The demise of the big US investment houses and the global stock market slump have been the focus of endless media attention in the last few weeks. Suddenly, regulation is “in” again; and deregulation is now the main culprit focused on by the media to explain the way in which “toxic” investment instruments have poisoned the economy. Better late than never. Thousands of column inches of the major daily newspapers and the national news magazines, as well as millions of pixels worth of web space, are packed with hand wringing and tooth gnashing over the realisation that it was a mistake to weaken rules that might have checked the greed of the speculating classes. It is no longer taboo to lament the repeal of the Glass-Steagall Act under President Clinton or to execrate the US Securities and Exchange Commission’s 2004 relaxation of the 12:1 capital reserve requirement which allowed investment banks to leverage themselves all the way to hell and back again.

Fox in the henhouse
Nearly three years ago toxicity of another kind, equally attributable to deregulation, commandeered public attention over a period of many days. On January the 2nd 2006, a tremendous explosion rocked a coal mine in Sago, West Virginia, trapping thirteen miners in a poisonous pocket of carbon monoxide and methane gas. Of the 13 miners only one survived the underground ordeal. Subsequent investigation revealed that the Sago tragedy happened in the context of a pattern of regulatory neglect. This neglect was the outcome of the Bush administration’s desire to foster a “cooperative relationship” with the mining industry. In practice, the cooperative relationship translated into adoption of a benign attitude towards the big mining corporations’ systematic violations of health and safety laws.

Bush selected a former mining executive, David D. Lauriski, to head the Mine Safety and Health Administration (MSHA), the mining industry regulatory watchdog. The change of mine inspectors’ job title to “compliance assistance specialists” epitomized Lauriski’s indulgent approach to enforcement. This change was ostensibly to help foster a less “confrontational” relationship between the regulator and the regulated. Lauriski left MSHA in 1994 under suspicion of awarding contracts to his associates from the mining industry, but his legacy of weakening protections for workers lived on.

Under the Bush administration’s see-no-evil approach to regulation, even when mine safety violations are spotted by government inspectors, they rarely result in penalties tough enough to discourage further violations. As the Washington Post put it in a January 2006 article about the Sago disaster, “While inspectors issue a blizzard of paper citations each year, these violations rarely translate into serious penalties, even for the worst offenders” [link]. Although the operators of the Sago mine were issued with 273 citations for safety violations in less than two years, the highest fine they received in that period was a paltry $410. When mine operators have received larger penalties, they are permitted to whittle them down by negotiation.

The phenomenon of regulators cozying up to those they regulate and adopting a “non-confrontational” relationship is not limited to the United States. For neoliberal policy makers around the world it is axiomatic that pursuit of the highest possible profits by business should not be impeded by anything more than minimal attention to the risks to workers and the public. Thus, over the last three decades there has been a gradual reformulation and dismantling of safeguards put in place to protect society from abuses of corporate power. (Some instances of the power of business to coerce government into submission were the focus of an earlier Dittologica article. [link])

The disarming of the public’s regulatory guardians has been done under the cover of various efficiency initiatives which promise to reduce “unnecessary ” burdens on business. This program has been pursued by liberal and conservative governments alike. Voters in democracies around the world have been offered no choice in whether to accept deregulation or not.

Better regulation
The European Union’s “Better Regulation Agenda” is one of the larger and more established schemes for regulatory reform. Officially adopted  in 2005,  it has as its main objective the reduction of “administrative burdens” on businesses in order to make the EU a stronger competitor in the global marketplace.

The UK was ahead of the game in establishing a Better Regulation Task Force in 1997. There is now a permanent Better Regulation Executive under what was the Department of Trade and Industry and which was too aptly rechristened in 2007 by the incoming Gordon Brown government, the “Department for Business, Enterprise and Regulatory Reform”. The new Secretary of State for Business, Enterprise and Regulatory Reform is Peter Mandelson, who featured earlier on Dittologica for his efforts as EU Trade Commissioner to goad poor countries into adopting inequitable  neoliberal trade agreements [link]. Mandelson’s often quoted remark, that his Labour Party was ‘intensely relaxed about people getting filthy rich’, proved to be prophetic, at least as regards stock brokers and hedge fund managers. Mandelson has lately made headlines for his suspicious dealings with Russian aluminium billionaire Oleg Deripaska.

The European better regulation agenda is not driven solely by the selfish interests of business: there is a vein of common sense running through some of it in regard to efforts to reduce regulatory overlap and duplication, simplify form-filling, concentrate inspection and enforcement against the worst and most frequent offenders, and provide better guidance to encourage compliance. Attention to these themes could indeed result in more efficient and effective regulation. However, the term frequently used in conjunction with “better regulation” - “reducing administrative burden” - is the Trojan horse by which the anti-regulatory agenda has been lodged within regulatory reforms.

Reducing administrative burden is not bad in itself, but context is everything. On the one hand, the public expect government to at least protect them from the worst excesses of capitalism, and for this reason regulation of business has wide popular appeal. On the other hand, in today’s political environment business leaders pop in and out of public office with mechanical predictability and political parties are tethered to the funding provided by business interests. While business penetrates ever more deeply into government, government is becoming increasingly divested of any public responsibilities beyond its role as mega banker and insurer. Schools, transport, medical care, water and energy utilities, communications, policing, and a host of other public services are being steadily shifted from the public to the private, for-profit sphere.

It is in this context that government regulation is assigned the role of arch-villain. Ronald Reagan pioneered the trend decades ago with his rhetoric about getting the government “off the backs of the people”, the  real aim of which was to get  government off the back of business.  The realization of this aim by successive governments over the past four decades has brought with it relaxation of regulatory standards and continual anti-regulatory campaigns by powerful forces in and out of government. It is in this highly conflicted historical setting that “better regulation” has emerged onto the world stage.

British prime minister Gordon Brown, for one, has been a consistent proponent of the equation that less regulation equals better regulation. At the end of  November 2006, while still serving as Tony Blair’s number two, he announced a series of measures which constituted a mass assault on government’s regulatory role. He referred to instances where Britain’s regulatory standards exceeded those of  the European Union as “gold plating” and resolved to trim these back. Safety, accounting, environmental and other inspections were to be reduced substantially. This move received glowing praise from the director of the Confederation of British Industry, the main pressure group for British business, who said: “The Chancellor’s efforts to maintain momentum towards creating a better regulatory environment for business are very welcome. Business will be keen to ensure they are delivered swiftly and effectively.” [link]

The following January, Chancellor Brown evangelized about deregulation at a meeting of European finance ministers. Brown’s statements were characterized as a call “for the continent to create jobs and wealth through radical deregulation of protected sectors of the economy.” [link]

Risk-based regulation
The various schemes for “better regulation” invariably give prominence to the concept of “risk”. In the contemporary regulatory context, “risk” has three meanings:
(1) Risk to human well-being or the environment arising from operations which deliver personal or public benefits but also carry the potential for doing harm. These encompass many types of service and activity, such as nuclear power generation, industrial processes, provision of medical care, banking and investment operations, etc.
(2) Risk to businesses from strategies which may deliver handsome profits but may also harm or ruin a business and cause “collateral damage” beyond the business. This type of risk is best characterised by the volatile investments strategies which led to the current economic crisis. It can also refer to factors which impede business, such as regulatory regimes themselves.
(3) Risk taken by regulators, otherwise known as risk-based regulation, recognizes that regulation of businesses and markets can never be 100% effective: there is always the risk of failure in regulatory endeavors. Therefore, the central principle of risk-based regulation, at least nominally, is that regulatory efforts should be focused on areas where failure to achieve compliance would result in the greatest risk to society.

It is important to note that the first meaning of risk, which is the type of risk that creates the primary need for regulation, is the only one which does not carry the intimation that regulation should be reduced. The sole consideration is the mitigation of threats to well-being of people and the environment.

