The way they became ‘too big to fail’ by benefiting from every single economic bubble since the Great Depression has now been well documented, notably by Rolling Stone reporter Matt Taibbi who wrote a piece that went viral in 2009.

The inside job

They grew in strength in the 1930s, during the ‘tech bubble’ of the 90s, the ‘housing craze’ of the 2000s, and the ‘oil price rally’ of 2008. It culminated with the GFC when the US government chose to sacrifice their closest competitor Lehman Brothers. On the other hand not only Goldman Sachs got bailed out, but a heretofore unknown 35-year-old former Goldman banker named Neel Kashkari was put in charge of administering the $700 billion funds of the government rescue for the entire US financial industry!

That type of arrangement and the way they took the inside job to a whole new level is what has mostly attracted attention to date. In fact, they not only became insiders to the capitalist system, but became part of that system. It started in the 1930s, when Sidney Weinberg who ran Goldman for three decades, was a top fundraiser for Franklin D. Roosevelt. Since then, Goldman Sachs graduates have never stopped infiltrating the political system: as US Treasury Secretaries like Henry Paulson for the Republicans under George W Bush, or like Robert Rubin for the Democrats under Clinton; as Head of the European Central Bank like Mario Draghi, as Head of the World Bank like Robert Zoellick during the GFC, as Head of the New York Stock Exchange, etc…

As Taibbi put it, “any attempt to construct a narrative around all the former Goldmanites in influential positions quickly becomes an absurd and pointless exercise, like trying to make a list of everything.”

Two sides of the coin. Head, a fiercely free-market Goldman.

However, if the way they move seamlessly between Washington and Wall Street influencing regulation to suit their needs is now well exposed, there is another equally important aspect to the way they operate that probably has not received the attention it deserves. It is their double language between the pro-business free-market small-government policies which they advocate ‘in public’, and the astonishing government support they lobby ‘in private’.

For instance the Wall Street Journal recently reported how US employees of Goldman Sachs have largely abandoned Obama and are now the top sources of money to Mitt Romney and the Republican Party. In the four decades since Congress created the campaign-finance system, no company’s employees have switched sides so abruptly, moving from top supporters of one camp to the top of its rival.

The reason for this mass defection is the firm’s fury for not being consulted when the Obama administration crafted regulations in response to the financial crisis. Contrary to the quasi Royal Privilege they expected, they were not included in Obama’s Privy Council and instead were shocked by measures such as “the Volcker rule banning proprietary trading”, effectively restricting US banks from taking speculative risks with their own money – one of Goldman’s lucrative businesses, and a key cause of the GFC.

So they decided to fight back. Of course big banks always fight regulation with the standard argument, heard for decades immemorial: Don’t you regulate us too hard, or you’ll hamper market liquidity, stifle competitiveness and wreck the economy. It’s pretty much the template for all anti-regulation parliamentary submissions these days.

But Goldman has to be the best at everything. So they did it the Sachs way by taking the Fed head on and sending a study estimating with extreme specificity just how much damage the proposed rule will do to the economy: It will destroy 150,000 to 300,000 jobs, to be exact. They invoked (hold your breath) :

“damage to market liquidity, generating lower returns for investors and driving higher funding costs for corporate debt issuers, as well as higher transaction costs for activities like hedging interest rate and foreign exchange exposures.” which would be “likely to harm U.S. economic growth and international competitiveness. We estimate that the liquidity impact to the corporate bond market alone would reduce real GDP growth in the US by 15 to 40 basis points over a year. This, in turn, could raise the unemployment rate by 10 to 20 basis points, eliminating 150,000 to 300,000 US jobs.”

Message to the Administration: take another spoonful of Finance numeracy, you Socialist morons…

Two sides of the coin. Tail, a more confidential Sachs.

This more confidential Sachs is the firm who organised a private ‘macro economic conference’ in Australia this October and put the below charts up on the screen to support the view that government intervention had been beneficial. Not rocket science given the money they got from the bailout.

However the conversation that ensued was probably less expected. Several Goldman Sachs executives clearly argued that for them, the ‘orthodox’ economic view to reduce public debt was actually a significant ’systemic risk’ that could cause another recession, and they would much prefer that governments kept intervening even if it meant delaying debt reduction by a few years. It is ‘government withdrawal’ that they see as a key systemic risk, not the public debt.

Yes, you read this properly: in that conference Goldman Sachs clearly joined Occupy Wall Street, the French Communist Party and Greece’s Syriza to demand that Austerity be stopped!

Let’s be clear. This was not a slip of the tongue: they pulled all their analytical wherewithal to back this view: that Quantitative Easing worked (QE = injection of government money in the economy), that political intervention of the European Central Bank long opposed by Germany had finally “saved the day” in Europe, that the Bundesbank and Finance minister Wolfgang Schaeuble who are taking a hard line in the EU are playing a ‘bad cop’ role very convenient to Merkel when she negotiates. However Goldman absolutely insisted that it is obviously in everyone’s interest to slow austerity measures which are not delivering results and are losing politically (take that Merkel), and that finally they do not believe the Euro will implode as feared a few months ago.

