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The United States vs. Capitalism?

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The meeting of the Group of Rio wrapped up on Thursday, in a Brazilian holiday spot, with a ringing endorsement of an end to the U.S. embargo on Cuba. The Group of Rio was created in 1986 by eight Latin American states and grew to 22 (plus Caricom, the Caribbean organization); and as of this past week it has grown by one more, to include Cuba. The Rio Group was founded in part as a counterweight to the Organization of American States, whose charter was signed in 1948 but whose institutional roots stretch back into the 19th century. (The OAS has been, not wrongly, perceived as U.S.-dominated; its headquarters are in Washington.) According to an AFP report from the Brazil meeting, even the secretary-general of the OAS, Jose Miguel Insulza, agrees that it needs some company. He described the Cuba embargo as "un resabio de la guerra fría" ( a bad habit of the Cold War) that should be corrected. He added that membership in the Rio Group "will be indispensable."

The Cold War was not, of course, about Cuba. It was about alternatives to the Western-dominated, free-market, free-trade, frequently democratic order. There have not been any serious alternatives to that order for a while. Cuba is the opposite of a phantom limb: the limb is left but the body is gone. That hardly means the desire for alternatives is also gone. The enthusiasm for Cuba is a symptom of it. When Cuba becomes a capitalist society it will be much missed.

There was frequent joking at the Brazil meeting about Bush and the shoes that were thrown at him in Baghdad. There's a nice bit of punning to be done with zapatos (shoes) and Zapatistas (you know what they are). So at a conference that President Lula da Silva of Brazil had intended to be about serious matters there was a lot of Cubanismo and some jokes about shoes. Even Lula was telling them.

It's more than a shame that this is what the alternatives are reduced to. Consider Brazil: by most accounts, the pain its people are facing in this recession is not due to any behavior on their part. They are simply collateral damage. Brazil didn't borrow too much, or undervalue its currency, or fail to diversify because it was caught up in the paradoxes of a single-commodity economy. Brazil is, basically, a country that has done very well with what it has and made itself the major economic player that it should have been ages ago. And now those achievements, through no fault of Brazilians, are in grave danger.

I feel certain Lula would love some alternatives to shoe jokes and anti-embargo exclamations, but he just doesn't have any. While some of the press emphasized the presence at the meeting of Chavez of Venezuela and Morales of Bolivia alongside Raul Castro, the truth is that President Calderon of Mexico and Chile's Michelle Bachelet were there as well, eagerly participating, and they are very far from being Fidelistas. Like Lula, they must long for alternatives.

I wasn't in Brazil but did attend another such event - the Ibero-American Summit, with a bigger but basically similar lineup of heads of state - in El Salvador in early November. (Say what you will about the shortcomings of Latin American solidarity, they are not due to a lack of high-level get-togethers.) Cuba was a non-issue. Raul Castro and Chavez had both declined to attend. The U.S. was not there either, just as it would be absent in Brazil; neither the I-A Summit nor the Rio Group has the U.S. as a member. The El Salvador summit was about development. There was a certain amount of satire directed at the orthodoxies of Washington being undone by the collapse of its own economy, not least its far-famed financial sector. Pride goeth before a fall, etc. But sometimes it was merely cheap satire, and sometimes it seemed to spring as much from sorrow as from anger. The alternatives...were not forthcoming.

It's rather amazing, isn't it, considering what a fantastic breakdown we are in? We in the American media have been distracted - our industry went to hell in a handbasket in about nine days - but we did notice that capitalism's giants were fetching up onto the beach, whale-style, to breathe their spectacular lasts. True, by mid-December one's heart had been hardened. The mere collapse of a bank, or the evaporation of a few tens of billions in assets here or there, or the expiry of more than 50 percent of the market capitalization in one or another stock exchange - these were no longer enough to draw out more than the briefest shudder. Remember back when the tottering of Northern Rock seemed significant? Innocent days! Remember - the example only grows in significance - when the bailout of Mexico, in the Clinton administration, seemed like just the most extraordinary thing? Ha! You don't know extraordinary.

This business with Bernard Madoff - that figure of $50 billion stands there like a bouncer, inscrutable in its quiet violence, making $15 billion for the auto industry seem so unworthy. Can it really be $50 billion of sudden non-money? How is that possible?

Doesn't it make you wish for an alternative?