In the second meaning, regulation is often seen as an impediment to the functioning of “the free market” and thus is itself regarded as one of the risks which businesses would like to mitigate.

The third meaning refers to the risks inherent in regulation from the regulator’s viewpoint. This is a largely resource-determined viewpoint, since even in the best circumstances regulators are not omniscient and cannot hope to marshal resources which would enable them to monitor every potentially harmful activity. Under the neoliberal regimes of the past 30 years the situation is much worse because the work of regulators has been consistently undermined by powerful business interests in and out of government. These forces have actually managed to make the second meaning of risk - the risk to business arising from regulations - the primary focus of policy making. Thus, the primary meaning of risk has in many case been pushed aside, while the third meaning, risk-based regulation, has become a vehicle for mitigating the second kind of risk - the risk to business from regulation.

The most insidious aspect of this situation is the way that anti-regulation forces have dressed up their motives to make them appear benign, or, in other words, to make less regulation appear to be “better regulation”. They have thereby managed to win the support even of many who believe in genuine regulation but have been swept along by the publicity campaigns waged by the anti-regulation forces. This is very similar to the way in which polluting corporations have waged a green-wash campaign to portray themselves as environmentally responsible organizations.

Risk-based regulation in action
A thorough assessment of the actual performance of regulators employing a risk-based approach goes beyond the scope of this article. However, it is worth pointing out one very pertinent example of the use of this regulatory style. The Financial Services Authority (FSA) is the British government’s watchdog agency for the financial sector. In February 2006 then-Chairman of the FSA, Callum McCarthy, gave a speech explaining why his organization had adopted risk-based regulation. He said:
“The theory of risk management at the FSA is very close to that of risk management in a financial firm, in that there are the same elements of setting aims (in our case attaining our statutory objectives rather than a financial objective), establishing our risk appetite, identifying risks to our statutory objectives, establishing an agreed measure of risk, monitoring those risks, and managing them through both those with direct responsibility and those who provide challenge.” [link]

And the statutory objectives which McCarthy sought to achieve?

1. maintaining confidence in the financial system;
2. promoting public understanding of the financial system;
3. securing the appropriate degree of protection for consumers;
4. reducing the extent to which it is possible to commit financial crime.

McCarthy elaborated that:
“The result of this [risk-based policy] is that, for some 90% of the firms we supervise, we plan in the normal course of business never to visit them. We have adopted a comparable approach to hedge fund managers, of which there are (depending on definition) over 300 in the UK. We concentrate our information gathering and supervision on some 27 - less than 10% in number of the total - as the best means of managing the risks in the sector.”

Two and a half years later, several major British banks have collapsed and been nationalised at taxpayer expense or taken over by competitors; the British housing market has imploded due to the financial sector’s involvement with “innovative” financial instruments and the abandonment of prudent lending standards; major pension funds have followed the stock market down the drain; and the economy is mired in a recession which is far from bottoming out.

Is the British financial meltdown directly attributable to the FSA’s use of risk-based regulation? It most certainly is, in the sense that while this policy has been in effect, the financial system was spinning out of control and the FSA failed to do anything about it. This instance of a “better” form of regulation actually masked - intentionally or not - practices which resulted in the violation of all four of the statutory obligations which Callum McCarthy claimed his policies were designed to uphold.

“Better regulation” versus real regulation
As the world economy sinks deeper into recession there is a serious threat of further curtailment of regulatory activities. Governments in the wealthy countries have plunged themselves into historically unprecedented levels of debt by handing out vast sums of money to bankers, investors and insurers, who hold the world economy hostage to their risk-laden activities. This has brought about a clash of opposing reactions. Because of the obvious connection between speculative activities and the dire financial circumstances in which an escalating proportion of the population find themselves, there is strong demand from the citizenry - and even the media - for revitalizing the regulatory muscle of government. However, the cavernous public debt created by the international bail-out strategy also supplies the anti-regulators with another argument against expenditures on monitoring businesses: government doesn’t have the funds to do it, and businesses shouldn’t be over-burdened in these trying times.

At the same time as the moneyed classes have pulled off the biggest heist of public funds in history, the call to end the reign of neoliberalism is the strongest it has ever been. In analyzing this contradiction, the public and media are focusing much attention on  the US presidential election-as if the outcome can settle this conflict. This is probably wishful thinking. The question of whether regulatory policy should be set by the regulated themselves or by citizens making democratic choices is not on the agenda because no major contender for political office has any intention of challenging the power of business to shape government policies. For this reason it is crucial for citizens to maintain pressure on their governments to reform the regulatory process in favor of the broad interests of society rather than the narrow interests of profiteers and speculators.

The advocates of economic liberalism have managed to suppress dissent against their policies for the last thirty years. The world has been saturated with the liberal gospel that markets unconstrained by state interference are the most efficient means of allocating the finite supply of goods across society. This is because the market supposedly acts as a balancing mechanism for the forces of supply and demand. The idea is that on the demand side, competition between consumers for limited supplies of goods drives prices up. On the supply side, competition for market share between producers or vendors of goods drives prices down. The market is the matrix which brings producers and consumers together and balances their contradictory impulses in a way that enables the economy to function rationally and efficiently. According to liberal theory, interference by government in the marketplace upsets this finely tuned, self-regulating machine,  causing the forces of supply and demand to get out of balance.

Under the cover of this theory, neoliberal politicians have taken an axe to regulation of business and public provision of services. In the name of economic rationality they have lifted controls originally established to shield the public from over-exploitation and financial uncertainty, while moving to privatize every pubic institution in sight. Thus, national railway systems have been splintered into multiple mini-systems competing for “customers” over the same track networks; state schools have been turned over to entrepreneurs whose lust to turn a profit supposedly inspires a better learning environment; even the fighting of war has been contracted out to corporate mercenaries who supposedly provide more bang for the buck - literally.

If the market is the most efficient means to run trains, educate children and fight wars, why not turn the entrepreneurial mind to the problem of reducing environmental pollution?

Industrialists in charge of polluting enterprises have always resented interference in their affairs by do-good environmentalists, who rain on their profit parade merely to save the planet from climate catastrophe. However, if they could keep the spectre of effective environmental regulation at bay by using market incentives, that is, make money off their pollution, well, maybe “environmental protection” wouldn’t be so hard to swallow.

Hence, the concept of emissions trading. First implemented  in the USA in the late 1970s, it was popularized and internationalized in the Kyoto Protocol of 1997.

Under the widely employed “cap-and-trade” model of emissions trading, a price tag  is put on the pollutants emitted by businesses in the course of their operations. The state (reluctantly) sets a limit on the amount of the various pollutants which operations are permitted to emit. Operators whose pollutants fall beneath the threshold of allowed emissions are awarded credits corresponding to the size of the margin by which they “under-pollute”. They can then sell these pollution credits on the market. The less they pollute the more they stand to earn by selling off the credits they earn. On the other side, operators who exceed the limits allowed for their emissions have the choice of buying pollution credits from the under-polluters, which allows them to continue over-polluting, or face penalties imposed by the government. The more credits they buy, the more pollution they can get away with.

Thus, emissions trading creates a system in which pollution emitted in one place can be “offset” by curtailing pollution elsewhere. The progress, or lack of, in reducing emissions is assessed against a national emissions inventory.

Trading of pollution credits occurs on the open market, and the price of credits  supposedly fluctuates according to the aforementioned laws of supply and demand. Not only do polluters trade with one another, but brokers and investors can buy and sell pollution credits too. The pollution credit market is projected to grow over time as more countries and sectors enter into the process.