The reason they openly discussed is that they actually believe Merkel is playing the “good cop / bad cop game” to extract more from Europe (they singled out France as the obvious target of this game) but that despite the noise, “the German government is supporting President Draghi’s course. This should buy peripheral countries time to address the underlying structural problems.” History will tell if they are right, but this is where those guys, who are pretty ruthless at playing the market, put their money at the moment.

So much so that they actually bet on EU growth just behind the US in their risk framework, ahead of China which they fear is seriously slowing down (but that is a post for another day).

(click to enlarge)

So was this leftist moment confined to the restricted audience of this conference, or is this a view more broadly shared that would be at odds with the strong capitalist stand exposed previously?

Well, it takes a bit more digging in the public domain but it does turn out that Goldman’s CEO himself Lloyd Blankfein is having a change of heart. After having infamously declared that he was doing “God’s work” by amassing billions, he is now saying that the US economy does not do a good enough job of distributing wealth fairly. He adds that the US government needs to keep spending, that investment banks must accept more regulation. Oh, and bankers should be prepared for the criticism that comes with having been at the centre of the financial crisis.

He also argues that austerity is ‘killing’ the US economy, that “you can’t austere yourself into a higher GDP” and “it’s not going to be very good if the medicine kills the patient.”

You want more?

Blankfein pushed the envelope by adding on CNBC that he would be willing to pay higher US taxes if he thought it would help reduce the national debt: “No one is so unpatriotic that they wouldn’t pay a little bit more to resolve it” before adding what is for me a stunning confession: he apparently backed Hillary Clinton’s campaign for president in 2008 and hasn’t endorsed a candidate this year, but said he’s “on the left-center side of things” politically. “On the left-center side of things politically“… which probably makes the average reader of this blog a dangerous Trotskyist…

There you go. Pretty schizophrenic isn’t it. So who do you believe? Goldman who is switching support to Romney and fighting tooth and nail to dilute any serious regulation so that the Wall Street status quo remains untouched. Or Sachs who is now confessing social views and a renewed appreciation for public intervention?

But of course, there is nothing new in this: Goldman does what Sachs knows best: hedging.

Firstly, none this should not come as a contradiction, as it is just the illustration of the ‘privatisation of the profits’ and ’socialisation of the risks’ that the Wall Street class has been playing all along.

Secondly, playing both sides of the market is what hedging (arbitrage) is all about. A form of schizophrenia, but an institutionalised one, that makes a lot of money. And Goldman Sachs is a master at that. This is how they made their fortune. An example was in the early 2000s when they infamously ’shorted Greece’ after arranging “shady swaps” to mask its public debt (*): Goldman also bought insurance on Greek debt and engaged in other trades to protect itself against the risk of a default on those swaps, whilst having inside knowledge of the true nature of the Greek debt… A bit like a doctor treating patients, and at the same time buying a life insurance on those patients to recover money in case they die. Nice.

So by putting their money on Romney, whilst quietly spreading the word on the need for government support, Goldman does what Sachs knows best: hedging. They are backing the candidate that will keep regulation off their back, while asking for public money to support financial markets where they make their profits.

{ Sydney, 17 October 2012 }

Notes:

*: The question has been asked several times: did GS really short Greece when arranging swaps to help mask its debt?  The answer is absolutely yes. It has been well documented and reported. Again, it’s not necessarily “illegal” as Hedging is a way to manage risk, but it would definitely fail the ethical test. The circumstances in which it was done, ie. having privileged insider knowledge of the fragility of Greece’s finances, make it more than dodgy.
Just a few sources:
- Business Insider: Goldman Sachs Shorted Greek Debt After It Arranged Those Shady Swaps
- New York Times: Wall St. Helped to Mask Debt Fueling Europe’s Crisis
- Americablog.com What Chase & Goldman Sachs did to Greece
- Huffington Post: Goldman Sachs Robbed the EU By Way of Greece

Of course blogger @Get_Shortened is right when dismissing this as “just a load of politics“. That “If the woman who holds the highest office in this country won’t or feels she can’t speak out against the extreme sexism directed at her until nearly 2 years into her tenure and only when it’s related to the credibility of a parliamentary motion against the Speaker, how can other less powerful women do the same and with confidence?”

Of course blogger @Piping_Shrike is right objecting that this does not resolve sexism’s social impact. “That despite the fabulousness of having a female Governor-general, Prime Minster and now Speaker, there is still a gender pay gap of around 17% that has barely moved in 20 years.” You just have to look at this OECD chart showing a stunning drop in female participation leaving us well behind all other comparable countries. Now THAT is something to make us scream of shame: and Australian women are more vulnerable because of this drop than because of Tony Abbott’s alleged sexism – … unless he becomes PM and actively starts to push conservative policies accentuating it…

Even more ironic is the timing of this episode that happened on the very day Gillard’s government passed legislation that removed welfare payments to 100,000 single parents, mostly mothers, when their youngest child turns eight. Making Welfare groups furious it was done despite two parliamentary inquiries recommending it be delayed until the outcome of a study into the adequacy of the allowance is finalised. Speaking about social policy priorities…

Of course journalist George Megalogenis is right when he says there are no votes in this. Or rather there are no swing votes in this; as Labor faithfuls will probably overstate the impact of the stand Gillard took by standing up, whilst Liberals will overplay how she undermined her authority as PM by making it personal. And in the end, come election time, swing voters would have moved on to the next populist attempt to woe them.

