Money and power: A toxic bond
COMMENT: ECONOMICS COLUMN
Money and power: A toxic bond
Monday, June 01, 2009
07:10 Mecca time, 04:10 GMT
Development projects often fail if they go against the existing power structure in a village or region
Samah El-Shahat, Al Jazeera's resident economist, will be writing a regular column analysing key elements that have contributed to the global financial downturn and its impact across the world.
The US's bankers and the government - a toxic bond
I am a development economist, and in very crude terms development economics is about how to make emerging economies grow, develop, and become like industrialised economies.
Like many others working in my profession, I am always struck by the injustices facing less developed countries in trying to break out of the arms of poverty, from global institutions that placed the interests of those who fund them - always the richer more powerful economies - above the interest of those developing countries, to global trade rules that were and are blatantly unfair.
So for those economists such as myself who opted out of analysing the world through a "neoliberal" or "neoclassical" perspective, we analyse power and how that can seriously affect, influence and manipulate trade for certain interests.
These relationships of power asymmetry can also be found within the developing countries themselves. Far too often I have worked on projects which failed, not because of poor economics or poor design, but because it went against the existing power structure in a village or industrial cluster.
"The power of banks and the bondholders are preventing the Obama administration from taking sensible decisions"
That is, it was seen as disadvantageous to the existing power structures and status quo and hence those with power, prestige and a lot of money, went out of their way to stop it. Or equally as bad, they went out of their way to make sure it benefited only them.
In economic parlance, we say they "captured" the project and, of course, the funds.
So you find that when that happens, we write in our concluding reports that the reason for the failure of the project was the unique "political economy" of that village, town or country.
What I am finding quite astonishing though, is the more I look at the banking fiasco in the US, the more I see elements of an "emerging economy", with that same in-your-face political economy.
Don't get me wrong, I am not saying that in industrialised countries vested interests did not shape policies to suit them, but it has never been this blatant and there has never been more at stake - not just for Americans but for the whole world.
Somewhere along the line, the way the US does business - particularly financial banking - has been captured by bankers and, dare I say, they have the government under their control.
Out of want for a better word - the combination of power and vested interests is toxic.
The bankers are manipulating the bailout of their banks to their advantage. But this is not Argentina, nor is this even Japan, this is the US.
What do I mean by that? Well, I mean that the power of banks and the power of bondholders are preventing the Obama administration from taking sensible decisions that place the interest of the taxpayer before that of the elite minority of bankers.
The US's strategy for fixing the banking mess we are all in is inherently unjust and unfair, for it is rewarding the people who caused the crisis in the first place.
When the Obama administration is asked why it is doing that, it says it has no alternative.
I disagree, and so do a number of renowned economists such as Paul Krugman, Joseph Stiglitz and Jeffrey Sachs.
They, too, have have been critical of plans by Timothy Geithner, the US treasury secretary. Over the next few weeks in my weekly column, I will draw on my experience in developing countries, and, as a development economist, try to show you why the bankers have captured the US government. I will also point you towards alternative policies that can get the banking system out of this mess without making the taxpayer carry all the burden, risk and loss.
Over the next two weeks, I will be looking at two examples which capture this sorry state of affairs: the banks' "stress tests" - whose results were publicly announced on May 7 after some delay; and, the Private Public Investment Partnership (PPIP), put forward by Geithner, aimed at removing the toxic assets of the banks' balance sheets.
We have to consider these two programmes together because they are designed to work in unison in reducing the capital shortfalls of the major banks.
The pressure from the stress tests is supposed to lead to greater willingness on the part of banks to sell their bad assets, and the sales of the bad assets are supposed to provide more private capital.
The PPIP plan relies on private investors teaming up with the government to relieve the banks of assets tied to loans and mortgages linked to securities of unknown value.
This is private public partnership, where the American taxpayer takes all the risk, and the private investors walk away with the cash. It is a public swindle of astonishing proportions. So why is it happening America?
Samah El-Shahat also presents Al Jazeera's People & Power programme.
The views expressed in the above column are the author's own and do not necessarily reflect Al Jazeera editorial policy.
Source: Al Jazeera