According to the free market theory underlying emissions trading, polluters will be attracted like bees to honey by the opportunity to make money by reducing their pollution and selling off the credits they earn for doing so. That’s the supply side of the equation. On the demand side, those whose find it too difficult, expensive or inconvenient to reduce pollution will be eager to snap up the credits being sold by the supplying enterprises, as this will save them from being penalized by government for their emissions and/or save them the trouble and expense of retooling to achieve reductions. Using the incentives of market forces, buyers and sellers of pollution credits will, between them, stabilize the emission of pollutants at quantities mandated by law. The idea is not that this process in itself assures open-ended pollution reduction, but that it supposedly incentivizes compliance with regulations and so, constrains pollution within the limits agreed in treaties or prescribed in legislation. In order to achieve actual reductions in emissions, regulators need to reduce, over time, the total amount of pollution which is permitted and can be traded within the system.

Despite the free market allure of the emissions trading idea some pesky contradictions lurk beneath the surface. These contradictions suggest that those who champion the concept are either somewhat idealistic or somewhat dishonest.

Consider, for instance, the obvious fact that in order for the system to achieve the objective of reducing  pollution, operators have to make meaningful cuts in their emissions. You might be forgiven for assuming that the more they cut pollution the more the system will reward them. In practice, however, if operators become over-zealous and try to cut pollution “too much” then the market will end up with a surfeit of pollution credits. The market value of the credits would sink accordingly, raising the prospect that at some point the bottom would fall out of the market because the price being fetched by the proliferating credits would no longer be sufficient to incentivize emissions cuts.

In fact, something similar happened in 2006, except in this case the market nosedived  without any pollution cuts being made. One year after the 2005 start-up of the European Emissions Trading Scheme (EUETS), when several countries’ emissions turned out to be lower than the projected level for which initial credits had been allocated, the market value of emissions credits crashed to almost nothing. The loss of carbon credit values cascaded into negative effects on the stock market value of some of the participating companies.

The same thing is happening again this year. In a 13 September 2008 article, the Guardian newspaper reported that the EUETS has distributed up to nine million extra credits to 200 companies [link]. If the market holds, then these credits can be sold off, netting windfall profits for the fortunate companies, and again, without a single gram of carbon reduction taking place. On the other hand, the emissions market could crash again, as it did in 2006. Either way, this shows that the emissions trading system is extremely vulnerable to distortions which make it ineffectual at reducing pollution.

In some situations, operators might not find any incentive in emissions trading opportunities and therefore make relatively small or no cuts in their emissions. This can happen when industries find it easier to keep polluting than getting involved in the trading system, such as when exceeding permitted emissions limits is punished with relatively low and affordable fines. In this case, the penalties become part of the industry’s costs of production. If, as a result, uptake of emissions credits is less than enthusiastic, then relatively few pollution credits will come onto the market and, in accordance with the law of supply and demand, their price will be high. They would then be unattractive as an alternative to conventional regulation, meaning that there would be few buyers for them and the system would very likely founder.

So the hope that the market will strike just the right balance between the absurd concept of “too much” pollution reduction and the untenable situation of not enough pollution reduction seems highly suspect. Add to this the fluctuations in the market which could be caused by the participation of speculative traders, and that hope becomes no more than pie in the sky: the hoarding or dumping of credits by speculators would cause unpredictable fluctuations in prices, and futures trading in emissions would distort the system beyond credibility.

As suggested above, perhaps something less than honesty underlies the concept of emissions markets as a vehicle to reduce pollution. Could it be that the corporations, which are much happier with emissions trading than mandatory pollution reduction, realize that this is the perfect foil against having to engage in serious cleanup efforts? After all, if the market fails to achieve the desired effect no one in industry will be directly guilty, and at worst they will have evaded profit-reducing regulatory requirements for at least several years while the trading system flounders around. At best, they stand to make further large profits from the scheme, as is happening at the moment. Furthermore, in accordance with the principles mentioned above, liberal governments hate to interfere with the operation of the markets - unless, of course, they are bailing out failed businesses with pubic money. Having made emissions reduction into a market phenomenon means that in addition to the existing inertia in dealing with damage to the environment, governments have yet another economic/ideological barrier preventing them from dealing decisively with pollution. The more entrenched emissions trading becomes as a part of the market system, the more non-market, enforcement-based regulation of emissions will be regarded as unwarranted state interference; and the more lobbyists will be deployed to protect industry from legislated changes that might crimp any existing profit-making opportunities in the trading system.

There are many other holes in the case to the use market incentives as an instrument for reducing pollution. One of these is the fact that industry can pass on the cost of reduction or non-reduction to the consumer. Whether compliance with emissions reduction schemes means purchasing credits, paying fines or refitting factories, unless specific rules are made to prohibit it, businesses will pass on the costs to the public. Another class of problem stems from the fact that the emissions market can elicit environmentally adverse behavior, such as the felling of old-growth timber, which has slow carbon absorption characteristics, in favor of new plantations containing species which absorb carbon faster.

The world is now at environmental code red. We will shortly be arriving at the tipping point beyond which it is too late to reverse the profound disruption we have caused to global ecosystems. There is literally no time to tinker with incentive systems which supposedly offer profit-making opportunities for reducing pollution. Our sole objective can only be to get pollution levels down, fast.

A faint glimmer of hope is found in signs that the sway of neoliberalism is on the wane. The shocks dealt to the world economy by the bursting of the financial bubble have resulted in new mistrust of unregulated markets. This situation may make some politicians more sensitive to the absurdity of  trading emissions to halt climate change. But their feet will have to be held to the fire: nothing will be accomplished without an upsurge in political/environmental activism at all levels, from the grassroots up.

“When or where it will end, no one can say with certainty. The duration of the turmoil, its scope and the growing evidence of effects on the real economy have come as a great surprise to most commentators, private as well as public.”
- Bank for International Settlements, 78th Annual Report [link]

The first two parts of this article [part 1] [part 2] suggested that the drive for ever increasing rates of wealth accumulation fuelled a process which gradually knit the entire world into a single economic system dominated by the industrialized West. Having benefited from a century of dramatic revolutions in production technology, new sources of raw materials and labor, and from geographical expansion of production and consumption, the system settled into a period of saturation and stagnation beginning in the late 1960s. Institutions which earlier in the 20^th century had played a role in saving the accumulation system from the crisis of the 1930s depression by promoting adequate levels of demand— public welfare, regulation of finance, agreements with trade unions—were now considered obstacles constraining private investment. The central objective of the moves made to eliminate these obstacles was to bring down labor costs. In the period characterized by the ideology of neoliberalism entrepreneurs used the ruse of the “free market” to relocate their operations anyplace in the world where wages were lower, while ignoring the damaging effects of these economic displacements on affected communities and the general economy.

The natural outcome of these developments was the decline of purchasing power for the majority of citizens in what had been the most industrialized countries. In order to preserve the system it became imperative to somehow bolster flagging consumption without increasing wages. The answer to this problem came in the shape of the growing arsenal of credit instruments which proliferated from the 1980s onward. While keeping the system from immediate collapse, the credit-based economy became decoupled from the actual production of goods and services and came to be characterized by inflating and deflating financial bubbles.

With the help of financial speculation, lack of government regulation, and the intensive use of public funds to compensate private losses, a general credit bubble has now grown to unprecedented proportions. This presents a lose-lose situation in which deflation of the bubble brings severe economic losses at personal and institutional levels, while actions to prevent the bubble’s deflation only cause further growth of the bubble and increase the level of disruption its deflation will inevitably cause later.

Future prospects

Given the steady decline of wages relative to prices over the past 40 years, the economic policies practiced by the world’s major powers and by transnational institutions like the World Trade Organization and International Monetary Fund are nothing short of lunacy. The more consumption and demand drop the greater are the attempts to beat down the “overhead” of wages via anti-trade union laws anti-welfare legislation, swelling the ranks of the unemployed to increase competition for scarce jobs, contracting public services to private speculators and more offshoring of jobs. And the lower real wages go the more intense are the efforts to bridge the consumption gap using credit (which itself is in peril as a “profitable” business). The bigger the credit bubble grows and the more banks and businesses fail as a result, the shriller the cry from businesses for governments to speed up the money printing presses, further devaluing currency and pumping up inflation. Because, in truth, although inflation is pilloried as the great Satan by neoliberal economists, it is wage inflation that is the true target of their wrath.