However since this kind of politics is a cynic’s game, and since it is not going away, cynics about this cynicism could argue that we may as well make the most of it and appreciate when it works in the favour of a genuine cause: namely here, the ongoing struggle against misogyny.

Indeed, despite the justified caution commended by the Australian murky political context, the very fact that it went viral abroad showed that it can be appreciated in isolation from our domestic politics. You find it ludicrous? Stick with my cynical take for a moment…

As a non-English native speaker, even more than the New Yorker’s coverage it was the video reported and subtitled in Le Monde that struck a chord and showed that Julia Gillard had unintentionally done the right move no matter the local objections. The loose analogy that sprung to my mind was those English songs I grew up listening although I didn’t understand all the nuances of the lyrics. They had an appeal and symbolism that transcended our different cultures and languages. French kids didn’t have to understand all the lyrics of Midnight Oil’s Bed Are Burning or Blue Sky Mining to relate to those roaring and rhythmic anthems against the spoliation of indigenous cultures and the environment… The same goes for Gillard’s speech: you don’t have to be familiar with all the minutiae of Australian politics to appreciate the message.

Gillard’s speech echoes what happened to two unlikely French politicians who unashamedly played the cynics’ card to defend worthy causes: President Jacques Chirac and his French Foreign Minister Dominique de Villepin.

In 2003 de Villepin gave an impassionate speech at the UN Security Council against a military intervention in Iraq. When he finished his remarks, the gallery burst into spontaneous applause, an unprecedented event at the UN. (video extracts at DemocracyNow.org)

” To those who are wondering in anguish when and how we are going to cede to war, I would like to tell them that nothing, at any time, in this Security Council, will be done in haste, misunderstanding, suspicion or fear.

In this temple of the United Nations, we are the guardians of an ideal, the guardians of a conscience. The onerous responsibility and immense honour we have must lead us to give priority to disarmament in peace.

(..) This message comes to you today from an old country, France, from a continent like mine, Europe, that has known wars, occupation and barbarity. A country that does not forget and knows it owes everything to the freedom-fighters who came from America and elsewhere.

And yet, France has always stood upright in the face of history and before mankind. Faithful to its values, it wishes resolutely to act with all the members of the international community. It believes in our ability to build together a better world. “

Similarly at the 2002 World Summit on Sustainable Development in Johannesburg, Jacques Chirac himself gave a speech which left his Greens political opponent stunned: they had been out-smarted on ringing environmental alarm bells on the world stage by a Chirac who suddenly embraced their rhetoric. The same Chirac who had been a fierce supporter of subsidising the French agriculture in the face of developing economies and had spent his political life supporting polluting industries of all sorts – not to mention the French nuclear tests in the Pacific that *he* restarted in 1995! Yet, you might be forgiven for believing from the following lines that Chirac was an environmentalist instead of a Right Wing leader back home…

” Our house is burning down and we’re blind to it. Nature, mutilated and overexploited, can no longer regenerate and we refuse to admit it. Humanity is suffering. It is suffering from poor development, in both the North and the South, and we stand indifferent. The earth and humankind are in danger and we are all responsible.

It is time to open our eyes. Alarms are sounding across all the continents. Europe is beset by natural disasters and health crises. The American economy, with its often-insatiable appetite for natural resources, seems to be hit by a crisis of confidence in the way it is managed. Latin America is again shaken by a financial, and hence social, crisis. In Asia, rising pollution evidenced by the brown cloud is spreading and threatening to poison an entire continent. Africa is plagued by conflicts, AIDS, desertification and famine. Some island countries are seeing their very existence threatened by climate warming.

We will not be able to say that we did not know! Let us make sure that the twenty-first century does not become, for future generations, the century of humanity’s crime against life itself. “

Did those speeches got those guys any more votes back home? No. Villepin did not even manage to be nominated as a candidate at the recent presidential election. Did they change any policies? Not an iota. The US still invaded Iraq in 2003, and Chirac’s environmentalist speech made many laugh out loud back home given the levels of pollution orchestrated in France’s name: just think of the oil company Total drilling and participating its share in “burning down the house”.

So yes those speeches were totally at odds with the political realities of Chirac and Villepin who belonged to the ruling conservative party inherently supportive of so many interests they seemed to denounce. But from a cynical internationalist point of view, it did not matter any more because they could become useful in somebody else’s hands. For instance I heard first hand in the Middle East how appreciative people were of the French stand on many issues and how they could use it as a wedge against the US neo-conservatives.

The point is to appreciate that Australia may be having one of those ‘Villepin moments’ – the last one probably being Rudd’s apology which also went viral around the world. Like it is often said that a text does not belong to the writer once it is published, it is possible that this tirade does not belong to Gillard any more but to those willing to push a little harder this rising new wave of feminism (*): although completely rhetorical and unintended, it is at least a little atonement and compensation extracted from this ‘Left’ government for all the disappointments and betrayals on other social fronts.

