The eerie parallels between Sept 11 and Sept 15

Business Times - 24 Sep 2008

US PRESIDENT George W Bush is standing next to his Cabinet's Alpha Male who has become the crisis manager. Mr Bush declares that America is facing a clear and present danger that is stunning in its proportions and calls on Congress - and by extension, the American people - to give his administration unprecedented broad legal authority to take action against the looming threat to life as we know it.

Trust the Man and his wise advisers, President Bush asserts. Give us a blank cheque to pursue a very, very costly policy. Trust us, guys! We know what we're doing.

Sounds very much like the scene we saw last Friday when President Bush, standing in front of the White House, was joined by Henry Paulson, the Secretary of the Treasury and former Wall Street banker, and the professorial chairman of the Federal Reserve, Ben Bernanke.

Mr Bush warned of the catastrophic consequences of the financial meltdown and requested that Congress give Washington a green light to back the most expensive government bailout of private industry that would allow the US Treasury to spend up to US$700 billion - perhaps more - to purchase mortgage-based assets from troubled financial institutions.

That dramatic announcement followed the devastation of the financial markets, culminating in Black Monday last week which saw the downfall of Lehman Brothers, one of the oldest and most exalted American financial institutions. It also saw a drop of about 500 points on Dow Jones in a single day. It rattled confidence in global economy and produced a sense that Washington needed to 'do something'.

It was a defining event in economic history; everything was bound to change, including the face of Wall Street.

I don't know about you, but watching President Bush and Mr Paulson on Friday, I had a feeling of deja vu, recalling a very similar display on the White House's Rose Garden on Oct 2, 2002, when President Bush was joined by Donald Rumsfeld, the then Secretary of Defense.

Mr Bush warned that against the backdrop of the US-led war on terrorism, the nation was facing an immediate threat from Iraq and the weapons of mass destruction (WMDs) that it had (supposedly) acquired. He asked that Congress provide him authority to deploy US troops to the Middle East as part of a plan to invade Iraq.

That event in the White House came a year after terrorists attacked the World Trade Center in New York and the Pentagon on Sept 11, 2001, and the aftermath of the US-led invasion of Afghanistan. The 9/11 attacks were a painful blow to US national security and led to a major transformation of American foreign policy.

It's not surprising therefore, that as Congress debates the Bush Administration's current bailout proposal, lawmakers feel the need to revisit the decision by Congress to give Mr Bush a green light to invade Iraq - which in many ways, reflected the failure by the legislative branch of government to exercise its constitutional prerogatives vis-a-vis the executive branch.

That Congressional approval in turn created the conditions under which Mr Bush, Vice-President Dick Cheney and Mr Rumsfeld were able to accumulate enormous legal powers that made Abu Ghraib and the rest of the mess in Iraq possible.

Congress is now being asked to empower Mr Paulson with an authority to dispense hundreds of billions of dollars that would go eventually to the coffers of failed and irresponsible American companies, with little or no Congressional oversight.

It would give the next Master of the Universe - King Henry or President Paulson, the terms that media pundits are using now to describe the Treasury Secretary - with the power to make decisions that would shift the balance of power in the financial markets from Wall Street to Washington.

The parallels between 9/11 and 9/15 become quite instructive when one considers the policies pursued by Washington that brought about these two disasters.

In the pre-9/11 era, both Republican and Democratic administrations attempted to establish an American hegemony in the Middle East - but without preparing for the eventuality that anti-status-quo players in the Middle East, including terrorist groups, would try to challenge US power. Al-Qaeda ended up ravaging the foundations of this cost-free Pax Americana.

Similarly, in the pre-9/15 period, both Republican and Democratic presidents and their aides tried to promote free-market-oriented agenda by deregulating the financial markets, including by getting rid of the Glass-Steagall Act and by reducing federal oversight.

At the same time, Washington continued to use the power of the government through the Fed to inject easy money after 2001 which helped inflate the financial and housing bubble. And through Fannie Mae and Freddie Mac, the semi-private huge mortgage companies that enjoyed government subsidies and guidance, the federal government was encouraging consumers to buy homes that they could not afford.

By removing oversight and regulation from the financial markets, while allowing the government to create incentives for financial irresponsibility, it becomes clear how Washington helped produce the current crisis.

The failure of intelligence agencies to warn of the terrorists planning to attack America and the failure of rating agencies to warn of the problems facing the big financial houses - shocking examples of bureaucratic and business malfunctions - turned 9/11 and 9/15 into catastrophes.

And the Bush administration's responses - after 9/11, a failed and costly invasion in Iraq that helped to weaken US strategic position in the region and create more anti-Americanism; and after 9/15, a series of bailouts that encouraged financial companies to continue pursuing irresponsible policies while using monetary and fiscal policies to encourage American to spend - only helped to turn the two catastrophes into cataclysmic events that would take many years to contain.

In the short run, the 'surge' in Iraq and the 'splurge' that King Paulson will be doing in Wall Street would create the impression that Iraq and the financial crisis are 'under control'.

In the long run, only structural changes - a reassessment of US strategic and economic policies would - would make it possible to readjust US military and economic power to the new global realities.

Copyright © 2007 Singapore Press Holdings Ltd. All rights reserved.


John M said…
I'm surprised more commentators haven't branded Paulson's scheme The Splurge ;-)

Over at our blog we data-mined the NY Fed's H.4.1 table and posted a series of charts that clearly shows how foreign central banks bought American mortgages for years, which is the investor side of that US encouragement of homeownership you point out above. It's the cenbanks fleeing these investments two months ago (painfully obvious on the charts) that is a lot of the immediate cause for what we are seeing now.

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