The most impressive thing in all this, in my opinion, is that the alternatives, such as they are, are being generated in the rich countries themselves. How entrepreneurial of them! The rich countries, most innovatively or desperately the United States, are right now developing alternatives to their own system, and very possibly undermining it - in order to save it. There has been a good deal of chuckling in Beijing lately about this. (Still the funniest public remark by a Chinese official, in my opinion, came from the head of the country's main sovereign wealth fund when he said he was "not brave enough" to invest in foreign financial firms and complained of the lack of clarity in American policy.) But of course developing alternatives to your own system in order to save it is what the Chinese Communist Party has been doing for 30 years, and it's only really funny if you look at it in a certain way. One more thing China and the West have in common.

How far will government management of America's markets go? Niall Ferguson argued in the FT on Friday that the root of our current problems is excessive leverage among borrowers in the rich countries. This leverage needs to work itself out - basically, some truer values need to be established for assets, such as real estate, that were overvalued. Many of the new policies aim at easing this "deleveraging" transition by, in essence, taking on as public debt the difference between real values and inflated values. "Is it really plausible," Ferguson asks, "that the cure for excessive leverage in the private sector is excessive leverage in the public sector?" No, it isn't really.

Ferguson ends by advocating conversion: schemes to use public resources to stretch out various types of loans (like home mortgages) over a long enough term to hit a nice balance of manageability and stability (for the borrower) and of possible repayment (for the lender). Fair enough: but what about the deeper problem of how savings surpluses (in China and the petrostates) relate to credit surpluses in the rich world? First World profligacy is a very real phenomenon, but profligate borrowers don't exist without willing lenders. The relationship is two-way (at the least!) and solutions will also be two-way.

Accepting that does not make finding solutions any easier. Elsewhere in the FT -- which really has made the global-capitalism story its own, even against its sister publication The Economist, as well as the WSJ - there was a fascinating Op-Ed, back on Tuesday, by Ricardo Hausmann of Harvard's Center for International Development and the Latin American Financial Regulation Shadow Committee. His sympathies are with the Lulas and the Bachelets. While the (soon-to-disappear, per Ferguson) attractiveness of U.S. government debt has enabled Washington to "organize a Keynesian reflation of its economy....fairly well behaved countries such as Brazil, Colombia, Peru, South Africa and Turkey have essentially lost access to external finance."

Hausmann has a pretty amazing plan. He accepts as his premise that the problem is one of the circulation and recirculation of value internationally. He proposes a massive American spend on precisely those economies: making the BRICs float, so to speak, including the smaller ones.

In Hausmann's argument, the most alarming (because plausible) prospect is protectionism. This seems exactly right to me. The likely development is not an alternative to capitalism per se. It is the repoliticization of economic power. Granted, the uses and distribution of economic power under globalization were hardly apolitical (much less ahistorical). But the ideology was, and that makes all the difference.

That is what the taking of economic power by governments in the current crisis threatens to undermine. When in November the Federal Reserve decided to extend $30 billion apiece to Mexico, Brazil, South Korea and Singapore - an amount greater than the IMF's own global figure of $100 billion - not all of those countries really needed it, but the Fed (as I understand it) insisted on a geographical mix. What kind of decision is that? It is by no means an apolitical one. Similarly, China seems to have decided that Bank of America's decision to improve its own capitalization by sell some shares of China Construction Bank was ... not OK. And here at home, many of us would support the preservation of our automotive industry, so much so that we might not think that to do so is protectionist. Yet it is. Nobody likes protectionism. But if it arrives it will not be wearing a hat that says Smoot-Hawley.

* * * *

The Fed announced Friday that, after consulting with issuers of, and dealers and investors in, asset-backed securities, it had decided to cancel plans to auction its own loans for such securities, and handle the sales in a more controlled way. The Fed also extended the life of its $200 billion Term Asset-Backed Securities Loan Facility (TALF) from one year to three. The program is one of the lesser known aspects of the current bailout plans.

The securities in questions are essentially bundlings of auto, student and credit card loans as well as some Small Business Administration loans. The Fed believes these securities, and thus in some sense the loans that they represent, are a better risk than the market currently believes they are. So the Fed is making up the difference, so to speak: using taxpayer money to make these asset-backed securities sufficiently attractive to private investors. Note that this program was redesigned after consultations with those very same investors, as well as dealers and issuers of the securities.

It cannot be a good thing when government is presuming to judge the quality of a credit-card loan - and use public monies to support its, er, bet.

Tuesday update: commercial real-estate investors have been in Washington looking to get on the TALF train, per the WSJ yesterday and today.

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