{ Sydney – 13 Oct 2012 }

(*): @BenEltham in New Matilda: http://newmatilda.com/2012/10/10/gillard-rides-new-wave-feminism

The trouble with this line of argument is that it positions the issue on an ethical ground by actually implying that financial markets would somewhat be neutral by design and unfortunately corrupted by a few rogue agents. In other words, if those bad apples didn’t exist all would be good.

However it might be a bit simplistic to blame recurring scandals, from Madoff to the LIBOR fixing, for this perceived disconnect between financial markets and the real ’social’ economy. Indeed the current examples of the soaring Greek stock exchange and US corporate profits also confirm that the issue is more systemic than just a few fraudsters attracted by the amount of money at play.

THE FACTS:

1 – Greece has been brought to its knees, yet its Stock Exchange is flying like Icarus

The picture could not be starker. On 8 October 2012 the ASE index traded at its highest since September 2011. A ‘rally’ started in June 2012 meaning that investors who put €10,000 on the stock exchange that month, would have sold for €17,800 on 8 October, realising a 78% profit – almost double the sum.

In the meantime, the rest of the country has been on the receiving end of draconian austerity ‘in exchange’ of successive bail-out loans.

The Greek government is anxiously lobbying the “European Commission – International Monetary Fund – European Central Bank” ‘troika’ to agree a further vital €31.5bn cash instalment before November to prevent the coffers from going empty. This agreement is dependent of further cuts into public services, wages and pensions, exacerbating a situation where unemployment is already at 25%, and more than 54% for Greeks younger than 25 are out of a job.

2 – The US economy is said to be in a L-shape recovery (i.e. not getting traction), yet corporate profits have been enjoying a V-shape pattern

If you find the case of Greek stock exchange to caricatural to make the point, there’s always the US to look at. Counter-intuitively to the accumulation of negative news about the car manufacturing going bust, and entire industries needed support and bailout, US corporate profits have never been so big. Whether you look at them in absolute value or as a ratio of GDP, they have been going parabolic: they now account for significantly more than 10% of GDP: that have never happened before.

Yet, in the meantime poverty levels have been steadily rising, so has inequality ( link to Slate’s Timothy Noah ‘The Great Divergence‘ – PDF )

SO WHY IS THAT?

Firstly because of the inherent flaws of publicly listed companies

It is easy to get lost in the rhetoric of ‘ruthless’ financial markets and to miss what exactly makes them work at odds with “real life”.

The oddity of the Greek example is a reminder that publicly companies listed on the stock exchange are primarily exposed to speculation, as opposed to privately owned firms (such as family businesses) or state companies which are more focused on the revenue they get for the service they deliver.

Indeed the system is designed so that most investors totally disconnect the enterprise from the stock, which becomes an abstract concept destined to go up in value (the share price rises) or return dividends a couple of times a year: that is all that matters.

The physical reality of the actually company does not matter to most shareholders: whether costs are cut by sacking staff, or revenue increases thanks to better sales, is kind of nice to know, but the bottom line is that investors demand returns today and more importantly a promise of returns for tomorrow. And it is precisely in this future promise of growth that lays the perversion of the system that gets revealed in extreme cases like Greece.

In June 2012 after the accumulation of bad news Greece elected a pro-bailout pro-austerity coalition led by the centre-right New Democracy party. Mentioning the previous “accumulation of bad news” is important because it meant that the share market plunged and hit rock bottom until that month. In finance lingo, the bad news had been ‘priced’ by the market: enough shit had gone through the fan to the point that nothing could make it worse in the eye of the investors.

If anything, now that the new government had committed to oblige European banks, even more riots triggered by new rounds of austerity would actually be a ‘positive’ signal to the financiers indicating that their debt would be payed back. And this positive signal was exactly the promise of future returns that pushed the stock exchange to speculative heights: people rushing to buy on the calculated bet that even more investors will grab cheap assets, everybody betting that authorities will flood the system with liquidity. Even (especially) if that rally ends-up being a mini-bubble: Quick! While it lasts!

French economist André Orléan has been researching this imperfect market hypothesis and explains it in simple terms: instead of evaluating companies for their ‘fair value’, the game has become to buy before other buy, and to sell before other sell (detailed in this post)

It is precisely because of the inconvenience of such speculation that even the Economist (which you cannot really suspect of leftism) questioned the public company model which was invented to provide limited liability and access to public capital to develop the business, but comes at the burdening cost of making that business vulnerable to market fluctuations, outside of anyone’s control.

