed to enforcing independent oversight from an agency with teeth.

See also this brief write-up from NPR (which includes a four minute audio clip from the radio station as well as links to important original documents like the Treasury Department's "blueprint" for modernizing the financial regulatory structure) which discusses just how sweeping some of these proposed changes are, as well as the political backlash likely to ensure from implementation.

Finally, this report by the Independent (UK) on the scale of the current credit crisis contains some very troubling statistics from the US government on the economy and how millions of citizens dependent on federal antipoverty programs like food stamps are suffering. Pretty startling stuff that for some strange reason doesn't seem to be getting as much prominent coverage by the media in this country.