In the Western world, the United States and Britain have gone furthest down the road of market liberalization and credit dependency. So it is not surprising that they are the hardest hit of the former industrial nations by the current phase of the crisis, with massive stock market losses, failure of major financial institutions, rising bankruptcy rates and levels of unemployment, and sharply declining consumption.

However, despite recent talk of other economies being “decoupled” from the financial Armageddon in Britain and the US, the integrated nature of the world economy has allowed the contagion from those economies to spread around the world. News from continental Europe, Australasia, India and China attests to similar patterns of downturn in those places.

Crisis is a catalyst for change in the system, and the world economic system will not emerge from the present crisis without some alterations to its landscape. The possibilities range from struggling on with the application of a few patches to deep social unrest and profound structural changes.

As the quote which opens this article says about the current crisis, “When or where it will end, no one can say with certainty.” Below, some of the possible and not so possible responses to the crisis are examined.

Role reversal

Although it is impossible to predict the precise outcome of this crisis, what does seem clear is that the economic hegemony of the United States will continue to wane: it is increasingly unlikely that the US will resume the role it held in the years following the Second World War as driver of the world economy. Some writers suggest that hegemonic roles will be transposed, with China and/or India assuming first place in a newly emerging, Asian-centered, world economy. The de-industrialized countries of the West would, in turn, become low wage zones on the fringe of the Asian powerhouses. This scenario seems doubtful when the nature of the economic activity currently being fuelled by Western demand and capital in the developing world is considered.

While recent economic activity has resulted in the emergence of limited infrastructure improvements in the developing world, these have been focussed on processing for export: goods and money flow through designated processing zones but have very restricted effects on the lives of people not directly tied to the manufacturing and export industries. The workers in these export processing operations are typically unable to purchase the very products they help to manufacture. In most cases, the capacity to produce for local/national consumption has been relatively unaffected. This is evident from the high levels of rural and urban poverty which still prevail in India, Indonesia, Malaysia, and the Caribbean region–all highly integrated into the export processing system of the world economy.

The financial crisis may, therefore, have the two-fold effect of diminishing direct investment in the export dominated economies of the “developing” world, and of curtailing effective demand for imports in the West, which had been propped up by the flawed system of substituting credit for capital. China, with its prior experience in national development, its centralized decision-making structure and its huge internal market, is best placed of any of the developing nations to function autonomously in the face of a global downturn. Yet, with its vast holdings of increasingly worthless US debt and its dependence on imported raw materials, even China may find itself facing a perilous transition.

The old accumulation toolkit

In the past, the global economy has always recovered from its periodic downturns and intensified the process of accumulation and investment. The first part of this article [link] looked at the economic tools which have been used to overcome blockages in the process of accumulation: new technology; development of new markets; cheaper materials; cheaper labor. What are the chances of these tools working in the current situation?

Technology
The capacity of technology to overcome the current phase of the economic crisis seems questionable. Consider the fact that the greatest technological advance of the past century, the rise of the computer, coincides almost exactly with the downturn of Western industry and the decline of real wages. In fact, it is no coincidence that computer-assisted production (and the production of computers) failed to bolster the economy. Computers were mainly used to lower the cost of production by substituting machine for human labor–which is to say that they were used to put people out of jobs (notwithstanding the growth of a new category of workers dedicated to servicing computers). This clearly shows that the power of technology to overcome economic stagnation is contingent on other structural factors in the economy and society. An economy which is predisposed to the reduction of labor costs will apply all innovations towards realizing that goal.

Going green

The current phase of the economic crisis coincides with another crisis which is perhaps even more profound for the future of humanity—the looming threat of climate change. The development of environmentally friendly technologies is essential to address the threat to the natural environment, and perhaps provides one of the best avenues for boosting the economy. Retooling the energy industry to take advantage of renewable energy sources could be a globe-spanning endeavor with attractive prospects for investment. But the task is enormous, and, paradoxically, the prevailing lackluster economic environment may inhibit progress in this sphere. Moreover despite the currently fashionable genuflections towards the institution of private enterprise, the private sector would not be able to coordinate the resources needed to manage a rapid and timely world-wide shift to renewables. And, even if such a project were attempted in the private sphere it would eventually reproduce the social and economic patterns which perpetuate the boom and bust syndrome. To reap ongoing economic benefits, such an enterprise would need to be maintained in the public sphere.

 Regardless of which sector manages the project, the fact that green technology is a replacement for existing energy technology means that the greatest economic opportunities would occur at the beginning of the project; later dividends would be in lieu of, rather than in addition to, existing opportunities in the energy field.

Market expansion

The discovery or creation of new markets, a key to economic expansion in the past, is an unlikely source of significant new growth. As argued above, within the last hundred years the world economic system reached the limits of geographical growth, and within the last 50 years consumption reached saturation within the constraints of the current system, given the impossibility of endlessly expanding both consumption and accumulation.

Cheaper raw materials

With the price of raw materials increasing and their availability decreasing, salvation in the form of cheaper raw materials is not likely. New ways of producing and using materials more efficiently are always emerging, but whether this can happen with a force to significantly boost the world economy is questionable.

Cheaper labor

As already described, reducing the cost of labor is a trend already well underway and, far from solving the accumulation problem, is the main factor undermining the world economy.

There are two other possibilities which are not formally part of the old toolkit for stimulating accumulation, but which have played a role throughout economic history nonetheless.

Failure

One of these is the acceptance of circumstances brought about by economic failure. Breakdown of the credit system and concomitant downturn in the world economy would impose greatly lowered quality of life expectations upon people around the world and would be utterly catastrophic for many. Yet, as amply demonstrated by the list of failed states and economies currently in existence, people can adjust to existing for relatively long periods of time under circumstances of deprivation or severely reduced expectations. Absent the political will to construct a successor to a collapsed world economy, this unattractive option could become the reality for millions.

War

Large scale war stimulates production and at the same brings about great destruction of property as well as life, creating a vacuum into which investment is drawn. Reconstruction in the wake of the Second World War gave a tremendous boost to the economies which were still functioning, especially the US. Sadly, there are interests in existence today (the role in Iraq of Haliburton, Blackwater, and the major oil companies comes to mind), which would not resist, and might even welcome the outbreak of major wars as a form of economic stimulus.

The culmination of the current and ongoing crisis is not likely to be measured in years but rather in decades. There is a good chance that the existing system will give the appearance of rallying, possibly more than once, before resuming its torpor and decline. Attempts to deploy the old accumulation toolkit will be made with diminishing success. The process will be uneven, affecting various parts of the world economy in different ways and at different times. There will be an increased prospect of war, both of the regional and general variety.

An alternative?

Amidst the crisis of the world economy there is also the prospect that alternative paradigms for more positive economic relations will emerge. These would need to embody principles which moderate, if not reverse, the traditional patterns of domination and ceaseless accumulation. Central to any alternative model to replace the current madness would be the following transformations:

• From an economy of concentrated wealth to one of distributed wealth - Historically, the concentration of wealth in few hands has been the goal rather than its distribution across society. The dominant ideology grudgingly acknowledges that wealth distribution should take place, but insists that distribution should be no more than a “trickle”, as in “trickle down”. This must be reversed so that top priority goes to mechanisms to distribute wealth for the general welfare of the population. The “trickle down” should be replaced with a “tide” which flows across society.

• From production for accumulation to production for utility - Wealth should be valued for its utility, that is, for its ability to sustain and fulfil human needs, rather than primarily as a tool for driving further accumulation. 
   

• From unrelenting expansion to achievement of sufficiency - The frantic drive for endless change, ever-new ways to turn a buck, and ever-increasing prosperity for some should be replaced by a the quest to build an economy which delivers a level of comfortable and secure sufficiency for all. “Sufficiency” here means high and sustainable standards of health, nutrition, accommodation, sanitation, education, and recreation for all. A shift in attitude is vital not only to creating a society of equal opportunity but also to bringing human activity into balance with the beleaguered natural environment.