The soaring US corporate profits also give an insight on the inherent lack of redistribution caused by this financial system

In that case high corporate earnings are generated because the US economy has recovered (and actually better than Europe): the government bail-out followed by a couple of rounds of Quantitative Easing by the Fed have had an effect. The trouble is that those profits are not reinvested in the economy. It is sitting on corporations balance sheets as cash because they’re scared to invest by hiring and starting projects. Even with such low Fed rates, the Obama administration which has been shedding more public jobs that Bush and Clinton could – to quote journalist Felix Salmon ( @felixsalmon on twitter ):

“borrow at 1.45% in vast quantities, and invest that money back into the economy itself. Take a few hundred billion dollars and use it to fix our broken infrastructure, to re-hire all those laid-off teachers and fire-fighters, to provide some kind of safety net for the millions of Americans who have been out of work for more than a year. Even if the real long-term return on any stimulus package was zero, the nominal long-term return would be well over 1.45%, making the investment worthwhile.”

So why is it such a big deal to insist on the gap between finance Markets and the real economy?

After all, if cycles are part of capitalism – like we all have bad days and things become better after a while – shouldn’t we just accept them?

Unfortunately the answer is negative. Because whilst stocks and economic indicators can rise again after hitting the bottom of the pit, the social cost of those downturns is never totally reversible. The time lost by families whose parents are out of work, the youth of the Greek kids wrecked as their country descent into chaos while the banks keep reaping profits will never be given back to them.

To use a loose analogy, it would be like telling a bunch of soldiers about to die in Gallipoli in 1915 that the coming period was just going to be a rough ride and that all would be better in less than 20 years with a great new bridge in Sydney. You find this image absurd? Absolutely it is. But it is exactly the same bullying logic that pushes financiers to treat the social cost as mere variables to adjust, missing that the time wasted during those downturns is disproportionate on the time scale of an individual’s life.

For financiers, markets certainly are their ‘real’ economy, in the same way the fish market is the daily economy of a trawler’s crew. But to have succeeded in imposing them as ‘the’ one and only encompassing economy we all have to abide by is certainly an achievement even more spectacular than the profits they generate for themselves.

{ Sydney – 11 October 2012 }

Whilst it has been reported as a predominantly politically motivated uprising against autocratic incumbent regimes, there were important socio-economic underpinnings to the uprising. One important factor was increasing food prices in the region, which along with other socio-economic factors, such as high levels of unemployment, especially amongst educated youth, was the bomb waiting to explode.

Many regimes had for decades maintained their legitimacy via an implicit social contract, whereby they offered cheap subsidised food, housing, utilities and fuel along with guaranteed employment in a bloated public sector in exchange for political loyalty. Sharp rises in domestic food prices from 2007 onwards contributed to an unravelling of this social contract such that citizens in the region were no longer willing to tolerate repressive and autocratic governments.

That is not to argue that food price increases were the main contributory factor to the Arab Spring, nor to deny the desire for political freedom and human rights amongst citizens in the Arab world. Other factors, such as political repression, the role of social network media, youth unemployment and a domino effect also played important roles in the uprising. However, political repression and social network media have been present in the region for some time without leading to political upheaval.

The Ben Ali, Mubarak and Gadhafi regimes have been tolerated by citizens for decades, so why were they suddenly and violently opposed in 2010/11?

In a way there is a serendipitous parallel with 1788 that saw terrible crops in France and threw starving people on the streets of Paris in 1789, which prompted Marie-Antoinette’s infamous line: “They don’t have bread? Let them eat cake”. The timing of the Arab Spring was rising food prices, which both sowed some of the seeds and acted as an important trigger for the uprising.

Source of the chart and further read:
The Food Crises and Political Instability

The saga has shifted from the sensation caused by US military shooting civilians like in a video game and the exposition of the cynicism prevailing in diplomatic circles, to the impasse in which Assange finds himself: to stay indefinitely locked up inside the Ecuadorean embassy, or to be arrested by the British police as soon as he steps outside the building.

So for those not suffering from acute Assange fatigue yet, there is still the option to gamble money on it. Online betting sites have jumped on the opportunity of a good old publicity stunt. For instance PaddyPower.com has and exit in a UK police car at 5/4, in an Ecuador state car at 7/4, and in a Hot air balloon at 90/1…

On the other hand, an interesting angle is what this diplomatic stand-off says about ‘peripheral’ nations increasingly willing to defy Western powers against being treated like dominions, and whether this time the world order is really changing. Indeed despite numerous conflicts, the phoney war on terror, and a kind of continued Chinese veto against the US, the last 2 decades of globalisation have in effect seen the roll out of the western neoliberal agenda without much opposition to its logic of Trade and Finance.

But maybe this time it’s different

However there seems to be a recent inflexion in this global consensus: prominent intellectuals are starting to notice intriguing and unsettling parallels between the current crisis and the pre-WWI period.

Indeed while the term ‘globalisation’ is associated with the explosion of ‘free trade’ since the 1990s, the very first wave of globalisation actually happened between 1870 and 1914. The world was divided between a European core and the peripheral countries of North America, Latin America, and the rest of the world… Great Britain was the centre of the international financial system designed to allow the over-production created by the European Industrial Revolution to be sold on those colonial markets. Globalisation back then also saw a major migration wave of about 10% of the world’s population from Europe to countries of new settlement such as the US, Canada, Australia and Argentina.

In the end, this first attempt at the ‘global integration’ of the world economy was so brutal and unregulated that it actually lacked the safeguards to prevent the catastrophe of WWI. Capitalism betrayed its implicit promise of spreading progress and prosperity in a manner that would civilise the world and prevent the regular conflicts of the ancient regime.

Is the European crisis a crisis of Europe?

This where French academic Max Gallo sees similarities between today and 1914. He recently explained in an intriguing interview with Der Spiegel that “just as in 1914 current events could also trigger a chain reaction, driven by nervousness, panic, conflicts of interest, alliance obligations and practical constraints, which could ultimately defy control by politics and diplomacy.” Real insights or crackpots? At least it has the merit of starting the conversation…

A hundred years ago, says Gallo, it was the mobilization plans of military leaders, worked out down to the last detail, including train departure times, while today it is the anonymous market powers, banks and market traders, with their computerized commands, that have plunged all key players into ‘prognostic impotence’ and a ‘chaos of improvised decisions.’

The radical observation that Gallo makes is that for the first time since the creation of the EU, a twilight is approaching over Europe. For him the introduction of the euro was a ticking time bomb revealing irreconcilable nationalist differences within Europe. Doubt has suddenly crept into the German-French relationship: the French starting to believe that Merkel is pursuing the hidden agenda of preparing Germany, the world’s third-largest exporter, for the fight for survival in the age of globalisation at the expense of the greater interest of Europe as a whole. Of course military action is out of question in the medium term, but the war has become economic and social.

On one hand, Germany is following its doctrine of ‘Ordoliberalism‘, a variant of neoliberalism that emphasises the need for the state to ensure that the free market produces results close to its theoretical outcome in a perfectly competitive market. It was theorised as a reaction both to the consequences of unregulated liberalism in the early years of the twentieth century and subsequent Nazi fiscal and monetary interventionism. Ordoliberalism differs from other schools of liberalism (including the neo-liberalism predominant in the Anglo-Saxon world) in that it places a greater emphasis on preventing cartels and monopolies. At the same time, like neo-liberalism, ordoliberalism opposes intervention into the normal course of the economy. For example, it rejects the use of expansionary fiscal and monetary policies to stabilise the business cycle in a recession and is, in that sense, anti-Keynesian.

On the other hand, France wants to pursue more Keynesian policies anti-austerity policies. It has also lost about 10 percentage points of its competiveness against Germany since the introduction of the euro. As a result, what was once a relatively even balance of trade is now a gaping deficit of more than €70 billion, while industrial production is declining and the government debt is on the rise.

If Gallo worst case scenario eventuates, Europe could be drifting toward an August crisis like the one in 1914, with Greece or Spain assuming the role of Serbia, and there will no longer be a Euro in a few years…

… as well as global.

If things were not bad enough in Europe, the global scene is equality tense. Columbia University professor Ian Bremmer observes in his book ‘The End of the Free Market: Who Wins the War Between States and Corporations‘ that the GFC has accelerated the inevitable transition from a G7 to a G20 world, and with it comes a fundamental clash between free market capitalism and state capitalism.

For Bremmer, the G7 world accepted the assumption that growth in the global economy was driven by the diffusion of the ‘western democratic model’ underpinned by free market capitalism. In that model, multinational corporations were the principle economic heavyweights.

However the sun has set on that world because China, the country that has emerged strongest and fastest from the global slowdown, is one that does not accept the idea that a regulated free market economy is crucial for sustainable economic growth. Bremmer believes that China’s success has actually persuaded authoritarians around the world that they really can have prosperity without undermining their grip on domestic political power. China has enjoyed double-digit growth for 30 years without western style democracy.

Furthermore the events of the last 4 years have made China more important than ever for the future of global economic growth. So for Bremmer this means that we are likely to see governments around the world that no longer feel bound to follow the Western rulebook of decades past.

In conclusion, this brings us back to Ecuador’s rebuke. The real insight is that the 2008 financial crisis has turned into an economic recession immediately followed by a diplomatic crisis about resources, with China securing its grip on South-America and Africa. So when the Organization of American States (regrouping the Latin American states) supported Correa’s defiance against Britain, they knew very well what they were doing and intentionally flexed their muscles to keep challenging the West, continuing a pattern that started a few years ago.

Argentine President Cristina Fernandez de Kirchner holds up a sample of oil produced domestically as she announced the expropriation of YPF

In 2008 not long after he took office, Correa declared his country’s debt illegitimate on the basis that it had been contracted by the previous corrupt regimes and defaulted over $3 billion worth of bonds. In 2010 he nationalised the oil industry against the interests of Western corporations. “With this law, any oil company that doesn’t fulfil the policies of the state will see their fields nationalised and they will leave the country”. Correa pushed the button without remorse, clearly indicating that he had enough of the ‘Free Trade’ game set up by western powers for their own benefit. A few months ago, Argentina did the same when Cristina Fernández de Kirchner expropriated Spanish oil company Repsol and took control of the Argentinean subsidiary YPF, the nation’s largest oil company. She justified the move as “recovery of sovereignty and control.”