• From a culture of dominance/subservience to a culture of integration/participation - Democratic institutions have been co-opted time and again in the drive for accumulation. This has resulted in the repetition at every level of society of the pattern of disenfranchised majorities pushed to the margins by small power-wielding elites.

There are no “iron laws of history” which would ensure that these transformations come to pass. However, the sheer destructive illogic of the current configuration of the economy and society gives hope that it will give birth to its antithesis.

 ”Behind the housing bubble, there’s a super bubble which has been growing for the last 25 years. Every bubble has an element of reality and an element of fantasy, of misinterpretation. The reality has been a trend of ever-increasing use of credit, of credit expansion.”
- George Soros [link]

The Disservice Economy
It would be nice to have a penny for every time in the last couple of decades someone said or wrote that the “modern” economy is a “service economy”. As if steel and  cement were no longer used to build buildings, ships to carry goods, and textiles to make clothes. Having extended the reach of the world economy to every corner of the globe (see Part 1 of this article), Western entrepreneurs arrived at the point where uprooting whole sectors of the economy and shipping them overseas was their best bet for keeping their rate of wealth accumulation rising. Calling the economy a “service economy” was a way of euphemising the fact that the core production capacity of the industrial world had been gutted and shipped off to low wage zones.

Having stripped what was formerly the industrial world of much of its production industry, the appetite for offshoring proceeded to bite into the service industries that characterised the supposedly modern, post–industrial West. Accounting, insurance, product support services and software and technology engineering–in fact, any business which could be performed more cheaply at a location remote from its end-users–could be sent anywhere in the world.

Operating offshore offered lowered costs for premises, equipment and-crucially–labor. In fact, lower labor costs were achieved in two ways. First, there was the direct use of the super-cheap labor of less-developed countries, where unions are suppressed and laws to protect workers are weak or rarely enforced. And secondly, the threat of moving operations offshore was used to hold down the wage expectations of workers and weaken unions in the developed countries. As a result, the real wages of the middle and lower classes began to decline in the mid-1970s and have continued downwards ever since. One distinct indicator of this trend was the rise of the multi-income family as the basic economic unit in developed countries.

As successful as the wage-lowering strategy of the entrepreneurs appeared to be, a serious contradiction was lodged within the process. Shrinking real wages along with growing unemployment and underemployment among would-be consumers created the imminent threat of a collapse in demand.

The reduced costs of production gave entrepreneurs some leeway to lower prices in an attempt to sustain demand for imported consumer goods, but this in itself was not enough to keep the rate of accumulation rising.

Let Them Eat Credit
A more effective tool for keeping Western consumption alive in the face of declining wages had to be found, and the answer came in the form of the creation of ever greater quantities of consumer credit. A few decades ago, when wages were higher relative to the cost of living, consumer debt was usually limited to a relatively manageable home mortgage and the very occasional use of a charge card or credit card–more as a matter of convenience than of necessity. As time went on new forms of credit proliferated, driven on one end by the high rate of return for financiers on capital from such “financial products”, and on the other end, by the need for a way to bridge the increasing gap between sinking wages and the escalating cost of living for the majority of people.

As it became more and more of a struggle for people to pay their daily living expenses, these expenses were increasingly diverted to credit accounts, and in turn, it grew harder for people to keep up payments on their various credit accounts and loans. Default, bankruptcy, repossession and collection activity increased sharply. In Western consumer-oriented economies, like the US, where more than two thirds of GDP is linked to consumer spending, this situation embodied the prospect of economic disaster. The use of credit was growing at an unsustainable rate, yet without credit purchasing power would nosedive and take the entire economy down with it. Thus there was demand both from working people for some way of maintaining personal liquidity and also from entrepreneurs for some means of keeping the process of consumption and accumulation alive.

Driven by a combination of enterprise and desperation, lenders increasingly relaxed the standards of credit-worthiness they required of their customers. To protect themselves from the threat of defaults, lenders began to sell loans and their accompanying risk to larger banks and investment houses. Financiers higher on the financial food chain bought up the loans and bundled them together with other loans and obligations to create “derivative” packages. As standards of credit worthiness were lowered, these packages were used as vehicles to mix risky instruments, such as sub-prime mortgages, with less risky ones in order to mask the “toxic” content of the former. This process made it possible for derivative vendors to obtain high credit ratings and sell the packages on to others. These derivative bundles–unregulated, off the books and camouflaged as reliable financial products–entered the economy in such huge quantities that eventually even the most “prestigious” banks and investment houses were infected to their entrails with uncollectable debts. What started out as a technique to minimize risk ended up swamping the world financial system with unprecedented levels of risk. The collapse of this financial bubble was inevitable, and it came in August 2007.

Après Mois Le Déluge
The world’s central bankers have addressed the collapse of the credit markets by flooding their economies with fiat money in an attempt to create liquidity, or in other words, to create the illusion of value where there is none. This monetization of bad debts has debased the world’s major currencies, while at the same time giving investors in failed financial ventures the capital to switch over to commodity speculation. The result is the swiftly accelerating rate of inflation which is now occurring. The world economic system appears to be entering a period of “stagflation”, the term for a combination of depressed consumer demand, economic contraction and rising prices.

It should be remembered that the financial crisis just described is not the cause, but a symptom. of the deep crisis in the world economy. Trends which began in the early 1970s ushered in a new social and economic order, which is still unfolding today. The breakdown of the Bretton Woods system and the end of the gold/dollar standard; the US defeat in Vietnam; the rise of OPEC; the reversal of the favorable US balance of trade and the growth of competition in international trade from the European Union trading bloc and China–all have played a role in bringing about the increasing ferment currently being experienced by the world economy. All of the preceding are connected with and affected by the imperative of entrepreneurs to ensure a rising level of accumulation. But nothing is so basic to and intimately connected with that imperative as the issue of labor costs and the effect of diminishing wage levels on consumption.

The next and final part of this article will look at the prospects for the future in light of the current crises and the broader underlying crisis.

Where did we go wrong?
Until just a few months ago opinion leaders in politics and the media were almost unanimous that the demons of inflation, stagnation, recession and depression had been largely relegated to the scrapheap of economics. Just as history had ended with Western victory in the cold war, the uncertainty of economics had been tamed by sophisticated central bankers like Alan Greenspan, who had the wisdom to micro-manage the economy around any obstacle. How fortunate we felt to be living in the age of eternal economic expansion. Then, almost overnight, everything seemed to change. The word “crisis” began to make daily media headlines: fuel crisis followed food crisis followed credit crisis followed mortgage crisis.

Now the search is on to find the event(s) which triggered the current spate of economic problems. Was it the sub-prime mortgage debacle? The war in Iraq? The yawning maws of India and China gobbling up resources? Speculators bidding up the prices of commodities?

While it may be true that any, or all, of the above contributed to the current situation, the premise underlying these assertions is that the bubbles–which is what these crises really are–are themselves the problem. If we can just regulate investment a bit more, or pump a bit more oil, or end the war in Iraq, everything will be fine again.

World of bubbles
Bubbles occur when speculators pile into a particular sector of the economy which seems to promise faster growth and bigger returns than other sectors. When investment in any of these sectors grows grossly out of proportion to the rest of the economy some event eventually triggers a collapse of the bubble. Famous examples of bubbles include the Dutch tulip mania of the 17th century, the South Sea Bubble of 1720, and the dotcom bubble of a few years ago.

Contrary to the usual jovial connotation of the term “bubble”-champagne bubbles, bubble baths, children blowing bubbles with soapy water in the garden-economic bubbles are no laughing matter. When they are inflating they drive up the prices of affected commodities beyond the means of average earners, as recently happened with the property bubble and is happening now with the fuel and food bubbles. And when they collapse they often cause bankruptcies, job losses and social disruption.
 