History buffs would remember that this is a similar chain of events that cost Iranian Prime Minister Mohammad Mosaddegh his head on 19 August 1953: the refusal from those producing countries to see the main share of the oil profits looted by Western companies. Needless to say that a few ‘peripheral’ countries seriously intend to make history not repeat itself on that one.

The most ‘doom-ish’ geo-strategists (see Nouriel Roubini’s perfect storm) are seriously anticipating more tensions. Cyber-attacks are escalating as diligently monitored by cyber security boffins. And we know this is now part of the modern ‘Unrestricted warfare’ as famously theorised by two colonels of the People’s Liberation Army in 1999. Ultimately, the Assange saga is more about the nervousness of unsettled Western democracies rather than his personal circumstances. Will it escalate or fizz out? Will Greece be the next Serbia? Will Assange be the next Franz Ferdinand? Of course this would be giving him too much importance, but we like the music…

{ NKN, Paris – leLaissezFaire, Sydney – 4 September 2012 }

References

Der Spiegel: Attraction and Repulsion Define French-German Relations

Ian Bremmer: ‘The End of the Free Market: Who Wins the War Between States and Corporations‘

Organization of American States: Permanent Council Convenes Meeting of Foreign Ministers on the Situation between Ecuador and the United Kingdom

Nouriel Roubini: “The 2013 perfect storm scenario I wrote on months ago is unfolding“

Last March marked one year since the Fukushima disaster, and as anticipated a year ago the media caravan has passed. Whilst most of the technical reason of the nuclear meltdown have been analysed to death, the key issues surrounding the long term human toll has moved off the agenda, as if it was something that resilient populations were going to absorb anyway.

Indeed, in the nuclear development debate, human consequences are too often downplayed at the expense of purely technical considerations. As if the strategy adopted by public authorities was to forge a consensus on the reliability of the nuclear technology by preventing the population to even think about the possible social cost of a nuclear incident.

It is because of the need to shade more light on this deliberately obscured issue that the BBC documentary ‘Children of the Tsunami’ (aka ‘Children of Fukushima’) is a must see. (see full video embedded at the bottom of this post)

“Not in my backyard”

One of the key aspects of the politics of nuclear is where to put the power plants, and unfortunately for lobby groups of all sides, they quickly bump into laws of physics that no back-room machination can bend.

Indeed, it is a basic principle of thermodynamics that whether they burn fossil fuel, uranium or use renewable solar power, thermal engines require cold sources to cool down and to keep going through the cycle of converting heat into electric energy. Basically, the colder the source, the more efficient the process.

Applying this principle to Australia and looking at the average temperatures across the country, one doesn’t need be a nuclear scientist to second guess where the power plants would need to be located to be a) close to the water needed for the cooling circuits, and b) in relatively cold areas. And this is just looking at the average temperatures, without even considering peak temperatures which would reduce plant efficiency and limit the expected output even further.

This map clearly says that nuclear units are likely to be build south of the ‘Brisbane Line’ (linking Brisbane to Adelaide), the most populated part of the country, in a ominous parallel to the Japanese case.

To counter this growing generalised fear of power plants located near populated areas, pro-nuclear lobbies have developed the argument that Fukushima was not a disaster due to the Nuclear Energy per se, but rather a disaster of peculiar Japanese mistakes that could not occur in other western nations (as it was the case when Sarkozy defended the Nuclear French exception in the wake of the disaster).

This is obviously pure spin, as we know for example with the Fessenheim units built on the Franco-German border. Despite the dismissive tone of the official propaganda, France’s oldest reactors have been built below the dike of the canal that runs alongside the Rhine River, which water serves as the station’s coolant. We know it clearly sits in a seismic zone (in 1356, an earthquake decimated the Swiss city of Basel, just 30 miles south) and we know it is atop one of Europe’s largest aquifers. All of this has been reported by the NYT here.

If you think the way those issues have been consistently brushed aside by the French Nuclear lobby is rather troubling, then remember it is exactly the same complacency that prevailed about Japan before the Fukushima incident. Japan was presented as a model for nuclear safety (long experience of seismic safety, strong engineering culture, stable government, etc.) as Bloomberg reported here.

So whichever way you cut it, risk management is risk taking

The conclusion of any risk assessment regarding nuclear generation is that whatever the probability of an incident (i.e. whatever the security margins you take to make the probability of an incident as low as possible), the magnitude of the potential consequences are tremendous (thousands years of concentrated radioactivity level to just mention one of them).

To put it more visually, risk managers use the type of table below: we are at the intersect of “major to catastrophic consequences” and “occasionally to unlikely likelihood”: whichever way you cut it, we are in the “extreme” scenario zone.

This assumed “low probability” of incidents ended up in huge actual damages at Fukushima. And we know this will not remain an isolated incident…

The University College London has a good piece examining the statistics of nuclear accidents in countries depending on their numbers of nuclear reactors. It is a really good introduction to the difficulties of probabilities in stochastic systems and it concludes that in a world of 443 reactors (19 in the UK, 58 in France and 104 in the US) we can expect 2.34 accidents within any period of 20 years somewhere in the world. The probability for one or more severe accidents worldwide is 90.36%. Brought back to a single country, the calculation concludes that there is a 9% probability for a Chernobyl or Fukushima accident in the UK within the next 20 years…

Another trouble with this type of risk assessment is that they are based on past probabilistic references, therefore built on the implicit assumption that what happened in the past will determine what can happen in the future. And we know this is a seriously flawed method. As an example, the walls protecting the Fukushima units from a Tsunami had been seized (read ‘restricted’) according to historical references which were lower than the Tsunami of March 2011.