The coincidence of multiple major bubble-bursts could have consequences the likes of which haven’t been seen in the Western World for many decades. However, these bubbles shouldn’t be seen as the main story but rather as symptoms, of a much larger crisis which is unfolding slowly and which will have far deeper consequences than the bubbles which have transfixed us.

The longer view
Longer term historical trends are rarely mentioned in the mass media. This is not surprising given that there’s little bang for buck in a story about a gradual process that began perhaps five hundred years ago and which might take another century or so to play out. The idea of a long trend also goes against the impression cultivated by the media that society’s problems are all the fault of politicians, and can also be fixed by them.

Since the “Age of Exploration”  began at the end of the 15th century, the Western European economy has been expanding vigorously outwards. The process started with the quest for a cheaper way to acquire the luxury goods and raw materials of the “Indies”. A chief objective was to bypass Arab middlemen who until then mediated trade with Africa and Asia. This objective was accomplished with the opening up of sea routes to Asia and the “New World”, and in time all regions of the inhabited world became inextricably linked through a dense trade network encompassing complex exchanges of raw materials, finished products, labor and credit.

The continent of Europe dominated trade for the first four hundred or so years after the epochal voyages of Vasco da Gama and Christopher Columbus. After World War II the center of this world economy shifted to the United States. Now, at the beginning of the 21st century, the process of expansion is complete, with virtually no area of the world left outside the ambit of the world economy. Thus, the process now fashionably referred to as “globalization” and often thought to be a relatively recent phenomenon, has actually been going full tilt for at least half a millennium.

Accumulation über alles
The driving force behind this process is the quest by entrepreneurs to accumulate wealth and reinvest it to create yet more wealth. When investors can’t get a profitable return on their investments in one region or market they transfer to another; and when opportunities to increase accumulation seem to be lacking altogether they refrain from investing, and the system loses impetus or breaks down.

The ability of entrepreneurs to accumulate wealth is based on a system of unequal exchange with those who work directly or indirectly for them, and between more and less “developed” regions of the world. This accumulation process has always been supra-national: not only is it not constrained by the borders of nation states but in fact it thrives on the unequal conditions between them.

Over the centuries this process of accumulation has confronted many obstacles. In particular, periodic economic cycles, in which the balance of supply and demand for products and services is disturbed, have been a persistent headache for entrepreneurs. They have led to everything from investment bubbles, as mentioned above, to famine, depression and war. However, the system has always managed to overcome obstacles to accumulation using an economic toolkit which includes:

Note that the above tools have been applied by peaceful methods and by force, as the situation required.

In the 19th and early 20th centuries, the accumulation of wealth obtained by unequal exchange at home and abroad made possible the leap in the intensity of production known as the Industrial Revolution. This in turn created the conditions for a further tremendous surge of accumulation. It not only brought unprecedented riches to the entrepreneurs running the system but it also gradually, if unevenly, improved living conditions for working people. The entrepreneurs needed to bring together a large corps of skilled and semi-skilled workers to man and maintain their machines and to manage their accounts. The high level of demand for their skills gave workers the power to collectively bargain up their share of the take. The result was the creation of large affluent middle classes in the industrialized countries.

Non- and partially- industrialized regions in Eastern Europe, Africa, Asia and Latin America played the role of suppliers of cheap food, raw materials and, to some extent, of consumers of finished products from the industrialized countries. These regions also experienced some growth in prosperity for local businessmen, bureaucrats and professionals who mediated the relations between their own people and the entrepreneurs of the industrialized world. Regions which attempted to opt out and develop an independent material and labor resource base, or which resisted penetration of their economies, usually found themselves facing the sharp end of Western bayonets.

By the early years of the last century new territories in which to expand had begun to run out from. Stagnation and depression became more frequent, and world wars were fought over the allocation of international territories and their resources. It was apparent that new means would need to be found to keep the rate of accumulation rising. Social unrest led to experiments with direct economic intervention by the state in the form of corporatism, fascism and the welfare state, as a means of stabilizing industrialized economies. But towards the latter part of the 20th century this strategy too was beginning to lose steam as recession, inflation and stagnation returned to haunt economies.

The neoliberal nostrum
In the late 1970s the industrialized states began to roll out a new “neoliberal” strategy in another attempt to boost accumulation. Unlike the previous periods, in which the revolutions in industrial technology and the absorption of new geographical regions into the world economy provided the primary impetus for intensified accumulation, neoliberalism’s main strategy was to sharply drive down the cost of labor as a share of operating costs. State run services and industries were closed or “outsourced” to private owners, bringing wages down and giving the states leeway to cut taxes on entrepreneurs. More importantly, the process of “off-shoring” manufacturing jobs to low wage zones in the hitherto non-industrialized world, began to gather momentum.

For workers in the industrialized zones the consequences were severe. Many manufacturing regions of Europe and the US became “rust belts” as factories closed down. Large numbers of former workers and their dependents looked to social services for their survival. But social services require a reliable tax base and the aim  of neoliberalism was to reduce corporate taxation, while also funnelling more tax money to increasingly expensive military strike forces. So, to the extent possible without creating too much unrest, social supports were wrenched away from the unemployed.

While it was very bad news for working people, the off-shoring of jobs seemed to give entrepreneurs a new lease on life. Sending work to low wage zones and paying workers a small fraction of what they paid for the same work at home helped to overcome the stagnation of the 1970s and kick-start the accumulation process again.

But each solution to the problems of keeping the wheels of accumulation turning is only temporary and brings with it new problems. Looking beyond the oil, food, and housing bubbles it is possible to discern the iceberg-like dimensions of the underlying crisis facing the system of accumulation.

To be continued

Last week Mervyn King, governor of the Bank of England (Britain’s central bank), announced that the “nice decade” was over. [link]. King’s statement was widely taken as a reference to the double whammy which has hit the world economy: the consequences of the subprime mortgage crash in the US followed by the implosion of the market for “structured credit products” on the one hand, and on the other, the increasing rate of inflation, which is being led by sharp increases in the price of oil, food and metals.

In the most general sense, the end of the “nice decade” means the end of a period when cheap credit and cheap goods produced by cheap off-shore labor combined to allow middle- and upper-income people to enjoy the illusion of prosperity.

However, there is also a more technical meaning in King’s choice of phrase. “NICE” is an acronym which stands for “non inflationary constant expansion”, and “NICE decade” refers specifically to the ten years since 1997, when the Blair/Brown New Labour government gave the Bank of England independence to set interest rates. This supposedly decoupled the rate setting process from political motivations. The relatively benign global business climate of the past decade enabled inflation in some sectors to remain fairly low and the Bank of England (BoE) was able to take much of the credit. In turn, Blair and Brown were able to take much of the political credit for having reformed the Bank of England: so much for political decoupling.

Low inflation was Gordon Brown’s primary objective when he was Chancellor. He was committed to keeping inflation at 2% and imposed on the Governor of the BoE a requirement to write him a cringing letter of explanation if the rate exceeded 2%. The official rate of inflation is now pushing 4% and the BoE Governor is getting his stationery kit ready for some strenuous letter writing. As King says in his recent end-of-the-nice-decade speech, “The Monetary Policy Committee [which sets interest rates in the UK] must focus on bringing inflation back to the 2% target in the medium term.”

The Nobel Prize winning economist Joseph Stiglitz points out that the type of “inflation targeting” that Gordon Brown has championed, though currently fashionable, has little to offer. Stiglitz refers to it as a “crude recipe…  based on little economic theory or empirical evidence”. Central bank manipulation of interest rates might have some effect on prices of domestically produced goods and services, but it has little influence on international prices: the ones which are now driving inflation figures up [link].