“We can only work on precedent, and there was no precedent,” said Tsuneo Futami, a former Tokyo Electric nuclear engineer who was the director of Fukushima Daiichi in the late 1990s. “When I headed the plant, the thought of a tsunami never crossed my mind.”

At the end of the day, the ’science’ of risk management ends up being a calculated human gamble between risks and rewards (i.e. financial benefits).

Hunting Black Swans with Quantitative Risk Analysis… still more an art than a science

Benefits are all about risk taking, aren’t they?

Since the disaster, risk management experts and engineers have written extensively on how lagging and inadequate TEPCO’s methods were: you can read several very well documented pieces in the public domain:
- “Why Fukushima Was Preventable” http://carnegieendowment.org/2012/03/06/why-fukushima-was-preventable#
- “Fukushima, the Tsunami Hazard, and Engineering Practice” http://www.abnormaldistribution.org/2011/03/27/fukushima-the-tsunami-hazard-and-engineering-practice/, and
- “Nuclear Plant and Tsunami Risk: 3,000 Years of Geological History Disregarded” http://coastalcare.org/2011/03/nuclear-plant-and-tsunami-risk-3000-years-of-geological-history-disregarded/

All those analyses conclude that caught in their hubris and confidence, the private and public authorities in charge of the Japanese nuclear program simply ignored thousands of years of geological and seismic history. Because they put financial risks ahead of engineering and public risks on their priority list, and started to behave like an industry which had become ‘too big to fail’, as we reported earlier.

All of this isn’t even touching the mental consequences among the impacted population

In conclusion, despite our modern authorities’ desire to keep the medical risks of nuclear quiet, history has played a rather ironical twist. Indeed, the devastating biological effects of radiations have actually been documented since the very early days, when pioneer Marie Curie died following regular exposures.

French memorial stamp honouring Marie Curie

The modern nuclear industry has relegated those impacts to a past era of low precautions, whilst totally ignoring the psychological and mental consequences of subsequent accidents. A cynical development given the culture of our epoch where emotions and feelings are overplayed in every aspect of the public agenda….  don’t you think?

Yet the psychological trauma, which those Japanese kids will carry with them for the rest of their lives clearly appears as a major public health issue in the BBC documentary the ‘Children of the Tsunami’.

An absolute must (re)-watch.

CHILDREN OF THE TSUNAMI from Daniel Reed on Vimeo.

{ NKN, Paris – leLaissezFaire, Sydney – 18 June 2012 }

A very rich document proving numerous insights on “how tough” societies are doing (for example measured by the relative child poverty rates before taxes and transfers – market income) and how good they are at redistributing the wealth (for example measured by the relative child poverty rates after taxes and transfers – disposable income).

In this sum of data, one graph copied below particularly grabs the reader’s attention and might shade some light on a specific debate raging in Australia at the moment: why do Australians keep whingeing about their condition when economic indicators have apparently never been so good (low joblessness, low inflation, trend growth, etc)?

A beginning of an answer (just a personal hunch, having experienced both systems) might be in the nature of the social redistribution.

As the graph shows, in countries like France and Scandinavia, a lot of it is delivered via “services”, which provide a sense of comfort of being looked after. The “cash transfer” is relatively low in comparison.

Whereas in Australia, the bulk of this social spending is done via “cash transfers”, which reinforces the perception of a ’socialist’ Europe vs a more liberal Australian approach: as the libertarians would say “give people cash, and they’ll know better how to spend it“. This approach may be fine when choosing the latest smartphone, however it is a little bit more unhinging when it comes to schools, childcare and hospital. A reason is that using those services usually involves a level of uncertainty, stress, if not distress in the case of hospitalisation, at odds with the toughness of a ‘market’ of privatised services where everything is up for sale.

To be clear, that is not to say that European public services do not have their share of issues, and do not cause frustration for those using them…

However I would strongly argue that this psychological dimension is missed by the macro indicators and causes this obvious dissonance between the ‘dashboard’ and the ‘perception’ in Australia. Commentators such as Jessica Irvine and George Megalogenis have identified it as a “collective whinge” in their recent respective pieces and asked their readers to realise how good they’ve got it. (links to the pieces: Jessica Irvine and George Megalogenis)

So maybe, a way to continue this conversation would be to realise that beyond the quantitative accounting value of the “social entitlements” (the cash transfers) it is actually the qualitative nature of those services that is at the core of the current debate. And if a war was to be declared it could be to bring a Scandinavian quality of services to Oz in order (for example) to improve women participation in the workforce (see the less than rosy state of affairs here) or better work-life balance as detailed by the Global Mail here.

{ leLaissezFaire, Sydney – 30 May 2012 }

UN Child Poverty Rc10_eng