Mervyn King’s admission that the NICE decade is over is also a confession that he and his colleagues on the Monetary Policy Committee have very little leverage over the economic situation now facing Britain. In fact, far from being the unique outcome of effective policy-making, what Britain experienced in the decade from 1997 to 2007 was very similar to the experience of other developed countries which applied similar policies. Britain will also be in good company in the not-nice times ahead.

So, what was nice about the decade that we are now leaving behind? Well, inflation was low–or was it? In the UK and the US house prices nearly tripled between 1997 and 2007. Nice for home owners on the face of it, but not so nice for would-be first time buyers who couldn’t get a foot on the housing ladder except via subprime mortgages, which have now led hundreds of thousands into the not-nice territory of foreclosure. Not so nice either for home owners who borrowed on the equity of inflated home values and now face the prospect of owing more than their homes are worth as house prices fall.

Then there is the price of fuel, which costs around twice as much now as it did when the “nice decade started”. Home heating and transportation have thus become heavy burdens in the household budget where once their impact was relatively benign.

The cost of medical care in the United States has increased by more than 50% in the last ten years. In countries with national health care systems costs have also risen, but these are buried in state expenditures, escalating taxes, reduced service and/or quality of service.

If galloping inflation in house prices, fuel costs and health care wasn’t nice perhaps something else was nice. What about employment figures? Not a particularly nice picture there either. No significant inroads were made against the officially tolerated rate of around 5% of willing and able adults in the US and Britain out of work. The recession of 2001 caused unemployment in the US to spike and remain above 6% for over 5 years. Unemployment has come down in Britain, but only in comparison to the very high figures of the 1990s. And of course these are the official figures which exclude those who are discouraged about seeking work and live in poverty or near-poverty, subsisting on a combination of minimal state benefits and the underground economy. For those who are employed, wages have stagnated and even dropped, and there is no longer an assumption that standards of living will rise, or even remain the same, from generation to generation. Not nice.

Surely there must have been some truly nice news during the last decade. Indeed, the price of electronic gizmos has dropped so that nearly everyone can now afford a mobile telephone and a computer. Very handy for looking for new work when you’re sacked because your job has been moved to Asia or Eastern Europe and is being done by someone making a quarter of what you used to be paid.

Clothing got cheaper too, thanks to increasing production from sweat shops in China, Haiti and Bangladesh. Again, good news for laid-off workers in the West, who can now get cheaper suits to interview in.
 
Perhaps Mervyn King and his fellow central bankers think of “nice” as being the fact that the top 1% of earners have seen their income skyrocket in the last decade. By 2000, CEOs were making 525 times the salaries of average workers in the US, though this dropped to a mere 364 times by 2005, probably as a result of the dotcom bubble bursting [link]. Banking executives and fund managers also did very, very well. While 99% of the workforce were struggling to keep their heads above water–or were going under, corporate execs were struggling under the weight of the money sacks they were carrying home.

Whatever was nice about the “nice decade” the message from Mervyn King is that even that is not going to be so nice anymore. Given that for most people things weren’t especially nice during the “nice decade”, what lies ahead threatens to be decidedly nasty. The real message is that Mervyn King’s idea of nice is something that the average person will never experience, “nice decade” or not. For most, things can only start to get nicer when neo-liberal, trickle down economics are dropped and governments begin to focus policy on achieving well-being for the majority.

In the quest for peace in the Middle East you might think that no stone should be left unturned. Former US president Jimmy Carter turned a very large stone recently when he travelled to the region to meet with Palestinian and Syrian leaders. However, his efforts were not appreciated by the United States government and its regional mini-me, Israel. It seems that the Bush administration was so gripped by fear that Carter had endangered the status quo of hostility towards Syria that they quickly organized a CIA dog and pony show to dispel any illusions about the possibility of peace in the region.

In a performance for Congress reminiscent of Colin Powell’s February 2003 “WMD” circus for the UN security council, which paved the way for the invasion of Iraq, the CIA last week trotted out satellite photos and explanations purporting to prove that North Korea had helped Syria to construct a nuclear installation of some description. Israel had already destroyed the site in an airstrike seven months earlier. Not only was there no longer any evidence to prove what the site actually had been, but there were questions as to why the administration had waited so long to brief the legislative branch.

*   *   *   *   *

Jimmy Carter has a well-developed reputation as an international peacemaker. As president he brokered the Camp David accords between Israel and Egypt and re-established diplomatic relations between China and the US. Since leaving the White House he has served as an election monitor and citizen diplomat at flashpoints around the world, earning the Nobel Peace Prize. He vocally opposed the Bush/Blair invasion of Iraq.

Carter’s sin, in the eyes of Bush and his nasty band of neo-cons, is his recognition that a crisis might best be resolved by involving all relevant parties in negotiations. In order to move the Israeli-Palestinian conflict forward from the vicious cycle of attack and retribution, Carter understood that Hamas and the Syrian government would need to be recognized as legitimate players. His recent mission to the Middle East sought to sound out those parties about the prospects of reducing tensions. This incurred the wrath of the Bushites, who thrive on crisis as a means of extending US global hegemony.

According to a press release of 23 April from Carter’s charity, the Carter Center:

“Before leaving on the extended visit to monitor an election in Nepal and then to visit Israel, the West Bank, Egypt, Syria, Saudi Arabia, and Jordan, President Carter placed a telephone call to [US Secretary of State] Rice to describe his itinerary and to inform her of his intended conversations. She was in Europe and her deputy returned his call. They had a very pleasant discussion for about fifteen minutes, during which he never made any of the negative or cautionary comments described above. He never talked to anyone else.” [Link]

The situation changed, however, once Condi heard what was afoot and became personally involved. At a State Department press conference on 22 April Rice stated:

“I want to be very clear. We counselled President Carter against coming to — against going to the region, and particularly against having contacts with Hamas. We wanted to make sure that there would be no confusion and that there would be no sense that Hamas was somehow a party to peace negotiations which [Palestinian President] Abu Mazen has undertaken with the Israeli Prime Minister, and that is the Annapolis process and that is what we support.” [Link]

In one sweep Condi dismissed Carter’s effort and confirmed that she and her boss would talk only with pre-approved parties, thus ensuring that such “negotiations” would be a one-sided farce and condemning the region to indefinite strife.

Hamas, which is the majority party in the Palestinian parliament, reiterated to Carter what it had said at various points in the past regarding its willingness to accept a two state solution to the Israeli-Palestinian conflict on the basis of an Israeli withdrawal to its 1967 borders. For the Bush administration, which had refused to accept the outcome of the 2006 Palestinian elections and helped engineer the abortive coup by Fatah against Hamas in 2007 (see the article by David Rosen in Vanity Fair: [Link]), this was seriously upsetting. The Bush clique perpetuates the fiction that Hamas is wedded to the idea of destruction of the Israeli state.

According to an article in the New York Times on April 22nd:

“Mr. Carter… found the Hamas leadership, including Mr. Meshal [chairman of the Hamas Political Bureau], to be clear-thinking, educated people who gave no sign of fanaticism, although he did condemn in harsh terms their use of violence.” [Link]

Carter took away from the meeting with Hamas a commitment that it would respect any agreement reached by Fatah with Israel regarding a two state solution if it were ratified by a referendum of the Palestinian people, a similar position to the one taken by Abu Mazen. Though not without potential complications, such an undertaking by Hamas gave the lie to the Bush party line that Hamas is inflexible on the issue of the existence of the state of Israel.

In his meeting with Syrian President Bashar al-Assad Carter said he was told that 85% of the issues between Syria and Israel were already resolved and that relatively few details remained to be worked out to achieve a peaceful resolution.

With such positive undertakings from people portrayed by the Bush clique as the Middle East’s most rabid “terrorists”, there was a clear danger that peace might be about to break out in the region. The Bush administration was having none of that and quickly set to work to address the threat, first of all by painting Carter as a loose canon engaging in unauthorized dealings with the enemy. Furthermore, within days the matter of Syria’s supposed nuclear facility was taken out of the deep freeze and paraded before Congress and the public. The correct public reaction when confronted with images of the dastardly Syrian endeavors would have been a collective sharp intake of breath and a renewed resolution to smash the North Korean-Syrian Axis of Evil. As Bush put it:

“We… wanted to advance certain policy objectives through the disclosure. One would be to the North Koreans to make it abundantly clear that we may know more about you than you think.

“Then we have an interest in sending a message to Iran and the world, for that matter, about just how destabilising nuclear proliferation would be in the Middle East” [Link], perhaps meaning that any time the US sees an opportune target they will send Israeli jets in to destroy it.

Unfortunately for Bush and Co., the reaction to the show was actually somewhat muted. Syrian spokesmen, of course, directly denied that the building was a nuclear facility of any type and pointed out that Syria, unlike nuclear-armed Israel, is a party to the Nuclear Non-Proliferation Treaty. Mohamed ElBaradei, head of the International Atomic Energy Agency, condemned Washington for failing to make its claims known earlier, and Israel for bombing the facility rather than allowing the IAEA to verify the nature of the site [Link]. Most in the US Congress appeared to be taken in by the performance, but both Democratic and Republican members showed irritation about the Bush administration’s delay in providing information. Many commentators in the media suggested that the current allegations are just a little bit difficult to swallow given the administration’s record on Iraqi WMD.

Carter’s talks were probably not the sole reason for the timing of the CIA’s briefing–Bush also hoped to score points against North Korea at a time when negotiations with that country appear to have stalled. However, there is every reason to believe that any positive publicity generated by Carter’s mission was seen by the Bush gang as something which had to be buried.

Like so many previous episodes in the history of the Bush administration, this one has the hallmarks of both farce and tragedy. Rice’s reaction to Carter’s initiative is farcical but the tragedy is that a significant opportunity to end the violence between Israelis and Palestinians has been torpedoed and countless more lives will be lost as a result. It is farcical that the Bush administration would put on another WMD show to drown out signals from Syria which should have led to reductions in regional tensions. The tragedy is that the US continues to beat the drums of war and gives many indications that the Israeli raid was merely a rehearsal for an impending massive strike against both Syria and Iran.

Over the past two weeks the U.S. and its Iraqi allies acted out what appears to have been a well orchestrated campaign to bolster the Bush/neo-con objective of maintaining a long-term U.S. military presence in Iraq. First came the ill-fated assault on Basra by Iraqi government troops. Then, before the smoke of battle had cleared, the commander of U.S. forces in Iraq and the U.S. ambassador to that country appeared before Congress to argue the need to maintain large U.S. military forces in Iraq. In the final act, President Bush accepted the recommendation of his commander to call off reductions of U.S. troop levels in Iraq.

On the 25th of March, Iraqi prime minister Nouri al-Maliki deployed government troops to take control of the city of Basra. The official explanation for the action was that it was an operation to disarm “outlaws” in the southern Iraqi city. Far from strengthening Maliki’s hold on the country, the assault resulted in renewed challenges to his authority and further destabilization of the country.

Alongside the official reason given for Maliki’s action, there are other more credible explanations. One widely mooted reason for the attack was that Maliki, whose powerbase is in the Shi’ite Islamic Supreme Council of Iraq (ISCI) and the Islamic Dawa Party, wanted to cripple the faction of his main Shi’ite rival, Moqtada al-Sadr, in advance of upcoming local government elections. Another plausible explanation of the attack relates to U.S. unease at the fact that the streets of Basra, Iraq’s chief oil port, are controlled by Sadr’s anti-occupation Mahdi Army.

Before bogging down and being checkmated by Sadr’s forces, Maliki’s operation was portrayed in the mainstream press as the latest positive step in the “Iraqization” of the U.S.-driven war. But because U.S. troop withdrawals are linked to the existence of a viable Iraqi force to take their place in the fighting, Maliki’s failed operation left a question mark over the viability of a “draw-down” of U.S. forces.

The Bush administration’s troop “surge” tactic, initiated in the spring/summer of 2007, was supposedly intended to create a more favorable military situation for “Iraqization”, and, implicitly, to facilitate subsequent U.S. troop reductions. Predictably, however, the surge failed to significantly influence the political-military situation. As Phyllis Bennis of the Institute for Policy Studies argues, the decline in fighting attributed to the “surge” had more to do with other factors, including U.S. cash payments to buy off Sunni insurgents who joined the “Awakening Councils”; the cease-fire implemented by Sadr’s forces; and the completion of ethnic cleansing in the formerly mixed Sunni-Shi’a neighborhoods of Baghdad and other cities. [link]

In recent months, signals from the U.S. administration about significant troop withdrawals have been increasingly ambivalent. For instance, on the 25th of March - the day Maliki’s offensive began - the Washington Post quoted U.S. Vice President Dick Cheney as saying, “there’s no reason now to decide what the force level is going to be in December of ‘08… [The criterion] is how do we make certain we succeed in Iraq? It may be that we can make judgments about reductions down the road… But I don’t think [Bush] is likely to want to try to say now what the force level ought to be at the end of the year.”  [link]

The British government was also being cagey about troop reductions in its zone in southern Iraq. As the BBC reported on the 1st of April, British Defence Secretary Des Browne reported to the House of Commons that “in the light of the last week’s events” (Maliki’s abortive assault on the Sadr forces) plans to continue reduction of the British contingent have been put on indefinite hold. [link]

Given the reluctance exhibited by U.S. and U.K. leaders to seriously consider disengagement from Iraq, yet another explanation for Maliki’s Basra operation becomes plausible. This is that the U.S. pushed Maliki into taking action on the assumption that he would fail and indeed be weakened, thus demonstrating that further troop reductions by the U.S. and Britain would be premature. This impression is reinforced by the dependence of Iraqi government forces on British and American air and artillery support in the recent campaign, as well as by their inability to prevent mortar attacks on the U.S. “Green Zone” bastion in Baghdad.

President Bush characterized the campaign as “a test and a moment [sic] for the Iraqi government”, and as “an interesting moment for the people of Iraq, because in order for this democracy to survive, they must have confidence in their government’s ability to protect them and to be even-handed.” [link]

Maliki failed Bush’s “test” on both accounts: he neither enhanced the Iraqi people’s confidence that he can protect them nor showed any evidence of being “even-handed”. He failed to realize the goal of disarming the Sadr forces, failed to weaken their hold in Basra and elsewhere in the country, and failed to bring about the “defining moment” referred to in the strikingly similar words of both Maliki himself and President Bush.

By the 3rd of April, U.S. military and government officials had begun to publicly distance themselves from the unfolding debacle, as related in a New York Times article of that date. [link], In contrast to the praise offered to Maliki by Bush a few days earlier, the U.S. officials blamed him for acting rashly and contrary to their advice. The maudlin style in which the NYT article is written suggests that it was a sanctioned propaganda exercise, and it begs the question as to whether those quoted were truly embarrassed by the ostensibly maverick actions of Maliki or whether they had actually egged him on, only to dissociate themselves from his actions later.

General David H. Petraeus provided his assessment of the situation in Iraq to the Congressional Committees on the 8th and 9th of April. With the ruins of Maliki’s campaign smoldering in the background, he argued that there had been “significant but uneven” progress in Iraq. On the basis of this “unevenness” he built his case that troop reductions should be frozen at pre-”surge” levels pending further evaluation. U.S. ambassador Ryan Crocker and Republican presidential candidate John McCain were on hand to second Petraeus’ verdict. [link], [link]

Immediately following the hearings, President Bush ordered a halt to reductions of U.S. forces beyond the pre-surge level, freezing the number deployed at 140,000.

The upshot of these events is a perpetuation of the U.S. and British role in continuing the tragic violence that has plagued Iraq for the past five years. A virtually permanent foreign occupation of Iraq is needed to achieve the current goals of U.S. policy, whether these are “m